Does buy now pay later affect your credit score?

Using Buy Now Pay Later (BNPL) can affect your credit score. In this article, we’ll explain why this is the case, and give you a few alternatives if you decide it’s not the right option. 

Buy Now Pay Later—is it a good idea? 

For some consumers, yes—Buy Now Pay Later is a good idea.

With many retailers now offering Buy Now Pay Later services to their customers — both online, and increasingly in-store — many shoppers are using BNPL to spread the cost of their purchase over a longer timeframe, often at 0% interest and with a small initial payment. Common examples of BNPL services include those from Klarna, Clearpay & Laybuy.

But although spreading the cost of shopping in this way might work for many people, it's also worth being aware of the potential drawbacks when using a BNPL. 

It can be easy to feel like the purchase is cheaper because of the small initial payment needed, whereas in reality, goods bought using BNPL will cost exactly the same as if you paid upfront. It’s also useful to be fully aware that using a Buy Now Pay Later service is a form of short-term loan. Until you’ve paid the money back, you’re technically in debt. 

At the time of writing, many BNPL services aren’t regulated by the Financial Conduct Authority (FCA). This means that the companies aren’t supervised, and therefore aren’t held to the same standards as other financial institutions. It would also mean customers are unable to raise a dispute with the Financial Ombudsman, and don’t have Section 75 protection. 

(Section 75 is a form of credit card protection that allows customers to file for a refund if a purchase costs between £100 to £30,000 and is faulty, or undelivered, or mis-sold.) 

Some BNPL services are different 

You’ll find that some BNPL services, for example, those offered by certain banks, or for longer periods, operate differently and are regulated. But you may need to pay interest on these types of BNPL schemes. These services also tend to carry out a hard search on your credit report when you apply, which will be visible to other potential lenders. 

A hard (or application) search is a complete search on your credit report – including your credit repayment history. This type of search will be visible to lenders for 12 to 24 months. Having hard searches on your credit report isn't necessarily a bad thing (many consumers tend to have six to twelve hard searches on their report each year) but having a record of too many hard searches over a short timeframe can serve as a red flag to lenders because it looks like you’re relying too much on credit, or you’ve been rejected for lots of applications. 

Since BNPL schemes can vary in their terms so widely, it’s always worth reading the small print to know exactly what you’re signing up for. 

For clarity—we’ll be referring to the shorter term (and currently unregulated) type of BNPL services in the rest of this article. 

How does Buy Now Pay Later affect my credit score?

When you apply to use a Buy Now Pay Later service, they may run a soft search of your credit report.

These soft searches (also called ‘enquiry’ or ‘audit’ searches) leave a record on your credit report, but they won’t usually impact your credit score. Having a record of lots of soft searches on your credit report won’t impact any opportunities for being accepted for credit in the future. 

Although soft searches made by BNPL providers shouldn’t affect your credit score, using a BNPL scheme could. 

This is because BNPL providers are increasingly sharing a record of your borrowing with one or more of the three UK credit reference agencies: Experian, Equifax and TransUnion. Each one of these credit reference agencies holds a credit report on you — including things like applications for credit and a history of your repayments. 

If you always make your payments on time, then this will be reflected in a positive repayment history (which is one factor that goes into calculating your credit score). However, a patchy repayment history due to missed or late payments has the opposite effect — and can negatively impact your credit score. 

So, could using Buy Now Pay Later improve my credit score? 

Potentially, yes — using a BNPL service could have a positive impact on your credit score. 

If your BNPL provider shares a record of your borrowing with the credit reference agencies, then using a BNPL scheme could offer a chance to demonstrate that you are consistently managing your repayments. This is likely to be good news for your credit score. 

It can be easy to assume that the best way to maintain a good credit score is to never risk using any credit. Whilst there are potential benefits to this approach — mainly, the avoidance of any debt — being ‘credit inactive’ means there’s no evidence of your ability to use credit responsibly. This can put potential lenders off, because the uncertainty is higher.

Is there a chance that using Buy Now Pay Later could negatively affect my credit score? 

Unfortunately, yes — using BNPL can also negatively affect your credit score. 

Your credit report gives lenders a picture of your financial situation, including details of how up-to-date you are with payments for any credit accounts.

Missed payments and defaults are negative markers on your credit report, and subsequently, they affect your credit score. This is why it’s always wise to make sure repayments to BNPL providers are always made on time.

To make things easier, BNPL repayments are usually automatically taken from your chosen bank account, often weekly or fortnightly, and you’re usually sent a reminder beforehand. 

Still, some people can struggle to keep on top of repayments. So it’s important to be especially careful when using BNPL when:

• Returning items as the process of knowing exactly what you owe can be a little more tricky in these situations  

• If you’re already in arrears — it can be easy to stack up multiple BNPL accounts which can lead to higher levels of combined debt

• Using a debit card that’s about to expire. An expired debit card can make it easy to unintentionally miss a repayment. 

Ultimately, using Buy Now Pay Later schemes can be a good way to spread the cost of purchases, and potentially, contribute to your credit score (if you maintain payments). But using BNPL services can come with drawbacks — including a potentially negative impact on your credit score if you don’t keep up on repayments. It’s important to not use BNPL simply to improve your credit score. There are plenty of other ways to do this.

We present clear paths to progress, identifying actions which can raise your score, build positive habits and arm you with the know-how to keep them up. Check your file

Alternatives to Buy Now Pay Later 

BNPL schemes aren’t the only way to get interest-free credit on your shopping. Here are a couple more options that are available:

• A 0% purchase credit card. With this type of credit card, you’ll get interest-free credit on purchases for a set amount of time, which can be a useful way to spread costs — especially for higher ticket items. By using a credit card, you’ll get Section 75 protection and your credit limit will likely be higher. However, applying for a credit card comes with a hard credit check, and the fees for missing payments could be more expensive.

• A 0% overdraft. An 0% interest arranged overdraft can be a way to secure interest-free credit using your current account. However, this option doesn't come with Section 75 protection (unlike credit cards) and it also tends to involve a hard credit search.

As always: it’s always a good idea to read the fine print of whichever interest-free credit product you decide on — so you know exactly where you stand in terms of affordability checks and potential fees. 

A quick recap: Does Buy Now Pay Later affect your credit score? 

Using BNPL to spread the cost of your purchases can have an impact on your credit score — especially now many BNPL providers are reporting credit repayment history to the main credit reference agencies: Experian, Equifax and TransUnion. 

Whether that impact is positive or negative really depends on how able you are to keep up with repayments. Demonstrating that you’re good at managing credit by always paying your repayments on time should have a positive effect on your credit score, whereas delayed or missed repayments are likely to have the opposite effect. 

The key thing is to always know exactly what the terms are of any BNPL service you might decide to use — so you can make the credit you use work best for your finances (and your credit score!).