Will Buy Now Pay Later Affect Your Credit Score

‘Buy Now Pay Later’ (BNPL) is a new term that has recently caught the eyes of customers for the past 2 to 3 years, especially during the Pandemic. And during this period, the demand for online shopping and e-commerce services has increased drastically making BNPL a go-to option. It is an online payment form that offers instant and no-cost financing for your needs. And individuals with no credit history and low credit scores can also choose BNPL payment. However, you must also note that any type of credit that you borrow will have an effect on your credit score.

Read on further as we dive deeper into what BNPL is and how it has an impact on your credit score.

What is BNPL?

‘Buy Now Pay Later’ (BNPL) is a type of short-term credit that allows you to purchase a product or service and then pay for it in installments over a specified period instead of paying full the amount upfront. Moreover, customers find it a convenient payment method as it is easily accessible, transparent, and has no-cost EMIs. Therefore, it is an excellent alternative to credit cards.

So all you have to do is sign up with a fintech company that offers a BNPL facility. Once you make a purchase and opt for the BNPL payment method, the lender will pay on your behalf. And once the payment is complete, you will have to start repaying the amount within the given time period.

The main advantage of BNPL is that you don’t have to pay any interest unlike personal loans and credit cards. Moreover, you can either repay as a lump amount or you can pay through monthly installments (EMIs). If you fail to repay the amount on time within the given tenure, the lender will charge you interest on your amount. And missing or delaying your payments will also damage your credit score severely.

Steps To Get BNPL Facility

Here are steps on how you can utilize the BNPL facility when you make a purchase:

First purchase a product or service that you want.
Before paying, choose the ‘Buy Now Pay Later’ payment method.
You will have to make a small down payment of your purchase amount.
And then you repay the remaining amount through interest-free EMIs. You can pay your EMI either by bank transfer, cheque, credit card, debit card, etc.

Benefits and Key Features of BNPL

Here are some of the reasons by Buy Now Pay Later is beneficial:

It is affordable
You can have instant access to the credit even if you don’t have a good credit history.
The transactions are safe and secure.
Can choose the repayment tenure at your convenience.
You need not pay any interest.
Simple and transparent process

Eligibility Criteria for Buy Now Pay Later

Lenders will usually check if you meet the required eligibility criteria to know if you can repay your dues on time. So here is the general eligibility criteria to avail Buy Now Pay Later facility:

Must be an Indian resident.
You have to reside in a major tier 1 or tier 2 city.
You must be above 18 years. And the maximum age limit can be up to 55 years.
You should be a salaried individual.
You must have all the KYC documents such as your Aadhar card, PAN card, etc.

Buy Now Pay Later vs Personal Loan

The main differences between BNPL and Personal Loans are given below:

Personal Loan	BNPL
Banks and NBFCs offer a maximum loan amount of more than Rs.25 lakh	Banks and NBFCs offer a maximum loan amount of Rs.1 lakh
There are both secured and unsecured personal loans	Only secured loans can be availed
Interest is charged on the principal amount	No interest is charged on the principal amount
There are no restrictions on how you spend the money.	Usage is limited
The repayment tenure is up to 60 months.	The repayment tenure is up to 90 days.
It can be both a short-term or long-term loan	It is a short-term credit facility.

Credit Card vs BNPL

Let us have a look at how credit cards differ from ‘Buy Now, Pay Later.

Credit Cards	BNPL
There are hidden charges levied on credit cards	It is a transparent and low-cost pricing model
You must have a good credit history to get a credit card.	You can avail of BNPL even if you don’t have a good credit history.
Credit cards are accepted everywhere.	BNPL services/facilities are offered only by certain e-retailers and fintech organizations
Credit cards have a standard interest-free period	Interest – free credit period can go up to 48 months
Getting approvals for your credit card is slightly difficult	You can get easy approvals.
The option of paying only the ‘minimum due’ amount	To pay the fixed EMI on the scheduled date
Earn cashback, reward points, and air miles on purchases	No such benefits are available.

BNPL Service Providers In the Indian Market

Some of the BNPL services available in the Indian Market are mentioned below:

ZestMoney
LazyPay
Simpl
Amazon Pay Later
Ola Money Postpaid
Paytm Postpaid
Flexmoney
EPayLater
Capital Float

Now that we have seen about BNPL, let us now have a look at how your credit score plays a vital role in BNPL payment, the factors that affect your credit score, and how you can improve your score.

3 Ways How BNPL May Affect Your Credit Score

Though BNPL has a lot to offer, it is still a type of loan that has to be repaid. While you can get instant approval for BNPL, failing to make repayments on time will hurt your credit score. So here are 3 ways how BNPL may affect your credit score.

