With more than two million UK shoppers saying they've experienced a damaged credit score as a result of Buy Now Pay Later (BNPL) schemes - should you use it?
There are many BNPL schemes in the UK, including Laybuy, and millions of people are now using it as a way to pay for purchases without having to pay the entire amount upfront.
In this article we’ll look at what Laybuy is, how it works and how BNPL may affect your credit score.
Laybuy is a BNPL service, similar to Klarna, where customers can make purchases without having to pay the full amount upfront. Rather, they can split the total of their purchase into six equal, interest-free weekly payments.
Buying an item without having to pay the full amount upfront, is one of the main reasons why consumers are attracted to BNPL schemes. That, plus the fact that they won't be paying interest as long as they keep their payments on time.
Unlike some other Buy Now Pay Later service providers, when you apply for an account with Laybuy, it will automatically trigger a hard credit check on your credit profile, as the company uses Experian. This is true whether you get accepted for an account or not.
The company does this to assess how much credit you qualify for which, for most customers, is typically between £60 and £600.
You may still spend more than your credit limit, as Laybuy will change the way you make payments. For example, say you have a credit limit of £100 and want to purchase for £150, your designated credit or debit card will be charged £50. They call this the 'limit excess'.
Your remaining payments for the next five weeks will be £20 per week.
Although Laybuy doesn't charge any interest, you will be charged late payment fees of £6 for every missed payment. This may also negatively impact your credit score as defaults can be reported to credit reference agencies (CRAs).
If you followed the rules of your BNPL plan, it probably won't hurt your credit score.
However, Laybuy may report defaults to credit reference agencies, who would have placed it on your credit report, if you have late or missed payments or failed to return what you owe. Plus you'll be hit by late fees.
Experian, one of the largest credit bureaus in the UK, was questioned about whether individuals should avoid BNPL programmes.
It emphasised the fact that these strategies, when utilised properly, won't harm your credit rating and, in some situations, may even improve your credit score.
But it's always important to thoroughly check what you're signing up for, so you can avoid any potential and unnecessary damage to your credit score.
For instance, if you borrow money and then don't pay it back as agreed, your credit report may reflect negative information that lowers your credit score.
Retail credit can, however, genuinely help consumers strengthen their credit history and increase their score if utilised wisely and paid back on time.
Just like getting a credit card, for example, using BNPL schemes like Clearpay, Laybuy or Klarna, can hurt your score if you fail to make payments on time.
If you don't pay back what you owe it will show as a default on your account and this can remain on your credit report for up to six years.
Since this information will be visible to future lenders, it can severely impact your ability to get approved for credit in the future.
To summarise, here are a few ways Laybuy can impact your credit score:
Your repayment history for lines of credit or loans
How much you have borrowed in the past and the frequency of your credit applications or loans
Evidence of any missed or late repayments
Your current credit limits
Any bankruptcies or defaults in your name
Laybuy lists anumber of helpful tips on their website for consumers who want to enjoy Laybuy responsibly. This includes creating a budget, planning ahead, and keeping track of your spending.
This is especially helpful if you have more than one account as you'll have multiple payments to take care of - something that your Laybuy account dashboard helps you achieve.
Your past income and expense history is factored into your credit score and it may be negatively impacted if you frequently use Laybuy as it may look like you need credit to make ends meet.
Additionally, it shows spending patterns, which may reduce the likelihood that a lender will offer you a loan. If you have too many open BNPL accounts, they may, in rare cases, deny you credit.
You could unintentionally overdraw your account and accumulate more debt, especially if you continue making purchases that are more expensive than you can afford.
In addition to being viewed as a liability by lenders, this would probably have a negative effect on your credit score, making it even more difficult for you to pay back your loans.
Even if you pay off all of your accounts, some BNPL service providers may record large loans to credit reference agencies, which could lower credit scores.
When you open an account with some BNPL services like Laybuy, they may also run a credit check, which could have an impact on your credit score.
If you can't handle your Laybuy purchases responsibly, you'll fall behind in payments and this can lead you right into a debt spiral. Once Laybuy adds default notices to your credit report, it will hurt your score even further - something you want to avoid.
Also, having access to credit for purchases may lead you to spend more than you can afford, leaving you with account payments that you can't keep up with. Some people may even take out a loan to cover their debt payments and this means they are over-indebted.
One issue with BNPL providers like Laybuy is that their websites don't always highlight the dangers of Buy Now Pay Later schemes so consumers often enter into agreements without all the necessary information and knowledge.
However, Laybuy is still a preferred way of paying for purchases, asmore than 17 million people have now used BNPL schemes in the UK.
Yes. Laybuy performs credit checks on new account applications. Once your score has been obtained your application can be assessed and your credit limit can be determined.
Yes, Laybuy gives you a credit limit and they review credit limits every two to three months.
To get a Laybuy account you have to be at least 18 years old, have a verifiable email address, mobile number, and have a valid credit or debit card.
The initial hard credit inquiry will temporarily lower your credit score, but if you keep your payments up to date and don't open multiple accounts in a short period of time, your credit score shouldn't be negatively impacted at all.