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PayPal Credit: What It Is And How It Affects Your Credit Score

Written by Mike Pearson
Updated August 10, 2022

PayPal has simply won the online payment market. Out of all online buyers that use PayPal for payments, 87.5% end up making their purchases successfully. That’s over 40% higher than its closest competitor, Visa. 

So it’s no surprise that when PayPal launches a credit option, hundreds and thousands of people will use it whenever the opportunity arises. However, it’s important to take a step back and know how it operates before you start buying.

So what exactly is PayPal Credit? How does it work? And does it affect your credit score? In this article, we’ve rounded up all you need to know about how PayPal Credit works. Read on to find out more.

What Is PayPal Credit

PayPal Credit is a cardless credit line that allows you to make purchases and pay for them up to six months later. It’s basically just like a credit card that operates entirely online.

If you make a purchase of $99+ and pay all your installments on time, you pay no interest or extra charges. The credit limit starts from $250 and you get your account approved within seconds, according to PayPal’s website.

PayPal Credit used to be called “Bill Me Later” which existed since 2000. As part of a major plan to develop its operations, PayPal rebranded it in 2008 into “PayPal Credit” and expanded into the UK and Germany.

How’s PayPal Credit Different From PayPal?

There are lots of different types of PayPal accounts and services. Your average PayPal account is a debit account that deducts from the funds it already has. On the other hand, PayPal Credit lets you buy something and pay for it later like a credit card.

This is also slightly different from connecting an existing credit card to your PayPal account. In essence, it works the same way. You apply for the credit line, then connect it to your PayPal account, to use it wherever PayPal payments are available.

Is PayPal Credit Right for You?

PayPal Credit sounds like any other credit line option at first glance. In practical terms, however, there are a few ways PayPal Credit is different from your average credit card. 

These differences can be the difference between having a super handy payment method at your disposal and an unnecessary hit to your credit score.

PayPal Credit Advantages

The biggest advantage you’ll get from a PayPal account is probably how overall easy and convenient it is to manage and use. It comes with no annual fees and no interest on qualifying purchases over $99.

To apply for a Credit account, all you need is to fill out a form that requests your name, income excluding taxes, and social security number. Once you hit that “Apply” button you get a Credit line of $250+ within a few seconds if approved.

This is hardly the case for average credit cards. More often than not, the whole application process requires lots of paperwork and time till your credit card is up and running.

PayPal Credit Disadvantages

There are a couple of disadvantages that may affect your shopping experience with a PayPal Credit account. For some people, though, some of these points may actually be a good thing.

  • You don’t get a physical card.
  • You don’t get cashback reward points, which is essential for a lot of credit card users.
  • Finally, PayPal Credit is only available for online purchases. Because of that, they’re easy to use online but pretty limiting overall. Of course, that’s not necessarily a bad thing to have in a credit line if you don’t have your personal finances in order.

Does PayPal Credit Affect Your Credit Score?

Your credit score can affect a lot of major decisions in your life, so it’s crucial to understand how it may be impacted if you decide to apply for a PayPal Credit account.

Up until 2018, PayPal Credit didn’t affect your credit score since it didn’t report your transactions and info to credit bureaus. However, this is no longer the case.

Credit bureaus are the agencies responsible for researching individuals’ credit behavior and history. They make this information available to banks and other entities. That means that what you do with PayPal Credit affects your credit score.

How Does PayPal Credit Affect Your Credit Score?

There are a few ways your PayPal Credit account can affect your credit score. Given that it’s not exactly credit building, the effects are more likely to be negative.

That’s not to say that it’ll definitely drive your score down, but it’s easier to end up losing some points. A difference that in most cases would be negligible.

Hard Inquiry

There’s one unavoidable way applying for a PayPal account can hurt your credit score. When you apply for a Credit account, PayPal performs a hard inquiry, also known as a “hard pull.”

A hard pull means that the creditor requests your credit report to decide whether you’re a reliable borrower or not. This may not seem like much and actually shouldn’t affect your credit score with more than decimals.

However, hard pulls stay on your record for up to two years and can bring your score down slightly for up to a year.

If you apply for multiple credit cards, loans, or similar banking solutions in a row, that might signify a financial crisis. Why else would you be coming up with different ways of putting yourself in debt?

In order to have a noticeable impact on your score, though, these applications would need to be within a span of a few months up to two years.

Hard inquiries shouldn’t hurt your credit score by more than 10 points, especially if you have a full credit report. However, if everything else is going well, it’s nothing to be concerned about.

Missed Payments

Just like any other banking solution where you end up spending money you don’t actually have, missing due payments will instantly leave a little red flag in your credit report.

There’s also the simple fact that missing a payment means your purchases will no longer be interest-free.

What Can You Do to Improve Your Credit Score?

If PayPal Credit sounds like a practical option for you but the whole credit score situation is putting you off, fear not. There are just a few simple things that you can do to make sure your credit score doesn’t take a long-term hit.

  1. Make Timely Payments: The most straightforward thing you’ll need to do is make sure you make all your payments on time. Aim to pay it ahead of time.
  2. Settle Up Before Closing Your Account: If you ever consider closing your PayPal account, check with their customer support first. Make sure that everything is paid up before you do so you wouldn’t get any penalties.
  3. Improve Debt-to-Credit Ratio: Minimize the amount you use from your PayPal Credit limit. This improves your score and shows that you’re using your credit options in moderation.

Conclusion

To sum this up, PayPal Credit is essentially an online credit option. If your application is approved, you can get this credit line in a matter of minutes. It could, however, impact your credit score.

The definite impact it’ll have on your credit score is a one-time minimal decrease, which will fix itself within months.

Otherwise, PayPal Credit could only hurt your credit score if you’re missing payments, made multiple hard inquiries, or consistently used up all your credit limit.

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Mike Pearson


Mike is a recognized credit expert and founder of Credit Takeoff. His credit advice has been featured in Investopedia, CreditCards.com, Bankrate, Huffpost, The Simple Dollar, Reader's Digest, LendingTree, and Quickbooks. Read more.