How Buy Now Pay Later affects your credit report

Buy Now Pay Later (BNPL) has taken over the fintech landscape with more and more people finding it to be an easier option to fund their extra expenses. Part of the reason why BNPL has gained so much popularity over the last two to three years is that a lot of key e-commerce players in India have begun listing it as one of the payment options. This is also where most of India’s consumers were introduced to the concept, and ever since there has been no looking back. Essentially, BNPL solves a common, short-term, challenge faced by consumers, which contributes to the rise in its popularity.

It is a kind of short-term credit that enables customers to not only go ahead with their purchases but also receive their orders without having to pay in full right then. The installments have to be completed over a specified period of time and the most enticing part of it all is that it provides you the opportunity to avail no cost EMIs making it a more convenient alternative to credit cards. It also requires little to no paperwork and is processed considerably swiftly. 

The use of BNPL can go two ways for the consumer. If you maintain disciplined repayment hygiene, it will bring forth several benefits while reckless patterns will serve to impact your credit history. Unlike most other credit products, BNPL offers much-needed flexibility in choosing repayment periods, mostly at no additional cost.

Several BNPL service providers allow customers to also pre-close their loans. Despite these benefits, when customers fail to repay their dues, it is registered with credit bureaus’ credit score. In this blog, we take you through the ways in which BNPL could affect your credit footprint. 

Missing or delaying repayment

It must be noted that your repayment patterns account for more than 30% of your credit score. Missing out on repayment schedules or delaying your BNPL installment thus affects your credit history the same way a default credit card payment would. The credit report on a default BNPL payment can stay on in your credit history for up to 7 years, making it difficult for you to get credit access in the future when you really need it.

Multiple BNPL accounts could be detrimental 

Whether you know this or not, multiple BNPL accounts on your credit history indicate reckless spending habits. This invariably makes lenders doubt your ability to manage your personal finances well enough and pay back on time. The more burdened you are with debts, which these BNPL accounts essentially are, the more likely the formation of the perception that you are unable to pay back credit on time. Lenders now are also increasingly looking at this tendency as a liability and refusing credit approvals when they spot multiple BNPL accounts. 

Putting you deeper into debt

Taking a loan is usually the easier option to remedy your cash crunch than saving to buy the things you need or want. One aspect of BNPL is that it is particularly easy to access. This puts you in the temptation to buy much more through the BNPL option than you can afford to pay back comfortably. This traps you in a vicious debt trap for the more you have to spend on repaying your debts, the less it leaves you to spend on things that you want, ultimately making you go back to the appealing and convenient option of BNPL. 

Quick tips to ensure BNPL doesn’t negatively impact your credit scores is absolutely essential that you limit your BNPL account to one and not treat it any differently from having a credit card debt. Track your purchases and repayment schedules diligently, and set reminders if you have to but do not, at any cost, default on these payments. It is also important to not lose sight of your financial goals just because the BNPL option is so accessible and easy.

Stick to your budget and limit overspending or spending for things that can wait until you have saved enough. You must also avoid linking your BNPL payments to your credit card. Last, read the terms and conditions of your BNPL agreement carefully to make sense of whether or not there are hidden charges associated with the service.