There’s an increasing trend among shoppers in Australia to take advantage of ‘buy now, pay later’ (BNPL) platforms. This trend is seeing more and more online and offline retailers offering this convenient paymentoption. However, before using a BNPL service, you may want to know the impact it may have on your credit score.

Afterpay is one of the leading companies in the BNPL space. It lets customers make a purchase immediately by extending them a line of credit that they repay later in instalments. If you think that sounds like a credit card, you wouldn’t be too far off the mark. 

The big difference is that unlike a credit card, BNPL services like Afterpay allow customers to repay the borrowed amount in equal monthly instalments rather than charging interest. This means you know exactly how much you owe each month, rather than it changing based on the debt and interest. It’s no wonder these services are such a hit with so many shoppers.

Since they don’t charge interest, BNPL services make most of their money through fees, like late fees or the fees paid by retailers. They may also restrict your ability to continue purchasing using the platform if you’re late to make repayments.

But does Afterpay (or other BNPL services) affect your credit score like other loans or credit products? To fully answer this, you’ll need to understand how BNPL services work and the pros and cons of using these services.

How does Afterpay affect your credit score?

When you sign up for Afterpay, approval is almost immediate. During this process, you agree to terms of service. As a customer, you grant Afterpay permission to make any enquiries, either directly or indirectly, about your identity and your ability to make payments on time.

This permission would also include letting Afterpay check your credit report if they see fit. They may not check your credit but if they do it will be recorded in your credit file. 

Currently, Afterpay is not known to conduct credit checks on potential customers, and they explicitly state on their website that they never perform credit checks or report late payments

What this means is that if you make all payments on time and repay your debt, it doesn’t positively impact your credit score. At the same time, if you are unable to make a repayment on time, Afterpay won’t report it and your credit score is unlikely to be affected. However, it’s not clear whether Afterpay reports such instances to the credit rating agencies. 

Credit checks for Afterpay on the horizon

In future, however, you can expect some changes to how Afterpay and other BNPL companies work. 

Australia's Buy Now Pay Later (BNPL) industry is about to face the same rules and regulations as traditional credit providers. The National Consumer Credit Protection Act, which focuses on consumer protection, will be updated to include BNPL companies as credit providers.

At the Responsible Lending & Borrowing Summit, Assistant Treasurer Stephen Jones highlighted that BNPL services are pretty much like credit and come with similar risks. That's why it’s important these services follow the same rules and regulations as other credit providers.

Under the revised Act, all BNPL providers will need to get an Australian Credit Licence and carry out credit checks on prospective customers before approving them. They’ll also need to improve their practices in areas like resolving disputes, hardship assistance, providing clear information about their products, and marketing responsibly. These changes are aimed at promoting responsible lending practices in the BNPL industry to ensure better consumer protection and transparency.

Once these regulations are in place, applying for a BNPL loan could lead to a hard enquiry getting recorded on your credit report. At the same time, it’s also possible that managing your BNPL payments responsibly could help improve your credit score in future.

Will Afterpay affect my credit score negatively?

Using Afterpay may not directly affect your credit score but it could hurt your credit score in other ways. 

The ease of shopping with Afterpay could encourage you to spend more than you would have typically. These spending patterns could lead you to financial stress where you miss a payment. 

While Afterpay may not report this missed payment to a credit reporting agency, it’s essential to recognise the risks associated with using the service. Spending money that you don’t actually have on things you don’t really need could lead to a cycle of debt that may become challenging to escape in the future.  

As long as you use Afterpay responsibly, make all repayments and repay your balance on time, it shouldn't affect your credit score negatively. But you should also be mindful of the impact that multiple applications for BNPL services could have on your credit score.

Only a few BNPL providers carry out credit checks on customers at the moment, and Afterpay isn’t one of them. However, with the changes happening in the BNPL industry in Australia, you can expect to see a hard credit enquiry on your credit report each time you apply for a BNPL loan in the future. 

While a single enquiry may not affect your credit score as such, having multiple credit enquiries in a short period of time may reduce your credit score by a few points. Additionally, multiple credit applications could make you look like a risky borrower to prospective lenders, reducing your chances of getting approved for traditional credit products.