Some of the biggest players in the Buy Now, Pay Later space could be looking at your application with a more thorough eye, as the latest push for stricter regulations may see Afterpay commence credit checks.
With Buy Now, Pay Later (BNPL) platforms appealing predominantly to younger Australians who, as a group, are less likely to have built up credit or even have a credit score, how can they ensure their application is likely to gain approval.
Luckily there are some steps you can take to not only ensure your credit score is good enough to help boost your chance of approval for a BNPL platform, but to grow a credit score from scratch.
BNPL hit with stronger regulations
Over the last eight years, BNPL platforms have assisted Australians in paying for items, big and small, in regular instalments without interest charges (in most cases). Unfortunately, it has also put some into financial stress, as late payment fees can build up – especially when customers use multiple BNPL platforms at once.
The Buy Now, Pay Later sector may soon be transformed into a more heavily regulated industry, including mandatory credit checks for new customers. The industry has been mostly self-regulated up until now, with an AFIA Buy Now Pay Later Code of Practice. Big players like Afterpay, Brighte, Humm Group, Klarna, Latitude, Openpay, Payright and Zip Co have all signed up to the code.
But some have argued that this does not extend far enough to protect vulnerable Australians. Additionally, this code is voluntary, with major institutions like CBA, NAB and PayPal not yet having signed up to the code.
Due to these issues, a new Treasury paper was released yesterday by Financial Services Minister Stephen Jones, outlining three options for regulatory intervention of the buy now, pay later (BNPL) sector:
- Develop a mandatory industry-specific code without the need for an Australian Credit Licence;
- Bring the BNPL sector under the Credit Act but apply a more moderate set of responsible lending obligations; or
- Bring the BNPL sector under the Credit Act and apply similar rules as those for credit cards and other loan products.
Afterpay considers rolling out credit checks in Australia
The appeal of BNPL platforms has often been their lack of high interest charges on purchases, making them a preferred payment method for younger people that have turned away from credit cards. And for many, it has been the ease of applications, and the lack of traditional checks and balances, like a hard credit check on applicants.
As pressure mounts, it’s likely that some BNPL platforms will either make the switch to performing credit checks as part of mitigating credit risk or performing due diligence on customers – whether voluntarily or by law.
Afterpay has already begun credit checking its customers in the United States, so adapting this for Australia may be its next step.
Michael Saadat, head of international public policy at Block, which acquired Afterpay in February, said: “We have started doing credit checks in the US on our buy now, pay later products earlier this year.”
“Even though we are confident in how our product works, given the diversity of the market and the desire to establish minimum standards across the industry [in Australia], we can understand why the government would want to introduce something like this.
“All governments around the world are looking at a similar thing – a bespoke affordability assessment, which is not the same as a fully blown responsible lending assessment," Mr Saadat said.
Michael Saadat has warned against the Treasury paper’s third option (listed above), stating that this was “using a sledgehammer to crack a nut” and “and does not reflect how buy now, pay later works”.
“There is no government around the world that is looking to apply traditional consumer credit regulation to buy now, pay later without making sure the regulation is proportionate and tailored,” he said.
So, how do you grow your credit history and credit score?
Whatever the outcome may be from yesterday’s Treasury paper calling for stricter regulation around the BNPL sector, young Australians looking to apply for platforms like Afterpay may want to look at growing a credit history and credit score.
A credit score is assigned to Australians aged 18 and over when you apply for credit products. It is a measurement of your “creditworthiness”; aka your ability to repay debt responsibly. The more you demonstrate positive behaviour, such as making bill repayments on time or paying off a loan, the better you look to the credit bureaus assessing your credit score.
Your first step should be to see if you even have a credit history or credit scores yet. Luckily, you can check your credit score in a matter of minutes through helpful apps, like the RateCity Credit Score app.
If you do not have any credit history or credit scores, you may want to consider building this. After all, you have to start somewhere!
Steps to building credit as a younger Australian:
You can’t just apply for a car loan at 18 and hope you’ll gain approval to try and build credit. It may be easier to start with less risky credit products with less strict eligibility criteria. This may be done through utility plans, such as energy and gas, or a phone plan.
- Hop on your family’s utility bills
If you still live at home, you could ask your household about signing on to a utilities plan, such as the home energy, gas or water. This may be a lower-risk option, as your family or household should already have passed the approval process, and be meeting these repayments.
Typically, it's as simple as calling up the provider and asking about adding an additional person to the plan. You may need to provide identification documentation, such as a driver’s licence, and proof of income, such as a PAYG slip. Even if you’re casually employed, you may still be able to jump on the utility plan, as your family has already gained approval and demonstrated they can meet repayments without you.
- Start your own phone plan
If you still have a prepaid phone, or are on your household’s mobile phone plan, it may be worth branching out and starting your own. This process does involve an assessment of your income and likely your credit history as well, so be sure to have checked that you have a credit score, and pay off a few family utilities bills before you attempt this.
Keep in mind that signing up to a phone plan, or any credit product, comes with a level of commitment and requires financial responsibility. If you’re only signing up to a phone plan to be eligible for a BNPL platform, and have not budgeted or planned ahead to meet your repayments, you could find yourself in serious financial stress or debt.
