Does Buy Now and Pay Later Harmful to Credit?
Plans from BNPL might help you create an excellent credit history—or they can get you into trouble.
Buy now, pay later arrangements allow customers to spread out the cost of their purchases into four or more installments, frequently with no interest. These point-of-sale installment loans, known as BNPLs for short, are becoming more popular as individuals spend more time buying online.
In all, 60% of consumers claim they’ve utilized a BNPL service at least once, with 51% doing so in the last year. BNPL plans have several appealing advantages, but it’s vital to know what they represent for your credit score. We go through the fundamentals of buy now, pay later options as well as some of the most popular.
Takeouts Vital
• Plans that allow you to buy now and pay later provide a simple way to pay for items made online or in shops
• The bulk of BNPL services allow customers to pay in four installments for their purchases.
• Because many BNPL services do not require a hard credit check to qualify, applying will not harm your credit score.
• Making on-time payments can help you create a good credit history and a great credit score if your BNPL provider reports your account activity to the credit agencies.
• If you don’t make your payments on time, BNPL can hurt your credit score.
Basics of Buy Now, Pay Later
Consumers can use the buy now, pay later applications to get short-term finance for their purchases. When shopping online or in a store, customers may be able to select the BNPL option at the checkout. They will be required to make an initial down payment on the purchase if they choose one of these point-of-sale installment loans. The remaining debt is then divided into three or more payments.
These agreements differ from layaway programs, rent-to-own, and credit cards in the following ways:
• Spending and purchase restrictions
• Structures of payment
• The expenses (interest and fees)
• A list of major retailers that accept BNPL
• Prerequisites for approval
Flexible spending restrictions are sometimes set by the platform that delivers the service rather than the business in buy now, pay later options. For example, Afterpay provides customers with a projected spending limit that changes over time depending on how they use their accounts. Klarna does not have a defined spending limit; instead, the quantity of the purchase, the time of day, and the length of time the consumer has used the service are all taken into account.
The number of installments varies depending on the BNPL service and the magnitude of the purchase. Many point-of-sale installment loans are interest-free, making them more appealing than a credit card with a high annual percentage rate in terms of cost (APR).
Note
Some buy now, pay later arrangements are interest-free, while others are not. So, before you sign up, find out which ones are and which aren’t.
Is a credit check required by BNPL?
Consumers who seek for loans or other forms of credit are typically subjected to a hard credit inquiry, which allows lenders to look at the consumer’s credit reports before making a decision. Each rigorous credit inquiry can lower your credit score by a few points. On the other hand, soft credit pulls have no effect.
When you apply for a BNPL, some providers run a strict credit check, while others don’t. Soft or no credit checks are used by the following providers:
• Affirm
• Afterpay
• Klarna
Enter a zip code (previously Quadpay)
• PayPal
A rigorous credit check may be necessary if you use a purchase now, pay later service’s special financing option. If you’re applying for one of Klarna’s six-month, 12-month, or 36-month installment loans, for example, a rigorous credit check is required. Otherwise, BNPL financing may allow you to escape a hard credit check—and any resulting damage to your credit score.
Checking your own credit reports is a light credit pull that will not affect your credit score. AnnualCreditReport.com is a website where you may get your credit reports.
Do BNPL Services Provide Credit Bureau Reporting?
Lenders often report credit accounts to the credit bureaus, including loans and credit cards. Your credit report will contain the following types of information:
• Previous payment history
• Credit ceilings
• Unpaid debts
These are some of the most heavily weighted criteria in your FICO credit score calculation. However, this information isn’t automatically disclosed; lenders must share it with credit bureaus, which not all do.
If a buy now, pay later company chooses to report your account activity to one or more of the three main credit agencies, that information will appear on your credit reports, which will have an impact on your credit score.
For example, Sezzle offers a buy now, pay later option that includes credit bureau reporting for those who want it. They’ll build a strong credit history if they make all of their payments on time, but if they’re late, it could hurt their credit score.
Afterpay, on the other hand, does not submit payment history to the credit agencies and hence has no impact on credit scores.
Consumers who wish to use BNPL to develop credit should look for a service that reports to the credit agencies and, of course, make timely payments. Consumers who have a history of not paying their bills on time may want to find a company that does not.
What Happens If You Don’t Make Your Payments?
Borrowers are expected to make the appropriate installment payments as specified in buy now, pay later agreements. Late fines can be incurred if a payment is missed, and several missed payments can result in an account being sent to collections.
Zip adheres to this policy. Any negative history linked with an account, such as late or missed payments, might be reported to the credit bureaus when it is handed to a debt collector. The debt collector may report your account activity even if your BNPL lender does not.
Late payments can lower your credit score, and the longer an account is past due, the worse it can be. Negative information on credit reports, such as late payments, can last up to seven years.
