Buy Now, Pay Later – Does it affect my Credit Application?
Was That Shopping Spree On The Weekend Such A Good Idea?
The ability to have a desired item now and not contribute a single dollar until later sounds too good to be true. Especially without any additional interest charges or exorbitant fees. The hype has even been recognised by established organisations with Latitudepay and now even NAB getting on the action with their StraightUp interest free credit card.
Buy Now Pay Later (NBPL) facilities have taken shoppers by storm in the past few years. It's clear why that would be so as it is simple to utilise and understand - As long as you pay on time, you won’t be charged additional transaction fees or interest payments. The ease of accessing your account details by mobile app makes it even easier.
Whilst this does seem to be too good to be true in the moment, does it have any repercussions when credit applications need to be made for bigger purchases? We get asked on a daily basis whether BNPL arrangements affect your credit application. It is worth weighing up if you should buy that new TV or pair of shoes now or whether it's better to buy them later.
Disclaimer: For this particular article, we will focus mainly on Afterpay as one of the leading BNPL providers. There may be slight differences between other providers but the general overall principle applies regarding BNPL facilities.
The Good News Is Afterpay Doesn’t Affect Your Credit Score (Unless...)
Afterpay won’t affect your credit score as long as you make payments on time. There is no credit footprint upon applying for BNPL. In other words if you sign up with Afterpay and make all your payments on time, your credit history is left unaffected.
However the fine print does mention that Afterpay does reserve the right to perform credit checks. Whilst they will not leave an enquiry on your file when you sign up, this authorises Afterpay to report negative activity on your account to credit reporting agencies such as Equifax. This includes instances of late payments and defaults. This is an extra incentive to ensure payments are made on time.
In addition, where Afterpay holds the right to report negative activity, good payment history will not assist with improving your score either as this activity will not be reported. Therefore, it is good to think Afterpay as “credit rating neutral” as long as you meet your payment obligations.
So My Credit File Is Safe – What About My Credit Application?
This is where things get interesting. If Afterpay is credit rating neutral then surely my credit application will be fine as if Afterpay did not exist – right?
Ultimately BNPL arrangements are fixed expenses that you are contracted to make. The majority of lending institutions have taken the stance that fixed repayments are committed to be made in analogy to any financial loan, the regular payments for BNPL contributes to your ability to meet capacity. In other words, your current payments to Afterpay will be treated the same as any other loan that you are contracted to pay.
Your current payments to Afterpay will be treated the same as any other loan that you are contracted to pay.
Whilst the BNPL arrangement does not show on your credit file, the payments will clearly be evident on your bank statements (which is regularly requested for most loan applications).
Scenario 1: Andy decided to go on a shopping spree during the weekend where he purchased some household items. This included a vaccum cleaner, some clothes, and some premium dog food and treats for his pug. As he did not have the money upfront, he used Afterpay which totalled at roughly $400 per month.
Two weeks later Andy needed to apply for a loan to start renovations on his property, totaling at $20,000. He approached his bank to utilise equity on his property to fund the renovations. Upon looking at Andy’s bank statements the bank had discovered Andy to be addicted to Afterpay and had multiple payments ongoing with them.
Whilst he has made his payments on time with Afterpay and his other financial commitments, Andy’s renovation loan was subsequently declined due to insufficient affordability. The bank’s recommendation was to pay his Afterpay commitments off prior to reconsideration for his renovation loan.
The extra repayments may be the difference between obtaining your desired finance approval or not due to affordability criteria. All personal lenders are required to verify that you can afford any proposed financial commitment in the form of an application. This means that payments for a BNPL arrangement will be factored into their servicing calculation.
In addition to meeting affordability, a lender also needs to get comfortable with the level of debt that is ongoing relative to your income level. Whilst taking your income minus all expenses may show some affordability, you will be hard pressed to find a lender that will assist if half your wages are going to Afterpay!
It should be worth noting that Afterpay does not allow you to nominate the day your payments come out. Whilst this may not be an issue with you keep surplus funds in your account at all times, for those that don’t you run the risk of dishonouring your commitment especially if the payment date is a couple of day before payday. Any dishonours on your bank statements can affect your application as lenders may consider this as an inability to make repayments altogether. In addition, you may cop a late fee from your bank and Afterpay.
I Still Want To Use Afterpay As I Can Afford It – What Can I Do To Make Sure I’m Not Affected?
With the above points, a BNPL arrangement is still a handy facility to reduce your overall repayments due to the interest-free component. Being a short-term commitment as well you won’t be tied down for years with the same commitment for the same item.
Still though like every financial product, moderation is key which ties in with our following recommendations:
Budget your overall income and expenses - Although it may be a no-brainer, it is always critical to consider whether you should purchase that item given your current spending. If you find yourself running your bank account dry before your next pay check, a BNPL arrangement may be unsuitable.
Separate impulse spending habits from BNPL – Afterpay allows you to literally take your purchase home without spending a dollar from the time you buy it. With this said, do this multiple times in a short span of time and the payments will all hurt at once.
If you can’t pay for it upfront, then it may be worth giving it a miss – Whilst this mindset may defeat the purpose of a BNPL facility, this mentality will help you to shop responsibly and purchase items in moderation.
If you do find yourself in the middle of several BNPL commitments, you have the ability to make extra nominated repayments to pay off one commitment at a time faster when surplus funds are available. There are no penalties for making early repayments.
In A Nutshell
Your finance application can be affected by ongoing BNPL arrangements based on the following:
Excessive debt to income ratio
Dishonours with any BNPL commitments
The same principal applies to BNPL arrangements as with all financial products – moderation is key. This also means that the lack of moderation can be the difference between finance approval or not.
While there is comfort that your credit file is unaffected (on the proviso you meet your repayments) this does not mean that credit applications in the near future are not unaffected. BNPL does not mean throwing out the basic principle of budgeting and planning especially if you have some goals in mind that requires funding in the near future.