A popular and growing option for short-term financing, called Buy Now, Pay Later (BNPL), lets you pay for a purchase in installments. BNPL companies do not usually have interest charges or other fees and tend to be easy to use for online shopping. But does buy now, pay later affect your credit score? Is it the best choice for shopping with credit?
Keep reading to learn how BNPL can affect your credit score and other ways you can make your next purchase.
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Buy now, pay later programs, or point-of-sale installment loans, have risen in popularity as a way to break up the cost of a large purchase. Plus, most do not charge interest.
They're often available directly at checkout with online retailers, and some even have a card option you can use at participating brick and mortar stores.
The downside? Many BNPL programs run a credit check before approval. You may not qualify for Buy Now Pay Later financing if you have less-than-stellar credit.
There are a few BNPL options for bad credit. Affirm and Afterpay, for example, do not run a credit check when you apply for BNPL financing.
If those options don't sound like a good fit, you could also use an in-store layaway program, which lets you reserve items and pay for them over time.
With layaway, however, you won’t be able to pick up your items until they’re paid off. It's also becoming less and less accessible, as more retailers move to Buy Now Pay Later programs.
Another option is a short-term installment loan from a lender who doesn’t require a credit check, such as Possible Finance.
Is buy now, pay later credit, or something else entirely? BNPL programs are a type of credit, even if they work a little differently than a traditional loan or credit card.
A BNPL repayment program helps you split the cost of purchase into multiple payments.
To use BNPL, you’ll need to apply for the program. If approved, you’ll be asked to make an initial down payment for your purchase. Many programs ask for 25% down.
You’ll then have three remaining payments of the same amount to pay off the item in full.
How does it work? You’re making a loan agreement between you and your BNPL provider.
They agree to vouch for you financially as you make payments on your purchase. In return, you agree to pay for your purchase on a set payment date, at a set amount.
It’s also important to remember that a short-term program that is interest-free can still affect your credit score. Most BNPL programs send your account to collections after several missed payments.
Collection agencies often report to major credit bureaus. That means any negative account history—like missed or late payments—will likely be added to your credit report.
On-time payments are the biggest factor in credit scores. Missing or late payments on any type of debt (including BNPL) can bring down your credit score.
How does buy now, pay later affect your credit score if you make payments on time? And, can these programs still change your FICO credit score?
The answer is, it depends. Most short-term BNPL programs don’t report regular activity to credit bureaus. As long as you make your payments on time and in full, your credit report might not show the account at all.
Note: The major credit bureaus are planning to add data about BNPL accounts on credit reports.
For example, a BNPL account that doesn’t report to credit bureaus can be helpful if you’re trying to keep your credit utilization rate down. Your credit utilization rate is the amount of credit you’re using versus your total available credit.
A low utilization rate is good for your credit score because you’re not using all of your available credit. This often shows lenders that you’re not relying on credit to cover all of your expenses, or overspending.
BNPL programs that do report your account could affect your score, even if you’re in good standing. For example, say you use BNPL for multiple purchases in a couple of months.
This causes your score to go down because the average age of your credit accounts is much shorter than before.
Additionally, some BNPL programs make hard inquiries on your credit report when applying.
Hard credit checks can lower your credit score—at least temporarily. If you make several purchases using BNPL within a short time, your score could take a hit.
Luckily, many BNPL services use a soft inquiry to determine eligibility. These don’t go on your credit history, so you shouldn’t see a dip after applying.
If you’re going to use BNPL, be sure to read the fine print and learn whether the lender uses a soft or hard inquiry and if they report the account to credit bureaus. In addition, check your credit report as often as possible to see what is and isn't showing up. Knowing which BNPL accounts are impacting your credit score can help you use buy now, pay later services without negatively affecting your overall financial health.
Not necessarily! Like most forms of credit, the most important factor to decide if it’s a good fit is knowing what you’re getting into. You’ll need to read the details of your contract to make sure you understand what’s required of you.
When is buy now, pay later a bad choice? While BNPL programs aren’t inherently bad, they can still get you into financial trouble.
It’s easy to overspend when you’re buying on credit. According to research by The Strawhecker Group, 55% of BNPL users tend to spend more than they would using a different form of payment.
You can also get into trouble by signing up for too many BNPL accounts.
Let’s say you buy new furniture using BNPL. You decide you also want to buy a new phone using BNPL, as well as some new clothes.
Each payment is manageable on its own. When added together, however, you find that you can’t afford to make all of your BNPL payments and may face late fees.
Buy now, pay later services can be a great short-term financing solution when used responsibly.
Just make sure you consider all of your options to see if they’re the right fit for your needs, and keep track of your monthly payments to ensure you can afford them before you buy.
Buy now, pay later financing isn’t the only way to break up the cost of a purchase. Other options include:
Now that you know how buy now pay later affects credit scores, you can decide if a BNPL account is right for you.
Remember: it’s never a good idea to jump into a loan—even an interest-free one—without thinking about how it will affect your overall financial health.
Ask yourself if the purchase you're making is critical, or if you can delay and save up the money instead.
If you do need the item in question right away, or simply don't want to wait, make sure that you really are going to be able to pay for it when the payment comes due.
If you want to purchase in installments, take the time to research all of your financing options before you commit to BNPL. It's possible that another option works better for your financial situation.
Whatever you decide, you'll be making the decision from an informed place, which is a great step towards owning your financial future.