Buy Now Pay Later Leads to Bad Credit - Australia

Easy Cash Can Make Getting a Home Loan or Refinancing Not So Easy

Aussies are one of the world’s biggest buy now pay later (BNPL) users.

Recent research from financial specialists Mozo suggests that the average BNPL-using Australian spends $2,208 annually on BNPL platforms. This works out at $184 per month. And the more BNPL accounts held the more people spend.

It’s not hard to understand why we love BNPL. It’s an easy source of credit that lets you buy what you want when you want it before paying it back in interest-free instalments over time. But while it’s easy to access and use, it has its downfalls.

Debt is one, the other, perhaps lesser considered, is bad credit.

How BNPL Creates Bad Credit for Australians

Buy now pay later schemes, such as AfterPay, Zip, Humm and Klarna, won’t directly hurt your credit score as they’re not deemed credit facilities under Australian law - though new BNPL regulations may change this.

However, BNPL providers do have the right to report BNPL missed or late payments to credit bureaus, such as Equifax, illion and Experian. This is what can push your score south and lead to buy now pay later bad credit for many Australians.

Bad credit essentially means you have a low number recorded on your credit file, typically between 300 and 500.

Why Bad Credit is Bad News

Bad credit or a low credit score is undesirable because it indicates to lenders that you’re a higher-risk borrower.

The downside of being a high-risk borrower is that it can result in difficulty getting new credit and mean higher interest rates and unfavourable loan terms. This makes large purchases, such as buying a home or car, difficult. It can also affect your ability to qualify for credit cards, loans and refinancing.

On top of this, a low credit score can affect your ability to rent an apartment or get a job, as some landlords and employers may use credit information as a factor in their decision-making.

Other Factors That Lead to Bad Credit

If you already have a low credit score, missing or making a late payment on your buy now pay later account/s will only add to your poor creditworthiness.

If you answer ‘yes’ to having all or any of the following, you need to be extra careful when using BNPL:

• High credit use
• Short credit history
• Minimal existing lines of credit
• Multiple credit products applications over a short period

Tips on Avoiding BNPL Bad Credit

If you love your buy now pay later account/s and aren’t keen to part with them despite the risks or you’ve been thinking about using it, it’s important to use it smartly to avoid being reported.

Here are our recommendations:

• Stay on top of your budget - Budgeting is key to financial health. To avoid missing a BNPL payment or paying late, make sure you factor any payments into your weekly, and monthly household spend. Resist temptation if buying the item isn’t covered by your incomings. This will ensure you avoid a dent in your credit score and additional debt.

Don’t have a household budget? Check out our handy budgeting calculator.

• Familiarise yourself with the fees and terms - Every buy now pay later provider is different, so before you sign up, read the fine print. This includes fees and terms and whether or not they report you to credit bureaus for late or missed payments.
• Stick to one BNPL account - Not only does having multiple buy now pay later accounts lead you to spend more, as shown in the Mozo statistics, but it also makes them more difficult to manage. It’s much easier to stay on top of your payment dates and payments if you only have one account.
• • Set up automatic payments - If remembering to make your BNPL payments is more of an issue for you than being able to make your payments at all, we recommend you link your buy now pay later scheme to your debit card. Importantly, make sure you always have money in your account.
• • Keep an eye on your credit score - As well as being smart in how you use and manage your buy now pay later account/s, it’s a good idea to keep a regular eye on your credit score. You should be able to see if any of your BNPL accounts are recorded and if they have negatively impacted your score.

You can request access to your credit report via the website of the three main bureaus - Equifax, Experian and illion.

Don’t Let BNPL Give You Bad Credit

Because it’s not considered a traditional credit product, buy now pay later may be a tempting way to purchase. After all, you don’t face credit checks to get it, and the repayments are interest-free.

But BNPL isn’t without risks. As well as risking bad debt you can’t manage through carelessness or overuse, missing or not making payments can negatively affect your credit score and, in turn, your ability to live the life you want.

If you’re going to buy now pay later, just be smart in how you manage it. If you’re already struggling financially and relying on BNPL and other lines of credit, seeking professional help is a sensible option.

If your currently experiencing financial problems, already have a low credit score or are relying on BNPL to make purchases, get in touch with our team of specialists today on 1800 534 534 for support, advice and to discuss your options.