Does Buy Now Pay Later Affect Credit Score for Car Finance?

Buy Now Pay Later (BNPL) seems to be the quickest and simplest method of payment when shopping online. Some times are more a drain on your finance than other - like 🎄Christmas🎄 which progressing on the horizon at time of writing, and it’s easy to have increased outgoings, and some of those expenses might be a bit more than you’re able to afford. 

However, it's important to consider your options carefully before using BNPL. Many don't realise it is in fact considered to be credit. BNPL can affect your credit score and your ability to obtain further credit down the late, whether it be a mortgage or car finance. But does buy now pay later affect credit score? Let’s find out more. 

What Exactly Is Buy Now Pay Later?

You may have heard of companies such as Klarna, Clearpay or Very. Buy Now Pay Later (BNPL) delivers exactly what it says on the box: it gives you the chance to purchase anything without having to pay for it right now. Also referred to as point-of-sale credit, some BNPL programmes give you up to 30 days to pay while others give you up to 12.

But what we usually don’t think about is that Buy Now Pay Later (BNPL) is a type of borrowing. If you adhere to your repayment agreement, you won't typically be charged any interest or fees on the amount you borrowed with these products.

They are frequently offered by a different credit provider, not the brand you are purchasing from. The Financial Conduct Authority (FCA) does not oversee agreements that are shorter than 12 months, so if something goes wrong, you won't have complete consumer protection.

In general, you won't incur interest if you pay back the whole amount of what you purchased within the grace period. When using the buy now, pay later option wisely, you can put off paying for something for several months or even a year without accruing any interest. If you pay off your debt before your delay period expires, even if it's just the day before, many of these BNPL providers won't charge you any interest. 

Alternatively, some programmes will let you spread the cost out over a longer time frame, but a high rate of interest, like 39.9% APR, may be applied.

How Do Different BNPL Providers Affect Your Credit Score?

Although Buy Now Pay Later undoubtedly offers advantages and flexibility, there is concern that it is just far too simple to obtain. It is prominently advertised when you checkout and in marketing campaigns, which encourages customers to pay with it without fully understanding its implications and hazards. As a result, it can lead to more people getting into debt.

​​In comparison to using a credit card, the interest free repayment period for those is frequently substantially shorter, typically lasting 6 weeks.  After the 6 week period you will be charged interest, and have to make a minimum payment by a set date and at monthly intervals thereafter.  You can be charged a fee if you ignore your payment reminder or are unable to settle your debt by the agreed deadline. Charges can accumulate, and debt collection companies can become involved. 

Either way, with credit card or BNPL, your credit score can quickly be impacted by missed or late payments. It’s a shame that this isn’t more clearly disclosed before you purchase using a BNPL offer. Let’s look into the different BNPL providers and how they affect your credit score. 

Does Klarna Affect Your Credit Score?

Does using Klarna affect credit score? Well, Klarna sends credit information to Experian and TransUnion regarding clients who utilise Klarna's Pay in 30 and Pay in 3 offerings. Soon, they’ll be notifying Equifax too. They have stated that while the information they are disclosing will be taken into account as soon as possible, it won't immediately harm your credit score. Even while the information won't immediately affect your credit score, lenders will be able to see it, therefore it may have a positive or negative impact on your eligibility with them.

However, Klarna conducts soft credit checks every time you require BNPL, which means the application won’t show on your credit score. This is not likely to change anytime soon. Do be careful though, because other BNPL providers perform hard credit checks when you request a purchase, and this will be written into your credit record. 

Does Clearpay Affect Credit Score?

There are three major credit reference agencies in the UK, but Clearpay does not presently disclose information about your payments with any of them. Therefore, your Clearpay BNPL purchases will not be visible on your credit report. When you apply with them, they run a soft credit check similar to Klarna, which doesn't affect your credit score.

However, Clearpay's strategy may very well change in the future. In fact, a Clearpay spokeswoman, recently stated that the company is “reviewing its approach to credit checks and recognised that appropriate and proportionate credit reporting can add value for customers”. 

Does PayPal Credit Affect Credit Score?

Your credit score is affected by applying for PayPal Credit because they perform a hard credit check every time you request a purchase. Synchrony Bank, a financial institution with which PayPal has a partnership, examines your application before reaching a decision. This hard inquiry could result in a few points being deducted from your credit score and will be on your credit report for two years. 

Additionally, PayPal Credit reports data to credit bureaus since 2019, which means that missing a payment or being late could also be reported on your credit report, further reducing your credit score.

Takeaway

The fact that some BNPL credit providers communicate your credit behaviour to credit bureaux can be quite positive or quite negative depending on how often you use it. It increases transparency for potential lenders, making it less likely that you will receive a loan for an amount you cannot afford to repay. But if you use BNPL frequently it may also put other potential lenders off, as they will see you as not being able to manage your day to day finances without constant borrowing. So don't use this as your normal method of paying for purchases. 

Having proof that you consistently pay your BNPL bills on time will help you establish a credit history, raise your credit score, and increase your likelihood of being approved for other types of credit as well.

In the long run, using BNPL credit may benefit you even if it lowers your credit score temporarily. It means that your potential financial restrictions have not gone ignored, and as we mentioned above, it makes it less likely that you will be lent money you cannot afford to repay.

Being in a position where you owe more than you are able to pay back can cause problems and challenges that last for years. Give yourself adequate time to consider your repayment strategy. 

You might not even be aware that you selected BNPL at checkout, because of how easy it is to do so. The implication of this is that you might not give yourself enough time to consider whether you need what you're buying and how you're paying for it, or you might be persuaded by discounts to buy something you don't actually need.

It's also possible that the fine print regarding what you're signing up for is hidden elsewhere on the website. Especially if you are presented with a selection of BNPL products at checkout, it may be challenging to determine which repayment plan you have selected or whether it is the ideal one for your needs. Make sure you read the fine print carefully to avoid any confusion.  And always keep an eye on your credit score regularly anyway, applying for any credit can have negatives and positives depending on how you repay it. And it's usually free for a basic check. 

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