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Buy Now, Pay Later | Impact on Your Credit Score

You may have come across the payment option "buy now, pay later" loan when making an online purchase from a retail brand. BNPL offers a set number of regular payments made sporadically over several weeks or months with no interest.

Owing to enhanced digital purchasing across the past year as a result of the pandemic, BNPL loans have become incredibly popular. According to Kotak Institutional Equities research, in the final three months of the calendar year 2021, BNPL companies provided more than 4 million lines of credit to clients.

For the dozens of individuals around the globe without a traditional credit card, Buy Now, Pay Later is a new credit option. Since credit cards have strict mandates, getting one might be challenging for someone with a modest income. 

Due to the numerous benefits accessible with a credit card, many people in the current economy lack the buying power that a credit card provides.

BNPL and what it means for your credit score 

Buy now, pay later can assist you in enhancing your spending power while raising your credit score. But not all loan deals are built the same way. You may be required to pay more in fees and interest than with ordinary loans, as well as having to pay it for a longer time, based on your credit history and the kind of loan you acquire. 

Many conversations are going around about how BNPL affects your credit score negatively. However, it is false that merely utilising a BNPL service will harm a person's credit scores. Credit ratings fluctuate in response to other criteria like total leverage and repayment habits. Therefore, most consumers would only experience a drop in their credit ratings if they neglected to make any payments on their credit cards, lines of credit, or Buy Now, Pay Later overdrafts. 

Additionally, BNPL, against other financing options, gives customers much freedom in selecting repayment terms and instalments percentages, typically for no extra cost. In actuality, many BNPL companies let clients pre-close loans at their discretion.

BNPL even helps to improve credit scores

But in all the fuss about BNPL affecting credit scores, the opportunity it affords first-time credit customers to establish solid credit profiles is often disregarded. To give people the chance to obtain legal credit assistance for the first time, BNPL companies evaluate their creditworthiness using various information and bureau data. Customers can build solid traditional credit ratings by maintaining on-time repayments, using credit responsibly, and extending the life of their borrowed funds.

Even for platforms, it's a good mix. It has been demonstrated that BNPL increases growth by reducing cart abandonment rates and enhancing general customer satisfaction.

How credit reports could benefit customers by including buy-now, pay-later loans

Credit reporting agencies promote buy now, pay later as a fantastic opportunity for consumers with little to no traditional credit history to enter the credit mainline. Additionally, credit scoring firms are keen to apply the new information to scoring systems.

Young customers and those with poor credit are expected to profit from the inclusion of buy now and pay later loans on credit reports. Compared to typical credit cards and loans, these accounts collect more essential consumer behaviour data.

Do BNPL services track transaction activity?

The following credit risk occurs if the BNPL service informs one of the credit agencies about account balances and activity. Once again, based on the type of loan, some do while others do not. For example, Affirm reports instalment loans for extended loans even though it does not track behaviour on its four biweekly repayments option.

Contrarily, some BNPL services, such as PayPal Credit, may provide revolving credit lines instead of fixed repayments. The proportion of credit you use for revolving accounts (also known as credit utilisation) significantly influences your score and makes up 30% of it.

Determining whether and how the BNPL company you are contemplating reports your activities is a prudent move in light of this.

What comes into play if a BNPL payment is missed?

Missed payments might be detrimental to your credit, but keep in mind that not all BNPL services will record your activities. Therefore, your credit rating can be unaffected if you skip a few payments but subsequently make them up.

However, if the BNPL does record, skipping a loan payment will probably appear as a deleterious entry on your credit report and decrease your credit score. The primary considerations of the score when it comes to missed payments are how newly the payment was delayed and how badly overdue the instalment was.

Final Verdict

BNPL services may be helpful resources, particularly for customers without access to other forms of finance. When utilised responsibly, mainly if there isn't a rigorous inquiry or monitoring, they could provide repayment flexibility without adversely affecting credit.

Like any other credit product, your primary goal should be to maintain minimal debt burdens and pay instalments in a timely manner. These actions will probably benefit the consumer's FICO score in the long run, whether on a BNPL loan, a credit card, or a personal loan.

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