Using a Buy Now, Pay Later (BNPL) scheme will leave a mark on your credit file, but will not usually involve a 'hard' credit check. This less intensive affordability process has opened up BNPL to a wider range of users and made it extremely popular. However, that does not mean you should be rushing to use BNPL if you have bad credit, as how you use it will affect your creditworthiness and your future borrowing options. This article explains how a credit check works when purchasing through BNPL, why your credit is assessed and what that means for your future borrowing and spending plans. You can learn more about the basics of BNPL in our article 'Everything you need to know about Buy Now, Pay Later'.
Buy Now, Pay Later credit checks
Buy Now, Pay Later providers will either run a ‘hard’ or ‘soft’ credit check when you sign up. Usually, a soft search does not involve an in-depth look at your credit history and is less likely to pick up past debt issues. However, BNPL transactions will be recorded on your credit file in a break from how soft searches have previously worked.
A hard check is much less common and will always leave a mark on your credit record that future prospective lenders can access, allowing them to view where you have previously applied for credit. This means that too many applications in too short a period of time can suggest to lenders that you are desperate for credit and struggling to manage your finances. If you have just been turned down for a credit card or loan, don't rush into applying for any type of credit, especially one that involves a hard check. A credit card application will always require a hard credit check, as it gives a detailed picture of your creditworthiness and affordability.
This all means that if you have had debt issues in the past, you may still be able to use BNPL, even if you cannot get a credit card. However, it is important to remember that BNPL comes with risks. It can be tempting to overspend if you do not have to pay for something upfront. Spending more than you can afford will make the repayments more challenging and increase the risk of missing repayments, which can lead to additional fees and charges.
BNPL firms are required to run an affordability assessment to make sure you can afford the repayments based on your income and outgoings. They must act responsibly when approving users in order to reduce the likelihood of people falling into problem debt. However, you should not wholly rely on this process and instead make sure you feel confident that you can afford to repay what you borrow.
Buy Now, Pay Later with bad credit
You may still be able to use Buy Now, Pay Later if you have bad credit. This is because providers often only run a soft credit check, so your poor credit may not become apparent during the sign-up process. While this is an advantage of choosing BNPL for users with bad credit, it can also be risky. BNPL works best for people who can make the repayments on time and resist overspending.
You may have bad credit because you have missed a repayment in the past. Missing a repayment on a BNPL plan can be very expensive relative to what you have spent. You may need to pay a penalty and could be banned from using that company’s service again in the future.
Conversely, using a BNPL service could help you prove that you have turned a corner and are able to handle your debt responsibly. Past errors are not always an indication of future behaviours, so just because you have missed payments in the past does not mean you should give up on trying to manage your finances responsibly. Borrowing within your means and making regular repayments is a great way to build up your creditworthiness and improve your future borrowing options. BNPL could be one way to do this – especially as your repayments will appear on your credit file – but you should also think about other ways to improve your spending behaviour. This could be by making a regular budget, using a credit-builder credit card or improving your credit score.
Keep in mind that some BNPL services will conduct a hard credit check if you are looking to spend a particularly high amount or spread the cost over a lengthy period of time. This would likely lead to someone with bad credit being rejected, but it will ultimately depend on the policies of the particular BNPL company you are using.
Buy Now, Pay Later rules
Since 2022, Buy Now, Pay Later providers have been required to get approval from the FCA (Financial Conduct Authority) in order to operate. This means they must follow certain government regulations, including making sure the debt and repayment plans taken on by users are manageable. This does not mean everyone who uses BNPL will be easily able to repay what they borrow, but it does mean that a provider has to take more care in how it approves its users.
Regulated BNPL schemes are also required to ensure any promotions are not misleading, to avoid consumers taking on debt without an accurate picture of how repayment will work and what it will cost. Anyone who believes they have been misled into using a BNPL scheme, given an unaffordable repayment plan or encouraged to spend more than they can afford to repay is able to complain to the Financial Ombudsman Service.
