What is BNPL and how does it influence your credit score?

The buy now, pay later (BNPL) mode of purchasing has offered millions access to electronic purchasing with an instant, interest-free line of credit, revolutionizing online shopping. India's banking system is now intertwined with everything from food staples to electronics. However, a vital question begins to surface with all this convenience in online purchasing: What is the impact of a BNPL on your credit score?

What is BNPL?

BNPL is a short-term credit facility that allows customers to break down their total cost into smaller and easier payment instalments, usually without incurring interest costs. Compared to traditional loans, BNPL has quicker approvals, fewer requirements (if any), and often does not require a hard credit check at the outset.

However, this new accessibility raises concerns about how this may affect credit health, or financial discipline, particularly when the payment is requested but not fulfilled.

Does BNPL show on your credit report?

In the past, BNPL providers did not share consumer behaviour with credit bureaus, but now things are changing. It looks like with real action on regulatory conditions, or standardization of BNPL products, Indian lenders will follow suit. That means depending on if you use BNPL responsibly, it may soon have a positive or negative impact on your credit profile.

Positive impact of BNPL on your credit score

• Build credit history: It is constructed principally as an example of your responsible borrowing behaviour in the timely repayment of BNPL, especially if you are new to credit.
• Improves credit mix: BNPL adds to your credit profile by increasing the distinct types of credit you carry and helps your credit score with its structure.
• No hard inquiries: Most service providers do not impact your credit score when they approve you because they only conduct soft inquiries.

Negative impact of BNPL on your credit score

• Missed payments: Once reporting begins, if you miss payments, it will negatively affect your credit score and cause late penalties.
• Risk of over-commitment: If you have multiple commitments with BNPL, your credit utilisation ratio will be higher, which is a red flag for lenders.
• Unmonitored loans: It's so easy to get BNPL, you can easily forget about the other past-due amounts, and therefore, default inadvertently.

What happens when BNPL is reported?

If credit bureaus are notified of your BNPL use, then after a period:

1. A better credit score will be determined with the timely repayments.
2. Missed or partial payments will lead to a drop in your credit score similar to personal loan default.
3. The indication of the status of the account (active or closed) will help lenders with determining how you've repaid the loans in the past.

Smart ways to use BNPL without hurting credit score

• Do not consider BNPL as "free money,” use BNPL only when necessary.
• Set reminders to remind you which provider is on what repayment plan.
• Understand the terms carefully, identify if your provider submits reports for you to credit bureaus.
• Keep a record of every transaction because it is easy to forget all the different BNPL accounts you opened up.

In conclusion, if it is managed correctly, BNPL can be an effective jumping off point for some individuals to develop credit. However, consumers have to be diligent with BNPL as the links to credit bureau reporting are evolving, and the implications can be damaging even if you do not have an immediate need for reimbursement.

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Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.