How to Use Buy Now, Pay Later to Help (Not Harm) Your Credit
The development of buy now, pay later (BNPL) has made it easier for consumers to take out small, short-term loans to make purchases and repay them in installments (usually four, with payments to be made every two weeks). .
Until recently, BNPL loans had little impact on consumer credit because information about these purchases, including your payment history, was not sent to the three major credit bureaus (Equifax, Experian and TransUnion). However, that’s changing: Apple now reports all BNPL loans to the bureaus, while others like AfterPay, Affirm and Klarna also send at least some information about those accounts.
But while BNPL loans are starting to appear on credit reports and will be visible to both consumers and lenders who use your credit, they are not yet included in scores . However, you can use BNPL to positively impact your credit.
How to Use Buy Now, Pay Later to Increase Your Credit
Responsible use of BNPL loans—repaying them on time and in full—can offer consumers with limited credit histories the opportunity to obtain credit, which in turn makes them eligible for other credit products and lower interest rates in the future. Even though these loans will not directly impact your fear, your history of on-time payments and your proven ability to manage credit (and a specific type of loan, such as an installment loan) will still be visible to lenders/lenders who are actually viewing your credit report, not just getting your score. This is not a feature of BNPL loans. For example, reported lease payments are also not included in all credit scoring models. But a history of making scheduled loan payments demonstrates to lenders that you are at less risk with a credit card, car loan or mortgage.
BNPL loans can be especially useful for those just starting out with credit, although there are many other options (such as rent reporting) that may be safer than taking out a short-term loan.
In terms of borrowing, BNPL is best for those with the money, according to Andrew Herzog, a certified financial planner in Texas. He recommends using these services for relatively small, non-recurring purchases that you have the money for and can easily track.
(Again, this only works if your installment loan and payment history are reported to credit reporting agencies, which is not currently the case with all BNPL providers.)
Be careful: buy now, pay later.
Of course, BNPL can still be risky : if you get carried away with the convenience, you’ll easily end up spending far more than you can afford. There are also hidden costs, such as late fees, transaction fees, and interest (if you fall behind), which can quickly increase your monthly payments and plunge you further into a financial hole. According to a Bankrate survey , nearly 20% of consumers using BNPL have missed a payment and 30% have overspended.
Missed payments can hurt your credit, and as CNBC notes , short-term BNPL loans can also lower the average age of your credit history, which can indirectly—and negatively—affect your score. And no matter how responsible you are, BNPL is still a form of debt.
In general, you should avoid using these services for everyday needs ( like groceries ) or excessive expenses, and instead use them (and infrequently) to finance average purchases for which you have the funds and a clear and realistic repayment plan. .