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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.

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