'Buy now pay later' schemes warning from Martin Lewis

Buy now pay later (BNPL) schemes are causing young people to build up debts that they will find difficult to pay off, financial guru and campaigner Martin Lewis has warned.

Speaking to The Times, Martin Lewis said that increased use of these services could “catastrophise the finances of young people”.

Buy now pay later (BNPL) schemes, such as Klarna and Clearpay, allow consumers to buy items without having to pay for them until a later date, which can be anything from 30 days to 12 months, encouraging shoppers to spend on goods they may not be able to afford.

The repayment period is usually interest free if you clear the balance before the payment date, but if you fail to pay in time a lump sum of interest may be added to the debt and you may be charged a late payment fee.

These schemes are offered by a whole host of fashion retailers including Boohoo, PrettyLttleThing and Very. Listed as a credit option when you check out your shopping, it is easy to click on BNPL as an option.

Influencing young shoppers

These schemes have come in for criticism because of the way they promote themselves to young shoppers. Just before Christmas, the Advertising Standards Authority (ASA) upheld complaints against Klarna for posts in April and May 2020 by four Instragram influencers, promoting Klarna’s deferred payment service as a way to help people lift their low mood during the Covid-19 lockdown. Three of the complaints were brought by Stella Creasey MP and the fourth by the ASA itself.

The Financial Conduct Authority has been reviewing the unsecured credit market and its report is due out in early 2021, but, speaking to the Treasury Select Committee last month, Mr Lewis said he was concerned that any regulation will come too late due to the “explosion of this form of credit”. He called for “maximum speed” to get BNPL regulated.

Will 'buy now pay later' affect my credit score?

According to credit score provider Experian, if you use BNPL sensibly and make repayments on time, it will not have a negative impact on your credit score. It could even improve it as it will show lenders that you are a reliable borrower. However, it needs to be taken as seriously as any other credit (like a personal loan or credit card) - you need to make your repayments on time, every time.

If you fail to make the repayments on time, this can be noted on your credit report and can remain there for six years, lowering your overall score.

How can I avoid BNPL pitfalls?

1. Before you buy, ask yourself: do I really need it and can I afford it?
2. Pay upfront for goods if you can afford to do so or consider taking out a 0% credit card that you can repay monthly as an alternative to BNPL.
3. Read the small print carefully for each scheme, so you understand the penalties if you miss a payment.
4. Return unwanted goods you have bought on BNPL schemes fast, so you won’t be paying for goods you don’t want.