The first time I ever found out about credit scores, I was dumbfounded: my ability to take out a credit mostly relies on… this number?
I quickly started consuming as much content as I could on credit scores and researching tactics to get it as high as possible. I signed up for my first credit card, joined the electoral roll and fixed all the errors on my report.
Why am I saying all this? The point is, I put in quite a bit of work to make sure a low credit score wouldn’t be the reason I would get a bad rate on my future mortgage or business loan. It’s possible that you have too, and that’s why you’re now doing your research to make sure PayPal Credit doesn’t undo the hard work you’ve put in maintaining your credit score.
Although PayPal Credit may seem like a good alternative to other credit methods, it’s still important to be aware of how it could impact your ability to take out credit in the future. Because yes, PayPal Credit will affect your credit score. Let’s dive into this a bit deeper… 👇
What is PayPal Credit?
Although PayPal was founded back in 1998, PayPal Credit only launched in 2016. PayPal Credit acts similar to a credit card: you can use it to buy any consumer item that accepts PayPal. If the item is under £99, you have 6 months to pay for it without having to pay interest. If it’s over £99, that period is reduced to 4 months. After that, you have to pay a pretty high APR of 19.9%.
Although there is no annual fee, you will need to be approved when you apply - and that’s where your credit score will take a hit. Unlike comparison websites that do “soft checks”, PayPal does a full “hard check”, which leaves a footprint on your credit report.
How does PayPal Credit work?
PayPal Credit is straightforward to sign up to and start using (which is what can make it so enticing!). When you’re ready to purchase your pair of shoes/online course/exercise bike, you’ll see the familiar PayPal button which means you can purchase it using your PayPal balance. Once you click on that button, the PayPal Credit option will pop up. It’ll ask you to complete an application, and if you’re approved you’ll receive the credit that same day. According to certain sources, you need a credit score of around 700 to get approved.
Submitting that application means you’ll be getting a full credit check, which is what leaves a footprint on your credit report. Having said that, the one main advantage with PayPal is that you’ll only have to get a credit check done once: once you’re approved, you’ll be able to shop freely anywhere that accepts PayPal. That’s why PayPal credit users reportedly spend 30% more than others!
In order to apply to PayPal Credit, you’ll need to meet their requirements:
- Be over 18 and a UK resident
- Not having gone bankrupt
- Have an annual income of over £7,500
- A reasonably good credit history
As you see, it works like a credit card. Once you take credit, you’ll need to pay off your balance over a specific time period. For the first 4 or 6 months, you won’t have to pay interest. But once those months are up, you’ll have to start making minimum payments and paying an interest of 19.9%. The minimum payments are either £5 or 2% of the outstanding balance. And if you don’t pay on time, you’re then hit with £12 in late payment fees.
According to the PayPal website, the minimum repayments are calculated depending on your purchases, including various factors and fees. This example table comes from the PayPal website itself:
Like credit cards and other loan arrangements, you will be protected against unauthorised purchases and fraud.
Does it affect your credit score?
Yes, applying for PayPal Credit affects your credit score. That’s because every time you undergo a “hard credit check”, your credit score takes a hit.
PayPal is partnered with a bank called Synchrony Bank, which will review your application and then complete an audit. This hard check will appear on your credit report for 2 years and could lower your credit score by a few points. Since 2019, PayPal Credit now reports information to credit bureaus. This means that if you miss a payment or are late, it might also get published on your credit report, further lowering your score.
Does this happen even if I get approved? Yes, even if you are approved for PayPal Credit, you will be going through a full hard check. The more loan products you apply for, the more “footprints” this leaves on your report and the more your score may decrease.
This will make it harder to get approved for future products such as a mortgage, credit or loans. Although one hard check won’t hurt your credit score too much, applying for several loans in a short period of time could reduce it by quite a lot.
Does it help you build credit?
As mentioned above, PayPal Credit does not help you build credit, since a hard check will actually make your credit score go down. Read below for tips on how to build your credit score...
Steps to effectively build your credit score
If you are looking for ways to build your credit score, then your best bet is staying away from PayPal Credit and using a different product. If you desperately need to take out credit, consider taking out a credit card that is specifically made to build your credit score.
- Sign up to the electoral roll
The electoral roll is the registry of voters. Being on the electoral roll will allow you to vote in elections, and lets the credit bureaus (those who calculate your credit score) know where you are living. It also serves as an identity verification step that helps combat identity fraud whenever you sign up for a credit product.
You can sign up to the electoral roll on Gov.uk and it just takes a few minutes!
- Use a credit card made for credit building
Think about it: if you’ve never had a credit card before, how will mortgage lenders or credit companies know how you manage your debt? They don’t. That’s why one of the best ways of building a credit score is signing up for a credit card and building credit history.
But not any credit card - there are some credit cards that are specifically designed for people with “short credit histories” which will make it easy and safe to learn about managing debt. The credit limit is lower, and the APR is a lot higher - so make sure you set up a direct debit payment then it’s all set up automatically and you don’t have to worry about missing any payments. Using Cards like Aqua might be a good way to start building a credit history. If you need help deciding whether credit builder cards are right for you, check out our article on how Aqua can help your credit history.
- Reduce the number of applications
Each time you apply for credit, you are leaving a footprint on your credit report. That’s why you want to try reducing the number of loans you apply for as much as possible. If your application gets denied, this can lower your credit score even more.
If you already have a line of credit open or even a credit card, then it’s best to keep using that one rather than applying for something like PayPal Credit. If you can, try to find out the likelihood of you getting approved before applying. There are many free credit score tools available such as ClearScore that can help you find out the likelihood of your application being accepted.
- Correct any errors on your credit report
The three main credit bureaus in the UK (TransUnion, Equifax, Experian) will have a lot of data and information on you, and they will be responsible for whether you’ll get approved or not for a loan. That’s why if the information they have is incorrect, your application is more likely to be denied and your credit score will decrease.
When you get a full report on your credit history, make sure to check every line for any errors. If you find any, get in contact with the bureau to make sure it’s fixed. It’s worth comparing your score with a couple of the bureaus to double-check.
PayPal Credit does affect your credit score, which is why it’s important to be mindful about applying. If you need to take out credit, consider using a credit card or credit line that you have already applied for. Use free credit scoring tools to see how likely it is for you to get accepted before actually applying. You’re the one who has worked hard to take care of your credit score, so don’t let PayPal ruin that for you!