Buy now pay later (BNPL) schemes might be a quick and easy route to retail heaven, but if misused, they can seriously damage your credit score.
Over the past few years, BNPL schemes have done for shopping what Tinder has done for dating. All it takes is one app to open a world of instant gratification! Of course, if you’re sensible and use BNPL responsibly, it’s a great way to spread the expense of a purchase, at no extra cost.
But the moment you’re late with a payment, you risk more than late fees. If you don’t keep on top of your repayments, it could negatively affect your credit rating and your ability to borrow money, even years down the line.
Although there’s no hard data on the BNPL market in NZ, over the ditch, government research has highlighted the number of BNPL users who have fallen behind on their payments. Over the 2018-19 financial year, missed payment fee revenue for BNPL providers grew 38% to over A$43 million. Nearly a quarter of all users (21%) had fallen behind on their payments at some point, and 15% had taken out another loan to help finance their BNPL debt.
The rapid expansion and choice of BNPL schemes in NZ suggests that similar figures could apply here. So if you use a BNPL platform, what impact could it have on your credit score and your ability to take out credit or loans in the future?
BNPL and credit scores
BNPL providers generally do not do a full credit check on you when you sign up or make a purchase. Because they’re not considered lenders in the traditional sense, they don’t have to adhere to the same responsible lending criteria as credit card and personal loan providers.
Rather than a thorough full, or hard, credit check that leaves a mark on your record, they can get away with a quick check that doesn’t leave a permanent hit on your credit report. This is why the application process is so quick and easy.
However, while they might not do full credit checks, their T&Cs give them the authority to do so. When you agree to a BNPL provider’s terms of service, you authorise the company to make any enquiries they consider necessary to assess your capability to make payments, which may include ordering a credit report.
More importantly, you also authorise them to pass on any information about your late payments, missed payments, defaults or penalty payments to credit reporting agencies. This means if you miss payments or have other negative activity, your credit score could take a hit.
Policies of the BNPL platforms
Here is what each of the big BNPL providers in NZ have in their T&Cs about credit checks, and passing on negative information:
|BNPL platform||What they say about credit checks||Report negative info?|
|Afterpay||“You authorise us to make, directly or through third parties … any enquiries we consider necessary to verify your identity and assess your capability to make payments … This may include ordering a credit report.”||Yes|
|Genoapay||“Genoapay will complete a credit check in relation to you before issuing the loan to the merchant.”||Yes|
“Yes we do (perform credit checks). We need to be sure, both for you and us, that you have the ability to afford to pay for the things you want.”
|Laybuy||“Laybuy performs a credit check to obtain a credit score on all new users upon registration.”||Yes|
|Zip||“When you sign up for a Zip account, we perform a credit check … This type of check will not impact your credit score and it will not show up as a hard enquiry on your credit report.”||Yes|
What are the other risks of BNPL platforms?
If you’re using BNPL platforms, some other risks to be aware of include:
Fees can add up
Most BNPL providers do not charge interest and instead charge fees. This can include missed payment fees and account keeping fees. For example:
It could impact your future loan applications
According to a mortgage expert on the OneRoof website, a BNPL debt of just $200 per month will reduce your ability to get a home loan by $25,000.
Could a low-rate credit card be a better option?
As we’ve touched on above, one of the main reasons that BNPL schemes have taken off is that they’re easy and simple to use. Unlike applying for a credit card, you can make a BNPL purchase with the minimum of fuss. However, if you make the extra effort and thoroughly research your options, you could secure an even better deal.
In its recent review of non-bank financial institutions in NZ, the multinational firm KPMG noted that: “Despite the fact that a credit card may actually be cheaper if payments are made late, the ease of BNPL seems to outweigh the mental workload associated with a credit card.”
As we explain in our story Afterpay vs Credit Cards: Interest-free Periods Explained if you link your BNPL scheme to your credit card, you’ll be able to push out your interest free periods even further.
Ultimately, if you’re prepared to do a little research into the financial products you use on a day-to-day basis, it’s easy to play the system to your advantage.
Is your credit card right for you?
Part of playing the system is regularly reviewing whether your choice of financial products is right for your spending patterns and lifestyle. Could a low-interest credit card be a better option for you than BNPL? Unless you do the research, you’ll never know.
This is where Canstar can help. Annually, we research, rate and compare all the major credit cards in the market. Our comparison tool and Star Ratings are a great start to making an informed decision. All you have to do is click on the button below: