Is Buy Now Pay Later (BNPL) Good for Your Credit Score
Unless you stay completely away from everything digital – which I’ll assume you don’t since you’re reading this online – you’ve come across buy now pay later or BNPL as a payment option. It’s a popular choice offered by companies such as PayPal, Klarna, Affirm, and Afterpay. Up to this point, choosing BNPL hasn’t affected most people’s credit, but it seems that’s about to change. Let’s look at this payment option, how it’s worked up until now, and what changes are in store.
How Exactly Does Buy Now Pay Later Work?
The basic idea of buy now pay later is a bit like using a credit card. You get to purchase the item now and pay for it over time. However, there are some pretty big differences, as you’ll see below.
Upfront Payment
With a credit card, you don’t have to make an upfront payment. BNPL usually requires that you make your first payment the day of purchase.
Shorter Pay Period – Usually
When you use a credit card, you can take pretty much as long as you want to pay, just as long as you make your minimum monthly payment. To be clear, that’s not something you want to do, but it is a difference.
With BNPL, on the other hand, you usually need to pay off your purchase in about four payments – the first on the day of purchase and then one every two weeks until it’s paid off.
In other words, if you make a $300 purchase, you’ll pay $75 on the day of purchase and then $75 every two weeks for three payments. With some companies, larger BNPL purchases offer a longer period to pay, but it’s usually four payments.
Credit Check and Reporting
Applying for a credit card and getting approved requires a hard pull on your credit. It also means that your payments are reported to the credit bureaus. Therefore, using a credit card definitely affects your credit.
Typically, BNPL doesn’t require a credit check at all. Some companies will do a soft check on your credit, but that doesn’t impact your credit score. And since they don’t require a credit check, it makes it much simpler for the average person with not-so-great credit to get the purchases they need and desire.
Additionally, in the past, they didn’t report your payments to the credit bureaus. If you had a longer-term payment plan, that might change. However, as most purchases have a two-month payment term, they didn’t go on your credit.
Purchase Options
One downside to buy now pay later is that it’s not something you can use for your household bills like you can with a credit card. Instead, you can use it for actual purchases – and only when the company you want to make a purchase with accepts it. While BNPL is definitely becoming more widely accepted, there was a time very few retailers accepted it.
Purchase amounts also come into play. You can, of course, use a credit card to make a purchase as small as one dollar if you want. BNPL usually has a minimum purchase amount. PayPal, for example, requires that you spend at least $30.
Interest
Another great benefit of BNPL is that there’s no interest added. If you make a purchase for $30, that’s all you pay back. Credit cards do add interest if you don’t pay the full balance before your billing cycle ends.
To Review
As of now, BNPL does not impact your credit in any way and does not charge interest. Let’s be honest, interest alone can play a big role in your credit, as it can make it much more difficult to repay your loan. Therefore, BNPL provides a convenient way to make purchases without worrying about the effect on your credit.
What’s Changing in BNPL?
Buy now pay later has become such a big deal that we’re looking at how it handles credit reporting. Why? Well, let’s just say that the COVID pandemic led to a surge in BNPL financing. That might not seem like such a bad thing, but the truth is that if consumers can shop with this financing and no potential risk, there’s a good chance that some payments won’t be made.
When you use a credit card, you know you have to pay that money back, right? If you don’t, it’s going to go on your credit, and your credit can impact everything. This includes job opportunities, the chance to get a home loan, and so much more. With so much at stake, you’ll be more inclined to make your payments. Of course, there are always people that won’t pay or can’t pay, but when there is risk involved, most people will.
With BNPL, there’s not really any risk to the consumer. Go back to that $300 purchase we discussed earlier. If you choose to make that purchase, you’ll pay your first payment – that’s the only way you’ll get approved. However, you could technically not make those last three payments – leaving you with a $300 item that you got for $75 and the BNPL company with debt.
So, when COVID hit and people began to use BNPL more, it made some folks in the government sit up and pay attention to the amount of debt piling up. Now, all three major credit bureaus have announced that they will begin collecting and reporting data associated with BNPL purchases.
Understand that this is not a bad thing. If you handle your purchases and payments responsibly, this can actually help build your credit. However, if you can’t make your payments, it’s going to hurt.
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Tips for Managing BNPL Responsibly
The bottom line with any financial move is to make sure you can handle it. In other words, if you aren’t certain you can pay for a $600 purchase within the payment term, don’t take the BNPL loan.
As soon as you make a BNPL purchase, you need to add it to your budget to ensure it gets paid. It can be very easy to forget a small bill or one that you don’t normally pay, but writing it down helps you remember it. One of the easiest ways to do this is to use a budgeting tool, like the one in Goalry Mall.
Once it’s on your budget, do everything you can to pay for it. Pick up an extra shift at work, sell some clutter in your home, babysit your neighbor’s kid – whatever you need to do.
Conclusion
Changes to BNPL credit reporting practices might seem a little scary but think about the positive side of it. You still get the chance to make convenient, interest-free payments on things you desire – even if you don’t qualify for a credit card. And by making timely payments, you can build your credit over time. As long as you manage it responsibly, this can be a very positive change.