Understanding the Impact of Buy Now Pay Later (BNPL) Apps on Your Credit Score

Before we dive into what a credit score is and why it matters, let’s talk about something that’s quietly destroying your credit score: Buy Now Pay Later (BNPL) apps. These days, using BNPL services is easier than borrowing money from a friend. Everything is online, and with tools like DigiLocker, all your documents are available digitally. Many young people, especially those between 18 and 25, are getting hooked on the convenience of shopping apps and BNPL offers, lured in by discounts, cashback, and easy credit options. You can open an account in just a few clicks, but here’s the dark side—if you don’t manage these accounts properly and pay on time, it can seriously hurt your credit score. Many young adults assume there won’t be any real consequences if they don’t pay back the amount. Sure, these companies might charge penalties or make some threatening calls, but the real damage is being done to your credit score, which can affect your financial future for years. Each time you sign up for a BNPL service using your Aadhaar or PAN card, it gets reported under your PAN number. If you miss payments, it’s not just the penalties you need to worry about—it’s the hit to your credit score, which can follow you for a long time.

Credit Score: What It Is and Why It Matters

What’s a Credit Score, Anyway?

Think of your credit score like a report card from school—but for your finances. Instead of showing how good you are at math or history, it shows how well you handle borrowing and paying back money. The score is a number, usually between 300 and 900, and it tells banks or lenders how “trustworthy” you are when it comes to borrowing money.

Here’s a simple way to think about it:

• High score (closer to 900) = You’re a trustworthy borrower. Lenders will feel good about giving you loans, and you might even get better deals, like lower interest rates.
• Low score (closer to 300) = You’re risky. Lenders may worry that you won’t pay back the loan on time, or at all, so they might either reject your application or charge you higher interest rates.

What’s Involved in a Credit Score?

Your credit score doesn’t just pop out of nowhere. It’s built based on a few things, kind of like how your final exam grade is made up of different parts like homework, quizzes, and attendance. Here’s how it works:

1. Payment History (35%)

This is the most important part of your score. It’s all about whether you pay your bills on time. Imagine you borrowed ₹100 from a friend and promised to pay it back in a week. If you do that, your friend will trust you the next time you need money. But if you’re late or don’t pay at all, your friend may hesitate to lend you anything in the future.

2. Amounts Owed (30%)

This is about how much money you already owe compared to how much you’re allowed to borrow. Think of it like this: If you have a credit card with a ₹10,000 limit, and you’re always using ₹9,900, lenders might think, “This person is using too much credit and might not be able to pay it back.” A better scenario would be using less, say ₹2,000, which shows you’re responsible.

3. Length of Credit History (15%)

The longer you’ve been borrowing and paying back money, the better it is for your score. It’s like your reputation—the longer you’ve been reliable, the more people trust you. For example, if you’ve had a credit card for 10 years and always paid your bills on time, it shows you’ve got a track record of being responsible.

4. Credit Mix (10%)

Lenders like to see that you can handle different types of credit. It’s like getting good grades in both math and English. If you’ve got a home loan, car loan, and a credit card, and you manage them well, it shows that you can handle various forms of borrowing.

5. New Credit (10%)

If you apply for a lot of loans or credit cards in a short amount of time, lenders might get nervous. It’s like asking all your friends for money at the same time—people might start to wonder why you need so much cash so quickly.

Why Should You Care About Your Credit Score?

You might be thinking, “Why should I care about some number?” Well, here’s why it matters:

1. Getting Loans: If you ever need a home loan, car loan, or even a new credit card, your credit score will decide if you get approved and how much interest you’ll have to pay. A higher score could save you a lot of money on interest.
2. Better Deals: If you have a high credit score, banks may offer you better deals, like lower interest rates or higher credit limits. It’s like getting VIP treatment!
3. Renting a House: Some landlords check credit scores before renting out a place. A bad score could make it harder to find a rental property.

How to Improve (or Keep) a Good Credit Score

Okay, so how do you keep your score high or improve a bad one? It’s pretty simple:

1. Pay on Time: This is the golden rule. Always pay your bills on time. Whether it’s a credit card payment, home loan EMI, or even your electricity bill—don’t be late.
2. Don’t Max Out Your Credit: Try to use less than 30% of your credit limit. So if you have a ₹10,000 limit, try not to use more than ₹3,000 at any given time.
3. Don’t Apply for Too Many Loans/Cards: Only apply for credit when you need it. Every time you apply for a loan or a credit card, it shows up on your report and could lower your score temporarily.
4. Keep Old Accounts Open: If you’ve got a credit card that’s been open for a long time and you’ve been managing it well, keep it open! The longer your credit history, the better.
5. Check Your Credit Report Regularly: Sometimes there could be errors on your report that hurt your score. Make it a habit to check your credit report once a year. If you find a mistake, get it fixed!

A Quick Example to Wrap It Up

Let’s say you’re 25, just got your first job, and got your first credit card. You decide to spend ₹8,000 on a new phone using your card. The bill comes at the end of the month, and instead of paying the whole ₹8,000, you just pay ₹1,000. The rest starts building up interest. The next month, you spend another ₹5,000 on some clothes. Suddenly, your ₹10,000 credit limit is almost full. Because you’re using so much of your credit and not paying it off quickly, your credit score might start to drop. But if you had paid off the ₹8,000 in full and kept your spending lower, your score would stay healthy.

Final Thought

Your credit score is just a number, but it’s a number that can have a big impact on your financial future. Treat it like your reputation—build it slowly, protect it, and it’ll help you when you need it the most!