Does Afterpay affect your credit score?

Many Australian shoppers take advantage of ‘buy now, pay later’ (BNPL) platforms, with more and more online and offline retailers offering this convenient paymentoption. However, before using a BNPL service, you may want to know the impact it may have on your credit score.

While there may be small differences between them, most BNPL services operate very similarly. There are currently just over 16 providers in Australia, including the likes of AfterPay, Klarna, and LayBuy, while big four banks like CBA and NAB also offer a BNPL service, with StepPay and NAB Now Pay Later respectively.

Afterpay is one of the leading companies in the BNPL space. It lets customers make a purchase immediately by extending them a line of credit that they repay later in instalments. If you think that sounds like a credit card, you wouldn’t be too far off the mark.

The big difference is that unlike a credit card, BNPL services like Afterpay allow customers to repay the borrowed amount in equal monthly instalments rather than charging interest. This means you know exactly how much you owe each month, rather than it changing based on the debt and interest. It’s often this reason that makes these services such a hit with so many shoppers.

Since they don’t charge interest, BNPL services make most of their money through fees, like late fees or the fees paid by retailers. They may also restrict your ability to continue purchasing using the platform if you’re late to make repayments.

But does Afterpay (or other BNPL services) affect your credit score like other loans or credit products? To fully answer this, you’ll need to understand how BNPL services work and the pros and cons of using these services.

How does BNPL affect your credit score?

When you sign up for a service like Afterpay, approval is almost immediate. During this process, you agree to terms of service. As a customer, you grant permission to make any enquiries, either directly or indirectly, about your identity and your ability to make payments on time.

This permission would also include letting these services check your credit report if they see fit. They may not check your credit but if they do it will be recorded in your credit file.

Currently, not all BNPL providers are required to check your credit score, but some do. Afterpay is not known to conduct credit checks on potential customers, and they explicitly state on their website that they never perform credit checks or report late payments.

What this means is that if you make all payments on time and repay your debt, it doesn’t positively impact your credit score. At the same time, if you are unable to make a repayment on time, Afterpay won’t report it and your credit score is unlikely to be affected. However, it’s not clear whether Afterpay reports such instances to the credit rating agencies.

What are the changes that could affect providers like Afterpay?

In future, however, you can expect some changes to how BNPL services work.

New legislation, if passed, could see Australia's BNPL industry face the same rules and regulations as traditional credit providers. That’s because the National Consumer Credit Protection Act, which focuses on consumer protection, will be updated to include BNPL companies as credit providers.

Under the revised legislation, which is currently open for consultation, BNPL providers will have to get an Australian Credit Licence and abide by the set of rules and requirements that come with that act.

The draft legislation requires providers, like Afterpay, Klarna and humm, to perform lengthier checks on potential customers.

These checks could include seeing if a customer has previously applied for credit, or if they have any defaults, judgements or bankruptcy on their credit file - even if their credit request is under $2,000.

They’ll also have to prove they have checked if the loan is suitable for the customer, improve their practices in areas like resolving disputes, hardship assistance, providing clear information about their products, and market more responsibly.

These changes are aimed at promoting responsible lending practices in the BNPL industry to ensure better consumer protection and transparency.

Once these regulations are in place, applying for a BNPL loan could lead to an enquiry getting recorded on your credit report. At the same time, it’s also possible that managing your BNPL payments responsibly could help improve your credit score in future.

Will Afterpay affect my credit score negatively?

At the moment, using a BNPL service like Afterpay, Zip or Klarna may not directly affect your credit score but it could hurt it in other ways.

The ease of shopping with BNPL could encourage you to spend more than you would have typically. These spending patterns could lead you to financial stress where you miss a payment.

While providers like Afterpay may not report this missed payment to a credit reporting agency, it’s essential to recognise the risks associated with using the service. Spending money that you don’t actually have on things you don’t really need could lead to a cycle of debt that may become challenging to escape in the future.

As long as you use Afterpay responsibly, make all repayments and repay your balance on time, it shouldn't affect your credit score negatively. But you should also be mindful of the impact that multiple applications for BNPL services could have on your credit score.

While a single enquiry may not affect your credit score as such, having multiple credit enquiries in a short period of time may reduce your credit score by a few points. Additionally, multiple credit applications could make you look like a risky borrower to prospective lenders, reducing your chances of getting approved for traditional credit products.