The lure of a new pair of shoes, a shiny watch or a comfy new couch is strong. But you’re short on cash. A handy buy now, pay later provider (BNPL) is lurking close by.

BNPL providers like Afterpay, ZipPay or Oxipay are happy to help you take home your new toy, straight away. But there can be a downside to BNPL- that flashy purchase may have a negative impact on your credit score with long term consequences.

How does it work?

BNPL works for mostly small, discretionary purchases like clothing, beauty or household items. It can also be used for larger purchases such as solar systems or home improvements. The goods are most commonly paid for as 4 equal interest-free instalments. This means you can purchase goods or services without paying the full amount upfront and if you pay the instalments on time, there’s no interest charges.

BNPL is a tool to get you to spend more

BNPL can be used for online or in-store payments. In most cases, you’ll use a mobile app that is linked to your debit card or bank account. The app will display a payment schedule and send payment reminders. Keep in mind that retailers see BNPL as a tool to encourage you to spend more in their stores and are paying fees to the BNPL providers to be able to offer the service.

What are the benefits?

Instant gratification! You get your goods immediately! The approval process for BNPL can be completed within minutes and you will be on your way.

BNPL is an alternative to other payment products such as credit cards, personal loans and payday loans.

If used as part of a disciplined budgeting plan, BNPL might help you manage your cashflow. You may be able to align the repayments to your pay date and other bill payments. But if you’re already that organised with your money, you probably have no need for a BNPL service!

What’s the catch?

It can be easy to get carried away with BNPL and over-commit. You must make your monthly repayments or you’ll start to be charged interest. Late payment fees may also apply. If you have multiple BNPL accounts and are managing other monthly repayments like a home loan, you may find it tricky to balance everything.

While BNPL lenders may say that they’re not lenders in the traditional sense, the fact remains that they make money available to people who have to pay it back with costs tacked on. In most cases BNPL service providers aren’t required to run credit checks like a traditional lender, which means that it’s easier to access and if you’re already finding it difficult managing your money or spending money that you don’t have, then you could easily end up in a lot of debt.

So is it safe?

Regulation for BNPL is pending in the federal parliament so it currently isn’t covered by the Credit Act. BNPL providers say there are some checks and balances in place to protect consumers. Customers are started on low spending limits with the first instalment payment required upfront. If you miss any repayments, you will be prevented from spending more. This reduces the risk of getting into debt but it doesn’t remove it entirely.

Will it impact my credit score?

Your credit score is based on personal and financial information about you that's kept in your credit report. When you apply for a BNPL service, the provider may make a credit enquiry which can affect your credit score. How you use your BNPL service will impact your credit score. For example, if you miss a payment you may end up with a black mark on your credit score.

Banks use your credit score (or credit rating) to decide whether to give you credit or lend you money.

You can check your credit score and see if any BNPL accounts have been recorded and if this has impacted your score. Even if you don’t use a BNPL service regularly, if it appears on your credit history, it is considered a small loan by a lender and could influence the outcome of a future lending application.

Want to know more? Check out the MoneySmart website for more info on Credit scores and credit reports

The wrap up

BNPL may seem attractive but you need to manage repayments along with your other financial commitments to avoid interest charges.

Do your homework! Perhaps a savings account that rewards you for saving by paying you interest might be a good alternative. Our blog 7 reasons to consider a savings account is a good place to start.

Saving will mean you may have to wait a little longer for those discretionary items but you will remove the risk of over-committing financially.

Please note this information is general in nature and does not take into account your personal circumstances or objectives. You should consider this before acting on any of the information contained.