BNPL stings borrowers’ credit scores, broker warns

Borro owner Cara Giovinazzo said just a couple of transactions using buy now, pay later (BNPL) could be enough to prevent a borrower from gaining a loan approval as lenders take a “hard-line” approach.

“We are seeing BNPL facilities are now appearing on client’s credit reports and significantly reducing their credit scores, which was not the case in the past,” Ms Giovinazzo said.

“Previously, BNPL facilities did not show up on your comprehensive credit reporting, so it was a good option to utilise when you wanted to purchase larger items online and pay it off, usually over 4–6 smaller fortnightly repayments.

“But buyer beware! While it has looked like an easy and convenient way to purchase items, particularly in these times of cost-of-living increases and rising interest rates, you need to consider the impact it has on obtaining credit in the future, as lenders are now treating BNPL very differently.”

It follows the Australian Prudential Regulation Authority (APRA) amendments to its prudential framework, which made clear that banks needed to include buy now, pay later and higher education debts when reporting debt-to-income ratios from September.

The changes aimed to ensure that banks are “operationally prepared” to limit growth in “higher risk residential mortgage lending”, such as loans at high debt-to-income multiples or high loan-to-valuation ratios.

Despite rising popularity, BNPL had been somewhat of an outlier in regulation and was not regulated under the National Credit Act like normal debt mechanisms as providers do not charge interest on repayments.

Under the changes, the DTI is now the ratio of the credit limit of all debts held by the borrower, to the borrowers’ gross income (annual, before-tax income verified by ADI excluding compulsory superannuation contributions and before any discounts or haircuts under the ADI’s serviceability assessment policy).

Ms Giovinazzo said the ability for consumers to obtain credit and pay them off without accruing interest had enhanced the popularity of BNPL, but they can now “significantly affect” borrowers’ credit scores.

“When you start an application with a BNPL facility and even if you don’t proceed or aren’t approved, this is recorded on your credit score and reduces your score by approximately 50 points,” Ms Giovinazzo said.

She added, if you miss a repayment or had conduct issues on your BNPL facility, this could significantly reduce your score and when applying for credit, you will have to explain the reasons behind the late payment.

“A lender could decline your application based simply on the conduct of the BNPL facility,” she said.

“Previously, lenders saw BNPL facilities as an extension of declared living expenses.

“If you were declaring $500 a month on clothing, and had $500 on your BNPL facility, they would not consider the BNPL facility a liability. Now, most lenders are adding it as an ongoing liability, even if you owe nothing on it, which is reducing the amount of money you can borrow.”

[Related: BNPL debts to be included in DTI ratios: APRA]