Buy now, pay later allow buyers to pay for their purchases in four or more installments, often without interest. Dubbed BNPL for short, these point-of-sale installment loans are growing in popularity as people spend more time shopping online.
Overall, 60% of consumers say they have used a BNPL service at least once, and 51% have done so in the past year. While BNPL plans offer some great features, it’s important to understand what they can mean for your credit rating. We outline some of the basics of Buy It Now, Pay Later plans, as well as some of the more common ones.
Key points to remember
- Buy Now, Pay Later plans offer a convenient way to pay for your purchases online or in-store.
- Most BNPL services allow consumers to pay for their purchases in four installments.
- Many BNPL services do not require a thorough credit check in order for you to benefit from them. Therefore, your application will not adversely affect your credit score.
- If a BNPL provider reports your account activity to the credit bureaus, making payments on time can help you build a good credit history and a strong credit rating.
- BNPL can negatively affect your credit score if you don’t make your payments on time.
Buy now, pay later
Buy now, pay later provide consumers with short-term financing for their purchases. When a person purchases online or in a store, they may have the option of using the BNPL option at checkout. If he opts for one of these installment loans at the point of sale, he will be asked to make a first advance payment on the purchase. The remaining balance is then spread over three or more installments.
Some features that distinguish these agreements from layaway plans, lease purchase or credit cards include:
Buy Now, Pay Later plans can have flexible spending limits, which are typically set by the platform providing the service rather than the store. Afterpay, for example, gives buyers an estimated spending limit that can change over time based on how they use their accounts. Klarna does not specify a predefined spending limit, but takes into account the amount of the purchase, the time of day and the length of time the customer has used the service.
Payments are typically split into four installments, although the number may vary depending on the BNPL service and the size of the purchase. In terms of cost, many point-of-sale installment loans are interest-free, which can make them more attractive than a credit card with a annual percentage rate (APR).
While many buy now, pay later, the plans are interest free, some are not. So it’s worth knowing which are and which aren’t before signing up.
Does BNPL require a credit check?
Normally, consumers who apply for loans or other forms of credit are subject to a firm credit check, which allows lenders to view the credit reports before making a decision. Each serious credit application can cause your credit score to drop a few points. Soft credits, on the other hand, have no impact.
Some BNPL providers perform a credit check when you apply, while others do not. The list of providers that use smooth or no-check credit checks include:
A credit check may be required if you use a special financing option offered by a buy now, pay later service. For example, Klarna requires a credit check if you apply for one of her six-month, 12-month, or 36-month installment loans. Otherwise, you may be able to avoid a rigorous credit check and any damage to your credit score with BNPL financing.
Checking your own credit reports is considered a bad credit and will not damage your credit score. You can request your credit reports from AnnualCreditReport.com.
Does BNPL Services report to Credit Bureaus?
Credit accounts, including loans and credit cards, are typically reported to credit bureaus by their lenders. The type of information that goes into your credit report will include:
- Payment history
- Credit limits
- Balances due
These are some of the most weighted factors used in calculating your FICO credit score. But this information is not automatically reported; lenders have to share it with credit bureaus, and not all do.
If you buy now, pay later, the provider chooses to report your account activity to one or more of the three major credit bureausThis information can show up on your credit reports and, in turn, affect your credit score.
Sezzle, for example, offers a buy now, pay later option that includes credit bureau reports for consumers who have subscribed to them. If they make all of their payments on time, it will help them build a good credit history, but if they are in arrears, it could hurt their credit score.
Afterpay, on the other hand, doesn’t report payment history to credit bureaus at all, so it won’t affect credit scores in any way.
Consumers hoping to use BNPL as a credit building tool will want to choose a service that reports to credit bureaus and, of course, tracks their payments. Consumers who know from experience that they don’t always pay their bills on time may want to choose one that doesn’t.
What happens if you miss payments?
Buy now, pay later, agreements assume borrowers will make required installments as agreed. Missing a payment can result in late fees, and multiple missing payments can result in an account being sent to collections.
This is the policy followed by Zip. When an account is transferred to a debt collector, any negative history associated with it, including late or missed payments, can be reported to the credit bureaus. Even if your BNPL lender doesn’t normally report your account activity, the debt collector can.
Late payments on your credit report can lower your credit score, and the longer an account is in arrears, the more damaging it can be. Negative information, such as late payments, can stay on credit reports for up to seven years.