With a buy now, pay later app, you can purchase the things you need right now and pay the bill another time. But how do these apps work, and can they improve your credit score over time? Let’s take a look.
How does buy now, pay later work?
Think of a buy now, pay later (BNPL) app as a kind of store finance.
Essentially, you can buy something now and, well, pay another day. Klarna, Clearpay, Laybuy and PayPal Credit are all examples of BNPL apps. Here’s how they work.
- BNPL credit is offered at the point of sale.
- Repayments are usually interest free.
- You can spread the cost over a few weeks or months. Klarna, for example, gives you up to 60 days to pay the balance, while Clearpay gives you a few weeks.
You can either pay in instalments or defer the whole payment until the due date – it all depends on the provider.
Can a buy now, pay later scheme boost my credit score?
Maybe, but it’s not the best way to do so.
Many BNPL providers don’t run hard credit checks. Instead, they run soft searches just to confirm your identity and some basic information. While this might help you get credit, it also means they usually don’t file on-time payments with credit reference agencies. In other words, you won’t boost your credit score just by making BNPL payments on time.
That said, some providers like Laybuy and PayPal Credit do run full credit checks, so if you’re trying to build your score, these might be an option for you.
Still, BNPL apps aren’t a quick fix. Even if you pay on time, you need to use BNPL over a few months to see any improvement to your score – and remember, that’s only if your provider records on-time payments.
Are there any downsides to a buy now, pay later scheme?
Yes. While BNPL apps can sometimes help you improve your credit, they can also damage your credit score. Here’s why:
- Missed payments can be filed with credit reference agencies. In turn, this lowers your credit score. The one exception is Klarna. At the moment, they don’t report missed payments to credit bureaus, and they don’t charge late fees either.
- If you apply for a buy now, pay later app and they do check your credit score, the search leaves a ‘footprint’ on your file. Other lenders can see this, which might affect whether they offer you credit or not.
- BNPL providers may pass your debt on to debt collection agencies, which can further damage your score.
- You could be charged late payment fees, and these costs quickly add up.
Bear in mind, too, that BNPL is an unregulated industry. So, if you can’t resolve a dispute with your provider, you can’t complain to the Financial Ombudsman.
What happens if I take out too much credit?
As tempting as BNPL might be, it’s still credit. While some credit can actually help you build your score and make it easier to manage your money, it’s possible to have too much of a good thing. Signs you’re overextending yourself include:
- Relying on credit cards or BNPL to live from month to month
- Missing one or two payments
- Using all or most of your spare income to pay down debt
- Having no emergency fund to fall back on for unexpected expenses
Debt and money worries can have serious consequences. In the long run, it can stop you getting credit for the big purchases you really need, like buying a house. Contact Citizens Advice if you’re struggling with debt.
Should I use BNPL apps?
Well, there’s nothing ‘wrong’ with using a buy now, pay later app. It’s fairly easy to get approved and there’s often no credit check, so it’s useful if you want to avoid credit enquiries.
What’s more, making regular BNPL payments does teach you how to budget money and pay bills on time, which is a skill you’ll need to maintain a solid credit score.
All that said, missed BNPL payments will usually affect your credit score, which makes it harder for you to get credit elsewhere.
It’s also pretty easy to get into debt because you could lose track of how much you’re spending. So before you use BNPL, consider whether you’re better saving up for the items you want instead.
If you track your spending and use BNPL schemes sparingly, they might be worth checking out. However, they’re not the best way to improve your credit score. Credit cards have the edge here, even if you have bad credit.
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