Buy Now Pay Later (BNPL) and Your Credit Score: What You Should Know

Buy now, pay later (BNPL) is a popular payment method in today’s digital shopping era. With its promise of instant purchases and delayed payments, BNPL offers you flexibility while making a purchase. While BNPL helps make shopping easier, it also has implications for your credit score. Understanding how BNPL works and its impact on your financial health is crucial for making informed decisions. Read on!

What is Buy Now Pay Later (BNPL)? 
 

BNPL is a short-term financing option that allows you to purchase goods or services and pay for them later in installments. Unlike traditional loans or credit cards, Buy Now Pay Later doesn’t always require interest, making it an attractive choice if you are looking for affordability and convenience.

How Buy Now Pay Later Works?

The BNPL process is straightforward, here is what to do:

Step 1: Choose a lender online or offline who offers BNPL payment option.
Step 2: While making payment select BNPL. 
Step 3: Agree on a repayment plan, often split into equal payments over weeks or months and make regular payments.

Advantages of Buy Now Pay Later

BNPL offers several benefits, including:

•    Instant Access to Products: You can make purchases without worrying about immediate payments.
•    Interest-free Installments (Mostly): Many providers offer no-interest plans, making it a cost-effective solution.
•    Budget Management: This allows you to distribute expenses over manageable payments.
•    Convenient Alternative: BNPL often requires less stringent approval compared to other payment options, such as credit cards, which makes it accessible to more users.

Effect of BNPL on Your Credit Score

BNPL can either improve or decrease your credit score, depending on how you use it:

•    Positive Impact: If your BNPL provider reports on-time payments to credit bureaus, responsible repayment can help build your credit score.
•    Negative Impact: Late or missed payments can lower your credit score, especially if the BNPL provider reports failures.

BNPL transactions often don’t appear on traditional credit reports unless the provider reports them. Some lenders treat BNPL debt as part of your overall financial obligations when assessing future loan applications.

Other Factors Influencing Your Credit Score

Now that we have seen the effect of BNPL on your credit score, let’s check out several others factors that determine your credit score:

•    Repayment History: Making consistent and on-time payments is important to maintain a good credit score. Missing payments on BNPL plans may lower your score.

•    Credit Utilisation Ratio: Utilizing a significant percentage of your available credit affect your score.

•    Credit Mix: Having different types of credit, including BNPL loans, can influence how lenders view your financial responsibility.

•    Length of Credit History: Short-term BNPL loans may not contribute to a long, stable credit history.

•    Hard Credit Inquiries: While BNPL typically uses soft inquiries, some providers might conduct hard checks, if they offer larger financing options.

How to Improve Your Credit Score

Here are five keyways to improve your credit score:

1.    Pay Bills on Time: Timely payments for loans, credit cards, and BNPL installments boost your creditworthiness.
2.    Keep Credit Utilisation Low: Use less than 30% of your available credit. It helps maintain a strong score.
3.    Check Your Credit Report Regularly: Identify and dispute errors that might negatively impact your score.
4.    Limit Hard Inquiries: Avoid applying for too many loans or credits in a short period to prevent score dips.
5.    Use BNPL Wisely: Only opt for BNPL plans, if you can meet the payment deadlines without financial strain.

To Conclude

BNPL is a convenient financing option that allows you to shop without immediate financial strain. However, it carries implications for your credit score, depending on how you manage payments. While responsible BNPL use can support financial flexibility, excessive reliance and missed payments may hurt your credit standing. Understanding the impact of BNPL and adopting smart financial habits will help you make the most of this payment option without harming your creditworthiness. However, it is always advised to be informed about your credit score in advance. 

With minimal documentation requirement and instant result, checking your credit score is easy with Poonawalla Fincorp. Try today!

Frequently Asked Questions

1.    Do BNPL services charge interest?
Some BNPL providers offer interest-free installments, while others may charge interest or fees for late payments.

2.    What happens if I don’t pay on time?
Late payments may result in penalties, additional fees, and a negative impact on your credit score.

3.    Does BNPL affect my credit score?
BNPL can impact your credit score if payments are missed or if the provider reports transactions to credit bureaus.