“Buy now, pay later” services such as Afterpay have grown in popularity over recent years. In fact, 39% of online shoppers in Australia have used one of these services and 10% use them whenever possible, according to a recent Power Retail Report. But could using services like Afterpay affect your credit rating?
The number of online retailers offering Afterpay has skyrocketed. You can even now pay for Jetstar flights using Afterpay. With this service, you would need to pay one quarter of the purchase price immediately and then pay back the remaining three quarterly payments fortnightly.
You won’t necessarily pay any extra to use Afterpay, as there is no interest charged. The cost is borne mostly by retailers, who pay merchant fees – a flat fee of around 30 cents plus a 4-6% commission – to Afterpay. However, late fees of up to $68 are charged if you don’t pay for a purchase on time. (Afterpay also reports defaults to credit reporting agencies.)
Even if you pay off each purchase on-time, using “buy now, pay later” services can still impact negatively on your credit rating. This can make it harder for you to apply for credit cards and loans in the future.
“The issue is that these services are classified as a line of credit, meaning the way you use them can impact on your future borrowing capacity,” said Geraldine Magarey, Thought Leadership & Research Leader at Chartered Accountants Australia & New Zealand.
Although Afterpay may not necessarily conduct a credit check every time you make a new purchase, their terms & conditions do give them the right to do this at any time they consider necessary. Meanwhile, other services including zipPay, zipMoney and Openpay say that they do conduct credit checks with each new credit application. When this occurs, it’s treated as a new line of credit on your report.
“Lenders will take your Afterpay purchases into consideration alongside your other expenses, when deciding if they should give you a loan or not,” Magarey said.
Afterpay defends customers, attacks banks
Despite these and other warnings, Afterpay itself claims that banks are not rejecting applications just because somebody has used their service. In a recent submission to the Senate Select Committee on Financial Technology and Regulatory Technology, the company said the idea that a Afterpay customers are a higher risk to banks when applying for a loan was “clearly disingenuous”.
Here are a couple of highlights from Afterpay’s submission:
Consistent with ASIC’s updated regulatory guidance in RG 209, Afterpay’s customers are in an excellent position to adjust their spending behaviour – if required – in order to meet the repayments under a home loan. Banks already know this: they are not actually rejecting home loan applications simply because someone is an Afterpay customer. The idea that a significant proportion of Millennials, and over 3 million Australians and growing, will be turned away by banks when applying for the banks’ most profitable product clearly does not stack up.
The notion that a credit card with a limit of $5,000, $10,000 or $20,000 is ‘safer’ than an Afterpay account that allows consumers to borrow up to $2,000 (and typically much less – the average outstanding balance is $208) repaid over four instalments is simply not credible.
A significant proportion of younger generations are avoiding credit cards and using Afterpay as a budgeting tool. These customers are forming strong savings habits, and 85% of them are using debit cards to manage their finances with Afterpay. Banks should be rewarding consumers that can meet their repayments with Afterpay and avoid long-term high-interest revolving debt.
So, if you’re using Afterpay responsibly, this doesn’t necessarily mean your credit card and home loan applications will be instantly rejected. However, credit checks from “buy now, pay later” services are recorded on your credit report. The current consensus is that most banks look at the use of these services unfavourably. And if you ever failed to repay a purchase on time, that would be almost certainly be detrimental to your credit score.