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Can PayPal Hurt Your Credit?

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If you are one of the millions of people who use PayPal to send or receive money, you may not have given much thought to how it might affect your credit. But if you read the terms of service, you’ll see credit reports and credit scores mentioned, and that may leave you wondering how that will impact you. If you care about your credit scores, you should know what Paypal does with credit information.

Here’s how this service works: When you sign up, you can link your credit, debit and/or bank accounts to your PayPal account. When you buy an item online (and, more recently, in some retail stores as well) you can check out with your PayPal account, which will then process the purchase through your preferred payment method.

In addition, PayPal offers an option where you can pay for an item via PayPal using your credit or debit card, even if you haven’t set up an account.

More than 137 million consumers around the world have PayPal accounts, and the service processes some 8 million payments every day, according to the company. PayPal can be handy for those who do not have a credit or debit card and want to shop online, or for those who feel safer paying for items online without exposing their card information directly to the merchant. In fact, for those who lack credit or debit cards, it may be one of the few ways to shop online. And some merchants only accept payment via PayPal.

There are two places in PayPal’s terms of service where credit is mentioned.

A Credit Check?

The first is through credit report inquiries. According to the PayPal terms of service, your credit report may be reviewed in the following situations:

Credit Report Authorization. If you open a Premier or Business Account, you are providing PayPal with written instructions and authorization in accordance with the Fair Credit Reporting Act to obtain your personal and/or business credit report from a credit bureau. You are also authorizing PayPal to obtain your personal and/or business credit report: (a) when you upgrade your Personal Account to a Premier or Business Account, (b) when you request certain new products, such as the PayPal Debit Card, or (c) at any time PayPal reasonably believes there may be an increased level of risk associated with your Premier or Business Account.

When a company checks your credit reports, it creates an “inquiry” on the credit report that was used for the review. This inquiry can lower your credit scores, though it will probably only result in a loss of a few points. The impact of a single inquiry should not be significant. You can see how inquiries impact your score with Credit.com’s Credit Report Card, a free tool that gives monthly credit score updates.

When we asked the company how often this happens, we were told by email that “we pull credit for Pro/VT/Advanced applications – personal, blended or business credit – as part of our vetting process.” These three types of accounts are associated with businesses that want to accept credit cards, not individuals. Furthermore, PayPal representatives explained that these credit checks usually take place in situations involving larger transactions. Specifically they said, “PayPal will check the credit of users applying for Premier or Business accounts under certain circumstances, such as the individual requesting to accept transactions in excess of $10,000/transaction. A larger business would most likely have the company’s credit checked, rather than the individual’s.”

So, good news there. It sounds like the individual user, or even most small businesses, are not likely to see an inquiry from PayPal on their credit report.

When credit is checked, PayPal says that reports from all three credit reporting agencies are used, and “FICO or business credit score is used to determine tier.”

Bad Credit = No PayPal?

However, if you continue reading the terms of service, you’ll run into what appears to be an even more alarming clause:

9.1 Restricted Activities. In connection with your use of our website, your Account, the PayPal Services, or in the course of your interactions with PayPal, other Users, or third parties, you will not:

Have a credit score from a credit reporting agency that indicates a high level of risk associated with your use of the PayPal Services;

Does this mean your PayPal account could be denied – or terminated – because of bad credit? While there are anecdotal reports online of PayPal closing accounts due to poor credit scores – and leaving those customers in the lurch while they waited for the funds in their accounts to be unfrozen – these appear to have happened a few years ago. When we asked PayPal whether consumers’ accounts could be closed due to poor credit scores, they said no: “PayPal will not close user accounts solely based on a poor credit score.”

Another way a PayPal account could potentially affect your credit is through bad debt.

This issue appears to sometimes come into play when there is a dispute over something a seller has sold – either on eBay (which owns PayPal) or online – and payment was received via PayPal.

So, for example, let’s say you sell your cellphone on eBay and receive $100 from the buyer via PayPal. Then let’s say you turn around and quickly spend that money on another electronic item.

If your buyer later disputes the purchase, PayPal often refunds the buyer and tries to get the money back from you — the seller. But if the money has already been spent, and there is no backup form of payment available (such as a linked bank account), then that amount may be considered a bad debt. If that debt is turned over to collections, it potentially could  appear on your credit reports as a collection account, and lower your scores.

But here’s the good news: PayPal told us that they do not allow their agency partners to report to credit reporting agencies.

A word of caution: There are some scammers who try to collect fake debts that supposedly come from PayPal accounts. Just because you have been contacted by a collection agency about one of these debts, it does not mean you actually owe anything. Verify it before you pay it.

Other Services

It’s also worth noting that when you check out using PayPal, you’ll be offered the opportunity to pay for your purchase using a service called “Bill Me Later,” which lets you pay for that item later. This service features a line of credit, and your credit report will be reviewed if you apply for one of these accounts. Bill Me Later is clear about how credit reports will be reviewed for this service:

A credit report is reviewed when you apply for a Bill Me Later account and occasionally when you ask for an increase in your credit line. Periodically, updates of your report are obtained, but these updates have no impact on your credit score. Your account is reviewed quarterly. If for any reason your credit line is reduced, you will be notified of the reason in writing.

Bill Me Later may affect your credit scores as a result of the inquiries that are reported as well as through the account that will be reported on your credit reports. The impact can be positive or negative, depending on whether you pay late or carry large amounts of debt.

Has your PayPal account affected your credit scores? Share your story in the comments below.

