‘Buy now, pay later’ services are hugely popular in Australia. But they might just impact your credit score. So, our experts weigh in to answer the question, does buy now pay later affect your credit score?

A good credit score is a super important part of getting a home loan. While you can get a home loan with a less than stellar credit score, it can make a stressful situation harder, and getting into a new home trickier.

Most Australians understand the elements that can affect your credit score. These include your repayment history including loans and credit cards, your ability to pay your bills, your credit card debt and limit, your past borrowings, your credit applications and any bankruptcies and court judgments.

But what you may not understand (or simply haven’t thought about!) is the impact of the new ‘buy now, pay later’ services on your credit score.

What is ‘buy now, pay later’?

‘Buy now, pay later’ services (BNPL) are simply another type of financing. And its name pretty accurately describes the service. You buy something now and make a promise that you’ll pay for it later.

There are a lot of services that have popped up in the last few years offering this service – Afterpay, PayPal, Zip and many more. And many private companies – from banks to retailers – are offering their own proprietary services as well.

How do ‘buy now, pay later’ services work?

In most cases BNPL services offer convenient and immediate financing for purchasers. BNPL companies generally give you instant approval at check out. You don’t have to pay any amount upfront. Instead, your costs are spread over time. You also aren’t generally charged interest or fees, as long as you make your repayments on time.

The convenience of BNPL makes it easy for many buyers to jump on to the bandwagon. And many, many have. In fact, Australians spent over $11.9 billion through BNPL services in 2021.

But when you’re looking to buy a home, you might want to take a second before pushing that Afterpay button on checkout. You might want to ask yourself, ‘does buy now pay later affect your credit score?’

Does buy now, pay later affect your credit score?

There’s a huge number of Australians who use BNPL services. In fact there were six million active accounts in 2021. And with interest rates rising, it’s highly likely this number will continue to rise.

Unfortunately, there is a correspondingly high number of missed repayments. When it comes to BPNL, 18% of users have missed a payment. This number is slightly higher than the 17% of credit card users that have missed a payment.

When you miss a payment – and nearly 1/5^th of users currently are – this will be reflected in your credit report. This is no different from any other missed repayment. However, there is some risk that with multiple BNPL accounts, they can become difficult to manage. And because they’re easy to miss, it’s easy to get a negative hit on your credit score.

Your credit score is largely based on your repayment history. So, if you are missing repayments, whether they are in very small amounts or large amounts, your credit score will be impacted.

In addition, some BPNL services may also run a credit check before approving you. Not all will because not all are required to. However, if they do, these credit checks can also have an impact on your credit score as well.

Finally, many BNPL services will set a credit limit for you on your account. This may not be obvious when you are checking out and quickly clicking the ‘buy now, pay later’ button. But credit limits also impact your credit score over the long term. And too many accounts will make a lender sit up and take a closer look at your ability to service your home loan repayments.

Read more: Why is it important to have a good credit score?

How to use BNPL services without putting your credit score at risk

Now that we’ve answered the question, ‘does buy now, pay later affect your credit score’ we want to add a little caveat. There are steps you can take to use BNPL services without putting your credit score at risk. Our suggestions are:

• Only use one BNPL account at a time. When you use multiple accounts things can get messy.
• Keep track of your payment dates with a calendaring system with reminders. That way you can make sure you never miss a payment. And you can ensure that you have money in your account if there are automatic withdrawals.
• Double check account limits. Ensure you know the limits on each account that you have (hopefully this will only be one account).
• Stick to your budget on all spending. This includes BNPL accounts. Don’t use them as a way to get more, sooner.
• Link BNPL accounts to a debit card, not a credit card. This ensures you aren’t also paying credit card interest on those amounts.

So… does buy now pay later affect your credit score? Yes. But we can help!

'Buy now, pay later' can impact your credit score. But if you find yourself in a messy BNPL situation, don’t panic. Use the tips here. Or get in touch with our experts who are happy to help find the right home loan solution.