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How does buy now pay later affect your credit score

There's no avoiding the pressure to spend more at Christmas. But before you get tempted at the checkout by Klarna or Clearpay, it's worth understanding how buy now pay later can affect your credit score - and getting a mortgage

Post updated: December 2nd, 2021

5 minute read

How does buy now pay later affect your credit score

How does Buy Now Pay Later affect your credit score? Put simply, it’s a type of credit so how you use it can have an impact on your overall credit score.

With the pressure on to spend money at this time of year, money experts say using a credit card responsibly can help spread the cost. Likewise, using a 0% purchase credit card allows you to pay off your Christmas spend over a few months without paying interest. And a cashback card can be a savvy option as it actually earns you some rewards when you shop.

But what about Buy Now, Pay Later?

Buy Now, Pay Later explained

Buy Now, Pay Later lets you can spread the cost of your purchase – interest free – over a number of weekly instalments, or pay it off as a lump sum at a later date. Also known as “point of sale credit”, some schemes give you 30 days to pay while others allow you to up to 12 months.

It means you don’t have to go into your overdraft. Unlike credit cards or store cards, Buy Now Pay Later doesn’t come with any fees. And the approval process is almost instant when you get to checkout.

You’ve probably heard of the main providers of Buy Now, Pay Later:  Klarna works with thousands of retailers including ASOS, Peloton, Superdry and Samsung, Clearpay provides the service for M&S and Laybuy are at JD Sports.

The retailer covers the cost of the credit and the Buy Now, Pay Later providers get a cut of the sales they help retailers to make.

How does Buy Now Pay Later affect your credit score?

1. By increasing your personal debt levels

While it certainly has benefits and provides flexibility, the worry is that Buy Now, Pay Later is just too easy to obtain. It’s promoted heavily at the checkout, and in marketing emails, in a way which encourages people to pay using it without properly understanding the significance and risks of what they are signing up to. It could as a result end up pushing more people into debt.

2. Through missed payments

The repayment period is often much shorter than with a credit card, usually over a matter of 6 weeks. If you miss your reminder to pay or are unable to pay what you owe at the time it is due, you could be charged a fee. Charges could soon mount up and debt collection agency’s get involved. Late or missed payments can impact your credit score.

Black marks stay on your credit record for six years. So missing a payment on a pair of trainers when you are 18 could end up affecting your chances of getting a mortgage when you’re 24.

3. Hard searches on your credit file are bad news

When you agree to Buy Now, Pay Later through Klarna and Clearpay, the companies will only do a soft check of your interest-free borrowing. This soft check won’t directly impact your credit score. But Laybuy and OpenPay do a hard search of your credit report. This will show on your credit report to other lenders. Lots of hard searches worry lenders when they check your credit report as it looks like you are desperate for credit.

How do mortgage lenders know I’ve used Buy Now, Pay Later?

Just because you’ve used a Buy Now, Pay Later company that does soft searches doesn’t mean a mortgage lender considering your application won’t know you have been using the schemes. Several lenders look for Buy Now, Pay Later commitments when analysing bank statements you have to submit when applying for a mortgage. So your borrowing will be picked up eventually even if it isn’t on your credit report.

Lenders are less concerned with you using Buy Now, Pay Later for smaller items. It’s only when the borrowing falls into the category of an ongoing financial commitment that they are likely to be taken seriously. So those trainers you defer payment on for 30 days, interest-free is unlikely to be of much concern if you make your payments on time. However, a larger purchase spread between six payments would be seen as a financial commitment that would impact your disposable income each month assuming you are still repaying it when you apply for a mortgage.

Ways to protect your credit score

Here are some ways to protect your credit score, from using Buy Now, Pay Later schemes carefully to cutting financial ties with previous partners….

  1. Make your Buy Now, Pay Later repayments on time. If you use Buy Now, Pay Later sensibly it could improve your credit score. By repaying on time you are demonstrating that you are a reliable borrower.
  2. Only apply for a credit card if you know you’ll be accepted. If a lender sees you’ve applied for multiple cards over a short period of time (i.e. if you’re trying to get a credit card to spread the cost of Christmas) you’re going to look a little bit irresponsible and, perhaps even, desperate. Check you’re eligible for the card before applying
  3. Don’t apply for too many store cards. Let’s be honest, it’s certainly tempting. But too many credit searches will not go down favourably with lenders. What’s more, if you’re late making a payment the interest you’ll be charged will immediately cancel out any saving you made.
  4. Watch out for scams. Scammers are, unfortunately, not a seasonal occurrence. However, they do tend to be more prevalent at Christmas. And if a scammer gets your financial details, not only can they take your money they can also make applications for credit in your name and damage your credit score in the process. Be careful when shopping online. Credit checking agency ClearScore advises sticking to websites you trust, watching out for emails from big brands that have grammar or spelling mistakes and strange website addresses.
  5. Stay on top of bills. It’s easy to lose track of what day it is throughout the Christmas period. Make sure you don’t miss any bills or payments by setting up direct debits wherever possible.
  6. Cut all ties It’s a sad fact that many relationships break down over the Christmas period. In fact, statisticians who studied Facebook posts for a research project found December 11th is the most common day of the year for couples to break up. If you’ve had any finance agreements with an ex-partner, whether a mortgage, a loan or even just shared bills, their credit history can be considered when determining your score. Make sure you inform the credit reference agencies that you’re no longer together by asking for a ‘notice of disassociation’.

What’s you experience of Buy Now, Pay Later? Let us know in the comments below?

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