The Control Your Money: Own Your Life (™) Blog

February 27, 2024

Control Your Money: Own Your Life (™) - Buy Now, Pay Later 

Does Buy Now, Pay Later (BNPL) help or hurt my credit scores?

Generally, Buy Now, Pay Later (BNPL) does not help your credit scores, but may hurt your credit if not paid off as agreed.

What is BNPL, and how does it work?

Buy Now, Pay Later allows you to make a purchase immediately, and to pay for it in 4 installments. It is in fact a short-term installment loan made available by lenders such as Afterpay, Affirm, Klarna, PayPal Pay Later, Zip and others, and is generally offered as one of the payment options, along with other payments methods such as credit card, debit card, or PayPal. It’s sometimes known as “pay in 4.” Be sure to read the fine print for specific terms of the BNPL option. On smaller purchases, the payments are usually made over a 6-week term. There may be a longer period for larger purchases.

What are some of the benefits of BNPL?

One of the primary benefits of BNPL is that there is no interest if the payments are made when the installment payments are due. If a payment is made with a credit card, interest accrues if you don’t pay the full outstanding balance when invoiced. Another feature which may be helpful to consumers who have low or damaged credit is that there is a very limited credit check, or no credit check at all. You may qualify for BNPL where you don’t qualify for traditional credit.

Late fees for BNPL are currently just under $10 per lateness, compared to late fees on credit cards which start at $30 for the first lateness, and can rise to $41 for subsequent late payments within a 6-month period. (Note that CFPB has proposed bringing credit card late fees down to $8; this may take effect in early 2024).

What are some of the disadvantages of BNPL?

Installment payments under BNPL are automatically debited from your bank account, so if you’re not careful about monitoring your balances, overdraft fees may be incurred.

Why doesn’t BNPL help my credit score?

Timely and diligent payments on BNPL loans may not help your credit score because creditors are not required to report your payment history. The Fair Credit Reporting Act only requires that creditors who choose to report must report accurately. Currently, most BNPL lenders do not report, even though they have the option to do so.

How can BNPL hurt my credit?

Although a perfect payment history on BNPL purchases may not help your credit, failure to pay as the terms require can hurt your credit. Even when the BNPL lender does not report your positive or negative payment history, if your account is turned over to a collection agency for non-payment, the collector will report the collection account to the credit reporting agencies.

How can you maximize the benefits of BNPL?

BNPL can be very helpful in allowing you to make a needed purchase and managing your cashflow. For example, if you must replace an item immediately, but don’t have the cash on hand until your next paycheck, you may be able to make the purchase and pay it off over six weeks without incurring interest.

If you are trying to rebuild credit and have the wherewithal to make the payments as required, you’ll want to choose a BNPL lender that offers an option to report the payment history to the credit reporting agencies.

If you are trying to increase or maintain your credit score, BNPL can be a useful option. The outstanding balance on a BNPL loan is not factored into the credit score since it’s not reported. Thirty percent (30%) of your credit score (255 points out of a possible 850) is based on how much of the available credit on your credit card or revolving debt is being used. The recommendation is that you use less than 30% of the credit available (the lower the better). So, if you have a credit limit of $1,000, you should not have a balance of more than $300 on that card. If a new purchase puts you over that amount, consider making the new purchase using BNPL, (if you can make the required installment payments) if it would allow you to keep your utilization ratio at 30% or lower.

BNPL can be a good option for consumers who have the wherewithal to make the interest free required payments, where they might not qualify for traditional credit, need to manage their cash flow, or in some cases may even be able to help to rebuild credit.