Using BNPL programs to pay for new clothes may seem like a good option, but any missed repayments can remain on credit records for up to six years. Overuse of such credit programs can also be seen as problematic for lenders.
Norton Finance offered tips on maintaining a good credit rating while still being able to use the program.
Their best advice is as follows:
• Always make repayments on time, as late payments are detrimental to credit scores.
• Avoid opening too many credit accounts at once – too many active credit accounts are a red flag for lenders.
• Borrow only what you can afford to repay and borrow rarely – this helps show lenders that you are a responsible borrower.
The UK spent over £ 53bn on clothing in 2020, and with the BNPL option, it’s no surprise that 22% of BNPL users have seen their credit scores negatively affected by their spending habits. ‘online purchase.
Having a good credit rating is essential for making big financial decisions such as applying for loans, mortgages or credit cards.
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Credit scores are what most lenders use to determine loan eligibility and there are many factors that can damage them including the use of BNPL programs.
Staying in control of your finances and maintaining a good credit rating means people are more likely to be accepted for credit when needed.
Through BNPL programs, instead of purchasing items in advance, consumers can make payments over time without incurring interest.
Over the past year, the BNPL market is booming largely due to the flexibility it offers.
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Figures show that more than five million people have used BNPL’s services since the start of the pandemic.
With the uncertainty surrounding jobs and finances during the pandemic, people would rather be able to split costs and pay in installments when shopping online.
Richard Lane of StepChange discussed the issues with Buy Now, Pay Later on Supershoppers last year.
He said: “It’s not a bad thing for people to want beautiful things. What people need to understand is that they can’t always predict what’s going to happen in the future.
“So you can use it for a month and that’s great because you think you’re going to pay it off by the next month, but in fact your car breaks down or your washing machine breaks down.
“It’s very quick and very easy to get things out of hand and the fees and charges piling up. “
BNPL providers are popular with online retailers because they make it less likely that a person will abandon their shopping cart.
However, debt activists and charities have argued that the BNPL marketplace imprisons customers by spending money they don’t have.
They say companies are using social media influencers to advertise their products, which magnifies debt.
Even if the total debt is not huge, over time there are risks of unaffordable borrowing.
A study published by the Financial Conduct Authority (FCA) concluded that the watchdog should regulate the BNPL industry “urgently” because there was “significant potential for harm to consumers”.
Despite the FCA’s review calling for urgent action, no date has been set for regulation.
But once the rules are in place, it will be interesting to see the impact this will have on the burgeoning BNPL industry.