With prices rising and concerns about the economy top of mind, there has been a rise in Buy Now, Pay Later (BNPL) plans. Consumers can use BNPL for just about anything. Shopping online and in-person, big and small purchases, even your groceries and your takeout.
There are dangers to this practice, however. Financial experts Rod Griffin, senior director of consumer education and advocacy for Experian, and Can Arkali, senior director of predictive analysis at FICO, share what you need to know:
BNPL is making its way to your credit reports
For a long time, BNPL loans have existed in a credit limbo. Many providers only require a soft credit check and, until recently, haven’t reported payment history to the credit bureaus. This means such loans are relatively easy to get approved for, but they offer no credit benefits. BNPL usage goes unreported, unless it results in a default.
Last year, the Consumer Financial Protection Bureau (CFPB) ruled BNPL providers should be treated like credit card issuers — and offer the same legal protections and rights to consumers. This prompted a lawsuit from the Financial Trade Association. Now, with the CFPB’s fate up in the air, the Bureau said in a court filing it would revoke the rule.
Despite the CFPB uncertainty, some of the major BNPL lenders are already moving in this direction and collaborating with the credit bureaus…
Does BNPL impact your credit?
The credit reporting industry moves slowly. Right now, we’re seeing it starting to overcome the first hurdle, which is including BNPL in credit reports in the first place. Griffin says that when more leading BNPL providers begin reporting to Experian, this information will become available to lenders. However, he doesn’t mention any timeframes.
Another hurdle is implementing the BNPL data into credit scores. Currently, the most commonly used scoring models aren’t designed with BNPL in mind, Griffin says.
“What makes BNPL different from more traditional credit products is both the frequency and duration of these loans,” says Arkali. “BNPL loans can have terms of as little as six weeks, and consumers can open a large number of these loans within a short period of time.”
FICO developed a proprietary treatment of BNPL data that allows lenders to incorporate BNPL data into their credit evaluation process. The company is now working on a solution to introduce this treatment to the credit-scoring marketplace…
Be smart with your BNPL purchases
Your credit score won’t be impacted in any way as long as you make your BNPL payments on time. Even a couple of late payments might not be an issue if you catch up. After all, your future lenders won’t see them just yet.
However, if you default on a BNPL loan, your account will likely be sent to collections. This will appear as a negative item on your credit reports, resulting in a score decrease. Since payment history is the most influential credit score factor, that decrease can be significant.
Sadly, it’s all too easy to get carried away with BNPL. Almost one in four (24 percent) of the U.S. adults who used a BNPL service say they spent more than they should have, according to Bankrate’s Buy Now, Pay Later Survey. Further, 16 percent reported missing a payment.
To avoid any negative consequences from using BNPL, be it to your credit or your budget, stay responsible by:
-
Avoiding instant gratification: Let the purchase wait for at least a week to ensure you’re not impulse-buying.
-
Considering other options: For example, a 0 percent APR credit card can provide a much longer timeframe to pay off your purchase without interest.
-
Creating a repayment plan: If you do decide to sign up for a BNPL plan, determine how it would fit into your budget. You’re adding to your debt — see if you’ll need to cut down on any other expenses to pay it off. Make sure your plan is realistic and won’t put you in a tough spot financially.
-
Reading the fine print: Always understand what you’re signing up for, including any interest and fees.
You can read the full article, with specific information on the top BNPL providers, here.
When trying to make ends meet, it can be attractive to take advantage of a Buy Now, Pay Later offer. And it can make sense, as long as you assess the risks and are careful with how much you purchase using BNPL. Remember, you will have to pay eventually.