Does PayPal Pay in 3 affect my credit score?

While applying for PayPal Pay in 3 doesn’t affect your credit score, the way you manage the debt can. Pay in 3 is a convenient option for splitting a large purchase into more manageable instalments, but there are some potential risks to keep in mind.

In this guide, we discuss how Pay in 3 might impact your credit score, potential risks, and tips for responsibly using the service. We also answer some of the most frequently asked questions about PayPal’s Pay in 3.

How does PayPal Pay in 3 affect my credit score?

Using PayPal’s Pay in 3 is a form of borrowing; PayPal lends money to the consumer to cover the entire purchase, and the customer pays them back in three instalments (one of which is made at the time of purchase). So, as with other types of borrowing, the way you manage the repayments can influence your credit score and credit report. 

Let’s take a closer look at how managing your purchase with PayPal’s Pay in 3 can affect your credit score.

1. The potential positive effects

Responsibly managing your PayPal Pay in 3 repayments —which means making the repayments on time—will count towards improving your credit score over time, which in turn increases your likelihood of accessing future credit. PayPal shares repayment history information with TransUnion, so future lenders who also use TransUnion will be able to see that you’ve been responsible when it comes to repaying debts.  

Credit scores don’t change overnight, and singular credit agreements, such as using Pay in 3 for a specific purchase, are unlikely to change your score significantly. However, being consistent with your repayments in general will help to improve your credit score over the long term.

2. The potential risks

Just like making PayPal Pay in 3 repayments on time can improve your credit score - late or missed payments can negatively affect it. Missed, late, or defaulted payments will result in negative markers being added to your credit report, which remain for six years. These markers can negatively affect your credit score and make it difficult to get future credit (such as a credit card, loan, or mortgage).

A study by Harvard Business School has found that PayPal Pay in 3, and low or zero-interest Buy Now, Pay Later (BNPL) services like it, have been associated with increased spending. This isn’t necessarily a problem in itself—however, it’s important to monitor your spending when using this type of credit, to make sure you can afford to pay back what you owe. 

If spending becomes excessive it could make it difficult to pay back the debt, which can lead to missed or defaulted payments. Consequently, your financial situation and credit score can be negatively affected. 

Does applying for Pay in 3 affect your credit score?

Applying for PayPal Pay in 3 doesn’t affect your credit score, because when you apply for a buy now, pay later product the lender will only run a soft search on your report. 

When you apply for a long term credit agreement, lenders will perform a hard credit check and this search can influence your credit score. 

Credit checks can be either:

• A full credit check, also known as a “hard check,” “hard search,” or “credit application search”. These checks reveal all the information in your credit report, including your credit repayment history, address history, any financial associations (people linked to you financially, such as spouses who you have joint accounts with), and public court records. 

Having multiple hard checks in a short period of time can impact your credit score.

• Or a soft credit check, also known as a “soft search”. These searches relate to your credit report being accessed for any reason that doesn't involve a formal application for credit.

PayPal doesn’t always conduct credit checks for Pay in 3, but if they feel they need more information in addition to the details you’ve provided, they may use a soft search to fill in any gaps. This search is only visible to you and the credit reference agency that performed it and doesn’t affect your credit score. 

Does Pay in 3 offer purchase protection?

As of the time of writing this article, BNPL agreements in the UK—including Pay in 3—are unregulated payment agreements, which means they offer limited purchase protection. This is because these services fall under the exemption outlined in Article 60F of the Financial Services and Markets Act (Regulated Activities) Order 2001, meaning consumers may not benefit from all of the protections offered by the Consumer Credit Act and the UK’s consumer credit regulatory regime.

For example, PayPal doesn’t currently need to provide Section 75 protection for Pay in 3, which holds credit providers and retailers jointly liable for breaches in contracts. This protection requires credit providers to refund customers if they don’t receive the goods or services they paid for and are unable to get a refund from the original seller. Section 75 applies to purchases costing at least £100 but not more than £30k.

While the UK government proposed new regulations for BNPL services in 2023, legislation has yet to be passed. So, for now, services like Pay in 3 continue to have limited protections. 

