Buy Now, Pay Later (BNPL) purchases will appear on credit reports for the first time, it has been announced.
The news comes as TransUnion, one of the UK’s top three credit reference agencies, revealed that the payment scheme will now be reported on credit files later this year.
A recent Buy Now, Pay Later Explained guide by our sister company Creditfix told how millions of people in the UK are regularly using the services to make purchases both online and instore.
A review by the Financial Conduct Authority (FCA) found that the UK market had trebled in size in 2020 alone. The market is estimated to be worth a staggering £6.4bn a year in the UK and is used by about 10 million shoppers.
However, people are being urged to be aware of the impact the new changes could have on their credit report in the future.
How does Buy Now, Pay Later work?
The concept of Buy Now, Pay Later is all in the name.
In simple terms it allows you to buy something now and pay for them at a later date, typically within 30 days, interest free.
BNPL companies like Klarna, Laybuy and Clearpay have become household names in recent years, with millions of shoppers making use of their services at the checkouts of big name brands such as ASOS, H&M and many more.
But how does it work?
When using BNPL the company, such as Clearpay, will conduct a soft credit check. That means it won’t appear on your credit history, as long as your repayments aren’t considered to be long-term such as three, six or 12 months.
In fact, the only time you’d need to worry about BNPL affecting your credit rating was if you’d missed a payment. However, that’s all about to change as TransUnion will start including the borrowing on reports later this year.
That will give other lenders visibility of your BNPL borrowing for the first time.
Why is my credit report important?
Lenders use credit reports to decide how much money they’re willing to lend, if anything at all.
Your credit report is a big factor in whether you’ll get approved for things like your mortgage or a credit card – even something as minor as getting a phone contract can be dependent on it.
A credit report paints a picture of your financial past, allowing lenders to see how much you’ve borrowed and if you’ve been able to keep up with your repayments, as an example. This helps them to make a decision on whether to lend to you in the future.
Having a poor credit score and negative marks on your credit report can make getting credit in the future much harder so it’s important to keep a close check on it. You can find out more about understanding your credit score here.
It’s also important to note that while BNPL doesn’t appear on your credit file at the moment, lenders can ask for bank statements to check your spending and payments and can see BNPL transactions there.
Why is TransUnion adding BNPL to credit reporting?
TransUnion announced it will become the first UK credit reference agency to accept BNPL finance into consumer credit files.
There will be no immediate change to credit reporting by the firm but changes will be implemented this summer.
The information and insights provider has said that the move is to help protect consumers and enable finance providers to ensure payment plans are both affordable and sustainable.
“We’re delighted to announce these important changes to the way buy now, pay later products are treated within the credit ecosystem,” said Satrajit Saha, CEO of TransUnion in the UK.
“We’ve been working closely with prominent providers of buy now, pay later finance to lead the way in line with industry changes and consumer needs.
“Incorporating this data into credit reports will support consumers that are using this type of point-of-sale finance, whilst also ensuring lenders have a comprehensive picture of a borrower’s financial position.”
TransUnion has also said it hopes that adding BNPL will help those with a poor score to increase their chances of borrowing in the future.
Using credit responsibly, like using a credit card and paying off the balance each month, helps build your credit score. But shoppers using BNPL are missing out on this because it doesn’t show up.
Shail Deep, chief product officer at TransUnion in the UK, said: “These changes will be really beneficial for those with thin credit files, supporting financial inclusion and wider access to credit, as well as helping to ensure finance providers have a holistic view of an individual’s borrowing, so they can use these insights to help ensure the right outcomes for consumers.”
It’s understood that Experian and Equifax are also working with BNPL companies to incorporate into future reporting too.
How can I manage BNPL debt?
BNPL can be a good way to spread the cost of a big ticket item if managed responsibly.
However, if you’re struggling to stay on top of BNPL payments it’s important to seek help as soon as possible.
Companies, like Carrington Dean, specialise in supporting people struggling with debt – including those owed to BNPL companies.
Owing money to BNPL companies is no different to owing money on a credit card so it’s important to take action as soon as you fall behind on payments if you’re to avoid serious consequences.
You can find out more about BNPL, how it works, its dangers and how to deal with BNPL debt with the help of the Creditfix Buy Now, Pay Later Explained guide here.
