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If you’ve done any shopping lately, you’ve probably been offered the option to “buy now, pay later” (BNPL) – in other words, split your transaction into installment payments. Getting some extra time to pay can sound like a great deal if you’re on a tight budget, but going that payment route may not be risk-free when it comes to 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 way. Before you sign up for one, make sure you’re not putting your credit score in jeopardy.
Key questions to figure out before you sign on to BNPL include:
- Will your payment activity be reported to the credit bureaus?
- Does the service run a hard or soft inquiry when you apply?
- What happens with late or missed payments?
Do BNPL services report to the credit bureaus?
Because BNPL is a newly emerging field, there aren’t many definitive answers as to whether or not BNPL transactions are reported to the 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 whether that particular issuer is reporting loans to the credit bureau at this time,” says Dornhelm. “That will at least tell them the immediate likelihood that their score and credit files could be impacted by obtaining the loan.”
The problem? “Nobody’s reading the fine print,” says Howard Dvorkin, CPA and chairman of Debt.com. “Either you’re checking out on a terminal or on your computer or phone, and the screen is small, and you’re not going to sit there and read this lending language.”
Nobody’s reading the fine print. Either you’re checking out on a terminal or on your computer or phone, and the screen is small.
— Howard DvorkinChairman, Debt.com
With 60% of consumers saying they’ve used a BNPL service, and more of these services popping up all the time, it’s important to understand how they work. Here’s a breakdown of how choosing to BNPL could impact your credit.
Do BNPL services use a soft or hard inquiry?
Many people use BNPL services as an alternative to credit cards, assuming no risk to their credit. Mary Rosado, a Staten Island, NY resident, says she uses the BNPL services Afterpay and Klarna all the time. “They don’t ask for your Social Security number, so I can’t see how they can pull your credit report,” Rosado says. “I use them, to be honest, because I have bad credit and can’t get credit cards.”
Rosado is correct. The services she uses perform a soft credit pull that doesn’t ding your credit score. “When a soft credit check is performed, we verify a customer’s identity using the details they provide, and we look at information from their credit report to understand their financial behavior and evaluate their creditworthiness,” explains a spokesperson from Klarna.
But consumers should know that some BNPL services do use a hard credit check. For example, Affirm offers a 0% APR option with four biweekly payments and no credit check, but its longer-term installment loans rely on a hard inquiry. PayPal’s “Pay in 4” only uses a soft credit pull, but PayPal Credit does a full credit check.
It’s important to understand those distinctions when you’re presented with different payment options at checkout because applications for new credit account for 10% of the FICO score calculation.
“Analysis of millions of credit files that we use to build our FICO scores consistently shows that those with higher numbers of recently applied-for accounts and recently-acquired accounts do represent a slightly elevated risk of nonpayment down the line,” says Dornhelm.
Of course, one hard inquiry isn’t going to tank your score. “We generally say that one inquiry is unlikely to impact the score by more than five points,” says Dornhelm. “But for a rare segment of the population, that could be a meaningful impact.”
If you’re applying for a mortgage or refinancing, for example, just a few points could put you into a different tier of interest rate qualification.
The bigger issue is if you take out loans that use hard inquiries regularly. “If they report and you go out and get five of these loans, it looks like you’re desperate for credit,” says Dvorkin. “You have to be very careful.”
Do BNPL services report payment activity?
The next potential credit impact happens if the BNPL service reports account activity to any of the credit bureaus. Again, some do, and some don’t, and it may vary depending on the loan product. For instance, Affirm does not report activity on its four biweekly payments offer, but longer-term loans are reported as installment loans.
Then there are some BNPL products, like PayPal Credit, that may offer revolving lines of credit rather than fixed loan payments, says Dornhelm. With revolving accounts, the amount of available credit you use (called credit utilization) also has a significant impact on your credit score – accounting for 30% of it.
That’s why it’s wise to find out if and how the BNPL service you’re considering reports your activity. Since payment history is the most important factor in the FICO calculation, comprising 35% of your score, consumers with thin credit files might even benefit from using these products as a way to demonstrate positive payment behavior, says Dornhelm.
What happens if you miss a payment?
As far as your credit goes, missed payments can be very harmful, but remember: Not all BNPL programs report your activity. So if you miss a couple of payments but then catch up, your score might come away unscathed.
“I was late this week, so they just sent me a notice saying ‘no big deal, we will try again in a few days,'” says Rosado. “They don’t have my Social Security number, so I’m not sure how it can go against my credit.”
Because her services do not report, she’s correct about being in the clear. But let’s say someone ends up defaulting on their remaining balance. Once a debt is sent to collections, then the credit bureaus will be notified. Klarna does this after 82 to 90 days of delinquency, while Affirm waits 120 days.
Of course, if the BNPL does report, once you miss a billing cycle, it will likely show up as a negative item on your credit report and trigger a score drop.
“When it comes to missing payments, the main focus of the score is how recently the payment was missed, and how seriously delinquent the payment was,” says Dornhelm. “And so to that end, missing payments is likely to have a significant impact on a consumer score.”
Verdict on BNPL credit impact
BNPL offers could be helpful tools, especially for consumers who don’t have access to other kinds of credit. When used carefully, and especially if there’s no hard inquiry or reporting, they can offer some repayment wiggle room with no credit downside.
“For me, BNPL is more manageable as long as I don’t get carried away,” says Rosado, who, as a rule, tries to keep spending under $400 so her payments aren’t more than $100 at a time.
Choosing BNPL options that do run credit checks and report payment activity is a bit more risky credit-wise, 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 let BNPL offers tempt you into overspending. “If you can’t afford it, don’t buy it,” says Dvorkin. “Consumers are very optimistic and sometimes get themselves in trouble.” But if you do use a BNPL offer, he recommends automating your payments, so you don’t get tripped up and forget to pay.
As with any credit product, your main goal should be to keep debt levels low and pay that debt on time, adds Dornhelm: “Those behaviors, whether it’s on a BNPL loan or a credit card or a personal loan, are likely to help the consumer’s FICO score in the long run.”