Tips to use PayPal Pay in 3 responsibly

The way you manage your finances—which includes how you use financial services like Pay in 3—is a personal decision that depends on your own circumstances, goals, and choices. However, there are some general tips for using Pay in 3 that can help any customer reduce the potential risks associated with the service. These include:

1. Making sure you don’t miss repayments. If you have automatic payments enabled for Pay in 3, the second and third payments will automatically be charged to the confirmed payment method provided in your application when they fall due. The payment method can be a debit card or bank account, and PayPal balances cannot currently be used for repayments. To avoid missing repayments, it’s best to make sure your payment method has enough balance to cover the repayments when they’re due. If you don’t have automatic repayments enabled, it’s important to remember to pay the instalments on time (setting reminders can help).

2. Checking sellers’ return and refund policies. Since BNPL services like Pay in 3 offer limited payment protection, you might want to check a seller’s return and refund policy before purchasing from them. It’s helpful to know how these policies can protect your purchase if Pay in 3’s protections fall short. 

3. Understanding that it’s a loan.  Different studies and surveys suggest that BNPL schemes can encourage financial risk, as they can lead to overspending and consumers taking on more debt than they can manage or would usually take.  So, in general, it helps to keep a realistic perception of Pay in 3—i.e. that it’s credit that needs to be properly managed and repaid. It’s also a good practice to keep track of any borrowing you have and only taking on as much as you can manage.

Overall, while PayPal Pay in 3 is a useful service, it’s important to use it responsibly to avoid any potential negative effects, such as affecting your credit score. 

PayPal Pay in 3: FAQs

1. What is PayPal Pay in 3?

Pay in 3 is an interest-free ‘loan’ offered by the online payment provider, PayPal. It lets buyers split a purchase of between £30 and £2000 into three equal payments. You’ll be required to pay the first instalment at the time of purchase, while the following two payments are successively due over the next two calendar months.

Like other Buy Now, Pay Later services, Pay in 3 lets buyers spread the cost of purchases without paying interest. 

2. How does PayPal pay in 3 work?

Pay in 3 is integrated into the regular PayPal purchase option, letting buyers conveniently split purchases into instalments without relying on an external third-party process. PayPal will also send you reminders directly to help you keep track of your payment schedule. 

You can log into your PayPal account to see the number of Pay in 3 options you have running—if any—as well as the repayment schedules and amounts owed. Payments under this system are taken automatically (unless you disable this option), so you don’t need to set up a direct debit or remind yourself to make payments. 

However, having an insufficient balance in your linked bank account or debit card may result in a late or missed payment. So, it’s important to make sure you have enough funds to cover the payment(s) to avoid negatively impacting your credit report and score. 

3. Who is eligible for PayPal Pay in 3?

The only requirements to apply for Pay in 3 are being a UK resident aged 18 or above and having an existing PayPal account with a PayPal purchase history. You’ll be asked to provide your title, phone number, address, date of birth, and payment details when applying for Pay in 3.

PayPal uses an automated decision-making process to assess applications. Their systems use a combination of the information about your usage and history with PayPal, along with the information provided in your application, to make a decision. If PayPal needs additional information, they may also perform a soft credit check with a credit reference agency. The automated system provides an instant decision.

If your application is declined, you can reapply once at least 35 days have passed. 

Summary: Does PayPal Pay in 3 affect my credit score?

Although applying for Pay in 3 won’t affect your credit score, the way you manage the Pay in 3 debt can influence it. Consistently making repayments on time, every time, can count towards improving your credit score over time, as it demonstrates financial responsibility. 

However, this also means that missing repayments can lower your credit score and make it more difficult for you to access future credit. It can also restrict your access to Pay in 3 services in the future. 

There are some potential risks to using BNPL services like Pay in 3, including limited purchase protection (although this may change in the future) and the possibility of encouraging overspending or taking on excess credit. 

Overall, Pay in 3 is a convenient service for splitting larger purchases into more affordable, interest-free instalments. But, it’s important to use the service responsibly to minimise potential risks and to avoid negatively impacting your credit report and score. 

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