Afterpay and your credit score

• Using Afterpay and concerned that it might be hurting your credit score?
• Learn whether they run a credit check and what they actually report to credit reporting bureaus.

Afterpay surged in popularity because opening an account was so easy, giving debt-wary consumers a new way to fund their lifestyle without the perceived risk of getting into long term debt. But the only thing in life that doesn't change is change itself, and as their customers start "adulting", many are questioning the impact Afterpay may have on their credit score.

Like many questions of a financial nature, there is a little more to how Afterpay affects your credit score than meets the eye. So let's take a look at how it works.

Do Afterpay run a credit check when opening an account?

Afterpay have, in the past, reserved the right to run a credit check on new customers, although they said that they rarely did so.

However, they’ve updated their credit policy recently, and they now say:

"at Afterpay, we never do credit checks . . . We don’t believe in preventing people from accessing Afterpay because they may have had an old debt from a long time ago"

It’s there in plain English. Afterpay do not run credit checks, ever. Credit checks made by lenders appear in your credit history, potentially lowering your score. But this won't happen with Afterpay: no credit check means no entry in your credit history.

What do Afterpay report to credit bureaus?

"we never . . . report late payments . . . And we don’t believe that missing a payment with Afterpay should result in a bad credit history"

So, once again, any Afterpay late payments or missed payments are not going to affect your credit score. However, it’s worth noting that Afterpay do not say that actual defaults – when someone fails to pay altogether – will not be reported.

Does using Afterpay help your credit score?

If you use Afterpay responsibly and make your payments on time, then Afterpay will neither help nor hinder your credit score because "positive" behaviour — paying on time — is also not reported to credit reporting bureaus.

This is in contrast to credit cards and most other loan repayments, where positive behaviour is reported and will help your credit score.

Will using Afterpay rebuild your credit score?

As noted above, Afterpay do not operate like a credit card or loan. They do not report payments that have been made on time to credit reporting bureaus. Therefore, Afterpay cannot be used to rebuild a damaged credit score.

What to do if you have missed a payment

If you have missed a payment to Afterpay, take these simple steps.

• Don't panic! Your missed payment will not be reported to a credit bureau.
• In order to avoid late payment fees, and to make sure that your Afterpay account is not suspended, make sure that there is enough in your bank account so that upcoming payments will be made on time.
• If you are struggling to make payments due to a lack of cash, then try to reduce your discretionary spending so you don't compound the problem.

Can Afterpay affect new applications for cards and loans?

Since Afterpay do not report successfully collecting your instalments, your responsible management of your Afterpay account will not be visible to a bank when they pull your credit report during an application. However, Afterpay do not report missed payments but may still report defaults. The net result of this policy, if you do not have other credit obligations showing your ability to manage your finances, is that your credit score may be an inaccurate reflection of your creditworthiness.

Besides Afterpay's impact on your credit score, banks may consider the use of Afterpay or other Buy Now Pay Later services as a sign that the applicant lacks cash reserves or may be living from paycheque to paycheque. In an article published in the Sydney Morning Herald, Otto Dargan, Managing director at Home Loan Experts, put it this way: "Afterpay creates questions, such as is this person living beyond their means".

Is Afterpay a credit card?

No, Afterpay is not a credit card. There are many differences, but it mostly comes down to interest and repayment schedules.

• Afterpay does not charge interest on purchases and payments are taken over four instalments.
• Credit cards charge interest on purchases — once any introductory promotions have elapsed — and debt can rollover from one month to the next with a minimum repayment in the region of 1 - 2% of the debt owed being collected each statement period in addition to interest at the purchase rate.

For a more complete look into how Afterpay and credit cards differ, click here.