The real cost of Buy Now Pay Later schemes - and how they can impact your future

how do buy now pay later schemes work
The truth about BNPL schemes - and your futureJohn Scott - Getty Images

“I couldn’t tell my friends or my parents. How would I explain that I’ve thrown my future away over shoes?” Gemma* was 22 when she first discovered buy now, pay later (BNPL). “It just came up as an option to pay on Asos. I was buying a pair of boots, it just seemed easier to move it to after payday, so I signed up. It only took two minutes”. Gemma’s first purchase, a pair of 4o quid boots, led to more purchases. “I paid the repayments on time. They send you a reminder email, so it was really easy. Overall, it was a great experience and I just didn’t think too much of it.”

A year later, Gemma was using BNPL regularly. “It meant that I could order things in two sizes and return the other one, but because I always bought with a pay later option, the 30 days would end and I’d start to panic. But I mostly managed to pay it off every month. It didn't feel like debt, debt was credit cards and mortgages, this was just – I don’t know, a treat?” Gemma began to make split payment purchases [where the cost is spread out over a number of months] as well as 'pay in 30-days; purchases. “I’d only have to put down £20. The rest would be paid off over three months, so it seemed manageable.”

After Gemma’s hours at the restaurant that she worked at were reduced at the start of the pandemic, she continued to shop. “It sounds awful, but there was this rush whenever a parcel arrived. I wasn’t leaving the house – no one was – so it was just a pick-me-up. When I was picking a dress, it didn’t feel like huge sums of money, just small amounts, but they added up really quickly.”

A few months into lockdown, Gemma missed a payment. “I managed to borrow some money from a friend, but I still had other payments to make, so I applied for a loan and a credit card, but my bank declined me. I also didn’t realise that being rejected for loans can impact your credit score.”

In total, Gemma owed around £400 across BNPL purchases. “I felt sick all the time. How would I tell my parents that after I’d finally moved out and into my first house share, I’d already ruined my financial future?” Gemma has now cleared all of her purchases and no longer uses BNPL, however, she believes that the purchases combined with her applications for credit have damaged her credit score. “The thing that no one tells you is that it’s a trap. It builds up way quicker than you think. I think if I was using my own money, I wouldn’t have bought all the things I did?”

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Oleg Breslavtsev - Getty Images

So, what is buy now, pay later?

For the uninitiated, BNPL or buy now, pay later, is essentially a short-term loan. One that can be paid either in instalments over several months or weeks, or repaid in full a month later. Unlike credit cards, loans or mortgages, almost anyone with a bank account can access it. Once you’ve signed up, customers can select the payment process that works for them (either split or deferred payments) and the BNPL provider will either agree a direct debit that takes the money automatically from your account or sometimes a date that you have to manually make the payment.

Let's decode some of the language

Before we continue: a 'soft credit search' is used by BNPL, and these checks aren't visible to potential lenders (like a mortgage application) and won’t affect your credit history. In contrast, a hard credit search is used by banks for products like loans, and they can affect your credit history and score.

“I filled out my email, address and date of birth, I think that was pretty much it," explains Gemma, discussing the sign-up process for BNPL. “It definitely took less than five minutes and it was honestly really easy. So, when I rang the bank, I think I expected the same thing, but they wanted to know all about my income, outgoings, spending habits and rent payments. I was really surprised that it was so complicated.”

Alice Tapper, a financial expert, author of Go Fund Yourself and the woman behind the #RegulateBuyNowPayLater campaign to bring BNPL products under their remit, explains that the reason these processes are different is due to the type of search they conduct. “BNPL products often use something called a soft credit search. Whereas if you’re applying for a loan or mortgage, the lender will use a hard credit search, which is why they need more information.”

Alice explains that for some of these hard credit searches, even just applying can impact your credit history as these show up on your credit file. If you are declined for this credit it can negatively impact your credit score, as it suggests to lenders that you might be in financial difficulty and in need of credit. “As unfair as it sounds, applying for too much credit in a small space of time can suggest to lenders that you’re in financial difficulty and banks are less likely to offer you financial support.”

But can BNPL affect my credit score?

BNPL products are designed to be easy to use and have a very quick sign-up process – and Alice explains that there is currently no requirement for BNPL firms to be clear on what their products are. “It might surprise you to know that BNPL firms aren’t required to tell you that it’s a form of credit, their products are designed to be as easy to use as possible as they’re competing with your debit card to ensure that you purchase through them.”

Through campaigning, Alice hopes that this will be a lot clearer in the future and stricter guidelines are predicted to come in. “I hope that in the future, we’ll see more responsibility from BNPL companies and that they’ll focus on educating their customers about what their products are and the impact they can have on your credit history.”

However, some BNPL products have recently made changes. Alice explains that some BNPL companies are now reporting to credit reference agencies (the organisations, like Experian, that collect data about how reliable you are at managing credit). “So, each credit reference agency will create their own score based on your credit history. Banks then use this data to predict how likely you are to make a payment."

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“Up until very recently, most buy now, pay later companies didn’t report to a credit agency if, for example, you missed a payment. While you might pay a late fee, this wouldn’t be on your credit history for potential mortgage lenders to see. These new changes aim to stop debt building up, so they inform your bank if you’re missing payments, which in turn, can affect your credit score. This means that BNPL products carry a greater risk.”

So, if you’ve damaged your credit history by missing a BNPL payment, how can it impact you? Alice explains that “your credit history is checked by lots of companies. For example, when you’re applying for a phone contract, they’ll look at your credit history. Or if you apply for a mortgage, loan, overdraft and even a credit card.”

If you’ve damaged your credit history, there are ways to improve it. By paying your bills on time and not taking out more credit than you can afford, you can improve how likely you are to access credit.

So, how do I protect myself when using BNPL?

“The first thing I’d say is to be very aware of what product you’re using,” says the expert, as there are so many different BNPL providers out there – and each has a different process. “Some charge late fees, and others report to a credit reference agency. It’s worth knowing exactly what the consequences are if you miss a payment for each provider.” Alice also suggests sticking to one provider and adding the payment dates to your calendar to ensure that you don’t forget about the payment.

“Buy now, pay later can be useful. If you’re shopping for a bigger purchase that you really need, something that might help you save money in the long run, it can be really helpful. As long as you understand exactly how much the monthly payments are.”

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Alice explains that where you’re most likely to run into financial difficulty is using BNPL as an overdraft. “If BNPL wasn’t available, would you still make that purchase? That’s the best question to ask yourself. As we’ve seen, using BNPL for day-to-day purchases can create a spiral of debt, especially if you’re using a variety of providers. And, if you ever find that you’re likely to miss a payment, get in touch with the lender as soon as possible. It can feel embarrassing, but lenders have the power to help. They can extend payment dates and help you manage your repayments, but be warned, some providers charge late fees in these scenarios.”

Alice also warns that if you find that you’re using other forms of credit to clear BNPL, such as paying off your purchases with a credit card, then you want to take a step back. “Paying credit with credit can be the start of a debt spiral. If you find that this is the case, I’d recommend getting in touch with a charity like Stepchange who can help you protect your credit record.”

If you’re struggling with debt, you can get in touch with debt charity StepChange for free advice and support on 0300 303 5300

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