With gift buying season upon us, along with inflation, record numbers of Americans Are Buy now, pay later (BNPL) intends to avoid having to pay the full cost of items upfront. And according to a recent study According to data company PYMNTS, more than a third of them think this will help their credit score.
In fact, Sezzle, a BNPL company that worked with PYMNTS on the study advertises its services as a way for consumers to build credit. But experts say the answer is more complicated. BNPL can benefit consumers’ credit scores in some cases… or it can really hurt them.
What is buy now, pay later?
Buy now, pay later is an option alternative payment method which allows customers to pay for their purchases in installments over a period of time.
BNPL companies such as Clarna, PostpaySezzle, To confirmand PayPal allow customers to pay for more expensive goods (or anything, really) in four interest-free installments or through longer-term payment plans with variable interest rates. Essentially, these companies offer short-term microloans to their customers.
Sometimes retailers like Macy’s, Target, Amazon, and BestBuy offer BNPL options at checkout. Consumers can also purchase retail items directly through BNPL apps offered by companies such as Klarna and Afterpay.
How buy now, pay later can improve your credit score
Of the 3,177 BNPL users surveyed by PYMNTS, 17% said they choose to use BNPL specifically to improve their credit score. There are several reasons why this strategy makes sense, at least for some people.
With an average credit card interest rate of about 28%, paying off four interest-free BNPL installments is usually much cheaper than paying off a credit card bill. Using BNPL services can also help consumers maintain lower balances on their credit cards, which is typically the case is good for their credit scores.
“For consumers who are savvy enough to be concerned about their credit, being able to increase their cash flow a bit likely helps them stay in line with their other creditors,” said Ted Anders, head of payment solutions at Affinity Federal Credit . Union.
Customers’ credit scores are also not as affected by late payments on BNPL balances as they are by late payments on a credit card. That’s because not all BNPL companies send their customers’ data to the big three credit bureaus – TransUnion, Equifax and Experian. Affirm only provides data to Experian, and Sezzle lets consumers choose whether or not their data is shared with agencies. Meanwhile, Klarna, PayPal and Afterpay do not share their customers’ data with credit reporting agencies, the companies told Quartz.
Even if BNPL companies share their data with credit bureaus, none of the major credit bureaus currently include that information in consumer credit files, which are then entered into credit scoring models such as FICO. “As long as that is the case, your BNPL account information will not affect your FICO score,” FICO says.
But if BNPL were ever included, people with little credit history or multiple missed payments on their credit report could see a bump in their FICO scores if they made their BNPL payments on time.
How BNPL can damage your credit
If customers take too long to pay BNPL installments, they may be transferred to a collection agency, which can have serious consequences their credit score, noted Martha Callahan, a certified financial planner with FBB Capital Partners.
“Especially if they start using the ‘buy now, pay later’ feature for multiple purchases, I see the purchases piling up or snowballing so that on the other end they’re still having cash flow issues to pay it off on time,” she said. .
And the people who use BNPL are typically the types of consumers who face these problems. A study This year, the U.S. Consumer Financial Protection Bureau found that BNPL borrowers had, on average, more debt and delinquencies on their credit products, and also less liquidity and lower savings.
One more note: If credit bureaus include BNPL information on consumer credit reports in the future, the balances could pollute a person’s credit score by lowering the average age of their accounts, which in turn lowers his credit score, says John Ulzheimer, a credit specialist who previously worked for Equifax and FICO scoremaker Fair Isaac Corp., told Quartz.
“Every time you add something new to your credit report, you lower the average age of your accounts,” says Ulzheimer. “If you have that many brand new accounts on your credit report, it will take a long time for them to age to a point where they are no longer problematic.”
Tips for building credit
Ultimately, experts say the best ways to build credit are simple: use a credit card and a budget.
“A credit card can be a great way to build credit if you implement it properly, which means paying off the balance every month so you don’t get charged interest,” says Callahan. “Stick to your budget so you don’t have cash flow problems in the future.”
If customers use BNPL, “don’t let the attractiveness of how you’re going to pay outweigh the fact that you want to be careful with your money and make sure you don’t overspend,” Anders said.