Using BNPL this festive season? Here’s how it can impact your credit score

As the festive fever builds, borrowers look towards modern ways of borrowing funds. Tools such as personal loans, credit cards, and buy-now, pay-later services are just a few options that borrowers look to for meeting their day-to-day expenses, gifts for friends, and other spending obligations.

To put it simply, it is crucial to understand that Buy Now, Pay Later (BNPL) services can significantly impact one’s credit score. Still, the impact depends entirely on how one uses them and whether the provider reports your behaviour to credit bureaus. This write-up is dedicated towards discussing the same concept in detail.

What is the meaning of buy now, pay later?

1. BNPL provides consumers with the opportunity to purchase goods and pay for them later on in interest-free instalments. It is like a modern form of loan. The tenure of repayment is generally short in this case. It is offered by lending institutions that are regulated by the Reserve Bank of India (RBI) or even global providers permitted to do business in India.
2. The responsibility of the provider here is to make payments for the purchased goods or services to the merchant upfront. Whereas the borrower repays the loaned amount in a predetermined, scheduled instalment.

How does BNPL affect the borrower's credit score?

1. Credit checks
   
   
   • Some BNPL service providers conduct soft credit checks. These checks do not impact credit scores. Whereas there are some service providers that conduct ‘hard checks’, now such checks impact credit scores negatively, as the score drops temporarily. Many hard checks in a short span of time are a massive negative for any borrower and should be avoided.
2. Repayment reporting
   
   
   • If repayments are made on time and reported to credit bureaus in a normal manner, they can assist in improving credit profiles and boosting the credit scores of borrowers. It helps in building a positive payment history and can make future personal loans, credit cards and home loans easier to secure.
   • If you miss your personal loan EMIs, home loan EMIs, or credit card bills, it can immediately bring down your credit score. The decline in such cases can be even a drop of 100 points, depending on the severity of the case and the frequency and duration of missing repayments.
   • Furthermore, not all BNPL service providers report to leading credit bureaus, such as CRIF High Mark, CIBIL, Equifax, and Experian. That is why the impact can vary on a case-by-case basis.

How can you manage BNPL responsibly?

You can manage BNPL responsibly by following the given steps:

1. Always create an expense plan for the month to avoid unexpected expenses. Take into consideration the BNPL repayments to ensure no debt or interest builds up. This way, your credit score will remain healthy.
2. Don’t use multiple BNPL accounts. Excessive use of credit can reflect negatively on your credit profile and make future personal loans and home loans difficult to secure.
3. Consistently review your credit profile, review the terms, fees, and your credit report for transparency and accuracy.

Key takeaways

1. BNPL can have both a positive and a negative effect on your credit score. It depends on how responsibly one uses it and whether your actions are reported to the credit bureaus.
2. On-time payments improve the credit profiles and credit scores of borrowers. Missing payments or defaulting can result in significant declines.

Therefore, any form of credit or borrowing comes with its risks, such as the possibility of debt buildup, legal complications, recovery and liquidity issues. That is why any borrowing should only be done after proper due diligence and consultation with a certified financial advisor.

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Disclaimer: Mint has a partnership with fintech companies to offer credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article aims to educate readers and raise awareness about the essential needs for credit, including loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates and hidden charges. We advise investors to discuss with certified experts before taking any credit.