'Buy Now, Pay Later' and the impact on your credit score

In recent years, ‘Buy Now, Pay Later’ (BNPL) services have gained immense popularity among consumers seeking flexible payment options for their purchases. These services allow shoppers to make purchases and spread the cost over time, often with no interest or fees.

While BNPL services offer convenience and flexibility, it's essential to understand their potential impact on your personal credit score. If you want to know more about what a credit score is, this article is for you.

So, let's delve into how BNPL services work and the possible implications to your financial health.

Understanding Buy Now, Pay Later services

BNPL services function as an alternative payment method that allow consumers to make purchases and pay for them in instalments over a set period. These services typically partner with retailers to offer instalment plans at the point of sale, both online and in-store. Unlike traditional credit cards, BNPL providers often push interest-free payments and transparent fee structures, making them an attractive option for many shoppers.

The impact on your credit score

Credit reporting policies
While some BNPL providers may conduct a ‘soft’ credit inquiry to assess your eligibility for their service, not all report your payment activity to credit bureaus. This means that your BNPL usage may not directly impact your credit score if you make repayments on time, of course.

Late payments
If you miss a payment or default on your BNPL instalment plan, it could negatively impact your credit score. Some providers may report delinquent accounts to credit bureaus, leading to a negative mark on your credit report.

Debt-to-income ratio
Using BNPL services can increase your overall debt load, potentially affecting your debt-to-income ratio. This is a factor banks and lenders consider when evaluating your creditworthiness for personal and home loans, as well as credit cards.

Credit utilisation
Credit utilisation is the amount of credit you’re using compared to your allowed credit limit. For example, if your credit limit is $5,000 and you’ve used $4,000, your credit utilisation ratio is 80%.

While BNPL services may not directly affect your credit utilisation ratio, they can indirectly impact it if you use them in conjunction with other credit accounts such as credit cards. You can learn about ‘Buy Now, Pay Later’ services versus credit cards here.

Tips for responsible use

Budgeting
Before using BNPL services, always assess your budget and ensure you can comfortably afford the instalment payments without straining your finances. If you need help with budgeting, we’ve got tools available such as our budget calculator and the mymo budgeting app.

Timely payments
Ensure you make all instalment payments on time. By doing so, you’ll avoid late fees and any potential negative impacts on your credit rating.

Monitor your credit report
Regularly monitor your credit rating to check for any inaccuracies or negative marks related to your BNPL usage. There are a number of ways to find out your credit score, and you can find out more about obtaining your credit score on the CreditSmart website.

Limit usage
Use BNPL services sparingly, and only for important purchases that align with your financial goals and budget.

There is no denying that ‘Buy Now, Pay Later’ services offer convenience and flexibility for shoppers. However, it's crucial to understand the potential impact of these services on your overall financial health. You can read more about whether these types of services are right for you, here.

By using BNPL services responsibly, making timely repayments, and monitoring your credit report, you can enjoy the benefits of flexible payment options without jeopardising your creditworthiness. As with any financial tool, informed decision-making is the key to maintaining a healthy credit score and achieving long-term financial success.