Buy Now Pay Later rules are changing: why you should check your credit score
Australia’s Buy Now Pay Later (BNPL) industry will soon be subject to the same rules and regulations as other credit providers, including requirements to perform hard credit checks on new borrowers.
The National Consumer Credit Protection Act - which aims to promote consumer protection, responsible lending practices, and transparency in the credit industry - will be amended to include BNPL companies as credit providers.
“BNPL looks like credit, it acts like credit, it carries the risks of credit,” Assistant Treasurer Stephen Jones told attendees at the Responsible Lending & Borrowing Summit earlier this week.
Under the revised Act, all BNPL providers will need to obtain an Australian Credit Licence. They’ll also be required to enhance their practices with regards to dispute resolution, hardship assistance, product disclosure, and marketing.
These legislative changes are expected to be introduced to Parliament sometime later this year.
Your credit score matters more than ever
When you apply for credit, providers perform a hard credit check in order to evaluate your ability to make repayments. Once BNPL companies become regulated credit providers, these credit checks will be mandatory for all customers.
Each time a hard credit check occurs an enquiry is added to your credit report. If your credit application is subsequently denied, this could negatively impact your credit score and your potential to access credit in the future.
Your credit score is a unique rating that helps lenders determine whether or not you’re an equitable borrower. Learning your credit score could assist in negotiating financing and may encourage you to improve your ranking.
Don’t stress! Checking your credit score isn’t the same as a hard credit check and won’t hurt your rating.
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Considering the upcoming changes to BNPL, it’s vital that you are aware of your credit score, and how to improve it, in the event that you wish to utilise these contemporary loan services.
Be aware that shopping around for credit and applying to a number of different providers within a short space of time could negatively impact your credit score. These actions could flag you as a risky borrower.
BNPL driving competition among credit providers
There are now around 7 million active BNPL accounts in Australia according to Treasury figures. The average BNPL consumer makes 18.2 transactions per annum, with an average transaction amount of $136.
Research conducted by the Australian Financial Industry Association (AFIA) in 2022 found BNPL services generated an extra $2.7 billion in revenue for merchants. This increase in revenue was driven by the acquisition of new customers, larger average transaction sizes, and improved customer satisfaction and loyalty.
Moreover, BNPL has emerged as a cost-effective alternative that has introduced healthy competition to traditional credit products like credit cards and payday loans. By offering lower costs, BNPL has exerted pressure on these traditional credit options, providing consumers with more choices and potentially better financial outcomes.
The new regulations will cap fees for late or missed payments, bringing these costs in line with similar charges on other credit products. Additionally, credit limits can no longer be increased unless you explicitly make a request.
Capacity for excessive borrowing will persist
In his speech, the Assistant Treasurer noted concerns that some borrowers were taking out multiple BNPL loans.
“We have heard that some people are opening multiple BNPL accounts, to access far more debt than they’d be able to get on a credit card or a payday loan,” Jones said.
However, unlike banks, BNPL providers won’t be required to report your data to credit-reporting agencies. As a result, if you use a BNPL service, that provider may not have access to your credit history with other BNPL providers.
This lack of visibility means that the potential to use multiple BNPL services simultaneously will continue to exist, despite the government’s acknowledgement that this practice is contributing to debt stress and repayment issues.
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