Does Afterpay affect your credit score?

Does Afterpay affect your credit score?

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.

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Does borrowing money affect credit score?

Whether it’s through a home loan, a personal loan, or a credit card, borrowing money will affect your credit score. Taking on a home loan or a credit card may have a positive impact on your score, but too many loan applications can bring your credit score down.  

Every time you apply for credit, an inquiry is performed against your name. Too many inquiries can reflect negatively on your credit report, and if your loan application is rejected it will negatively impact your credit score.

How you handle your debt can also make a big difference. As long as you make timely payments you may be able to improve your credit score and overall creditworthiness. However, any missed or delayed payments will likely result in a negative impact on your credit score.

What can impact my credit score?

Your credit score isn't set in stone and can change with every financial decision and action you take. While you checking your score is a soft check and won't impact the result, payments and other actions can affect the score. 

The very things that can impact your credit score include your payment history (late or on time), the age and type of credit you have and owe, your debt balance (both current and delinquent, if any), recent payment behaviour, the credit available to you presently, and if you have any court judgements or actions resulting form bankruptcy.

Australia's Comprehensive Credit Reporting (CCR) also tracks your positive payments, and allows your credit score to be impacted positively, as well. 

Does a credit score check impact your credit score?

You may have heard that when a bank or lender performs a credit check, that it can impact credit score. But checking your own credit score isn't the same, and won't affect your credit score in the same way.

There are two types of credit checks that can be recorded in your credit history: hard credit checks and soft credit checks.

Hard credit checks occur when you apply to borrow money from a bank or lender, such as when you apply for a credit card or loan. A soft credit checks occur when your credit file is accessed outside of applications to borrow money, such as when you check your own credit score or credit history.

Checking your credit score is a request for information and not an application to borrow money, so it should not affect a lender’s decision to accept or decline your credit applications. As such, it's a soft credit check, and is unlikely to affect your credit score, positively or negatively.

 

What if your credit score has dropped for no reason

The importance of checking your credit score regularly is hard to overstate as the changes may not be as relevant to your life, and there may be the occasional error, but what should you do if it drops for no reason?

Credit reporting agencies calculate your credit score based on the information they receive from lenders, banks, credit card providers and utility companies, among others. This report takes into account both the credit enquiries these companies make, as well as your payment history with them, and may include other factors. But because some reports may come in at different times, delays can appear like drops. 

Suppose you missed paying a bill while on holidays and the supplier couldn’t reach you, or something like it -- in this instance, the provider may report the default to the credit reporting agency, which can cause your credit score to fall when the credit reporting agency eventually sees the information. Because of an obvious delay, the drop can seem random.

Regularly checking your credit score and the transactions that have appeared can provide some understanding as to why a credit score drop might have occurred, and even provide some understanding as to how you can fix the drop, improving your credit score in the process. 

What are some advantages of a good credit score?

You should know about the advantages of credit score improvement as there are many occasions when having a good score is helpful. If your credit score is categorised as good, very good, or excellent, it can indicate you have strong borrowing power. This may encourage lenders to give you special discounts on interest rates and other loan terms. You may also find it easier to get approved for a credit card or a property rental. You can also try to negotiate terms using your superior credit score as leverage.

A high credit score indicates that you are financially responsible, but it requires you to be disciplined. If you currently have a good credit score, you still need to remember not to apply too often for credit cards or loans as these can quickly pull down your score. On the one hand, you may have better access to credit, but your good financial habits mean that you may not need to access this credit. Having some credit products can help build up your credit report, and therefore your credit score. You would just need to keep the debt and limits to a minimum and pay the bills on time. It’s never advisable to take out credit that you can’t afford to pay as it negatively impacts your credit history.  Even if you have a good credit score, you can always improve it further.

Why should I check my credit score annually?

You may not need to get your free credit rating every year, but it can help you stay informed. A yearly free credit report can help Australians keep track of the impact of various financial transactions on their credit score.

Your credit score helps inform financial organisations, particularly lenders, about the sort of payer you are. Depending on how you've paid down debt in the past, it will have affected your credit score in various ways. In Australia, the inclusion of Comprehensive Credit Reporting (CCR) means that you can find out which transactions affect your credit score positively, as well those that have a negative impact.

Because of this, you may want to consider getting a free credit report once a year irrespective of whether you’re planning to apply for a loan or take on other debt. Checking your credit report can tell you if there are errors in your credit file, which affect your credit score and need to be corrected.

How regularly does your credit score change?

There are plenty of things that can affect your credit score, but when they'll impact it can vary wildly, and often depend on when the information has been passed on.

Every credit enquiry is noted on your credit file, and this impacts your credit score. Thanks to Comprehensive Credit Reporting (CCR), it means you both positive and negative transactions can impact your score, but so, too, can the frequency. For instance, if you apply too often for credit cards or apply with multiple lenders for a home loan and aren't successful, you may see a decline. 

