Buying now and paying later, or BNPL, is pretty standard, with so many lenders on the market. There are many easy options to pay off on instalments, using credit, debit, Apple Pay or other options. All of which makes it extra hard, when you do something you want, not to immediately take it on BNPL.
But what should you do? Is there a 'best' option when it comes to what affects your credit score?
The risks involved.
BNPL loans can be taken out without a full credit enquiry — which means they won't affect your score directly. However, loans like these are set up to be easy to apply for, even for those with low scores. So it would help if you were careful you don't borrow too much or you'll risk-taking on a lot more debt.
A BNPL may also involve a quotation enquiry — which doesn't hurt your score but does show up on your record. This means lenders can see how many loans you applied for — and come to their conclusions.
The good side of borrowing.
Some borrowing is expected of you — after all, very few of us can afford a house or even a car upfront. This means we'll all need, at some stage, to take out a loan. However, lenders will want some information from you to help them decide on the type of loan they give you — including what interest rates to charge you or whether you're an unexpected risk.
So having a history of paying back debt can help in these circumstances. Those with a low credit score often haven't borrowed much money or done anything to grow their score.
The wrong side of borrowing.
As soon as you forego repayments, you'll have debts to repay if you take out too many loans. Fees and other interest payments are added, where BNPL lenders make their money. Missing payments will also bring down your credit score, which affects your chances of getting loans in future.
What are credit scores?
Credit scores are worked out on algorithms that source a lot of credit data, placing your score against the rest of New Zealand and the world. Are you typically a good saver, or do you have trouble budgeting? The actions you take on repayment will be feedback into that same algorithm, as either a positive repayment action or a negative one.
In short, there are destructive behaviours as well as good ones. An example of bad behaviour could be taking on a whole heap of BNPL loans or several credit cards. That typically tells lenders that you're impulsive, and your solution to not being able to afford something is to take out a new card to avoid hitting the maximum limit on your other one. Other examples are extending or adding more payments than you can budget for, maxing out credit cards, defaulting on payments (that's simply not paying the money you owe back) or applying for too many credit cards.
Credit enquires are when your credit provider (that's the person who lends you credit, like a bank or finance company) runs a check on you.
A credit enquiry won't always hurt your score. Sometimes the bank or a lender will run something called a quotation enquiry, which means they'll look at your credit history, credit score and other details, but it won't cost you valuable credit scoring points.
Sometimes a complete credit application will be run for bigger loans (not usually a BNPL). That's where a hard pull of your credit is taken, and it does impact your credit score. While the lender will have to get your consent for this to happen, be sure to read the fine print on their website. If you're unsure, talk to them about how they access you before taking out a loan with them.
Also, whenever you finance a purchase, a complete application is usually run. So, if you find yourself taking out heaps of BNPL loans, maybe it's time to cut back before other lenders see your actions.
Can credit agencies see what I've bought?
Not in detail. A credit report is based on numbers and types of loans you take out, not on the actual items themselves. They may see the kind of loan you've applied for, though, or the lender you've applied through — which tells them what sort of thing you're buying.
Returning to BNPL.
As mentioned above, BNPL's rely on adding late fees for those who miss a payment date. So, while interest is not usually applied on this loan type, and the monthly breakdown of costs might be reasonable, you'll also have to consider the possibility of additional fees.
If you take out a BNPL, make sure you pay them back in time. While they don't affect your score, they may incur some serious late fees if not paid — those do affect your score.
Also, quotation enquiries get noted on your credit report, which lenders consider. So it's always a good idea to show restraint and that you're not borrowing more than you earn. Be careful to keep a track record of loans you can afford and budget for any you decide to apply.