If you recently shopped online or in the store, you probably “Buy now, pay later” (BNPL) Options, tempt you to split your payment into smaller installments. According to a survey by the Consumer Financial Protection Agency, 21.2% of consumers with credit reports funded at least one purchase with BNPL loans. This is up from 17.6% in 2021. It is not surprising that BNPL is on the rise.
These installment services have caught the eye of many shoppers, and even traditional credit card issuers are now jumping on the bandwagon variations. However, it is important to understand how this choice affects your finances and credit score. Discover how BNPL works, how it affects your credits and avoids the pitfalls of BNPL before signing up.
Buy now or pay for work later?
Buy Now, Pay Later is a fundraising option that allows you to split your purchase payment into multiple installments. As long as you pay on time, it is often interest-free.
BNPL services have become more common online and in-store, pop up as a payment option during checkout.
The process is simple:
- Select the BNPL option at checkout.
- You will make your first payment at the time of purchase.
- Pay the remaining balance in a series of scheduled installments.
For example, if you purchase an item worth $200, you can pay $50 at checkout and $50 every two weeks until your balance is repaid. Many shoppers choose this option better Manage your budget By widening the cost of purchasing over time.
Do BNPL require credit checks?
BNPL services are often used as a credit card alternative. Mary Rosado of Staten Island, New York, is a resident and says she uses BNPL services. afterpay and Clear everytime.
“They don’t ask for your Social Security number so they can’t see how they can pull out your credit report,” says Rosado. “To be honest, I use them because I’m not able to get a credit card because I’m not good enough to get a credit card.”
Rosado is correct that the services she uses run Soft Credit Pull It’s not ding Credit score. Check your soft credit check identity and evaluate your financial behavior. They do not involve a complete review of your credit report, so they do not get in the way and leave no marks in your credit history.
However, some BNPL services use hard credit checks. For example, AFFIRM has a 0% APR option and no credit checks. PayPal’s “Pay for 4” uses only soft credit pull, PayPal Credit A complete credit check is required.
How much does credit check affect your score?
If you consider BNPL as a payment option, it is important to understand whether a hard credit check is required and how this will affect your credit score. Application for a 10% new credit account Calculating FICO scorestherefore, if you pull hard, your score can get soaked.
“Analysis of millions of credit files used to build FICO scores consistently shows that people with recently applied and recently acquired accounts represent slightly increased risks in Nonpayment.”
One difficult inquiry will not tank your score significantly. “We generally say that it’s unlikely that a single inquiry will affect your score by more than five points,” Dornhelm says. “But for rare segments of the population, that can have a meaningful effect.”
For example, if you are applying for a mortgage or refinance, just a few points could lead to another interest rate tier.
If you use strict inquiries regularly, you may experience bigger issues. “When they report and you go out and get five of these loans, you look craving credit,” says CPA Howard Dovlkin, chairman of debt. “You need to be very careful.”
How does BNPL affect credit reports?
Another important factor to consider in the BNPL service is whether account activity can be reported to the Credit Bureau and could affect your credit score. December 2021, Equifax led Include BNPL loans in your credit report Experian and Trans Union I’ll follow you soon.
However, not all BNPL providers report their account activity. Whether or not your use of BNPL appears on your credit report may depend on the specific loan products your provider offers.
For example, for plans occurring before April 1, 2025, AFFIRM does not report activities regarding four biweekly payment offers, but long-term loans are reported as installment loans. For plans prior to April 1, 2025, the company reports not the initial installment loan and not the subsequent loan unless the account is delayed by 30 days or more. However, from April 1, 2025, all payment plans and related repayment activities have been reported to Experian. It also began reporting to Transunion in May, “we can report to other credit bureaus in the future.”
Some BNPL products, such as PayPal Credit, may offer Revolving Credit Line Not a fixed loan payment. The amount of available credits to use in a spinning account (called) Credit use) It also has a big impact on your credit score – accounting for 30% of that.
April 2024, Apple Became the first major BNPL provider Report the account history of all “4 Payments” customers to the Experian. This information is currently coded invisible to lenders and may take some time before it is factored into the borrower’s credit score.
However, as BNPL services become more common, the relationship between service providers and credit departments may continue to evolve.
How does BNPL affect credits?
While missed payments can be harmful to your credit, please remember that not all BNPL programs report your activities.
You missed some payments, but if you catch up, your score might leave unharmed. However, if the remaining balance is default, the liability is It will be sent to the collectionand will be notified to the credit department. This usually happens when your account expires between 90 and 120 days and differs depending on your provider’s policy.
If a BNPL provider reports that they missed a payment to the credit department, it will appear as a negative item on your credit report, which could trigger a score drop. Payment history is the most important factor in FICO calculations and accounts for 35% of the score, so missing BNPL payments can have a significant impact.
On the positive side, if your BNPL provider reports on payments on time to the credit department, it will help you build your credit history and improve your credit score. Consistent and timely payments indicate responsible credit behavior. If you are trying to establish or rebuild your credits, that can help. A BNPL account can also diversify your credit mix, which accounts for 10% of your score.
What are the other risks of a BNPL loan?
Beyond potential credit risks, there are other things Disadvantages of using BNPL services.
For example, splitting your payment into fewer installments can make your purchase seem more affordable and allow you to buy more than you can comfortably buy. For example, in 2023, US shoppers who used BNPL on Black Friday spent 48% more More than those using other payment methods.
This can lead to debt accumulation, especially when using multiple BNPL services at the same time. Additionally, if you miss a payment, late fees will accumulate, further increasing the total purchase cost.
Returning items purchased from BNPL can also cause complications. Even if you have already returned the item, you are responsible for making payments until the return is processed and added to your account. Additionally, some BNPL providers charge additional fees for services such as payment changes and early repayments, adding hidden costs to your purchase.
Inconsistent reporting practices among BNPL providers cause confusion about how BNPL activities affect credit, making it difficult to manage credit health.
How can you avoid the pitfalls of BNPL?
Before using the BNPL Services, please read the Terms of Use carefully to understand credit check requirements and reporting practices.
To avoid inadvertently risking your credit score, ask yourself the following question:
- Do BNPL programs require credit checks?
- Will your payment activities be reported to the Credit Bureau?
- When you apply, will the service perform strict or soft inquiries?
- What happens if I missed or missed my payment?
Regularly Monitor your credit report Ensure that all BNPL activities are accurately reflected and that you catch errors early. If you notice any discrepancies, please notify your BNPL service provider and credit reporting agency immediately.
Remember, you need to maintain your BNPL payments to avoid late fees and potentially negative effects on your credit score. Consider setting up automated payments and use BNPL services wisely to ensure you can comfortably pay installments without overstretching your budget. Following these guidelines will help you maintain a healthy credit profile as it helps you use your BNPL services responsibly.
Conclusion
The BNPL plan is a great option for those who don’t have access to traditional credit. Some BNPL providers only perform soft credit checks, allowing for flexible repayment terms. However, BNPL options that require hard credit checks and report payments to the credit department may be risky, but as long as you use them sparingly and pay on time, they can work in your favor as well.
“For me, BNPL is easier to manage unless I’m into it,” says Rosado.
Dvorkin recommends: “If you can’t afford it, don’t buy it.” If you decide to use BNPL, he suggests automate your payments, so don’t forget to pay.
Like any other credit product, your main goal is to keep your debt levels low and pay that debt on time. This is because these actions are likely to help your credit score in the long run.
