CHRISTMAS can be an expensive time of year but borrowing cash to cover the cost could lead to a spiral of debt.
Borrowing money isn’t always a bad thing – as long as you can afford to pay it back.
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Plus you should understand how much it will cost you, as you could be charged interest or fees which mean you pay back more than you originally borrowed.
Used right you can even improve your credit score by using a credit card or taking out a loan.
But get it wrong and you could end up in unmanageable debt and ruining your credit score.
But now, pay later (BNPL) has rocketed in popularity and makes it easier than ever to borrow cash at the checkout when shopping online.
The schemes let you spread the cost of a purchase, with payment usually due a month after buying or in several instalments over a longer period.
BNPL is offered by thousands of top retailers, like Boohoo, Asos and H&M through companies like Klarna, Clearpay, LayBuy and PayPal among others.
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Each company offers different terms, but with the credit available at just the tap of a button, you should always check what you’re getting in to first – or you could risk damaging your finances.
Justin Basini, chief executive and co-founder of ClearScore, the credit score and report app said: “Buy Now Pay Later providers generally run a ‘soft search’ on a person’s credit report before they use their service, instead of the more thorough hard search that a credit card or loan company carries out.
“This means they don’t get the full picture of whether someone can afford to pay back the money they borrow, which can lead to problem debt.”
If you take out a loan or credit card for example, the lender will look at what other debts you have to work out what you can sensibly afford to borrow and pay back.
This is a “hard search” meaning it also appears on your credit file so other lenders can see that you applied for the credit.
With BNPL there’s more of a light touch. A “soft search” means BNPL lenders will look at your financial circumstances but not as in-depth as for other credit products.
They will usually do a soft search if you are choosing to pay the bill in one month, but can do a hard search if you choose a longer period, like six months.
These soft searches do not appear on your credit history either, so shoppers can use several BNPL providers at once, borrowing large amounts in total because each provider can’t see how much they are borrowing from each one.
SPIRALLING DEBT
A recent investigation by the BBC’s Panorama found one borrower was able to buy more than £1,000 of clothes using different BNPL providers in one day.
Campaigners have warned that this can lead people to borrow money that is unaffordable and will struggle to pay back.
When BNPL debt becomes a problem it can then lead to missing payments, which could affect your credit score in a negative way – something many users are not aware of.
Justin said: “According to a recent ClearScore survey, 40% of people believe that Buy Now Pay Later is ‘safer’ than using a credit card, while almost a third believe that it won’t affect their credit score.
“In reality, if you don’t make the repayments, BNPL providers can add late payment fees to the money that you owe.
“And in the worst case scenario, they can pass on the debt to a debt collection company.
“Missed payments will come up as a negative mark on your credit report, which could lower your credit score.”
Citizens Advice say one in 10 BNPL users had been referred to debt collectors, rising to one in eight among young people.
The charity found that none of the BNPL checkouts on leading retailers’ websites warned people they could be referred to debt collectors for missed payments.
Instead this was only flagged in the terms and conditions on a separate page.
Missed credit card repayments can also negatively affect your credit score.
If you use a credit card you should always pay off your balance each month unless you have a 0% interest rate offer and are spreading the payments over a number of months.
If you don’t then you could be paying up to 18% APR. If you had a balance of £1,000 then it would take you 18 years and three months to pay off the balance and you’d pay £1,204 extra in interest.
You should never borrow more than you can afford to pay back and shoppers should also always shop around to see if there’s a better borrowing option available.
DEBT HELP
Having your debt passed on to someone else is generally a last resort, and if you’re struggling with making repayments on BNPL or any borrowing then you should speak to someone as soon as you can before it escalates.
Meanwhile missed payments on your credit score can affect the amounts you can borrow in future and the interest rates available to you.
So don’t put your head in the sand and seek help as soon as you can.
Speak to your lender in the first instance and you can contact a debt advice charity such as StepChange, Citizens Advice or National Debtline for guidance
“BNPL companies aren’t yet regulated by the Financial Conduct Authority (FCA) – the people that hold financial services companies to account,” Justin adds.
The companies will have to do more stringent checks in future, after the FCA announced it will soon regulate BNPL.
Unhappy shoppers will also be able to complain to the financial ombudsman – something that they currently can’t do.
The changes will bring it more into line with other lending like credit cards and loans. But that will not come until next year.
So if you’re tempted this Christmas into using BNPL or other credit then do so responsibly, says Justin.
“Never borrow more than you can afford to pay back and always make repayments on time. Think about what you’re actually getting into before you click and read the terms and conditions carefully.”
Debt charity StepChange recommends that you ask yourself the following questions when shopping online and consider using BNPL:
- Is the money needed for the purchase within your weekly (or monthly) budget?
- If BNPL was not available, would you still make the purchase?
- Is what you’re buying a necessity?
- Can you wait for the item until you next have some money to spend?
We saved £129k in just 17 months after getting into £458k of debt – we got rid of furniture, slashed meals out and became VERY frugal
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