In today’s fast-paced digital economy, services like Clearpay are being increasingly selected at the till or online checkout. They are designed to offer greater convenience and flexibility in managing large payments.
However, as more individuals adopt this method of paying for goods and services, questions about its impact on credit scores are becoming increasingly important. After all, your credit score forms the backbone of your financial health.
What is Clearpay?
Clearpay is a Buy Now, Pay Later service that enables consumers to purchase items and pay for them over a period of time. It requires a first payment (deposit) and three further instalments every fortnight.
Unlike other forms of credit, such as payday loans, store cards, catalogue credit, and traditional credit cards, Clearpay doesn’t charge interest or fees as long as payments are made in full and on time. This makes it an attractive option for individuals looking to manage their budget more effectively, especially when it comes to large or unexpected expenses.
However, Clearpay comes with a range of potential risks, which multiply when the tool is used irresponsibly. Before using any Buy Now, Pay Later company for making purchases, it’s crucial to do your research and consider the long-term financial impact.
How do credit scores work in the UK?
In the UK, your credit score is a numerical representation of your creditworthiness, which is another term for how likely you are to pay back any credit borrowed. It is compiled by credit reference agencies (e.g. Experian, TransUnion, and Equifax) and is calculated based on your credit and payment history.
Lenders use your credit score to determine whether or not to approve your application for a loan, credit card, or mortgage. Maintaining a good credit score should be a key consideration for anyone looking to access credit because it influences the financial products you’re eligible for and the interest rates you’ll pay.
Many factors can positively or negatively impact your credit score. For example, having a large credit utilisation and paying bills late can lower your credit score, while registering to vote and maintaining other payments can boost your credit score.
Your repayment history and credit utilisation are widely considered to be the largest contributing factors to your credit score, reportedly accounting for over half of your credit score. Understanding your credit score can help you make more informed financial decisions.
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Why is my credit score important?
Your credit score is more than just a number; it’s a reflection of your financial reliability to lenders.
Here are some of the many things your credit score can impact:
Access to financial products
Lenders, including banks and credit card companies, check your credit score and the information contained in your credit file to determine whether or not it would be a good idea to lend to you.
Generally, a higher score will make you eligible for a wider range of financial products. It can also expose you to better terms, meaning you get a better deal overall.
Interest rates
Your credit score doesn’t just affect your eligibility for credit; it also impacts the interest rates you’re offered.
The higher your credit score, the lower the interest rates you’re likely to be offered. This means you’re paying back less each month, potentially saving you a significant amount of money over time.
Tenancy agreements
Some landlords might view your credit score before agreeing to rent a property to you. If you have a poor credit score, they might be less willing to enter into a tenancy agreement with you because there is a higher risk of you not meeting your monthly rent payments.
However, it’s not a legal requirement for a landlord to perform a credit check. It is up to each individual landlord how thorough they want the screening process to be.
Employment checks
Some employers conduct credit checks as part of the hiring process, especially if the role involves a certain level of financial responsibility or requires you to handle other people’s money.
A poor credit score can negatively impact your career prospects if you work in certain industries.
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What happens if I can’t make my Clearpay payments?
Clearpay claims to carefully review every application to reduce the number of people who end up defaulting on their payments. However, financial emergencies can happen to anyone, even individuals with perfect credit histories, so it can be useful to know what to expect if it happens to you.
If you think you’re going to miss a payment, don’t hesitate to ask for help. Clearpay has hardship measures in place to help you find a solution to deal with any financial difficulties you may be facing and potentially find an alternative arrangement.
When you miss a payment, Clearpay will contact you immediately to remind you of your missed payment date and discuss your options for getting back on track. At this point, a hold will also be placed on your Clearpay account to prevent you from making any further purchases.
If payment is still not made by the date specified in the payment reminder, a late fee of £6 will be applied to your outstanding balance. If payment still hasn’t been made seven days later, an additional £6 late fee will be added.
Clearpay’s late fees are capped at £6 for orders under £24. For orders over £24, they are capped at £24 or 25% of the total order, whichever is less.
If your balance remains unpaid after several payment reminders and late fees, Clearpay might pass the outstanding debt to a debt collection agency. This is extremely unlikely after just one missed payment, but it can happen if your account has been in arrears for several months.
Once debt collectors start pursuing you for payment of the debt, you’ll likely start receiving continuous phone calls and letters until you’ve come to an arrangement to repay what you owe. This can be a stressful process and, if left undealt with, it could lead to legal action.
Will Clearpay impact my credit score?
When you apply for Clearpay as a new customer, a soft credit check is performed to verify your identity and assess your eligibility.
This type of credit check has no impact on your credit score and isn’t visible to other lenders, but Clearpay does reserve the right to report any negative activity, such as missed payments, to credit agencies. This can have a negative effect on your credit score for several years.
The short answer is, Clearpay doesn’t directly affect your credit score, but indirect implications can arise from poor financial management. For example, consistently making late payments or defaulting on your BNPL agreement can trigger a hard credit check, which can lead to negative information being added to your credit report for up to six years.
Additionally, frequent use of Buy Now, Pay Later services might be viewed negatively by lenders because it could signal financial distress or poor money management, even if you make timely payments.
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Can Clearpay affect my mortgage application?
Before approving you for a mortgage, a lender must make the appropriate affordability checks to ensure they are confident in your ability to make repayments. However, because lenders will be able to see evidence of any borrowing on your bank statements, it could still have an impact on your mortgage application.
For example, if you’re spending more than half of your income on personal debt repayments, this can increase your debt-to-income ratio and make it more difficult to borrow as much as you’d like. Some mortgage lenders also view all Buy Now, Pay Later usage negatively because they assume you’re using it for everyday purchases.
The bottom line is that missed Clearpay payments could have the biggest impact on your ability to get a mortgage. This will be visible on your credit profile and will, in most cases, make all lenders think twice about offering you a mortgage.
How can I use Clearpay responsibly?
Using Clearpay responsibly is crucial to avoiding further consequences, including enforcement action and severe credit damage.
Here are some factors you should consider before using a BNPL service like Clearpay:
Assess your budget
The first thing you should do before you apply for Clearpay is to assess your budget and set a spending limit. Ensure you can afford each individual payment as it falls due and set payment reminders if you’re worried you’ll forget or you have a history of missed payments.
Understand the terms
Clearpay requires an initial deposit and three additional payments every two weeks, lasting six weeks in total. This could differ from the payment structure of another BNPL provider you’ve used in the past, so you must be confident you understand the terms before agreeing to anything.
Limit your usage
Clearpay can be useful when you need to spread the cost of a large purchase or you’ve had a financial emergency that you didn’t budget for, but it shouldn’t be used too frequently. It can be easy to lose track of multiple loans each month, and this might suggest to lenders that you’re reliant on credit.
Ask if you really need it
Perhaps the most important thing to consider before using Clearpay is to ask yourself whether you actually need it. For example, if you’re considering using it to treat yourself to a new television because you can’t afford to pay for it outright, it’s probably not a smart financial decision.
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Conclusion
Clearpay can be useful to spread the cost of a purchase over four interest-free instalments instead of paying for it outright. But while this type of retail credit doesn’t directly impact your credit score under normal circumstances, irresponsible use can lead to indirect effects.
The key to maintaining a healthy credit score while using Clearpay is to make your payments in full and on time and only use it for essential purchases.
Always consider your ability to repay any amount borrowed and review your overall financial health before committing to a Buy Now, Pay Later scheme like Clearpay.
