Can ‘Buy Now Pay Later’ Schemes Damage Your Credit Score?

28 June 2021

Can ‘Buy Now Pay Later’ Schemes Damage Your Credit Score?

Buy now, pay later schemes like Afterpay and Zip Pay have exploded in Australia in recent years. According to the latest figures, 30% of Australian adults have an account with a ‘buy now, pay later provider’, and that percentage is growing rapidly. Significantly, 21% of these people have missed a payment over the past 12 months.

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

‘Buy now, pay later’ schemes are not a new concept. For example, credit cards operate on that system. However, services like Afterpay differ from credit cards because they don’t charge interest. Instead, they charge a $7 late fee if you miss a payment (plus an initial $10 fee for the first late payment).

Afterpay breaks down a payment into four equal fortnightly instalments. If you make all your repayments on time, you only pay the original purchase price of the item. Some credit cards on the other hand charge interest as soon as you make a purchase. Others charge interest if you don’t pay off the purchase price in full within an interest free-period (usually up to 55 days).

Their surge in popularity of services like Afterpay has coincided with a decline in credit card usage in Australia.

How ‘buy now, pay later schemes’ affect your credit score

Your credit score is compiled by credit reporting agencies. Lenders usually check your score before approving any loan or credit application that you make. If you don’t have a good credit score, your application may be declined or you may be charged a higher interest rate.

Every time you apply to a lender (including ‘buy now, pay later’ lenders), it can negatively affect your credit score. If you miss repayments to any lender (including ‘buy now, pay later’ lenders), it can also negatively affect your credit score.

You can reduce the risk of damaging your credit score by using ‘buy now, pay later’ schemes wisely. Don’t sign up with more than one provider and make sure you make all your repayments on time. You should also avoid buying items that you can’t afford to fully pay off in the ‘buy now, pay later’ timeframe.

Don’t be tempted by the low late repayment fees that ‘buy now, pay later’ providers offer. Making your repayments late will damage your credit score. It’s important to have a good credit score if you’re thinking of taking out a home, investment property loan or applying for any other credit in the future. A good credit score will help you to get your application approved on the best possible terms and conditions.

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