Does Buy Now Pay Later (BNPL) Affect Your Credit Score?

Updated on: 3 Dec 2024

Are you wondering if using BNPL impact your credit score? It’s pretty important to know, especially with all these point-of-sale (POS) instalment loans getting popular in India. BNPL or Buy Now Pay Later, is when you buy something with credit and then pay it off in chunks later, without any extra interest.

In this sense, it acts as a short-term loan and therefore, can affect your creditworthiness. To know more about how this new method of financing affects your credit score, read on.

What is a BNPL Service?

As mentioned earlier, it provides a short-term loan for your big purchases. The retailer or service provider may provide this facility at the time of checkout. Here’s how BPNL service works:

Down Payment: When you opt for this loan, you need to make an initial down payment on the purchase.
Easy EMIs: You can spread the payment of the remaining amount into smaller monthly instalments spanning three or more months.
Flexible Limit: These can have flexible spending limits, which the service provider sets instead of the merchants.
Interest-Free: These generally don’t attract interest, but it depends on the service provider.

Do BNPL Services Require a Credit Check?

Considering that it is offered at the time of checkout, how does buy now pay later affect your credit score? The answer depends on whether the service provider checks your credit report. Financial institutions carry out this check to determine whether to approve your credit request.

Whenever financial institutions check your creditworthiness, it can temporarily dip your score. However, this applies only if it is a hard inquiry, as soft inquiries do not impact your score.

While some BNPL providers conduct a hard check inquiry to access your credit score and report, others only carry out a soft inquiry. Like other forms are credit, here is the information related to BNPL transactions included in the credit report:

When the transactions occurred or the date of account opening
Monthly repayments
Current balance
It also highlights how you’re managing your existing credit

Also check: Fibe EMIS – Buy Now Pay Later

Credit Reporting by BNPL Plans

While credit checks done by service providers affect your score, the impact is only temporary. However, if these lenders report your account to the credit bureaus that calculate your score, there’s a more lasting impact.

Credit bureaus have allowed BNPL service providers to report payments to be included in the credit report. However, most of these companies still don’t report these payments. This is because although BNPL facility is a type of loan, it is different from traditional loans.

The difference is the BNPL accounts are closed relatively quicker, generally paid within 3 to 6 months. Given this, consumers can experience a significant decline in their credit score despite making payments on time. This impact can remain for more than a year on their credit reports, potentially causing long-term damage.

However, credit bureaus and financial institutions are working towards a solution to remedy this. Experts suggest that these products can be treated as revolving lines of credit. However, that would mean users would max out their credit limit while using a BNPL loan.

A higher credit utilisation will also translate into a fall in credit scores. Additionally, BNPL companies may not want to comply with credit card regulations. All in all, these limitations are mainly because traditional credit scoring systems cannot treat BNPL as a separate credit product.

How BNPL Can Help Build Credit Score

Considering that payments do get reported, it is natural to wonder, ‘Can BNPL improve credit score?’. It is possible and the facility can even help you improve it and build robust credit histories if you are new to credit.

These service providers determine your creditworthiness using alternate data if you are availing of credit for the first time. Post that, you can build and improve your creditworthiness by:

Paying all the dues on time
Lowering credit utilisation
Opting for a longer tenure

However, these can help improve your credit score only if the service provider reports your payments to the credit bureaus.

The answer to the question, ‘Can BNPL improve credit score?’ is still being debated, but with proper reporting it should be able to. In any case, choosing the right service provider is key to accessible short-term financing at a low cost. With Fibe, you can access the Buy Now Pay Later facility of up to ₹10 lakhs for various services, such as healthcare, online courses and more.

You can also opt for an Instant Personal Loan of up to ₹5 lakhs. This funding comes with flexible tenure options and competitive rates, making your repayment comfortable. We also employ an alternate credit scoring system, which means you can get funding even if you don’t have an adequate score. Download our Personal Loan App or register on the website to apply.

FAQs on the Impact of Buy Now Pay Later on Credit Score

What is the negative impact of BNPL?

As credit scores rise or dip based on your repayment history, it may take a hit if you don’t repay your BNPL dues on time.

Does BNPL get reported to credit bureaus?

Credit bureaus allow BNPL service providers to report user payments. However, many of them still don’t do so because their products don’t fit into the current credit scoring designed for traditional financing solutions.