Missing Out or Delaying Payments on BNPL Will Lower Your Credit Score:

The credit score is a numerical indicator of your creditworthiness. It ranges from 300 to 900. Having a score above 750 is considered good and shows that you have the ability to repay the due on time. Moreover, this score is generated based on various factors such as your payment history which accounts for more than 30% of your credit score. So if you miss out on any payment or delay your BNPL payment, it will be noted on your credit report and stay up to 7 years and this will further make it hard for you to get any type of loan in the future.

Multiple Buy Now Pay Later (BNPL) Accounts:

Your credit score indicates how you spend and manage the loan amount. So if you use Buy Now Pay Later services more often, it will show that you have reckless spending habits which will make lenders doubt your ability to manage your credit. Moreover, if you have multiple BNPL accounts, it will reduce your credit score as you will be seen as less likely to be able to repay a loan on time. In some instances, lenders will not approve if you have too many open BNPL accounts.

Using Buy Now Pay Later Services Might Leave You in More Debt.:

Since BNPL is easy to access, you might end up purchasing more than you can afford to repay. As a result, you might find it difficult to repay your due on time which will in turn leave you in debt. This will not only be considered a liability by lenders, but it will also impact your credit score negatively. It will further reduce your chances of getting a loan in the future. Moreover, even if you make all your repayments, some BNPL lenders report larger loans to credit bureaus which could affect your credit score. And some Buy Now Pay Later lenders also perform a credit check when you open an account with them which again has the potential to affect your credit score.

Reasons Why ‘Buy Now Pay Later’ Affects Your Credit score

Your credit score is generated based on your credit history and your ability to manage your debt. It is a summary of a variety of factors that includes the following:

Payment History:

The payment history accounts for 30% of your credit score. It shows whether you have made repayments on your loan consistently on time. So if you delay your payment by more than 30 days, your credit score will be reduced. And if you default on any of your loans, it will have a severe impact on your score and will stay on your credit report for 7 years which will in turn make it difficult to get loan approval in the future.
Amounts owed:

It holds for 25% of the credit score and indicates how much you use your credit which is commonly known as the Credit Utilization Ratio (CUR). If you spend often using your credit, it will seem like negative financial behavior and lender will doubt your ability to repay the loan. Therefore, it is better to maintain your credit utilization ratio below 30% of your income.
The number of Credit Inquiries:

It accounts for 20% of your credit score. Each time you apply for a new loan, lenders will first check your credit score which generates a hard inquiry in your credit report. So if you apply for a loan from multiple lenders at the same time, there are high chances of having multiple hard inquiries which will lower your credit score.
Length of Credit History:

It accounts for 15% of the credit score. Having a long credit history shows that you have been a responsible borrower with consistent repayments. So if you have a long credit history, your score will increase. Therefore, keep your old credit accounts open even if you do not use them any longer.
Credit Mix:

It accounts for 10% of your credit score. Having different types of credit such as home loans, education loans, car loans, etc will increase your score significantly as it shows that you can manage your debts very well.

Therefore, using ‘Buy Now Pay Later’ services has the potential to affect your good credit history, even if you are diligent when you use them. Moreover, if you don’t plan your budget or if you forget to repay on the scheduled time then it will have a more negative impact on your score.

Also Read: Does Loan Settlement Affect Your Credit Score

How To Use BNPL Service Without Affecting Your Credit Score?

If you want to use Buy Now Pay Later services but are worried about damaging your credit score, there are a few strategies you can use:

Firstly, use only one BNPL account at a time. Keep track of your purchases and set a reminder on your calendar to make sure you have enough funds in your account at the time of repayment.
Limit unnecessary spending, and make a proper budget that includes all of your necessary expenses like food and groceries. Doing this will help you avoid overspending when you’re using BNPL services.
Link your BNPL account to your debit card instead of your credit card if you have one. The reason is that if you link your credit card, you will be charged interest on your credit card, and again you will have to repay your credit card debt.
Read the Terms and Conditions thoroughly before availing of a BNPL service to know how they use your personal information and check if they charge any kind of extra fees you might end up paying.

Quick Tips To Improve Your Credit Score

Make repayments on time
Maintain your Credit Utilization Ratio to less than 30% of your credit limit.
Check your credit report on a regular basis.
Have a variety of credit (both secured and unsecured loans)
Keep your old credit accounts open even if you don’t use them.

Final Note: The Key Takeaway

Some of the best buy now pay later apps available in India are Amazon Pay Later, Flipkart Buy Now Pay Later, etc. Though the ‘Buy Now Pay Later’ service allows you to shop now and pay later, it can affect your credit score even if you have made repayments on time. So the best way to avoid damaging your score is to use only one BNPL account at a time, keep track of your purchases to avoid overspending, and make repayments on time. If you’re worried about how these services might have affected your credit score, you can get a free credit score check using Buddy Score.

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