Does Buy Now Pay Later (BNPL) affect your credit score?

What is Buy Now Pay Later? 

Buy Now Pay Later is a way of purchasing items on credit and paying for them later or in instalments.  

Used sensibly, BNPL can help with cash flow and budgeting and be cheaper than other forms of credit such as credit cards. 

BNPL is nothing new. Various brands, such as Very, Grattan, Jacamo and Littlewoods have been offering catalogue-style credit for some time.  

But the increase in BNPL over the past few years is largely down to new fintech firms, which work with multiple online retailers and target younger shoppers. Rather than charging interest to customers, BNPL firms make money by charging retailers commission on purchases.  

The best known BNPL companies in the UK are: 

• Klarna 

• Clearpay 

• Laybuy  

• Zilch 

Different retailers work with different BNPL lenders – there might be just one BNPL option available at an online checkout, or several. PayPal and Amazon also have their own BNPL options.  

How does BNPL work? 

BNPL usually offers the option to pay for a purchase in interest-free instalments, with the first instalment due at the point of purchase. Alternatively, you can simply pay for something at a later date.   

For example, you might pay in weekly, fortnightly or monthly instalments; or in full, 14 or 30 days after the purchase. 

Although BNPL credit is often interest-free, you are still borrowing money and entering into a credit agreement. Not paying the money back can affect your credit score. 

Do I need a credit check to use BNPL? 

You usually need to pass a credit check to use a BNPL service. The credit check will also be used to confirm your identity. 

Most BNPL lenders use ‘soft’ credit checks. These are only visible to you, not lenders or anyone else looking at your credit report. 

Some BNPL lenders might carry out a ‘hard’ credit check if you apply for a longer-term or interest-bearing loan. They should tell you before they do this. A hard credit check will leave a mark on your credit file that can be seen by other lenders. Too many hard credit checks can cause your credit score to temporarily decrease. 

Does Buy Now Pay later affect credit scores? 

Yes, using BNPL can affect your credit score.  

Since mid-2022, most BNPL lenders have started sharing payment information with credit reference agencies (CRAs).  

There are three UK CRAs:  

• Experian 

• Equifax 

• TransUnion 

From 2022, it then took 12 to 18 months for the CRAs to update their credit scoring systems so that BNPL use could be factored into individuals’ credit scores. 

As it stands in mid-2024, BNPL information from most (but not all) lenders will show on your credit report and use of this payment method could affect your credit score. This could vary between the three CRAs as some BNPL lenders only report information to one or two credit bureaus, not all three.  

There are plans for the Financial Conduct Authority (FCA) to regulate the BNPL sector – but we don’t know when this will be. When regulation comes into effect it is possible that all BNPL lenders will be obliged to report payment information to the credit bureaus.