If you’ve made purchases recently, you’ve probably been offered the ‘buy now, pay later’ (BNPL) option – in other words, split your transaction into installment payments. Getting a little extra time to pay might seem like a lot if you’re on a tight budget, but going this payment route might not be without risk when it comes to your credit.
Installment payment services have really took off. And credit card issuers are starting to offer their own versions. But not all BNPL programs work the same way. Before you sign up, make sure you don’t jeopardize your credit score.
Key questions to address before connecting to BNPL include:
- Will your payment activity be reported to the credit bureaus?
- Does the service run a hardware or software survey when you apply?
- What happens with late or missed payments?
Does BNPL services report to credit bureaus?
Because BNPL is an emerging field, there aren’t many definitive answers as to whether or not BNPL transactions are reported to credit bureaus, says Ethan Dornhelm, vice president of scores and predictive analytics. for FICO.
“The consumer can ask or do a little research online to find out if that particular issuer is currently reporting loans to the credit bureau,” says Dornhelm. “It will at least tell them the immediate likelihood that their credit score and records will be impacted by getting the loan.”
The problem? “Nobody reads the fine print,” says Howard Dvorkin, CPA and president of Debt.com. “Either you pay on a terminal or on your computer or your phone, and the screen is small, and you’re not going to sit there and read that lending language.”
No one reads the fine print. Either you pay on a terminal or on your computer or phone, and the screen is small.
—Howard DvorkinPresident, Debt.com
With 60% of consumers say they have used a BNPL service, and more of these services are popping up all the time, it’s important to understand how they work. Here is a breakdown of how choosing BNPL could impact your credit.
Do BNPL services use a soft or hard request?
Many people use BNPL’s services as an alternative to credit cards, assuming no risk to their credit. Staten Island, NY resident Mary Rosado says she uses BNPL Afterpay and Klarna services all the time. “They don’t ask for your social security number, so I don’t see how they can pull your credit report,” Rosado says. “I use them, to be honest, because I have bad credit and can’t get credit cards.”
Rosado is right. The services she uses perform a gentle credit application that does not affect your credit score. “When a soft credit check is performed, we verify a customer’s identity using the details they provide, and we review their credit report information to understand their financial behavior and assess their creditworthiness. “says a Klarna spokesperson.
But consumers should be aware that some BNPL services use a rigorous credit check. For example, Affirm offers a 0% APR option with four payments every two weeks and no credit checks, but its longer-term installment loans are based on thorough investigation. PayPal’s “Pay in 4” only uses soft credit, but PayPal Credit performs a full credit check.
Discount rate overview
A single serious inquiry isn’t going to drop your score, but consumers should be aware that some BNPL services use a rigorous credit check.
It’s important to understand these distinctions when you are presented with different payment options at checkout, as new credit account requests account for 10% of the FICO score calculation.
“Analysis of the millions of credit reports we use to build our FICO scores consistently show that those with a higher number of recently applied for accounts and recently acquired accounts represent a slightly elevated risk of non-payment across the board. “says Dornhelm.
Of course, a hard survey isn’t going to drop your score. “We generally say that an investigation is unlikely to have more than five points of impact on the score,” says Dornhelm. “But for a rare segment of the population, it could have a significant impact.”
If you’re applying for a mortgage or refinance, for example, just a few points could put you in another level of interest rate qualification.
The biggest problem is if you take loans that regularly use difficult surveys. “If they flag and you go out and get five of these loans, it looks like you’re desperate for credit,” Dvorkin says. “You have to be very careful.”
Do BNPL services flag payment activity?
The next potential credit impact occurs if the BNPL service reports account activity to one of the credit bureaus. Again, some do and some don’t, and it can vary depending on the loan product. For example, Affirm does not report activity on its offer of four payments every two weeks, but longer-term loans are reported as installment loans.
Then there are some BNPL products, like PayPal Credit, that can offer revolving lines of credit rather than fixed loan payments, Dornhelm says. With revolving accounts, the amount of available credit you use (called credit usage) also has a significant impact on your credit score – accounting for 30% of it.
That’s why it’s a good idea to know if and how the BNPL service you’re considering is reporting your activity. Since payment history is the most important factor in calculating FICO, accounting for 35% of your score, consumers with thin credit records might even benefit from using these products as a way to demonstrate a positive payment behavior, says Dornhelm.
What happens if you miss a payment?
When it comes to your credit, missed payments can be very detrimental, but remember: not all BNPL programs flag your activity. So if you miss a few payments but then catch up, your score could be off the hook.
“I was late this week, so they just sent me a notice saying ‘it’s okay, we’ll try again in a few days,'” Rosado explains. “They don’t have my social security number, so I don’t know how that can go against my credit.”
Because her services don’t report, she’s right to be in the clear. But let’s say someone ends up defaulting on their remaining balance. Once a debt is sent to collections, the credit bureaus will be notified. Klarna does this after 82-90 days of delinquency, while Affirm waits 120 days.
Of course, if the BNPL makes a report, once you miss a billing cycle, it will likely show up as a negative item on your credit report and trigger a lower score.
“When it comes to missing payments, the primary focus of the score is the date the payment was missed and the severity of the late payment,” says Dornhelm. “And so, to that end, missing payments are likely to have a significant impact on a consumer’s score.”
Verdict on the BNPL credit impact
BNPL offers could be useful tools, especially for consumers who do not have access to other types of credit. When used with care, and especially if there is no serious investigation or report, they can provide some leeway for repayment without a credit inconvenience.
Discount rate overview
When used with caution, especially if there is no serious investigation or report, BNPL plans can provide repayment wiggle room without credit downside.
“For me, BNPL is more manageable as long as I don’t get carried away,” says Rosado, who as a general rule tries to keep spending less than $400 so his payouts don’t exceed $100 at a time.
Choosing BNPL options that perform credit checks and report payment activity is a little riskier credit-wise, but as long as you use them sparingly and pay on time, they can work in your favor.
Credit issues aside, it’s important not to let BNPL offers trick you into spending too much. “If you can’t afford it, don’t buy it,” says Dvorkin. “Consumers are very optimistic and sometimes get into trouble.” But if you’re using a BNPL offer, he recommends automating your payments, so you don’t make mistakes and forget to pay.
As with any credit product, your primary goal should be to keep debt low and pay that debt on time, adds Dornhelm: “These behaviors, whether it’s a BNPL loan, a credit card or personal loan, are likely to help the consumer’s FICO score in the long run.
