Does ‘Buy Now Pay Later’ Affect Your Credit Score?

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When shopping online, you’re given many choices when it comes to making payments for the product. One option is “Buy Now Pay Later” (BNPL), a payment scheme that is currently in vogue for medium to large purchases.

What Is BNPL

When making large purchases, consumers are often given the option to pay for the merchandise in installments. Touted as an easy way to make a large purchase, BNPL is not the same as a credit card. BNPL is, in essence, a short-term loan.

The hook is that you usually won’t be paying interest on the installments. But there may be a flat fee, and the term for the total payback is short.

Types of BNPL

There are generally two types of BNPL loans: no-interest loans, and loans with interest.

Both require a set period to pay the loan back in full. Typically, the consumer is given six months, with required weekly or bi-weekly installments.

Many BNPL offerings advertise zero interest. Unfortunately, no-interest loan BNPLs usually have a catch. If you skip a payment, fees may be assessed. Or you may have to pay interest retroactively on the entire loan balance.

Third-Party Versus Credit Card BNPL Programs

There are two ways to take advantage of BNPL programs. First, you can use existing credit with a credit card—assuming your existing credit card has such a feature—or you can go with a third party specializing in BNPL.

Amex, Citi, and Chase currently allow cardholders to finance purchases through a BNPL loan.

Credit card BNPL works differently than that offered through a third party. A credit card usually doesn’t offer an installment option before the purchase. After making the purchase with your credit card, check with your credit card company to see if the item is eligible for a BNPL option. If it is, you will be paying in installments, but monthly interest is charged. This allows you to split up payments, using already established credit. It also allows you to take advantage of rewards plans.

If you make your payments on time, using a credit card for your BNPL purchases can help build good credit.

Unlike credit card BNPL, a third-party BNPL is offered to you before you make the purchase. It’s often seen as the last sales pitch before you decide to complete the sale.

Although, like a credit card, the third party offers an installment plan, it doesn’t usually charge interest—as long as you don’t miss a payment and pay off the balance in the agreed time.

BNPL Third Party Companies

PayPal was one of the first to enter the BNPL market, with its “Bill Me Later” plan. PayPal customers can now use “Pay in 4,” offering installments on purchases of $30 to $1,500. PayPal’s “PayMonthly” offers longer-term payment plans as well.

Swedish firm Klarna also offers a “Pay in 4” plan that is interest-free. You’ll be able to split your purchase price into four installments. Klarna also offers a “Pay in 30” plan.

With Klarna, you must pay your entire balance within six months, or you'll pay the interest rate for the purchase, charged from the date of purchase. Any missed payments are subject to a seven-dollar late fee.

If a retailer doesn’t offer Klarna, the service allows you to shop with a virtual card number that lets you make purchases from any online store in the United States that accepts pre-paid cards.

Apple Pay is relatively new to the BNPL scene. Apple recently announced Apple Pay Later, to be introduced in September 2022. Apple Pay Later allows a customer to make a purchase and pay it back in four equal installments over six weeks. Although there’s no interest on these installments, it’s currently unclear if fees or interest payments are assessed if a payment is missed.

Another online platform, similar to Klarna, is Affirm. Unlike Klarna, Affirm charges interest.

Spending Limits

For big-ticket purchases, Affirm may be the best option, allowing purchases of up to $17,500. Paypal’s “Pay in 4” allows purchases up to $1500, while Apple Pay Later maxes out at $1000.  Klarna has no pre-set spending limit. Instead, an automated approval decision is made each time a shopper uses Klarna.

Although these are specific examples, there are many third-party BNPL companies, and the number is growing. The basic process holds true for most BNPL companies on the market.

Does BNPL Affect Your Credit Score?

If you’re short on funds, with poor credit, and want to make a large purchase, BNPL might be the route to take. Third-party BNPL programs are typically generous with their approval process. The approval process may include a soft credit check, but seldom requires a hard credit inquiry. As a result, those who struggle with a poor credit score have a greater chance of using BNPL.

However, if you want to build or improve your credit, BNPL may not help you. Although traditional credit cards report on-time payments to credit bureaus, there is little consistency among BNPL companies on this issue. Some report timely payments, while others do not.

Likewise, BNPL may not directly hurt your credit. Some BNPL companies report late payments, while others do not. However, if you miss a payment or default on a loan, you may be referred to a debt collector. This will certainly have a negative impact on your credit score.

Danger of Overspending

The pandemic created a flurry of online shopping. Large purchases people used to save up for are now easy to make with BNPL.

As a result, there is a temptation to blow through already tight budgets. According to a DebtHammer survey conducted in February 2022, 45 percent of Americans have already signed up for BNPL. Unfortunately, of that 45 percent, 22 percent regret it after the fact.

In the past, many retailers offered lay-a-way plans. Shoppers paid in installments and received their merchandise once they had paid for it.

Today’s BNPL strategy allows consumers to have their merchandise and their debt simultaneously. With inflation roaring away, this could cause hardship for many Americans.

The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.