Buy Now, Pay Later: How BNPL influences your credit score

In recent years, Buy Now, Pay Later (BNPL) services have gained immense popularity among consumers, offering a convenient way to make purchases and pay for them in the set duration. However, as with any financial product, it's crucial to understand how BNPL can impact your credit score. In this article, we'll explore the various ways BNPL can affect your credit score and provide insights on how to use this credit responsibly.

What is BNPL?

BNPL services allow consumers to purchase goods or services and pay for them over a specified time. Typically, these payments are interest-free and spread over onetime payment or 2 to 4 instalments. The appeal of BNPL lies in its convenience and flexibility, making it an attractive option for those who need to manage their cash flow more effectively.

How BNPL works

When you make a purchase using a BNPL service, the provider pays the merchant on your behalf, and you repay the loan over a predetermined period. In India, while as a consumer, you can avail a BNPL on a merchant platform, BNPL is offered by entities regulated by the Reserve Bank of India. Therefore, as a consumer, it is essential to understand the lender from whom you are availing the BNPL, as terms and conditions of each BNPL provider can vary.

Impact on credit score

One of the significant benefits of BNPL is its potential to positively impact your credit score. When you make on-time payments on your BNPL, these payments are reported to credit bureaus, helping you build a positive credit history. This can be especially beneficial for individuals with limited credit history, as it provides an opportunity to establish a solid credit profile.

It can also negatively impact it if payments are not made on time. Late or missed payments are reported to credit bureaus, which can harm your creditworthiness. As BNPL facilities are shorter duration loans, if BNPL are not repaid, they can negatively impact the credit history within a very short period of time. It's crucial to stay on top of your payments and ensure you can meet the repayment schedule.

Usually, BNPL loans are issued by a merchant's partner bank or NBFC. Many times, customers might not be able to relate the lending entity mentioned in the credit report with the BNPL loan they have taken, causing confusion and complaints to lenders or credit bureaus, stating that such a loan was not taken by them. To avoid such confusion at a later stage, customers can check and make a note of BNPL financing partner’s details mentioned on the merchant platform and report to the lender or bureau only if the loan is not closed after all the due payments.

Key factors affecting credit score

Several factors influence your credit score, and BNPL can play a role in these areas:

• Repayment history: Consistent and on-time payments are crucial for maintaining a good credit score. Late or missed payments can have a negative impact within a short period of time, in the case of BNPL.
• Credit utilisation: Using a significant portion of your available credit can negatively affect your credit score. It's essential to manage your credit utilisation effectively. Therefore, BNPL Lines must be used judiciously.
• Credit mix: Having a diverse mix of credit types (e.g., credit cards, instalment loans, BNPL) can positively impact your credit score. However, it's important to use these products responsibly.

Responsible use of BNPL

To use BNPL services responsibly and avoid negative impacts on your credit score, consider the following tips:

• Read the terms and conditions: Understand the lender providing the BNPL facility, repayment terms, fees, and interest rates associated with each BNPL provider.
• Set up payment reminders: Use calendar reminders or automatic payments to ensure you don't miss any instalments.
• Monitor your credit report: Regularly check your credit report to ensure that BNPL payments are being reported accurately.
• Avoid overextending: Only use BNPL for purchases you can afford to pay off in the agreed-upon timeframe.

Conclusion

BNPL services offer a convenient way to manage purchases and payments, but it's essential to understand their impact on your credit score. By using BNPL responsibly and staying on top of your payments, you can build a positive credit history and improve your credit score. 

However, failing to meet repayment obligations can have adverse effects on your creditworthiness. Always read the terms and conditions, set up payment reminders, and monitor your credit report to ensure you're using BNPL services effectively.

Sachin Seth, Chairman CRIF HighMark Credit Bureau and Regional MD India and South Asia, CRIF.