Even though consumer credit, in general, has shrunk in the UK since the start of the Coronavirus pandemic at the beginning of 2020, one area has seen lots of growth; online credit from vendors such as Klarna and PayPal. With the growth of these providers, a question on lots of people’s minds will be; does PayPal Credit affect credit score?
- What is PayPal Credit?
- How do you use PayPal Credit?
- What is a credit score and how is it calculated?
- Does Paypal Credit affect credit score?
- How do you qualify for PayPal Credit?
- What is the minimum credit score for PayPal Credit?
- Does applying for PayPal Credit affect your credit score?
- Does PayPal Credit complete a hard search on your credit file (i.e does PayPal Credit check your credit file?)
- Does PayPal Credit help to build your credit score?
- What happens if I stop paying my PayPal Credit?
- What are the costs and fees associated with PayPal Credit?
- Benefits of PayPal Credit vs a credit card?
- Can you transfer PayPal Credit to bank account?
- Can you increase your PayPal credit limit?
- How to improve your credit score
- Exercise caution with consumer debt
What is PayPal Credit?
PayPal Credit is the online payment firm’s virtual credit card.
Like a credit card, without the plasticPayPal
If you are accepted, you will have a credit limit on your PayPal account, just like you have with a credit card. When you go to buy something online that accepts PayPal as a payment method, you can choose to select PayPal Credit at the checkout.
How do you use PayPal Credit?
You will be able to select PayPal Credit as a funding source when you checkout from an online retailer who accepts PayPal as a form of payment. This simply attaches to your normal PayPal account and will become available as an option in the checkout process when you buy things online. Note you can only use PayPal Credit online.
What is a credit score and how is it calculated?
Your credit score is calculated from information on your credit file such as your payment history, previous credit history as well as history of searches/applications for credit.
Your credit score will vary depending on the lender or even when applying for different products from the same lender. This is because they all have their own parameters and criteria set up that help to manage their own unique credit risk. This means there is no one size fits all advice when it comes to credit scores.
PayPal will decide whether you are able to have PayPal Credit, as well as what your credit limit is and your interest rate dependent on your credit score.
Does Paypal Credit affect credit score?
Think of PayPal Credit as a virtual credit card. Just like a physical credit card, if you miss payments then it will be reported to the credit bureau(s) and will impact your credit score.
Don’t treat this any differently to a normal credit card. Make sure you make the minimum payment, ideally pay off in full each month to keep the cost low, and check your credit report regularly to ensure your information is up to date.
How do you qualify for PayPal Credit?
PayPal, like other lenders, don’t publish their criteria and requirements. This means it is impossible to say without applying, and anyone giving a definitive answer on this is essentially guessing.
They do have some minimum requirements that need to be met though:
- UK resident ages 18 years +
- Have a good credit history
- Have not recently been declared bankrupt
- Are employed and have income greater than £7,500 per year
You will also be asked to sign in to your PayPal account, so if you are not already a PayPal user you will be prompted to sign up for an account.
Note that PayPal will run a full (hard) credit check on your credit file to assess your application.
At the application stage, they also ask for additional information that informs their assessment such as employment status, monthly after-tax income, monthly rent/mortgage commitment and any other committed monthly payments. These are all designed to help them build a picture of whether you can afford to service the debt.
Remember, even though it might be frustrating if you get declined for credit accounts like PayPal Credit, the rules are fundamentally designed to stop you from taking on too much credit than you can afford/support. The lender is attempting to answer the question of whether their money is at risk of not being paid back.
What is the minimum credit score for PayPal Credit?
PayPal doesn’t publish a minimum credit score to apply. Credit scores vary depending on which credit bureau you are looking at (i.e Experian vs Equifax etc).
Therefore, just focus on improving the basic elements of your credit score such as ensuring you don’t miss payments, keep your information (such as addresses) up to date, and register for the electoral role.
Does applying for PayPal Credit affect your credit score?
Yes. PayPal will run a full credit check (hard search) on you. This will show up in your credit report as a search and might temporarily impact your credit score (as other lenders can see you have been applying for credit).
Does PayPal Credit complete a hard search on your credit file (i.e does PayPal Credit check your credit file?)
Does PayPal Credit help to build your credit score?
As PayPal Credit is treated as any other consumer debt, with PayPal reporting any missed payments etc. If you manage the debt well by paying on time and keeping the account in good standing order, then it will help to improve your credit score over time.
What happens if I stop paying my PayPal Credit?
Just like with a normal credit card, if you have a balance on your PayPal Credit account and you don’t pay at least the minimum payment, PayPal will report this missed payment to the credit reference agency and your credit report will be affected.
If you continue to leave this balance unpaid, PayPal may turn over your debt to a collections agency. With all of these instances, there should be plenty of communications so you shouldn’t be caught out by this.
