BNPL products allow you to make a purchase at a shop or online and receive your goods and services immediately, by paying the merchant, or retailer, on your behalf. Once the retailer is paid, you make repayments back to your BNPL account via interest free instalments over a short period of time, usually in four fortnightly instalments.
But, because the “buy now pay later” model involves credit, does Zip Pay or Afterpay affect your credit score? In this article, we will explain how BNPL products like Afterpay and Zip Pay work and whether using them affects your credit score.
How do Afterpay and Zip Pay work?
When you buy a product from a retailer using Afterpay or Zip Pay, the payment processing companies pay the price of the product or service on your behalf to the retailer. The payment arrangement allows you to buy the product now and pay for it later, usually in four fortnightly instalments. The companies don’t charge interest on credit purchases and also don’t charge signup fees.
Afterpay offers you a credit limit of $500 if you sign up on its website using your debit card. However, if you sign up on its website using a credit card, the company would assess your credit card history and credit limit to determine your creditworthiness before offering you a credit limit. Zip Pay, on the other hand, offers three fixed credit limits of $350, $500, and $1,000.
You can apply for a credit limit from Afterpay and Zip Pay by signing up on their websites. After signing up successfully, you need to fill out an online form and attach your bank statement, Paypal transactions statement, social media account links, and any other requested identification document. The lender company analyses your documents and your social media accounts to verify your identity and conduct due diligence before starting a business relationship with you.
Afterpay and Zip Pay also allow you to sign up on the checkout page of online retailers. All you have to do is to fill out a short online form and questionnaire. After your account is approved, you can then use the payment platforms to make purchases.
By default, repayments are set for four fortnightly instalments, you have the option to change the frequency of payments to whatever period that suits you, within reason. For example, you can set repayment frequency to monthly, weekly, or fortnightly. However, the total monthly instalments must be greater than the monthly minimum. The minimum monthly instalment is deducted automatically via direct debit from your credit or debit card. You can also opt for making additional payments, but your scheduled payments would still be deducted from your account, credit card, or debit card.
What happens if you miss your due payment?
While it may seem attractive to shop using deferred payment facilities of Afterpay and Zip Pay, they also have their own risks. If you miss a payment for whatever reason, the company would charge you a late payment fee of around $10. It would continue to charge you a late payment fee every week until you deposit your outstanding dues.
Because these BNPL companies do not charge interest or sign-up fees, they rely on generating their revenue from late payment fees. While the credit limit allowed to you is small, if you default on your payment for longer periods, the BNPL company might refer your loan to a debt collection company. The situation could jeopardise your chances of securing a mortgage.
As well as being charged a late payment fee, you’ll also be locked out from paying for new orders with the BNPL company until you pay your overdue payments. It’s also possible that they may not approve you for future purchases either even after you have caught up on all your overdue payments and associated fees.
Do Zip Pay and Afterpay affect your credit score?
Although Zip Pay and Afterpay provide short-term small credit limits, they can affect your credit score in various ways. According to Zip Pay, it has the right to perform a credit check to confirm your ability to repay the debt, and too many credit check enquiries can lower your credit score. Also, Zip Pay can report your missed or late payments to the credit reporting agencies, which can negatively affect your credit score.
Even though Zip Pay and Afterpay provide low-amount credit, a missed payment can put a red flag on your credit history and can reduce your chances of securing further loans at favourable terms. Zip Pay offers a maximum credit limit of $1,000 to borrowers who have a good credit history with little to no missed payments. So, if you maintain a clean credit history using Zip Pay while paying your due instalments timely, you can improve your credit score as well.
In contrast, After Pay doesn’t affect your credit score as it neither runs a credit check on you, nor does it report your late payments to credit reporting agencies. However, your account will be disabled temporarily if you miss your due payment.
Does Zip Pay do a credit check?
While Zip Pay doesn’t do a credit check on every borrower, the company’s website mentions that it may perform a credit check to gauge the borrower’s ability to repay the borrowed amount. The company uses the services of Illion and Equifax for performing credit checks. Because credit checks are performed by third-party companies, Zip Pay asks its clients to contact credit companies, Equifax and Illion, for their queries related to credit reports.
Does Afterpay do a credit check?
According to the company’s website, it does not do credit checks on customers as it provides low-value credit limits for purchases averaging around $150. The company also does not report late payments to the credit reporting agencies. However, the company only pauses your account if you miss your due payment. Because the company does not report any of your activity with After Pay, dealing with the company does not affect your credit score.