How Buy Now, Pay Later Services Affect Your Credit
There's a new breed of buy now, pay later (BNPL) services being offered to online shoppers. You may have noticed one of these installment plan options while shopping online at your favorite retailer. These plans allow purchases to be paid off in multiple payments over time rather than all at once. They're similar to layaway, except that your products are shipped right away.
How Buy Now, Pay Later Services Work
Some BNPL services are offered with no fees or interest and sometimes no upfront payment, which can be attractive even for shoppers who have a credit card with available credit. Depending on the purchase amount, you may be presented with multiple payment options with different monthly payment amounts and interest rates. Choose the one that fits your budget, then provide your payment information.
For repayment, the service may link directly to your banking account, making it easier to pay off the balance and eliminate late payments as long as the account is open and funds are available.
Shoppers are embracing the opportunity to buy now and pay later. According to a survey from The Ascent by Motley Fool, more than a third of U.S. consumers have used a BNPL service. While most people say they have used the services to avoid paying credit card interest or buy something not in their budget, only ~22% say they understand all the service's terms and conditions.
The Impact on Your Credit
Remember that even if there's no credit check for a BNPL service, your credit could still be impacted. For example, missed payments could affect your FICO® Score, according to Janet Alvarez, Credit Card & Personal Finance Expert at The Ascent by The Motley Fool. You could also face penalty interest rates or fees on top of negative marks on your credit report.
Most services require you to provide your credit or debit card information, which typically help you avoid missed payments. However, you could default if your payment is declined or returned by the bank, for example, if you don't have sufficient funds or your account is closed. The provider might also consider you to be in default if you file for bankruptcy while you have an outstanding installment plan, you provide false or inaccurate information, or you otherwise violate the terms of the installment agreement.
Some services may check your credit to determine eligibility. With Affirm and Klarna, these aren't hard credit checks that affect your credit.
PayPal Credit may be offered at checkout, but you're actually signing up for a reusable line of credit, which is more like a credit card than a BNPL service. Some purchases made with PayPal Credit qualify for six months with no interest, and monthly payments are reported to the credit bureaus, whether late or on-time.
Tips for Borrowing Responsibly
If you're using a credit card as the payment method for the BNPL purchase, make sure you pay that balance in full and on-time each month. Otherwise, carrying a balance will lead to interest, and late payments will incur a fee and potentially damage your FICO® Score.
Like other inaccurate information, you're allowed to file a dispute with the credit bureaus if you believe information about a BNPL service is inaccurate. Accurate negative information can remain on your credit report for up to seven years and factor into your FICO Score.
Of course, when you're considering BNPL services for purchases, you should factor in your ability to pay. Smaller payments could tempt you into spending more than you actually can afford. While the payments may be more affordable, keep in mind any major expenses you have coming up that could impact your payments.
LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.