Image: Filograph

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  • goslie35

    If you need pay pal you don’t need the product.. They are not some how “Different” from any other money lender. They will do exactly what they want and you have nothing to say about it.. There are way to many options to pay for products instead of adding these folks to the list.

  • http://www.Credit.com/ Gerri Detweiler

    We wrote about PayPal and your credit here:

    Can PayPal Hurt Your Credit?

    However, with PayPal credit it may be reported. In their terms and conditions they state, “You authorize us to answer any questions about our experience with you related to this Account and to report that experience to credit reporting agencies.”

    • Iris

      I made a two day late payment to paypal. Will it affect my credit score???
      I will appreciate your advise

      • http://www.credit.com/ Credit.com Credit Experts

        Probably not, though you might have to pay a late fee. (Even those can sometimes be waived if you call customer service).

  • http://www.Credit.com/ Gerri Detweiler

    If it’s not on your credit reports, then no, it is not helping your credit.

  • TerryB42

    If anyone can help I would appreciate it. I have been doing a online facebook ad for a oversea’s partner as I’m in America and the ad is funded by my oversea’s partner sending me a paypal payment for services. Paypal has put my account on hold and wants additional verification including social card, address proof, and id copy. I don’t want my personal information out there like that but in order to free up the account from hold and get the funds out I have no choice but to submit the docs. I spoke with a Paypal rep and she stated that due to the fact the paypal payments I’m receiving are being funded by another paypal members credit card it puts me at risk for charge backs for 180 days or more from the date of each transaction and if this was to happen all of the funds would be considered due by me and my debit. My questions and concerns are if a payer is paying by paypal how would paypal not verify the funds prior and why would I be subject to a charge back battle with the outcome of thousands in debit. I’m talking upward around 13k or more. As of now my account is in the verification process with paypal but as a business operating online services I don’t feel confident in using paypal at all anymore. At this point I want my money out and to close my account with them. Is there anyway I can protect myself and my personal credit from what was mentioned above? Can anyone please advise I would greatly appreciate it. Also just to note I have not taken on any credit line with paypal such as the “Bill Me Later”. Thanks all for your help.

    • http://www.Credit.com/ Gerri Detweiler

      I don’t know the answer – maybe one of our community members does.

    • Bankerjoe

      You would be safer to get a money transfer. You can get a western union, or bank transfer. I would not trust PayPal on this. Once you receive the transfer..the cash is yours and there’s no way anyone can pull it back from you.

  • CherokeeGal

    BEWARE…..It doesn’t just pull a report from Businesses, as I don’t have a business account on Paypal, only a personal account, yet they did a hard pull on my credit when I signed up with them.

  • Askharjan

    I owe 1000 dollars to PayPal due to a chargeback from a customer. If I don’t pay back PayPal, what you are saying is that it may go to collections, but still would not be reported to credit agencies?

    • http://www.Credit.com/ Gerri Detweiler

      That’s what I understand from my research.

      • Ryan Gee

        So basically, it doesn’t matter whether or not you pay the debt. They aren’t going to report and it won’t show up on your credit report… what if it is linked to ebay? Will ebay show up on your credit report?

        • http://www.Credit.com/ Gerri Detweiler

          We haven’t researched that specifically.

      • Ryan Gee

        So basically if you don’t pay PayPal collection agencies nothing will ever happen to your credit? What about if the paypal account is attached to your ebay account? Will ebay also come after you for the amount that you owe PayPal? I recently sold a computer a month later the buyer said it was defective even though it was not. They opened a case and won. I was told to refund the buyer and if I didn’t I would be forced to pay. I know my item was not defective so I didn’t refund. Now I am just concerned about my credit. Is this going to negatively affect my credit? If paypal doesn’t report, I should be good right? Unless ebay reports it…

        • http://www.Credit.com/ Gerri Detweiler

          Again, I am sorry I can’t answer specifically as I haven’t researched that issue yet.

      • Yedmundi II

        I can assure you that they will indeed report this as a collection item. I can prove it with my own credit report. They will tell you otherwise, but they are the only negative on my credit report, and I have been attempting to fight it for a year, and they aren’t budging.

  • Yedmundi II

    So it is a MYTH that Paypal doesn’t report to credit bureaus. While it is true that don’t report on your positive account aspects, such as paying on time, having a large credit limit, having a high percentage of unused credit, etc… However if you are late with a payment, of if your auto-draft gets blocked by the bank for some reason, they do indeed report those negative events to the credit bureaus.

    So paypal as a rule refuses to help your credit in any way, however they WILL harm your credit, even if it is due to some issue on their side.

    To me, if you report the bad, you should also report the good, and paypal does not do that.

    • FitzpatrickPhillips

      Good to hear. I finally paid off my massive PayPal credit balance but was disappointed when it didn’t appear on my credit score.

      At least I don’t owe them anymore but I will never use such a pointless service again.

  • SH09

    Someone hacked my account and spend over $1000 in my account now [redacted] credit want me to pay that money back. I’ve tried to resolve this issue for months. I don’t have that kind of money to just give them. I’m wondering will it bother my credit if I don’t pay, it’s not my fault that my account was hacked.

    • Jeanine Skowronski

      Credit accounts that go unpaid could hurt your credit. Sometimes, you can work out payment plans with creditors/collectors. You can also consult a consumer attorney about your options.

      Thank you,

      Jeanine
      Jeanine

      • SH09

        Thanks, I hope It doesn’t hurt my credit

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