TransUnion, one of the three main credit referencing agencies in the UK recently made headlines when it announced it would start incorporating buy now pay later (BNPL) into its credit reports.
In return, a survey by UK credit builder Pave showed that some 78% of respondents did not fully understand the implications of BNPL on their credit history, and 60% were concerned about the impact it might have.
That prompted us look into how BNPL will affect people’s credit reports and ability to gain credit in the future.
Before we dive into that though, let’s first briefly outline what BNPL is and how it differs from other credit services.
What is buy now pay later?
Buy now pay later is a form of credit allowing users to buy products now and pay for them at a later date through instalments. That isn’t new. Catalogues and directories such as Next, have operated this way for decades.
What sets BNPL apart from traditional credit services is that you don’t have to pay interest. Instead, the credit provider makes their money from the retailers by taking a cut of each transaction.
Equifax reports that 28 per cent of UK consumers used BNPL schemes in November 2021. That represented an increase in 2.8m over the previous period.
Buy now pay later regulation
The BNPL market is reminiscent of the early days of the payday loans market. Whilst there are regulated schemes such as Instalments by Barlcays, and Monzo Flex, many of the most popular companies are completely unregulated. These include Klarna, Clearpay, and Laybuy. With Klarna serving over 8 million UK customers and more than 6,000 retailers.
The regulated schemes already report your repayments to credit referencing agencies. If you make payments on time it could help improve your credit history. Missing payments however, would have a detrimental affect.
The current worry is that the explosion of unregulated BNPL schemes could leave many customers over-exposed when taking on additional credit. Regulation is in the works that will require additional affordability checks to be carried out, but until that happens, currently it’s up to the firms themselves to decide what data they choose to share, if any with credit referencing agencies.
Currently Clearpay doesn’t share any borrowing data with any reference agencies. Klarna states that it intends to share data in the future, and Laybuy already shares data with Experian.
How does buy now pay later affect my credit history?
BNPL schemes can affect your credit history in a few different ways.
Firstly, when initially applying for BNPL, the firm will conduct a search of your credit history.
Clearpay and Klarna only perform soft checks. These are to determine how successful your application will be and have no impact on your report or future credit applications. Similar to using an eligibility calculator when applying for a credit card.
Laybuy and OpenPay however, perform what is called a hard search. This search will be visible on your report and can affect future applications for credit. Normally you would want to limit any hard searches on your report, especially if you were considering applying for a big-ticket item such as a mortgages in the very near future. See our post on the most common reasons for why credit applications are rejected.
Missed or late payments
The second way BNPL can affect your credit file is if you miss payments. Klarna doesn’t report payments to credit reference agencies, so missed payments have no immediate impact on your credit history.
Instead, it will send reminders until you pay, but if you are months behind, they may employ a debt collection agency to chase payment.
Laybuy on the other hand is planning to report payments to credit referencing agencies meaning a missed payment could negatively affect your ability to obtain credit in the future. On the flip side though, a history of prompt payment could be seen as a benefit.
Which credit referencing agencies report buy now pay later?
Until recently, many BNPL schemes were something of a dirty little secret between you and BNPL company. Credit reporting agencies weren’t privy to your secret and that meant potential lenders weren’t either.
TransUnion was the first major agency to announce incorporating unregulated BNPL schemes into its credit files starting in summer 2022. Experian soon followed suit. Then not to be outdone, Equifax has also stated it to plans to bring in BNPL data in some manner.
Remember, all regulated BNPL providers already report to credit referencing agencies.
Who checks which reports?
Even if your BNPL provider reports to credit referencing agencies, it doesn’t necessarily mean it will have an affect on your ability to gain credit. That’s because not all credit providers check against all three referencing agencies.
The big four banks (Barclays, HSBC, Lloyds and RBS Natwest), check all three credit referencing agencies, as does Nationwide, Santander and most other traditional banks.
However, On the digital side, whilst Starling checks Equifax, Experian and TransUnion when assessing credit applications, Monzo only checks two of these (Equifax and Experian), so if your BNPL provider only reports to TransUnion, Monzo will be oblivious to it.
Similarly, the Post Office only checks Experian, and mortgage lender Norwich & Peterborough building society only check Equifax. We should add though when applying for a mortgage you likely need to provide bank statements, which would highlight any BNPL activity.
When it comes to mobile phone providers BT, Tesco and Virgin, all shun TransUnion.
Buy now pay later vs credit cards
BNPL may seem like a quick and easy way of purchasing what you want whilst spreading out payments to make them more affordable, but traditional forms of credit can be just as cheap and offer much better protection.
If you choose to purchase and item through an unregulated BNPL provider, you have no protection under Section 75 of the Consumer Act. Additionally, because the firm is unregulated, you also forfeit your right to complain to the Financial Ombudsman.
Both of these protections would be afforded to you if using a credit card, loan or overdraft. Buying on a zero interest credit card could also mean a cheaper price, as you would have the ability to use cashback sites, and a longer repayment plan.
Want to check your credit report?
It is often recommended that we should check our credit reports/histories at least once a month. That is ensure that everything is as ok, and there are no unexpected items or mistakes on there that could prevent you obtaining credit in the future.
There is no way to check all three credit referencing agencies in one fell swoop, but at you can check individually, and it’s free. Signing up to CreditKama will allow you check your TransUnion report, and ClearScore your Equifax report. Experian does have its own free portal, but Money Saving Expert’s credit club which checks Experian data, is more useful overall.
Dealing with debt
This article discusses borrowing, and contains links to financial products. If you are struggling with debt issues due to products like these, then free impartial advice is available from non-profit organisations such as Citizens Advice, StepChange and National Debtline.