To keep your account in good order, you should set up a direct debit and at the very least make your minimum payment each month (ideally pay off in full if you can afford it).
What are the costs and fees associated with PayPal Credit?
The interest rate (APR) on your account will depend on your application and credit score. The representative example they use is at a 19.9% APR, but this is representative only so is dependent on your own application.
There are additional fees that you should be able to avoid if you manage your account well such as;
- late payment fee (late fee) (£12)
- returned payments fees (£12)
- paper copy statement charge (£5)
Note there is no annual fee for PayPal Credit.
Benefits of PayPal Credit vs a credit card?
PayPal Credit is linked up to your PayPal account, and so is a very convenient credit line just like using PayPal to pay online with your normal PayPal account.
The other benefit is that you are covered under PayPal Buyer Protection. This means that if something you’ve bought online doesn’t arrive or doesn’t match the seller’s descriptions, their Buyer Protection scheme will reimburse you.
The biggest benefit of PayPal Credit over a credit card other than the convenience is that this PayPal Buyer Protection will protect even on eligible purchases under £100. Whereas with credit cards you get protection for shopping online but only on purchases >£100.
Can you transfer PayPal Credit to bank account?
No. It can only be used for online transactions.
Can you increase your PayPal credit limit?
Yes. But you cannot request to increase it yourself. PayPal will regularly assess your account and send you an invite to increase your credit limit.
You can, however, opt-out of this assessment. Additionally you can also request to decrease your credit limit.
How to improve your credit score
It is nigh on impossible to give a blanket generalisation of “what credit score is required to apply for PayPal Credit”, and anyone that is providing an answer with any level of confidence is simply guessing.
Only PayPal will have that knowledge and they are likely changing it regularly as macroeconomic conditions change and their business risk and priorities change.
There are, however, some simple and effective ways to improve your credit rating. This will set you up in good stead for any kind of credit application, not just PayPal Credit.
Building a good credit score takes time, and therefore intentionally and mindfully improving your credit score over time will put you in the best position to apply for credit when you do get around to needing some.
First, check your credit report.
- Equifax credit report, use Clearscore (free).
- Experian credit report, use MSEs Credit Club (free).
- TransUnion credit report, use Credit Karma.
Check over the information they have on you as errors in the information they hold for you can impact your credit score negatively.
If you do find any errors, be sure to report them to the relevant credit agency. Each of the services above will have their own error reporting services, so be sure to contact them if you are having any issues.
Now to get to it, easy ways to improve your credit score are:
- Register on the electoral roll (you can do this in less than one minute on the GOV.UK website)
- Check for mistakes on your file (see above for the free services to give you access to your report)
- Related to the above, check for any fraudulent activity such as any recent applications or searches that you don’t recognise (or any accounts you don’t remember taking out)
- Pay your bills on time
- Bring your debt utilisation rate down. Debt utilisation is the percentage of your available credit that you are currently using i.e if you have a credit limit of £1,000 and you have a balance of £600, you are at a 60% utilisation rate. If it is high, other lenders see it as a risk to them. The general advice is to keep it at 25% or lower.
There are some other factors that can help improve your credit score, but they tend to be a bit of a slow burner. For example, moving home regularly makes lenders uncomfortable and so staying in one address for a long period of time can help improve your credit score. Obviously not a reason to stay/move in itself though but just one to bear in mind!
Exercise caution with consumer debt
Even though paying via a credit card or PayPal Credit can be useful when shopping online because of the additional consumer protection, try to be as mindful as you can of the cost of these services. If you don’t pay off your balance in full, you will be charged interest.
If you cannot afford the item in cash, why not try saving up each month until you can? Then pay via PayPal Credit and pay the balance off in full almost immediately (that way you benefit from the online protection without paying anything in interest).
Not only does this help you avoid any interest payments, but it also helps to take any emotion out of a purchasing decision by putting time between you wanting it, and you actually purchasing it. You never know, once you have the cash you might not be interested in the item anymore.
If you find that you are struggling with consumer debt building up, then start to look at your income and outgoings, look for areas where you can rein in some of your spending, and create a budget. I’ve got a handy guide of ways to pay off debt and easy ways to save money fast which should help to put a dent in it. If you need help tracking your spending, then check out our view on the best spend tracker app which can help you get on top of your spending.
If you’re having problems with persistent or extreme debt which you are struggling to shift or afford, then there are many, many amazing free services out there who are set up to help people in your situation. They are highly professional, specially-trained and empathetic and will help guide you through the process and any solutions to help.
Such organisations are:
There is also a great debt help guide on Money Saving Expert.
I hope this guide helped you understand the question “Does PayPal Credit Affect Credit Score?”. If you have any questions, please drop me a comment in the section below.
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