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Can using buy now, pay later hurt my credit score?


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More than 40 per cent of shoppers are unaware that missing payments when using a buy now, pay later service could harm their credit score, a survey has found.

One in five also felt they weren’t clearly shown the terms and conditions according to Compare the Market, raising more concerns over the increasingly popular payment method

Buy now, pay later is a way of paying for goods that covers a range of credit products, from store credit offered by the likes of Next to newer financial platforms targeted at younger shoppers.

Shop till your score drops: Buy now, pay later offers a way for shoppers to pay for goods after they’ve bought them, but it can have a sting in the tail if people miss payments

One of the best known facilitators is Swedish platform Klarna – a pastel-pink branded retail juggernaut which has been valued at much as $5.5billion.

It arrived in the Britain in 2015 and has become incredibly popular, with 6million people using its three ways of paying for items on these shores since.  

Users can pay for something 30 days after purchasing it, split the cost into three identical monthly payments, or set up plans with individual retailers of between six and 36 months.

It has also begun providing in-store payment options, with 10,000 shops including H&M, Halfords and Schuh letting you use Klarna offline.

While it claims to believe ‘in being simple and straightforward in everything we do’, it is difficult to find on its website the fact that your credit score is affected by non-payment, something likely reflected in the survey results.

For example, under an FAQ section on the website of one of the biggest retailers it provides payment options for – H&M – it responds to the specific question of whether Klarna affects your credit score with: ‘For more information about Klarna’s credit check and if it affects your score please contact Klarna directly.’

Klarna previously told This is Money: ‘We’re open about our lending policies and credit authorisation processes, and we make sure we stay in regular contact with customers to let them know when a payment is due.

‘If after a period of several months we have not received payment, we advise the credit bureau that they have not paid. 

‘At this point a customer’s credit score may be affected.’

The reverse can also be the case. Given that many buy now, pay later services do require credit checks and show up on your file, using them well and making payments on time can improve your credit score.

However, too many applications for credit in a short space of time will also hit credit scores.  

Sue Anderson, of debt charity StepChange, said: ‘It’s no surprise that buy now, pay later may be damaging people’s credit scores given the massive focus on convenience that retailers emphasise to customers about these services, which isn’t always balanced by the level of promotion given to information about risks and commitments.

‘We would like to see retailers and BNPL providers making strenuous efforts to ensure that the consequences of paying late or failing to pay on BNPL are made clearer, as well as a clear focus from the FCA on ensuring that appropriate affordability assessments are made.’

One in 10 of the just over 2,000 people surveyed by the comparison website said their use of buy now, pay later had negatively impacted their credit score.

Meanwhile, of the 33 per cent of 25-34-year-olds surveyed who said they had used buy now, pay later services in the last year, 39 per cent said their credit score had subsequently been damaged.

While the new breed of buy now, pay later platforms, which also include the likes of Laybuy and Clearpay, vary in their specific terms, all make their pitch to retailers by claiming they can get customers to spend more, and more often.

This has raised concern in some quarters about users potentially falling into a debt trap by taking on more than they can afford to repay, despite that many of these platforms do not charge interest. 

This is reflected in the survey. 

Two-fifths of those surveyed admitted they spent more as a result of the availability of such schemes than they otherwise would have done, while 51 per cent felt it had contributed to increased levels of personal debt.

Separate research last year from Hastee, a company which allows workers to access their earned pay early in return for a fee, found 56 per cent of 18–34-year-olds felt buy now, pay later schemes encouraged them to spend money they didn’t have.

Former pensions minister Baroness Altmann before Christmas called for further controls on buy now, pay later financing, and said greater affordability checks and longer cooling-off periods should be brought in.

The FCA last June brought in new rules on buy now, pay later services, but these were primarily aimed at helping users of store or catalogue credit, rather than users of newer platforms.

Regulators last year brought in regulations it claimed would save consumers £60m a year, but they were not aimed at a new breed of shopping platforms which have raised concerns

Regulators last year brought in regulations it claimed would save consumers £60m a year, but they were not aimed at a new breed of shopping platforms which have raised concerns 

John Crossley, head of money at Compare the Market, said: ‘The allure of buy now pay later is clear but these statistics show that such schemes are encouraging people into taking on more debt than perhaps they realise.

‘Failure to pay outstanding bills can damage your credit score and result in a spiral of outstanding payments which could jeopardize important life milestones like buying a house.

‘It is concerning that many of these schemes appear to be targeted at younger demographics.

‘If you need to take on credit for essential purchases, there are cheaper and less risky alternatives available. Many credit cards offer 0 per cent interest on new purchases, often for up to two years.

‘It’s also worth checking your eligibility for credit by using a soft eligibility checker which won’t damage your credit score.’

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