Does Buy Now Pay Later affect your credit score?

Buy Now Pay Later (BNPL) credit providers like Klarna and Laybuy are starting to share information with credit reference agencies, ahead of regulation by the Financial Conduct Authority (FCA).

BNPL credit providers, for the most part, aren’t regulated by the FCA. But, they will be soon. On 20^th June 2022, the government published an update on their intentions to create legislation that tightens rules that govern this type of credit. However, because the legislation still needs to be prepared, consulted on, and potentially tweaked following consultation, it may not come into effect until 2024.

But, some BNPL providers are getting ahead of the curve, and are already sharing information with credit reference agencies. Let’s find out what this means for you and your credit score.

Buy Now Pay Later and your credit score: what’s the latest?

This is the state of play with the three main BNPL credit providers in the UK – Klarna, Clearpay and Laybuy:

Klarna

Klarna are now sharing payment information for customers who use their Pay in 30 and Pay in 3 products with Experian and TransUnion (but not Equifax – yet). Klarna have said that the information they’re sharing won’t affect your credit score straight away, although it will be factored in as soon as possible. However, because lenders will be able to see the information, even while it doesn’t affect your credit score, it could influence your eligibility with them, for good or for bad.

No changes are currently being made to the way Klarna carries out credit checks or shares information about them. They will continue to carry out soft credit checks, which don’t affect your credit score, each time you apply with them.

Clearpay

Clearpay doesn’t currently share information about your payments with any of the three main credit reference agencies in the UK. So, you won’t see this information in your credit report, and it won’t affect your credit score. Like Klarna, they carry out soft credit checks when you apply with them, but these don’t affect your credit score either.

Clearpay’s approach may change in the future, though. A spokesperson for Clearpay recently said that “appropriate and proportionate credit reporting can add value for customers”, so watch this space!

Laybuy

Laybuy shares information about your use of their service and your payments with all three of the main UK credit reference agencies. However, reports suggest that this information only appears in your Experian credit report at the moment. It’s not clear whether it also counts towards your Experian credit score.

On top of this, Laybuy carry out a hard credit check – the kind that will affect your credit score – when you open an account with them. This is different to other BNPL providers, who only use soft credit checks, so is worth bearing in mind.

Other BNPL providers

Whether information from other BNPL providers you might use affects your credit score depends on whether they are regulated or unregulated. If they’re unregulated like the BNPL providers we’ve covered here, then it’s up to them whether they share information with credit reference agencies. If they don’t, then your credit score won’t be affected.

If they are regulated, like BNPL options that are tied to your bank account (think Monzo Flex, or Natwest’s new Buy Now Pay Later offering) then information about your use of this credit and your payments should appear in your credit report. This means it can affect your credit score.

Zilch is a BNPL provider that is regulated by the FCA and has recently announced that they will report customer transactions to credit reference agencies. This will affect customer credit scores – for better or worse, depending on whether or not repayments are made on time. This move pre-empts new regulations due to be introduced by the FCA. 

Not sure whether you’re using a regulated BNPL provider, and if they’re reporting to credit reference agencies? Ask them! Some companies are regulated because they also offer products that have to follow the FCA’s rules. If you’re not sure if the type of BNPL credit you’re using is one of them, then dropping the provider a line to ask the question is the best way to find out where you stand.

BNPL and debt collection agencies

If you don’t pay back the money you’ve borrowed from a BNPL credit provider, then they may transfer your account to a debt collection agency tasked with trying to get the money back. If this happens, then while the BNPL provider may not have affected your credit score, the debt collection agency could.

Credit checks by debt collection agencies have a particularly negative effect on your credit score. Debt collection agencies can also place defaults on your credit report, which can affect your credit score and seriously limit your chances of being approved for credit for up to six years.

So, just because BNPL credit may not affect your credit score, it should still be considered just as important to repay as types of borrowing that do.

What this all means for you

On the whole, this move by BNPL credit providers is a good thing. It gives greater transparency to other lenders you might apply with, which means you’re even less likely to be lent money you can’t afford to repay.

If you always pay for your BNPL purchases on time, then having records of this can help build your credit history, increase your credit score, and improve your chances of getting approved for other types of credit, too.

Even if your use of BNPL credit means your credit score takes a hit, this can still be good for you… in the long run. It means it’s not gone unnoticed that you may be close to your financial limits, and as we mentioned above, you’re less likely to be lent money you can’t afford to pay back. Ending up in a situation where you owe more than you can repay can lead to difficulties and issues that plague you for years. So, while nobody likes to be told “no”, in this case, it is said with your best interests at heart. 

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