Buy now pay later – How does it affect your credit score?

16th Feb, 2022 | First Home Buyer, Investor

In this article:
As the BNPL platforms can affect your chances of a home loan approval if they impact your credit score, it's important to understand how these schemes work.

Many of us are aware of the popularity of buy now, pay later platforms (BNPL) in Australia. Australians are increasingly turning to buy now, pay later schemes to purchase items they want or need, we are even seeing these schemes displacing some credit card activity. As these platforms can affect your chances of a home loan approval if they impact your credit score, it’s important to understand how these schemes work.

Like anything, used in moderation it can be a great tool for budgeting, but it requires speedy payment in line with the terms and conditions of the BNPL scheme. Unfortunately, if it becomes a habit, or you start to miss payments, then your new shoes or that new outfit could affect your home loan application.

So what mistakes do you need to avoid?

Mistake #1 – not enough savings to cover the debt

One of the most common mistakes people make with BNPL schemes is not having enough savings to cover the cost of the purchase outright. If your automatic payment fails, you’ll be charged a late fee. Setting a reminder before your due date can help, but take Afterpay as an example: if you miss your first payment, there is a $10 fee, and a $7 fee if it remains unpaid for 7 days after the due date.

Individual companies have different terms and conditions for their services so make sure you’re aware of whether there are account management fees or establishment fees on top of late charges.

You may not think this will happen to you, but an ASIC survey found that one in five customers are late on their BNPL repayments, have to cut back on essential purchases or miss out on paying other bills. Of this group of individuals missing payments, 49% were aged between 18 and 29.

When lenders assess your ability to repay a home loan, they will take into account all of your debts as well as your current spending patterns. This includes any outstanding balances on buy now, pay later scheme. If you have a lot of debt that you’re unable to repay, this could affect your chances of getting a home loan.

Mistake #2 – Linking to a credit card

You can elect to link your repayments to either your credit card or debit card with most BNPL schemes. If you already struggle with credit card repayments, link the repayments to your debit card to prevent further mishaps.

Mistake #3 – Overspending and letting it affect your credit rating

BNPL schemes can harm your credit score in Australia if you’re not careful. The BNPL platform can report “negative activity” to credit reporting agencies, such as missed payments, late payments and defaults. If this happens, when it comes time to apply for your home loan, you will find it significantly harder to qualify for your loan, as lenders check your credit rating as part of the application process.

Some BNPL platforms do soft credit checks when you sign up, but others like Afterpay do not. So be aware that too many enquiries on your credit file may be unfavourably viewed by lenders when it comes to applying for your home loan. Again, check the terms and conditions of the BNPL platform you’re using before you sign up.

Mistake #4 – Using multiple BNPL platforms

If you’re using multiple buy now, pay later platforms, this can be viewed negatively by lenders when it comes to applying for your home loan.  This can be potentially viewed as a red flag that people are having difficulties managing their day to day finances.

In Australia, lenders must ensure that you can repay any loan you apply for. When applying for the home loan, a lender will review your expenses by seeking your recent bank statements to assess your record of income and expenses. If there are multiple buy now pay later transactions across numerous providers in recent months, they could conclude that you are at a high risk of continuing those spending habits once you take out a loan.

If there are missed payments in your history, it could further suggest to lenders that you’re struggling to manage your finances and that you may be unable to meet the repayments on a home loan.

However, if you’re strict about your use of BNPL platforms, and you consistently meet your repayment requirements, with no outstanding debt when it comes time to apply for your home loan, then your use of BNPL services may be of no concern to the bank.

Will using buy now, pay later services prevent me from getting a home loan?

The short answer is no! Just because you use these services does not mean a lender will scrutinise your home loan application more vigorously. You won’t have to frantically close all of your accounts before applying for a home loan. So long as you manage your repayments and are responsible with your spending habits, then your debt will not increase. The key is to avoid the common traps of BNPL services that lead to payment defaults, which impact your credit score.

Best practices when applying for a home loan

  • Only buy what you really need and can afford. The temptation from BNPL platforms is obvious, but if it becomes a habit and you forget to manage it, then issues begin to surface.
  • Limit your use in the months leading up to applying for a home loan.
  • Restrict the number of BNPL platforms you’re using. If you haven’t used a BNPL account recently, then close it down.
  • A. Budget. It’s only when borrowers get lazy with their spending habits that BNPL platforms tend to impact their credit scores and by extension, their home loan applications.
  • If you know you’re about to go through the home loan application process, clear any outstanding debt with BNPL platforms.
  • Disclose your use of BNPL platforms with your lender and broker.

Our experienced home loan experts can work with you to understand your situation and help you avoid damaging your future home loan applications with a bad credit history. Reach out to our YBR brokers today and they can work with you to build a strategy for your home loan application!


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