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Can using a buy now pay later service hurt my financial health? | RateCity

Vidhu Bajaj avatar
Vidhu Bajaj
- 6 min read
Can using a buy now pay later service hurt my financial health? | RateCity

Buy now pay later (BNPL) services allow you to purchase what you want and pay for it later in monthly instalments. It works similarly to the in-store lay-by system, but you get to take your products home before you finish paying them off. 

The major draw of most BNPL services is that interest isn’t handled like credit cards. Typically, an interest-free period applies for each purchase, so you'll never pay interest as long as you pay it off before that is over. 

One part of these services that may impact your financial health and credit score are any potential fees that may be charged. If you miss a payment, you could be charged a late payment fee, and ongoing late payments may be recorded on your credit file, similarly to if you miss a credit card payment.

BNPL and credit score: What you need to know

Even though you may believe that using a BNPL service will not impact your credit score, this isn’t entirely true. BNPL services may impact your credit score through credit checks when you apply for a new account. Most BNPL providers carry out soft credit checks before approving a new account. But a hard check may be carried out by some providers, or when you wish to make a transaction of more than $2,000 on some platforms. 

Moreover, the government’s decision to recognise BNPL services as credit providers implies that the BNPL industry would soon be bound by the same rules and regulations like other credit providers, including requirements to perform hard credit checks on prospective borrowers.

Once the new regulations are put in place, you’ll find a hard inquiry appearing on your credit report when you make a BNPL application. These ‘hard inquiries’ can then be seen by other lenders when you apply for a loan or other credit product. If there are many hard inquiries on your credit report in a short period, it could impact your ability to borrow money in the future, as it may look like you are desperate for credit.

You may also find your credit score affected if you’re unable to keep up with your BNPL repayment schedule. Using your BNPL account irresponsibly can put you under financial stress.

Using a BNPL service may indeed cost you nothing when you make your repayments on time, making it a good budgeting tool to purchase items you cannot otherwise afford without stretching your monthly budget. However, if you start using a BNPL service to buy things you cannot afford, there’s an increased risk of missing a repayment and incurring late fees, which will add to your debt. 

There’s also the risk of signing up for multiple BNPL services, making it difficult to keep track of your repayment due dates. Besides leading you to a potential debt trap, using a BNPL service irresponsibly could also hurt your credit score. Most BNPL providers reserve the right to report payment defaults to credit reporting agencies, which could impact your credit score adversely. 

Another way your buy now pay later spends could lower your credit score is when you choose to link up your BNPL account to your credit card and miss paying your monthly bill. It may be worth considering linking your BNPL account to a transaction account instead to lower the risk of this occurring.

Can I improve my credit score rating by using a BNPL service?

Under the comprehensive credit reporting system, how you handle your debt impacts your credit report. Positive financial behaviours like paying your credit card bills on time will boost your credit score. On the other hand, negative financial behaviours, such as paying your bills late or defaulting on your credit card payments, could impact your credit score adversely. 

Using a BNPL service may help you improve your credit score in future once the industry is formally regulated. However, using a BNPL service cannot help you improve your credit score at the time of writing, such as repaying a car loan or maintaining a credit card. However, missing multiple repayments is likely to negatively affect your credit rating. That’s because most BNPL services reserve the right to report negative activity to credit reporting agencies. 

For instance, BNPL services like Afterpay and Zip Pay will report defaults worth $150 or more that are 60 days overdue. This information is likely to be listed on your credit report and hurt your credit score.

Even though you don’t pay any interest when using a BNPL service to pay for your shopping, you can be hit by late payment fees if you don’t make your repayments on time. While such fees are capped on some platforms, they could quickly add up, especially when using multiple BNPL accounts. 

If you do end up borrowing more than what you could afford to repay, you risk missing your repayments, leading to additional charges that will make the service more expensive to use. 

Tips on using buy now pay later responsibly to maintain your financial health

It’s essential to use buy now pay later services responsibly to avoid overspending. Here are a few tips to help you stay on top of your buy now pay later shopping:

  • If you use more than one BNPL account at a time, you may find yourself at a greater risk of overspending. To avoid trouble, stick to a spending limit and try using only one buy now pay later service at a time.
  • Before purchasing an item using a BNPL service, it could help to review your budget. This is to check whether you’ll be able to meet the payment deadlines to avoid paying a penalty.
  • If you find it challenging to keep up with your credit card bills, consider using your debit card to link to your BNPL account while setting it up. This will help you avoid credit card interest, as you’ll be using your own money to pay off your BNPL purchases. 

Overall, a buy now pay later service can provide you with a more manageable way of making purchases. However, you risk late payment charges, and your credit score could be adversely affected if you don’t pay off a purchase on time. This means that despite their wide availability, BNPL services may not be for everyone. 

If you find it hard to stick to a budget or think you’re likely to overspend, it may be better to spend time saving up and use your savings to buy what you need rather than a BNPL service. If you’ve used a BNPL service in the past and find yourself unable to make the payments on time, it could help to re-evaluate your budget and pause further spending. 

Platforms like Afterpay will automatically freeze your account once you miss a repayment, and most BNPL companies also offer hardship assistance. So it’s worth speaking to your service provider to see how they may help. You can also talk to a financial counsellor to find a long-term solution to your financial problem.


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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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