At the time of writing, not all Buy Now Pay Later (BNPL) companies run a credit check when you sign up for memberships, and these checks may not always affect your credit score. 

However, this is set to change with the government announcing its decision to classify BNPL products as credit products. Soon, the BNPL industry will be subject to the same rules and regulations like other credit providers, including complying with responsible lending obligations and holding Australian Credit Licences. 

“BNPL looks like credit, it acts like credit, it carries the risks of credit” - the statement was made by Assistant Treasurer and Financial Services Minister Stephen Jones at the Responsible Borrowing and Lending Summit.

To mitigate these risks, apart from enhancing their dispute resolution and hardship assistance plans, BNPL providers would be required to carry out suitability and affordability checks on customers (such as running hard credit checks) to ensure they can afford the repayments, just like any other credit product. 

How do credit scores and credit checks work? 

Every time you borrow or repay money in Australia, your information is sent to credit bureaus and recorded in your credit file. This credit history is used to generate your credit score. Borrowers who pay back loans on time are more likely to have good credit scores, while those with defaults or bankruptcies in their credit history are more likely to have bad credit.

Banks, lenders and other credit providers use credit scores to quickly assess a borrower when they apply for a loan, credit card, or similar financial product. Borrowers with good credit are more likely to be approved, and may be offered lower interest rates or extra features and benefits. Borrowers with poor credit scores may have to pay higher rates and fees, or may see their applications declined.

Applying for credit too often over a short period of time can risk damaging your credit score. Having too many credit checks appear in your credit history can lead some lenders to think you’re desperate for credit because you’re struggling to manage your finances, and they may decline your application as a result.

How does BNPL affect credit scores?

The debate as to whether BNPL platforms should be counted as credit providers has been put to rest. The government recently announced its decision to change the law and include BNPL companies as credit providers under the National Consumer Credit Protection Act. 

The BNPL industry will now be subject to the same rules and regulations as other credit providers, including requirements to perform hard credit checks on prospective borrowers.

Each time a hard credit check happens, an enquiry is added to your credit report. Whether your application gets accepted or rejected, this information is also recorded on your credit report. Too many credit applications in a short span of time, especially after multiple rejections, could make you like someone who’s hungry for credit. Lenders may even consider you a risky borrower and avoid lending you money.

By learning your credit score, you can understand the condition of your financial health and how lenders may perceive your application. This could even motivate you to improve your credit rating. 

Your BNPL accounts may also affect your credit score in other ways:

• If you fail to make your BNPL repayments on time, once they’ve been overdue for a certain length of time, your provider will be obliged to report your late repayments to credit bureaus. This will appear in your credit history and may damage your credit score.
• If you have multiple BNPL accounts open in your name, a lender may choose to decline your credit application, as the lender may feel that you may not be able to afford your loan repayments alongside your BNPL commitments.
• Linking a credit card to your BNPL account could lead to your credit score being affected. If you miss BNPL repayments and end up with credit card debt, this could turn into overdue credit card debt, which will need to appear on your credit report.