How does “Buy Now, Pay Later” Affect Your Credit Score?

If you’ve been shopping recently, you’ve probably been offered the option to “buy now, pay later” (BNPL) – in other words, split your transaction into installment payments. Getting extra time to pay might seem like a good deal if your budget is tight, but going this payment route may not be risk free for your credit.

Installment payment services have really taken off. And credit card issuers are starting to offer their own versions. But not all BNPL programs work the same. Before signing up, make sure you don’t put your credit score at risk.

The key questions to be answered before connecting to BNPL are as follows:

• Will your payment activity be reported to the credit bureaus?
• Does the service make a hardware or software request when you apply?
• What happens with late or missed payments?

Are BNPL’s services the responsibility of the 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 determine if that particular issuer is reporting loans to the credit bureau right now,” says Dornhelm. “This will at least give them an indication of the immediate likelihood that their credit score and records could be affected by getting the loan.”

The problem? “Nobody reads the fine print,” says Howard Dvorkin, CPA and president of Debt.com. “Either you check on a terminal, or your computer or your phone, and the screen is small, and you’re not going to sit there and read that loan language.”

No one reads the fine print. Either you pay at a terminal, or on your computer or phone, and the screen is small.

– Howard DvorkinPresident, Debt.com

With 60% of consumers reporting having used a BNPL service, and more of these services appearing all the time, it’s important to understand how they work. Here’s a look at 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 for their credit. Mary Rosado, a resident of Staten Island, NY, 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 I can’t get credit cards. “

Rosado is right. The services she uses perform a smooth credit draw that does not affect your credit score. “When a credit check is performed, we verify a client’s identity using the details they provide and we review information on their credit report to understand their financial behavior and assess their creditworthiness,” explains a spokesperson for Klarna.

But consumers should be aware that some BNPL services use strict credit checking. For example, Affirm offers a 0% APR option with four biweekly payments and no credit checks, but its long-term installment loans rely on careful investigation. PayPal’s “Pay in 4” only uses soft credit, but PayPal Credit does a full credit check.

It is important to understand these distinctions when you are presented with different payment options at checkout, as new credit requests account for 10% of the FICO score calculation.

“The analysis of millions of credit reports that we use to establish our FICO scores consistently shows that those with a higher number of recently requested and recently acquired accounts are a slightly high retention risk across the board,” says Dornhelm. .

Of course, one serious investigation is not going to lower your score. “We usually say that a survey is unlikely to impact the score by more than five points,” 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 a different level of interest rate qualification.

The biggest problem is whether you take out loans that regularly use in-depth surveys. “If they do a report and you go out and get five of these loans, it looks like you are in desperate need of credit,” says Dvorkin. “You have to be very careful.”

Do BNPL services report 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 this can vary depending on the loan product. For example, Affirm does not report activity on its four bi-weekly payment offer, but longer-term loans are reported as installment loans.

Then there are some BNPL products, like PayPal Credit, which can offer revolving lines of credit rather than fixed loan payments, explains Dornhelm. With revolving accounts, the amount of available credit you use (called credit usage) also has a significant impact on your credit score, which is 30%.

This is why it makes sense to know if and how the BNPL service you are considering is paying off your business. Since payment history is the most important factor in calculating FICO, accounting for 35% of your score, consumers with thin credit files might even benefit from using these products as a way to demonstrate a positive payment behavior, explains Dornhelm.

What happens if you miss a payment?

When it comes to your credit, missed payments can be very damaging, but remember: not all BNPL programs report your activity. So if you miss a few payments but catch up, your score might come out unscathed.

“I was late this week, so they just sent me a notice saying ‘okay we’ll try again in a few days’,” Rosado said. “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 to 90 days of delinquency, while Affirm waits 120 days.

Of course, if 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 drop in score.

“When it comes to missing payments, the main goal of the score is when the payment was missed and the severity of the payment default,” says Dornhelm. “And so to that end, missing payments are likely to have a significant impact on a consumer’s score.”

Verdict on BNPL’s credit impact

BNPL’s 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 investigation or report, they can offer some leeway for credit inconvenience-free repayment.

“For me, BNPL is more manageable as long as I don’t get carried away,” says Rosado, who typically tries to keep spending less than $ 400 so his payments don’t go over $ 100 at a time.

Choosing BNPL options that perform credit checks and report payment activity is a bit riskier on credit terms, 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 be tempted by BNPL’s offers. “If you can’t afford it, don’t buy it,” Dvorkin says. “Consumers are very optimistic and sometimes get into trouble. But if you are using a BNPL offer, he recommends that you automate your payments, so you don’t trip up 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 on a BNPL loan, a credit card or a loan. staff, are likely to help the consumer’s FICO score in the long run.