There’s an increasing trend among shoppers in Australia to take advantage of the ‘buy now, pay later’ (BNPL) option. This trend is seeing more and more online and offline retailers offering this as an option. You may want to know what kind of impact these convenient services make on your credit score before you use them.

Afterpay is one of the market leaders in the BNPL space. These companies let 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, these companies allow customers to pay back 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 this service is such a hit with so many shoppers.

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

But does Afterpay affect credit score just as other loans or credit products do? You’ll need to understand how this works and the pros and cons of using these services to fully answer this.

So, how does Afterpay really work?

BNPL products like Afterpay give shoppers the instant satisfaction and convenience that comes from making a purchase without having to pay the full amount upfront. You get to make a purchase, get your goods and not worry about interest or fees (as long as you pay on time) which is why it’s such an attractive option.  But the convenience of purchasing this way may cause you to end up spending larger amounts than are financially prudent.

If you’re considering shopping with Afterpay, you need to ask yourself whether you would buy the same item if you had to make full payment upfront. If your answer is no, then think about whether you can avoid the purchase, because the use of BNPL is creating a future liability for you. A study carried out by the Australian Competition and Consumer Commission (ACCC) found that 55% of consumers admitted to spending more with BNPL than they did before they started using these services.

Let’s understand this better with the help of an example.

Say you have an Afterpay limit of $1,000.  If you then spend in a way that maxes that limit every two months you would be paying $250 every fortnight. This would be similar to:

  • Buying an 87-night, world cruise for around $15,200 on your credit card and paying it off over three years, or
  • Taking out a personal loan to buy a 2019 Suzuki Swift GL for about $15,990 (RRP) and paying it off over three years.

Now compare this to your Afterpay spending habits. If you’re repaying $250 every fortnight for the three years, it will come to a whopping $19,500 (26 payments in a year x 3 years).

You could buy 30 Coach Hadley Hobo handbags priced at $650 each, or 18 (and a half) iPhone X phones. This is to showcase that it’s a large amount of money spent simply, in the long run, all because the payment isn’t upfront.

In many ways, using services like Afterpay is similar to taking on any other loan or using a credit card. But you may be unaware of the cumulative impact of using this service on your credit score, even if the spending limit appears to be relatively small.

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.

An important part of the terms and conditions you should note is anything that concerns any late or missed payment. When you agree to the terms, you are effectively authorising the company to report any negative behaviour on your Afterpay account to credit reporting companies. If they do this, it will impact your credit score.

On the other hand, Afterpay doesn’t usually run a credit check like other credit providers. What this means is that if you make all payments on time and repay your debt, it doesn’t positively impact your credit score.

Essentially the power over whether Afterpay affects your credit score lies with Afterpay, as it reserves the right to check your credit and report any payment issues. As long as you maintain your repayments, there should be no impact on your credit score.

Will Afterpay affect my credit score negatively?

Afterpay is not much different from a credit card when it comes to impacting your credit score negatively. 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. Afterpay is likely to report this missed payment to a credit reporting agency which will negatively impact your credit score.

Afterpay doesn’t usually run a credit check when you’re applying. This means your positive repayment history with them won’t be noted on your credit report.However, if you miss even a single payment, they’re likely to report this. This can then cause your credit score to decrease. It’s important to note that while it might not be charging you interest or fees, Afterpay is just as risky and can land you in as much trouble as a credit card or other loan.

As long as you use Afterpay responsibly, make all repayments on time and repay your balance on time, it shouldn't affect your credit score negatively.