Buy now, pay later (BNPL) doesn’t always feel like borrowing, but if something goes wrong, you’ll find out the hard way that this is just as serious as any other kind of debt.
Now these agreements are starting to show on credit reports, they can cause just as many problems for you further down the line too.
For some people BNPL is a sensible way to spread the cost of their shopping without paying interest, but it comes with risks that may not be immediately obvious. Borrowers can end up falling into debt without really thinking about it.
Research from consumer group Which? found people thought of BNPL as a budgeting solution rather than borrowing, so they didn’t consider it as carefully as other kinds of debt. And because of the basic credit checks done when people take them out, it means shoppers can build up multiple loans, without anyone ever considering overall affordability.
While money is tight, BNPL feels like an easy way to make ends meet, especially as it’s now available everywhere from supermarkets to takeaways. However, as the debts add up and need to be repaid, they add to the problems, and make money even tighter.
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According to Citizens Advice, two in five people have struggled to make BNPL payments and one in three have missed them.
While not all companies charge late fees, the debts start to pile up — and as a result, one in four who missed payments or made them late also failed to pay another bill.
Until earlier this year, borrowing wasn’t reported anywhere, so credit agencies weren’t getting to hear about any problem BNPL borrowing. It meant there was nothing to stop someone with worrying debts compounding the problem.
This rang alarm bells with the Financial Conduct Authority (FCA), which published a review, and started making plans to regulate the industry some time in late 2023 or 2024.
The industry has responded, with some voluntary changes in the interim, including reporting problem BNPL debts.
Reporting to credit agencies is currently pretty lumpy, but since the start of June, Klarna has reported missed or late payments to Experian and TransUnion. TransUnion says BNPL will show on its credit reports, while Experian and Equifax have confirmed they will include them at some point this year.
These are welcome developments, which will protect people from deepening debt problems, but it also raises the stakes when things go wrong.
If you struggle to make payments, and make any late or miss them, anything that is reported to the agencies will go onto your credit file. Not only will it make it harder to borrow in the short term, but this will stay on your file for up to six years, so when you apply for any other kind of borrowing — or even something as simple as a mobile phone contract — they’ll be able to see these missed payments and it could count against you in the future.
On the plus side, if you currently struggle to borrow on things like loans or credit cards, if you stick rigorously to all your BNPL repayments, it may improve your credit score when the data is included.
However, tthe best way to approach it is to think very carefully about whether you really need the item right now, and whether you can afford all your repayments.
With everyone’s budgets stretched to breaking point, sensible BNPL to improve your score can easily tip into unaffordable borrowing that builds problems for later.
Here are five ways to boost your credit record:
Check your credit report
There are three main credit reference agencies — Equifax, Experian and TransUnion.
You can check your credit report with each of the three agencies, so you know where you stand and check for any mistakes.
Make sure you’re on the electoral roll
Check that you're on the electoral roll where you live, as this proves your address.
Keep credit applications to an absolute minimum
Make sure you use an eligibility calculator first, to avoid failed applications.
Pay down whatever you can afford
If you’re borrowed to the max on your cards, pay down whatever you can afford.
Lenders don’t like to see you using more than a third of your limit.
Consider building up proof of payments
If you haven’t borrowed before, consider building up proof of payments with BNPL or a credit builder card.
However, be really honest with yourself about whether you can keep on top of this, because if you miss payments you’ll end up damaging your credit record instead of improving it.