Can I use BNPL every time I shop?

Buy now pay later shopping is a new way to spread the costs of your online and in-store purchases. While it can often be more manageable to buy expensive items like washing machines and ovens using buy now pay later schemes, more and more people are using BNPL to manage their everyday shopping.

During the pandemic, many people have had reduced incomes or perhaps faced unemployment and so it’s more important than ever that people can effectively budget and organise their finances to continue to meet existing priority bills. In some cases, this means applying for additional credit, taking payment deferrals on mortgages and car finance payments or simply using buy now pay later to reduce the immediate impact of large purchases.

However, using credit to cover every day expenses can be a sign of more long-term financial difficulty. Although your circumstances may be related entirely to Covid-19, as the world is still struggling to control the pandemic, it could be some time before we return to normality. For this reason, it’s important that we use credit sensibly and only when it’s absolutely necessary.

How does buy now pay later work?

If you’re new to BNPL or maybe you’ve used it a few times but don’t understand it, the best way to get your head around this new type of credit is to think of it like a loan. You are essentially borrowing money through a third party lender to buy your shopping online. The third party pays the merchant, and then you repay the third party lender. In some cases, there’s no interest charged for your borrowing if you repay within 3 or 6 months, however you will likely have to pay interest if you do not repay in this timeframe and often there are late payment fees for missing your repayments.

Currently BNPL is not regulated by the Financial Conduct Authority which means it’s not governed by the same rules as payday loans and other unsecured consumer credit. So, while buy now pay later is often offered via several online and in store shops, it doesn’t have to meet the same standards that other credit products do, which can result in harm to consumers.

How does BNPL affect my credit score?

Buy now pay later is a type of credit so it will be recorded on your credit file, and other lenders will be able to see these records for up to 6 years after the credit has been repaid. If you make all of your BNPL repayments on time, you’re unlikely to experience a negative impact on your credit file. Some providers of buy now pay later schemes only run a soft credit check as well, which has no impact on your credit score, unlike hard credit checks. However, missed payments may be recorded and extended non-payments could result in Defaults and even bailiffs. You should look to improve your credit score wherever possible, even when this means not taking out credit you don’t need.

How often should I use buy now pay later?

Used correctly, buy now pay later can be a great tool to keep your finances flowing throughout more challenging months. However, making small payments over several months can encourage people to overspend so you must always ask yourself: “do I really need to make this purchase?”, before taking out any form of credit to cover the costs.

In some cases, using credit may be unavoidable. For example, if you need your car to get to work, and suddenly you have to replace all four tyres, it’s unlikely you’ll have a spare £300 or so lying around. Therefore, buy now pay later can be helpful in spreading that cost over 3 months so you make payments of just £100 each month. You’ll be able to budget more easily around the smaller payments and feel safe in the knowledge you can meet your existing financial commitments.

For occasional uses like the example above, buy now pay later is a reasonable source of credit, but it’s not advisable to use buy now pay later every time you shop. This is because small payments can add up quickly, and you could suddenly find yourself paying out so much money in repayments that you need to re-budget or take out additional credit to meet your priority bills. Plus, if you miss multiple repayments, you could see several negative markers appear on your credit file which will make it harder to obtain credit in the future, when you might really need it.

Alternatives to buy now pay later schemes

It would be better to look at ways to save on a limited budget so that when occasional unexpected expenses arise, you’ll have some financial security – even if it just means borrowing less money to meet the payment. If you can adjust your budget to save even more, you might be able to put some cash towards luxury purchases for which you would normally be tempted to use buy now pay later.

Borrowing alternatives to BNPL include:

• existing low interest rate credit cards
• arranged overdrafts
• credit lines

Saving money really is the best way to protect yourself against credit dependency and while it might not be easy, it’ll be far more rewarding than having to use buy now pay later schemes every time you shop.