Afterpay and your credit score!

Afterpay is the latest shopping trend sweeping Australia. Consumers love it, as do retailers. While it can be convenient, it could mean disaster if you want to apply for a new credit card or loan. There are a few things about using Afterpay you should be aware of. Here, we look at the most common questions users ask.

What is Afterpay exactly?

Afterpay is a digital service that lets you buy something now – at no initial cost – and pay it off in four equal instalments. You can use Afterpay online or in-store and get your product straight away, unlike layby. The service has become so popular in Australia that as of February 2018, Afterpay had been used by over 1.5 million customers to buy approximately a billion dollars worth of product from 12,000 merchants. Jetstar even recently announced plans to start using the service for domestic flights.

How does Afterpay work?

To use Afterpay you need a debit card or credit card linked to your account. You then pay off your purchases in fortnightly installments that are automatically deducted from your linked card in four equal payments. There are no interest or fees unless you miss payments.

That sounds great! What’s the catch?

If you do miss a payment, you’ll be charged a $10 fee for each missed installment. If you fail to make the payment within another week you’ll be charged an additional $7 fee. So, failure to make your payments on a $100 purchase could potentially cost you an extra $68. Furthermore, if you link you credit card to Afterpay, rather than your debit card, you run the risk of paying credit card interest on your purchases if you let them stack up.

What happens if I don’t make my payments?

Aside from the fees you’ll be charged, Afterpay has the right to sell its unpaid debt to third party collection agencies and the company spent $2.3 million trying to recover unpaid debts in the first half of the 2018 financial year alone. If your Afterpay debt goes to a collection agency it will become a black mark on your credit report.

Does Afterpay perform a credit check before approving you?

Just like applying for any other forms of credit, Afterpay performs a credit check when you sign up for the service. This means it goes on your credit report as a permanent record for the next 2 years, in the same way as if you had applied for a new loan or credit card. We are seeing that lenders are viewing this in a negative light and often rejecting loan applications. They are forming the view that you used AfterPay because you couldn’t afford to pay for the purchase outright, bringing in to question your ability to pay your debts. Bear in mind that under the new Comprehensive Credit Reporting system about half of your credit score is made up purely by the number of applications you have made recently.

Does using Afterpay affect my credit score?

Absolutely! Under the new Comprehensive Credit Reporting system about half of your credit score is made up by the number of credit applications you have made recently. If you have used AfterPay a few times over the last year then you would most likely be rejected for a loan for any purpose, including a home loan. In 2019 the banks especially are tightening their lending criteria, looking for any reason to NOT approve your loan.So if you want to keep a high credit score or maybe you are planning to apply for a loan then you should avoid AfterPay or similar services.

Do you know what’s on your credit report? Get a copy of your credit report here!

So, should I use Afterpay or not?

Critics of Afterpay say that it normalises debt and encourages users to spend beyond their means. If you know you are an impulse shopper prone to overspending , then it may not be a good choice for you. The smartest way to shop is always budgeting and spending the money you know you have, not what you hope to have next month. It will have a big negative impact on your credit score which should be reason enough to avoid this service.

Want to find out more about your credit rating? Get a copy of your credit report today.