Debt Management and Your Credit Score

Buy Now, Pay Later Schemes Could Ruin Your Credit Score

Buy Now, Pay Later Schemes are quickly growing in popularity but did you know that they have the potential to ruin credit scores?

Young Woman Shops Online Representing Buy Now, Pay Later Schemes

Buy Now, Pay Later (BNPL) schemes have become a popular payment method over the last few years. This form of credit allows people to have instant access to products, without needing immediate access to cash. This scheme allows shoppers to delay the payment or spread the cost of an online purchase over a set number of instalments.

Using this type of credit, where you don’t need to worry about paying for something immediately can be very attractive but it doesn’t work unless you pay it off within the timeframe and even then, you could be paying over the odds in fees and interest rates. But did you know that they can actually do more harm than good to your credit score?

How do Buy Now, Pay Later Payments Work?

BNPL providers such as PayPal, Klarna and ClearPay supply a form of credit, a shopper can then spread or ‘slice’ the cost of payments over a period of months or choose to pay later, effectively delaying payment for a period of time.

These payment methods are popular with shoppers as it allows them to buy more expensive items that would have previously been unaffordable. The convenience and flexibility of BNPL payments make them a popular choice for people who need to purchase items before payday or cannot afford the cost of the item in one down payment.

Capturing the Market

The global leader in financial services technology, FIS, discovered that Buy Now, Pay Later schemes have become the fastest growing online payment method within the UK and are set to double their market share by 2023. Annually, BNPL schemes are growing twice as quickly as bank transfers and three times the rate of annual growth in digital wallets.

BNPL Providers Have Found Their Audience

Buy Now, Pay Later schemes are generally targeted at younger generations, such as millennials and Generation Z who typically do not own a credit card and appreciate the quick approval time and access to previously unaffordable products that these plans offer.

From social media campaigns to working with specific retailers, the BNPL provider, Klarna, knows how to target and capture a young audience. They regularly team up with popular social media influencers to promote their payment method. ASOS, JD Sports and Boohoo are just a few of Klarna’s retail partners who sell products aimed at a younger audience.

A recent survey conducted by Payplan revealed that 59% of 18 to 24-year olds said that online influencers had influenced their lifestyle choices and nearly one third (30%) admitted to overspending due to social media advertisements.

How has the Coronavirus Lockdown Impacted BNPL Schemes?

With people unable to leave their homes due to lockdown restrictions, many people have turned to online shopping. Research conducted by Compare The Market has revealed that just under a quarter (23%) of 18 to 24-year-olds are inclined to use Buy Now, Pay Later schemes to subsidise purchases since the coronavirus lockdown.

However, the research also revealed that two in five shoppers said the Buy Now, Pay Later scheme enticed them to purchase more and 51% said this type of payment method had escalated their debt problems.

How Can BNPL Schemes Ruin Your Credit Score?

Late Fees

Late fees occur when you fail to make a payment by a scheduled date agreed with the BNPL provider. Although late fees are usually capped at a certain percentage or amount, they can still add up to a substantial amount of money. For example, ClearPay’s late fees range from £6 to £36, depending on the cost of your order and how quickly you make the overdue payment.

Additionally, if you have more than one Buy Now, Pay Later plan in place it can become more difficult to manage payment deadlines resulting in late fees being added without a person realising.

High Interest Rates

Although this type of credit can be convenient, some providers who allow you to spread or ‘slice’ the costs over a period of months can charge high interest rates on top of your purchase, usually anywhere between 20% to 50% APR.

Take the electrical retailer Curry’s, for example, they charge 24.9% APR for their Buy Now, Pay Later Scheme. This means if you were to buy a new product for £200, you would be paying an additional £49.80 in interest which can really add up if you utilise these schemes often. Additionally, if you are unable to make the payments on time and this is reported to credit reference agencies, this can further impact your credit score.

Missed Payments

Missing payments is one of the most common ways a person’s credit score can decline. Some BNPL providers will report any missed payments to Credit Reference Agencies (CRA) which will stay on your credit file for six years. This will affect your ability to take out loans, apply for credit cards and mortgages and open new current accounts in the future.

Some BNPL providers, such as Klarna, say that on most of their plans they don’t report any missed payments to CRA until two months after the missed payment. However, they do attempt to automatically collect payments from your credit or debit card several times until the transaction is successful and the money leaves your account. This can leave some individuals in a vulnerable position if a payment is taken that is meant for other expenditures.

Hard Credit Checks

If your provider rejects your application, your credit score may take a hit as potential lenders will see this as evidence that you struggle to manage your money effectively.

Too many credit applications can also negatively impact your credit score. To keep your credit score in good condition, it’s recommended that you make no more than two credit applications a year.

However, with the ease of applying for BNPL payment plans, it is tempting to apply a lot more than twice a year.

Young Man Sat in Kitchen Looks Worried, With No Money In His Wallet, Surrounded by debt letters, credit cards and laptop

No Money, But Need to Make a Purchase?

Understandably, we sometimes all need to make unexpected purchases, but there may be some alternatives you could consider before turning to Buy Now, Pay Later payment plans.

Shop Second Hand

Gone are the days of searching through charity shops to find useful second-hand products, nowadays there are online platforms available to connect you directly with second-hand sellers.

Platforms including, Facebook Marketplace, Gumtree, Preloved and Depop allow you to find a complete range of high-quality, second-hand items, sold at a much cheaper price than on the high street or online shops. Additionally, you can also sell you unwanted items for a bit of extra cash.

Start Saving for a Rainy Day

Saving money is not always easy, especially when you’re trying to balance important financial decisions with entertainment and enjoying yourself. However, saving money is one way to cover unexpected costs so you don’t need to rely on Buy Now, Pay Later schemes.

Budgeting Your Money

Budgeting basically means having a plan for your money. It’s also a great way of ensuring you don’t overspend and live beyond your means. Many people who use a budget also find it frees up some of their money, so they have a little extra to save or spend on things they want.

There are many budgeting tools suited to your needs available online or in the App Store that can guide you through properly budgeting your money.

Here’s What to do if You’re Struggling with Debt

If you are struggling with debt, there are many free resources available to help you regain control of your financial situation. Below is a list of useful debt charities and resources who can provide you will debt advice and solutions. · 

Has Your Credit Score Been Affected by BNPL schemes?

If your credit score has suffered due to Buy Now, Pay Later schemes or debt in general and you’re trying to get back on the banking ladder there are options available.

Suits Me, is an alternative banking solution offering personal current accounts specifically targeted at people with low credit scores who are unable to gain access to a current account. To open a Suits Me account, you don’t need to worry about your credit record as we simply don’t do credit checks.

We believe that financial inclusivity should be a right for everyone and want to help you have access to banking if you don’t meet a traditional high street banks customer criteria.

About Suits Me

Suits Me, provides all account holders with a current account and a contactless Mastercard® debit card with a secure online banking facility and free mobile banking app to manage their finances.

It’s easy to get sucked into using a Buy Now, Pay Later scheme due to their clever marketing techniques and how easy they are to apply for, however, be mindful that one missed payment has the potential to spiral into a pile of debt.

Before resorting to a BNPL scheme, remember to check if there are any alternative options available – especially if the item you want to make a purchase isn’t essential – such as saving, buying second hand or selling any of your own unwanted items.Open Your Account Today

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