How long this information take to pass on is an important question, but the length of time often depends on the credit reporting agency. Some transactions can take a small amount of time, while others take much longer. For that reason, it's important to check your credit history regularly so you can be more aware of what your credit score looks like, and if you need to correct any of the statements made on it. 

Do landlords check credit scores?

For landlords, credit score checks can tell if a potential tenant has a history of delayed or missed rent payments. Usually, a poor record of repayments is likely to result in a low credit score. Also, your credit history may include information from tenancy databases such as the number of times landlords have inquired about your credit score. 

If there are too many inquiries within a short time, landlords may conclude that you have had issues renting in the past.  However, there is no rule as to when landlords check your credit score. Some might check every time they receive a tenant’s application. In some cases, landlords may even rent out their property to tenants with a poor credit history if they can submit additional documents or sufficiently explain their situation and how they are trying to address it.

 What credit score do landlords look for?

Landlords may look for issues relating to repayment rather than a specific credit score, although a low credit score probably suggests that you’ve had repayment issues. In general, if your credit score is categorised good, very good, or excellent - which corresponds to an Equifax credit score range of 622 - 1,200, landlords may not scrutinise your credit history too closely.

Where can I check my credit report for free?

While you can get a free credit report in multiple ways, RateCity's own credit checking system allows you to find your score from two credit history systems, Experian and Equifax. 

When you request your free credit report, you'll likely need to supply some personal information, such as your name, contact details, and a personal identification, such as a drivers license number or another form of identification. 

Not only does a credit report show credit score, but it usually often contains positive and negative credit transactions covering the past five years of payments. 

Does home loan pre-approval affect credit score?

Home loan pre-approval can give you a better idea of the amount you can spend when buying a property. It can also tell you about the steps you need to take to finalise your home loan and receiving the funds. Depending on how you approach a lender, pre-approval could include a credit inquiry which does affect your credit score. Some lenders, however, may offer an online pre-approval which is faster and doesn’t involve a credit history check. An online pre-approval may only consider your financial capacity and offer suggestions on how to prepare yourself to take a home loan.

Most lenders, however, will likely prefer to make a full assessment of your financial situation by requesting a credit report in addition to your bank statements and tax returns. Such a credit inquiry, sometimes called a hard pull, is usually recorded on your credit file and can therefore affect your credit score. If you approach several lenders and all of them initiate credit inquiries, this will impact your credit score negatively. Sometimes credit reporting agencies make an exception in terms of including multiple credit inquiries if they are made within a certain period. It would still be best to avoid making multiple applications with different lenders.

Do you need a credit score to rent a property?

A credit score is used by banks and lenders to understand your financial health and wellbeing, but you may not be aware that it's used as a way for landlords to understand whether or not it's risky to get into a financial relationship with you.

When you’re looking to rent a property, your landlord may check your credit history to get a sense of your capability to pay rent in a timely fashion. Landlors may look at your history of repaying debts, and this as a benchmark to understand the likelihood of you paying your rent on time, or not.

 

Can a bad credit score affect rental applications?

A landlord may check your credit score to work out how trustworthy you are, and whether you'll pay your rental obligations on time. So, can a bad credit score cause you to miss out on renting property?

When looking at your credit score for rental applications, landlords may not see a low score as a reason to instantly reject applications. Some may be more generous, and could be willing to consider a tenant with a lower credit score, or even request some form of additional deposit to act as security against possible future problems.

Alternatively, you may want to consider asking a guarantor to co-sign your lease, which gives the landlord peace of mind as they have an alternate payment source if you cannot make payment.

Can a debt collector affect your credit score?

When a creditor is unable to contact you by phone or by sending you a formal notice in regards to outstanding debt, they will often outsource the job to a debt collector. The debt collector can try to reach you by phone, or they can attempt to contact you face to face. If they cannot get through to you by either method, they can only report back to the creditor but not directly report a payment default to the credit rating agency. So, can debt collectors affect your credit score? No, they cannot do so directly.

However, if you owe money, you have an obligation to return it or communicate your difficulty in doing so to the creditor as well as to any involved debt collector. If they cannot contact you, they can report a serious credit infringement against you, which may affect your credit score for many years. Creditors can also take the legal route, and a court judgment against you can also severely impact your credit score.

You should remember that debt collectors need to abide by specific rules and cannot harass you by repeatedly calling or visiting you, or by threatening to confiscate your possessions if you don’t pay up. Similarly, they cannot threaten to file a default against you, especially with a credit bureau.

What is a good credit score?

Across Australia's major credit score providers, Experian and Equifax, there are five tiers, ranging from "below average" to "fair" to "good", "very good", and "excellent", with your score designating where you sit. As the tiers suggest, an Experian credit score between 625 and 699, and an Equifax credit score between 622 and 725, is technically considered to be in the range of "good". Anything above this is even better.

However, lenders will typically favour the borrowers with the highest credit scores which means that applicants with a "good" credit score may not be offered an interest rate as competitive as one offered to a borrower with a "very good" or “excellent” credit score.