Buy Now, Pay Later Payment Plans May Have One Problem: Your Credit Rating

“Buy now, pay later,” or BNPL, payment plans allow consumers to divide their total purchase at checkout into a series of smaller installments.

Although these plans are not new, they have recently catapulted into the mainstream, with major US retailers like Amazon, Walmart, and Target now carrying them. In September, Mastercard also unveiled its own buy now, pay later products amid strong consumer demand during the pandemic.

But with promises of convenience, zero interest, and minimal fees, many buyers are asking, “What’s the matter?” “

It could be your credit.

BNPL providers typically do not report payments on time to major credit bureaus, so unlike credit cards or loans, you cannot create credit with this type of financing. However, some providers will report missed payments, which could end up hurting your score.

Experts also warn of risks, such as hidden fees and lack of consumer protection, which may not be immediately apparent to borrowers.


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BNPL and credit bureaus

Afterpay, an Australian company that provides BNPL payment plans to over 16 million buyers in the United States alone, does not interact with credit bureaus at all, including when buyers request approval for the payment. first time.

According to Nick Molnar, co-founder and co-CEO of Afterpay, checking a buyer’s credit report has “no positive correlation” with the company’s ability to reduce losses. Instead of doing a soft or hard credit extraction, the company enforces safeguards such as suspending a buyer’s account after a missed payment, which Molnar says customers appreciate.

“I think this next generation is looking for those products that have their best interests at heart,” he said. “Basically that’s why we were able to grow as fast as we did.”

While this approach means easier approval for those without or bad credit, buyers cannot use Afterpay to demonstrate responsible use of credit to agencies. On-time payments are the main contributor to determining FICO credit scores.

Afterpay is not the only one. BNPL Klarna and Affirm also generally do not report payments for their interest-free plans.

This practice is particularly harmful for young people who may need access to credit to rent or buy a car, rent an apartment or buy a house, says Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling.

“There are so many circumstances in the life of a young consumer where credit checks are required,” McClary said. “It is very difficult to get around the types of situations where your credit report may be taken into consideration.”

BNPL providers can report missed payments

Although BNPL providers may not report payments on time, some still report missed payments.

For example, Zip, formerly Quadpay, doesn’t report payments to offices, but it will send overdue accounts to collections, which can affect your score.

Pamela Capalad, a certified financial planner based in Brooklyn, New York, said missed payments are the biggest risk when using a BNPL service. Since the installments can be automatically charged to your debit card, you could overdraw your account, which would incur penalty fees, before you ultimately default on the loan. It can hurt at a time when you are particularly vulnerable.


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“Often times, people who use these types of plans have to stop payments for one reason or another,” Capalad said. “For it to affect their credit at the same time, I don’t think that’s a good thing.”

McClary noted that a missed payment could also result in expensive financing in the future, as interest rates will likely rise for borrowers with lower credit scores.

“Once the collection account shows up on the credit report, it creates a bigger hurdle to overcome,” he said. “The cost of borrowing increases as your credit rating goes down. “

BNPL products experienced high double-digit growth during the COVID-19 crisis, overtaking rival unsecured loan types such as credit card debt, as more Americans flocked to trade electronics during the pandemic, according to McKinsey. Demand for loans is expected to continue to outpace other types of consumer loans, with the advisory firm forecasting compound annual revenue growth of up to 20% through 2023.

Alternative ways to create credit

Capalad and McClary both recognize that BNPL payment plans can be a valid way to budget for large purchases, especially if the plan charges no interest and you can make the payments. But if your focus is on building credit, you better look elsewhere.

A secure credit card is a smart alternative. This requires a cash security deposit, usually equal to your line of credit – a $ 300 deposit for a $ 300 spending limit, for example – and you don’t need good credit to qualify. Once you are able to switch to an unsecured card, you will receive your deposit back.

For those new to credit cards, Capalad recommends putting a small recurring expense on the card, like your Netflix subscription, and setting it to auto pay. This approach allows you to use the card consistently without spending too much.


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Another option is a credit loan, which you can find at credit unions, banks, and some online lenders. Unlike a traditional loan, you will make payments first and then receive the money. Payments are reported to the credit bureaus.

By displaying a history of responsible financial behavior, you can build your credit profile and access more affordable financing in the future.

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About Matthew R. Dailey

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