Does Buy Now, Pay Later affect your credit score?
Credit reference agencies (CRAs) do now include BNPL transactions in credit reports. However, the BNPL details will not initially affect credit scores. This is because CRAs and lenders need more time to work out how to incorporate BNPL data into their existing credit scoring systems. There are three major CRAs in the UK – Experian, Equifax and TransUnion.
So while your score itself might not be affected by using Buy Now, Pay Later, prospective lenders running a credit check will be able to see all of the key BNPL information on your credit file.
Why are some BNPL details now part of credit reports?
The argument for Buy Now, Pay Later transactions appearing on credit reports is to help lenders get a more accurate view of an applicant's existing credit commitments. While it may seem beneficial to minimise what a lender can see in order to maximise the amount you can borrow, ultimately an accurate assessment of your finances will be the best in the long run. Borrowing beyond your means can lead to missed repayments that will make borrowing much more difficult in the future.
Including BNPL information can also be useful for people with a limited credit history, as it could help build a more rounded credit report and eventually allow access to a wider range of borrowing options.
What BNPL information is included in your credit report?
Buy Now, Pay Later details are featured on your credit report in the same way as any other credit commitments or recent borrowing history. This means including when the credit account was opened, what monthly payments have been made, what payments are due and the current account balance. Each purchase will appear separately as a ‘deferred payment credit’ account if it is repaid within three months. Late payments will be recorded and falling behind by more than 90 days will trigger a ‘defaulted’ marker on your credit file, which will remain for six years.
Lenders will be able to see all of this information on your credit file each time a credit check is performed on your account, even though it will not yet affect your credit score directly.
How will Buy Now, Pay Later affect getting a loan or a credit card?
As your Buy Now, Pay Later history will be available for lenders to view on your credit file, it will affect future applications. Making regular repayments on time is a good habit that you want other lenders to know about, as it makes you appear to be a trustworthy and responsible borrower. It is why it is possible to improve your credit score using a credit card. Therefore, if you stick to your BNPL repayment plan, you could fll your credit file with examples of good borrowing and boost your chances of getting a loan or credit card in the future.
On the other hand, data showing late payments or high levels of debt will usually make getting a loan or a credit card more difficult. Having existing credit commitments will limit how much more a lender calculates you can afford to borrow, while a history of missed payments will suggest that you are not a reliable borrower.
Pros and cons of Buy Now, Pay Later
Here are the key advantages and disadvantages of using Buy Now, Pay Later:
Pros of Buy Now, Pay Later
- Interest-free short-term credit
- Less intensive application process than for a credit card
- Allows you to spread the cost of purchases that you may not otherwise have been able to afford
- Opportunity to add examples of responsible borrowing to your credit file
Cons of Buy Now, Pay Later
- No protection under section 75 of the Consumer Credit Act
- Missing payments will trigger penalties that are relatively high compared to what you owe
- Can tempt you to overspend
- Can be easy to build up debt and damage your credit history
Buy Now, Pay Later alternatives
It is important to properly consider the alternatives before signing up for a Buy Now, Pay Later scheme. Here are some other options to think about:
- Credit cards for bad credit - These credit cards are designed to help you improve your credit as you use them. Usually, there is a low credit limit and high-interest rates, but you can improve your credit score by using it responsibly.
- Personal loans - Some loans are targeted towards people with bad credit, but you should avoid sky-high interest payday loans. A personal loan can be a good option for expensive purchases and long-term borrowing.
- Credit unions - This is a traditional alternative lending option, but only a limited number of people will qualify to take advantage of it. You can find more information in our article ‘What is a credit union?’.
- Improve your credit score - Boosting your credit score will open up more credit options and better alternatives to BNPL. For example, a good credit score will usually mean you can get the top rewards credit cards and 0% purchase credit cards. This means you could spread the cost of your purchases, or earn points or cashback on your spending.
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