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Afterpay can be a quick and easy way to buy the things you need without copping the full brunt of their cost on your hip pocket straight away. However, before you start using services like Afterpay, it’s worth finding out whether doing so can have a negative effect on your credit score. Learn more about how these services work and if they leave a black mark on your credit file right here with Savvy!
Firstly, what is Afterpay and how does it work?
Afterpay is one of the largest buy now, pay later (BNPL) services operating in Australia. These services enable you to purchase a product or service upfront from a participating retailer and repay the amount to your BNPL provider in instalments over a short period, usually in four instalments over four to eight weeks.
The main benefit of using these services is that you don’t have to pay any interest on your repayments or, in some cases, any fees. However, many BNPL providers do charge certain fees for using their service.
For example, signing up for Afterpay Plus, which grants you access to a Mastercard, costs $9.99 per month. Additionally, making a late payment with Afterpay could set you back up to 25% of your purchase price, capped at $68.
Other BNPL providers charge more extensive fees. In the case of humm, you’ll be charged an establishment fee of $30 to $110 for using the service for the first time and $29 for each purchase made thereafter, as well as an $8 monthly fee for being signed up for the service and late fees of up to 18% of your purchase price, up to $78.
Will using Afterpay affect my credit score?
As of February 2024, using Afterpay doesn’t have any impact on your credit score. Unlike other credit providers like personal loan and payday loan companies, Afterpay doesn’t conduct any credit checks or report positive or negative repayment behaviour to credit reporting agencies. Some BNPL companies do this, but it isn’t currently a legal requirement.
This means that even if you continually make late payments on your Afterpay purchase, your credit score won’t be impacted. It’s still worth avoiding late payments wherever possible, though, as these will add up over time.
However, it’s important to note that the Australian Government has announced plans to regulate the BNPL industry to bring them under the same umbrella as other credit products.
This involves requiring BNPL services to hold an Australian Credit Licence (ACL) and comply with Responsible Lending Obligations, which would include conducting credit checks before approving payments to customers.
Federal Minister for Financial Services Stephen Jones, in his address to the Responsible Lending & Borrowing Summit in May 2023, said:
“[T]hrough its relatively low‑cost offering, BNPL has… provided a valuable source of competitive pressure on traditional credit products, such as credit cards or payday loans.
“But with those opportunities have come new and growing dangers to consumers, which up until now have been largely unregulated and unchecked.
“And evidence suggests that those risks are disproportionately affecting women, First Nations communities and people on low incomes.”
“[The Australian Government’s] plan will bring BNPL into line with other regulated credit providers, simplifying our regulatory system and addressing concerns about competitive neutrality.”
While the Government’s original aim was to have laws in place by the end of 2023, a draft of the required legislation has yet to be tabled at the time of writing.
How can I use Afterpay responsibly?
There are many ways you can go about responsibly using your Afterpay account. According to independent financial information site CreditSmart, some of the tips you can follow when using BNPL are:
- Don’t make BNPL payments at the expense of other, more important debts, like your mortgage or credit card payments
- Enforce a limit on your BNPL usage and wind it back if you’re approaching your limit
- Consider linking your account to a debit card, rather than a credit card
- Make payments on time to help maintain a positive credit record, as well as avoid late payment fees adding up over time
- Don’t spend more than you can afford to comfortably repay
What are the pros and cons of using Afterpay?
Pros:
- No interest or fees: if you make all your repayments on time, you won’t have to pay any interest or fees on your purchases
- Fast access to funds: BNPL is a quick and easy way of accessing the cash you need to buy goods and services
- Paying at your own speed: splitting up the cost of purchases can make it more manageable to pay for them
Cons:
- Potential for steep late fees: if you make late payments, these can cost you up to $68, depending on the size of your purchase
- Temptation to overspend: it’s easy to overspend with BNPL services, so it’s important to keep a firm eye on your budget
- Credit impact once legislation passed: applying for Afterpay once the regulatory legislation is passed means it can’t offer “no credit checks”, taking away one of its key benefits
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