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Buy now pay later to impact credit scores of millions

credit ratings
credit ratings

Buy now, pay later payments are to impact the credit scores of millions of people for the first time, The Telegraph can reveal.

Zilch, a British buy now pay later business with three million users, is to start sharing data on customers' balances and repayments with credit rating agencies in a move that could see people’s ability to borrow restricted if they fall behind on payments.

The tightening of the lending rules comes as buy now, pay later companies brace for regulation from the UK’s Financial Conduct Authority (FCA), with new powers expected to be confirmed later this year. A requirement to perform credit checks is expected to be among the new rules.

The FCA said in its 2021 review of the market that buy now, pay later companies would need to “properly consider affordability for consumers, particularly as they may not have visibility of missed payments with other providers”.

Zilch, which was founded in 2018 and valued at $2bn, used a “soft” credit check on customers until this month. It would perform its own lending assessment and set an affordability limit, but this would not impact the consumer’s credit rating.

Going forward, data it provides to credit reference agencies about people’s repayments and balances will be fed into their wider credit scores. This kind of balance monitoring can impact people’s borrowing ability at major banks and their ability to take out products such as credit cards.

Philip Belamant, Zilch’s chief executive, said the change would allow people to build up their credit scores without taking out credit cards.

“For the first time in the UK, customers can now build their credit scores without relying on revolving high interest rate bearing products,” Mr Belamant said.

MPs and campaigners have raised concerns that buy now, pay later companies may be encouraging consumers to spend more than they can afford.

The products, which advance people the money to buy items and let them pay back in instalments, are popular with online fashion brands and are increasingly being offered by takeaway apps and grocers. Stella Creasy, the Labour MP, has called buy now pay later a “scandal waiting to happen”.

The new wave of buy now pays later lenders claim they can be cheaper than credit cards, since they typically do not charge interest.

Zilch’s payments app and card allows consumers to pay in four instalments over six weeks. There are no upfront fees for using its app with a partner store and it charges a £2.50 flat fee for purchases from any other shop.

Mr Belamant said: “Zilch has always done a full affordability check when customers sign up. We have taken it a step further on the reporting side. Within the next 30 days, Zilch data will start to appear formally on customer’s credit scores.

“We hope by the middle of the year we will see regulation move in on this space.”

Mr Belamant, the company's 38-year-old South African co-founder, added that new regulations should also ban customers from paying off their buy now, pay later debt with credit cards, which could get them into a spiral of debt. 
“Practices like that are going to come under scrutiny, rightfully so,” he said.

Klarna, Zilch’s main rival, currently performs a “soft” check on its pay-splitting feature, although it can stop users from borrowing more using its app. It performs a so-called “hard” check, which can impact a consumer’s credit rating, on other credit lines it offers.

An FCA spokesman said: “We have been consistently calling for a change to the law to bring buy-now-pay-later products under our regulation. As soon as Government and Parliament decides on the scope of that legislative change, we will immediately consult on the rules these firms need to follow.

“Despite not yet having regulatory oversight of these firms, we’ve already secured changes to unfair contract terms and warned firms about misleading advertising.”

Ministers must first draw up legislation to bring the new wave of lenders under the regulator’s remit.

A Zilch spokesman said: “From this month, Zilch is integrating with all reputable credit reporting agencies to start influencing customer’s credit scores, giving them the opportunity to improve their scores if they keep up to date with Zilch and all their credit payments.”

The spokesman said the change would enable “people in Britain who responsibly borrow credit through buy now, pay later and repay on time, to both manage cash flow and improve - and in some cases, build - their personal credit records”.