BUY now pay later is an increasingly popular way to make purchases – but if you don't use it properly, it could hurt you in the future.
Shoppers using some buy now, pay later (BNPL) services, such as Klarna, are now having transactions logged on their credit reports.
It means that for the first time, other lenders can see this type of borrowing on their record.
And that might have an effect on your ability to get a mortgage or a credit card in some cases.
Following a shake-up of the BNPL industry announced by a number of credit reference agencies earlier this year, Klarna began reporting shoppers' use of its services to two of the three major credit reference agencies – TransUnion and Experian – from June 1.
Credit reference agencies put together information on how well you manage credit and make your repayments.
This is something lenders take into account when offering credit.
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Remember, BNPL deals are just like any other debt: you have to pay it back on time otherwise you will be charged interest or a penalty.
It is really important to read the small print when you decide to buy something on BNPL to make sure you know what you have to repay, and when.
So what can you do to make sure BNPL isn’t affecting your ability to access money to borrow?
Ultimately, lenders want to know you are responsible with your cash, said Sabya Mukherjee, head of credit risk at Monese.
Here are five potential problems you could run into if you use BNPL.
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Maxing out your credit
“A couple of months back, people’s use of BNPL was invisible to any mortgage provider. But now, lenders can see it when they are assessing how much you can afford to borrow,” Sabya said.
With any form of credit, you're given a maximum amount you can borrow – but you should try not to max this out.
Sabya suggests only using BNPL when you need it – borrowing the maximum amount might affect how much you can borrow elsewhere.
Also, if you forget to mention any BNPL transactions on your mortgage application, a mortgage lender could assume you aren’t declaring an ongoing financial commitment, even if you intend to pay the balance off in full quite soon.
So it is important to use BNPL wisely.
Not paying your balance on time
If you are not able to keep up with your repayments, lenders are more likely to think you'll default on other borrowing too.
Sabya said: "If I'm applying for a credit card but missed two instalments on my buy now pay later product, that wouldn’t give a credit provider a lot of confidence I will keep up with the credit card repayments.”
Missing payments could indicate that you’re struggling with your finances.
But keeping up with them shows a degree of financial responsibility, which will give lenders more assurance that you can keep up with more serious repayments, such as a mortgage.
How to cut the cost of your debt
IF you’re in large amounts of debt it can be really worrying. Here are some tips from Citizens Advice on how you can take action.
Check your bank balance on a regular basis – knowing your spending patterns is the first step to managing your money
Work out your budget – by writing down your income and taking away your essential bills such as food and transport
If you have money left over, plan in advance what else you’ll spend or save. If you don’t, look at ways to cut your costs
Pay off more than the minimum – If you’ve got credit card debts aim to pay off more than the minimum amount on your credit card each month to bring down your bill quicker
Pay your most expensive credit card sooner – If you have more than one credit card and can’t pay them off in full each month, prioritise the most expensive card (the one with the highest interest rate)
Prioritise your debts – If you’ve got several debts and you can’t afford to pay them all it’s important to prioritise them
Your rent, mortgage, council tax and energy bills should be paid first because the consequences can be more serious if you don't pay
Get advice – If you’re struggling to pay your debts month after month it’s important you get advice as soon as possible, before they build up even further
Groups like Citizens Advice and National Debtline can help you prioritise and negotiate with your creditors to offer you more affordable repayment plans
Not reducing your balance
Even if you aren’t paying your BNPL balance off in full, paying at least some of the amount in regular instalments will help show lenders that you can manage your debt.
“That isn’t going to be easy in the current climate,” Sabya admitted.
“But by having a regular budget, where you're trying to spend less than you are earning, is a good place to start.”
If you do have outstanding BNPL debt, try to put a little aside each month to keep on top of it.
If you are having trouble making ends meet, contact your creditors or meet a certified credit counsellor to discuss your options.
This won’t rebuild your credit score immediately, but if you can begin to manage your credit and pay on time, your score should increase over time.
Organisations like StepChange and Citizens Advice might also be able to offer some help or advice.
Applying for loads of BNPL accounts
You may think that opening multiple BNPL accounts and paying them off will improve your credit score by proving you can manage debt.
But this isn’t necessarily the case, Sabya said.
“The fact that you can manage to repay is more important than how much credit you have,” he explained.
Lenders get nervous about people who have lots of different piles of debt, and it could put them off giving you credit.
Another no-no is applying for lots of different credit accounts in a short period of time, within a few days or weeks for example, as lenders may think you seem desperate for cash.
It might seem obvious, but having the correct name on your account is crucial.
“Sometimes we see instances where someone hasn’t updated their name if they’ve got married and changed it, or they use a shortened version of their name for some providers,” Sabya said.
It's possible you might have two or more names on your credit file, which could be enough for lenders to refuse you on the basis that they think you're committing fraud.
It isn’t just a problem for BNPL of course – you might have previously applied for a credit card in a different name – but it is worth checking that your credit score details are consistent.
“The first thing to do is check your credit report to see what information they hold on you,” Sabya advised.
You can do this for free via sites such as Credit Karma or Clear Score.
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“If you want to get a name changed, you will need to send proof of the name you want, and why you want it changed, but it is pretty straightforward,” Sabya said.
“If it is just one provided, like Klarna, then it's typically not a big issue to fix.”
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