how to make sure your credit score is good enough
Some of the biggest players in the buy now, pay later space might be taking a closer look at your application, as the latest push for tougher regulations might cause Afterpay to start credit checks.
With the Buy Now, Pay Later (BNPL) platforms primarily appealing to young Australians who, as a group, are less likely to have built up credit or even have a credit score, how can they ensure that their application is likely to be approved.
Fortunately, there are steps you can take to not only make sure your credit score is good enough to help increase your chances of being approved for a BNPL platform, but also to build a credit score from scratch.
BNPL hit by stricter regulations
For the past eight years, BNPL platforms have helped Australians pay for items large and small in regular installments with no interest charges (in most cases). Unfortunately, this has also created financial hardship, as late payment fees can accrue, especially when clients use multiple BNPL platforms at once.
The sector Buy now, pay later may soon transform into a more heavily regulated industry, including mandatory credit checks for new customers. The industry has been mostly self-regulating so far, with an AFIA Buy Now Pay Later Code of practice. Big players like Afterpay, Brighte, Humm Group, Klarna, Latitude, Openpay, Payright and Zip Co have all signed the code.
But some have argued that this does not go far enough to protect vulnerable Australians. Additionally, this code is voluntary, with major institutions like CBA, NAB, and PayPal yet to sign the code.
Due to these issues, a new Treasury document was released yesterday by Financial Services Minister Stephen Jonesoutlining three options for regulatory intervention in the buy now, pay later (BNPL) sector:
- Develop mandatory industry-specific code without the need for an Australian Credit License;
- Bring the BNPL sector under the Credit Act but enforce a more moderate set of responsible lending requirements; Where
- Bring the BNPL sector under the Credit Law and apply rules similar to those for credit cards and other loan products.
Afterpay plans to roll out credit checks in Australia
The appeal of BNPL platforms has often been their lack of high interest charges on purchases, which makes them a preferred method of payment for the youngest who have turned away from credit cards. And for many, it’s the ease of applying and the lack of traditional checks and balances, like rigorous credit checking of applicants.
As the pressure mounts, it is likely that some BNPL platforms will shift to either performing credit checks as part of credit risk mitigation or due diligence on clients, whether this either voluntarily or by law.
Afterpay has already started checking the credit of its customers in the United States, so adapting it to Australia could be its next step.
Michael Saadat, Head of International Public Policy at Blockwhich acquired Afterpay in February, said, “We started doing credit checks in the US on our Buy Now, Pay Later products earlier this year.”
“While we are confident that our product will work, given the diversity of the market and the drive to set minimum standards across the industry [in Australia]we can understand why the government would want to introduce something like this.
“All governments around the world are looking at a similar thing – a bespoke affordability assessment, which is not the same as a fully accountable lending assessment,” Saadat said.
Michael Saadat cautioned against the Treasury Paper’s third option (listed above), saying it was “using a hammer to crack a nut” and “and does not reflect how to buy now, pay later works”.
“No government in the world seeks to apply traditional consumer credit regulation to buy now, pay later without ensuring that regulation is proportionate and appropriate,” he said.
So how do you build your credit history and credit score?
Regardless of the outcome of yesterday’s Treasury document calling for tougher regulation in the BNPL sector, young Australians looking to apply for platforms like Afterpay may want to build their credit history and credit score.
A credit score is assigned to Australians aged 18 and over when applying for credit products. It is a measure of your “creditworthiness”; that is, your ability to repay your debts responsibly. The more positive behavior you show, such as paying your bills on time or repaying a loan, the better you turn to credit reporting agencies that assess your credit score.
Your first step should be to see if you already have a credit history or credit ratings. Luckily, you can check your credit score in minutes with helpful apps, like the RateCity Credit Score app.
If you don’t have a credit history or credit ratings, you might want to consider building it. After all, you have to start somewhere!
Steps to build your credit as a young Aussie:
You can’t just apply for a car loan at 18 and expect approval to try to establish credit. It may be easier to start with less risky credit products with less strict eligibility criteria. This can be done through utility plans, such as power and gas, or a phone plan.
- Hop on your family’s utility bills
If you still live at home, you can have your household subscribe to a utility plan, such as power, gas, or water. This may be a lower risk option, as your family or household should already have gone through the approval process and be dealing with those refunds.
Typically, it’s as simple as calling the provider and asking them to add an additional person to the plan. You may need to provide identification, such as a driver’s license, and proof of income, such as a pay stub. Even if you’re employed on a casual basis, you can still hop on the utility plan because your family has already gotten approval and demonstrated they can handle the repayments without you.
- Start your own phone plan
If you still have a prepaid phone or are on your household’s cell phone plan, it it might be worth branching out and starting your own. This process involves an assessment of your income and likely your credit history, so be sure to have verified that you have a credit scoreand pay a few utility bills before attempting this.
Keep in mind that signing up for a phone plan, or any credit product, comes with a level of commitment and requires financial responsibility. If you only subscribe to a phone plan to qualify for a BNPL platform, and you have not budgeted or planned ahead to meet your repayments, you could find yourself in serious trouble. financial difficulties or in debt.