Does Paypal Credit affect my credit score?

Do you pay with PayPal?

If you shop online, split the drinks bill with friends, or put some money into the pot for a colleague’s leaving gift, you’ve likely stumbled across PayPal payments.

In most cases, you’ll link your PayPal to your bank account and any payments you make will come and go as easily as if you were paying in cash or with your debit card. It’s quick, easy, secure, and available worldwide.

But did you know that PayPal has expanded its product range? Since PayPal Credit and Pay in 3 have come onto the scene, things have gotten a little more complicated.

That’s not to say these products don’t have benefits – we all enjoy a little financial flexibility, after all (no yoga required) – but they also come with risks.

Let’s take a closer look at how these payment options can impact your credit score:  

What PayPal financial products are available?

If you’ve only ever used PayPal to transfer money to your mates for gig tickets or to cover your share of dinner, then you might be surprised to learn that it has a range of financial products up for grabs.
 
Of course, it’s best known as a way to buy things online (that always tempting one-click buying option) or send money to friends and family. This service is usually linked to your current account and won't have any impact on your credit score.
 
But that’s not all; PayPal also offers its own line of credit. As its name suggests, PayPal Credit works a lot like a credit card – except you’ll never get a piece of plastic to carry in your wallet. Instead, you can use it online wherever standard PayPal payments are accepted. To sweeten the deal, PayPal Credit offers users 0% interest for the first four months if you spend £99 or more, but after that, standard interest rates will apply if you hold a balance on the card.
 
Not keen on credit cards, but still need to spread your payments? That’s where PayPal’s Pay in 3 comes in. This is the company’s Buy Now, Pay Later option, giving you more time to pay for your purchases. You’ll typically make your first payment when you click buy and then pay the remaining balance in two further payments, due on the same date each month. 

Does using PayPal affect your credit score?

If you’re using your PayPal account to pay for purchases and send money to people, that typically won’t affect your credit score. It’s only when you choose to use one of PayPal’s flexible payment products like PayPal Credit or Pay in 3 that your credit could feel the effects.
 
Depending on the product you choose, you might face a hard or soft credit check. A hard credit check will be visible to other lenders for up to a year and having too many on your report in a short time could negatively impact your score. 
 
It’ll also depend on how you manage your payments. If you make every payment on time and in full, your score can probably give a sigh of relief. But, on the other hand, if you fall behind or even miss payments, you could see your score dip and find it tougher to find credit in the future.

How does PayPal Credit impact your credit score?

While you won’t have a plastic card to carry with you (or lose on a night out, not that we’ve ever done that *cough*), PayPal Credit works a lot like a standard credit card. And just like a standard credit card, your credit score will be part of the conversation.
 
Once you click submit an application, PayPal will run a hard credit check to assess your eligibility. This will offer up insights on your payment history and the other loans you have to manage. Even if you’re approved, this hard credit check will temporarily decrease your credit score, but don’t panic, it should bounce back as soon as you start making payments.
 
What happens next is up to you. How you use your credit, how much of it you use, and how you manage your payments will be reported to the credit reference agencies. Keep your utilisation percentage low and make all your payments on time and your credit score might even increase. Max it out and start missing payments and you’ll likely see it start to fall instead.

If you’re concerned about whether you’ll be approved, it might be worth checking the eligibility requirements.
 
There are no guarantees, but to increase your chances of getting PayPal Credit, you’ll need to:

• Be aged 18 or over
• Have a good credit history
• Not have been declared bankrupt recently
• Be employed and have an income above £7,500

How does PayPal Pay in 3 impact credit scores?

Buy Now, Pay Later works a little differently.
 
When you apply, you won’t usually need to have a hard credit check so choosing to Pay in 3 won’t instantly affect your credit score like PayPal Credit will – but that doesn’t mean it won’t in the future!
 
It all depends on how you manage your three payments. If you miss a payment or pay late, you could end up with a default that can still impact your credit score, especially if it’s reported to the credit reference agencies (spoiler alert - it probably will be).

Does PayPal report to credit reference agencies?

In the UK, PayPal Credit has reported to the three main credit reference agencies since 2019. In it’s T&Cs, it explains that it shares information with these agencies on an ongoing basis, letting them know about your settled accounts and any debts not fully repaid on time.
 
If we’re talking legalities, this falls under Article 6 of the EU General Data Protection Regulation.  
 
With Pay in 3, PayPal will share some data about your repayment history with one of three credit reference agencies: TransUnion. While it shouldn’t directly impact your credit score, this data will be visible to other lenders and so could affect your chances of securing a loan in the future.
 
It’s worth keeping in mind though that the regulations around finance products, especially Buy Now, Pay Later are always changing, so it’s important to read over the T&Cs and make sure you’re totally comfortable with what is and isn’t being reported before clicking apply.

What are the pros and cons of using PayPal financial products on your credit score?

Considering using PayPal Credit or Pay in 3? Before you go on a spending spree, let’s take a quick look at the pros and cons:

Pros

• It’s convenient – if you already make payments through PayPal or do most of your shopping online, PayPal Credit and Pay in 3 can be quick and easy ways to buy, while also buying yourself some time before the bill arrives!
• It’s flexible – you can enjoy 0% interest for the first four months with PayPal Credit or split a large payment into three more manageable instalments with Pay in 3 (ideal for those designer trainers you’ve had your eye on).
• No annual fee – both products won’t charge any fees, unless you carry a balance on your PayPal Credit account, which is when interest will kick in.

Cons

• Overspending – when all or part of a payment is deferred, it’s all too easy to blow through your budget and spend more than you should. You might even end up maxing out your PayPal Credit limit, which could affect your credit score.
• Missed payments – if you forget to make a payment, that could be reported to the credit reference agencies and make it harder for you to get credit again in the future.
• It can impact your credit score – the initial hard credit check with PayPal Credit will negatively affect your score for a short time and both products will be listed as an extra line of credit on your report. If you’re applying for a large loan like a mortgage or car loan, your credit card balance and Buy Now, Pay Later usage (whether it’s Pay in 3, Clearpay or Klarna) will be considered.

Financial products like these can be great, when managed well. You can set yourself up for success by being disciplined with your spending (try to keep well below your credit limit if you can) and setting up a Direct Debit or a calendar reminder to make sure your payments are made on time.