If you’ve done any shopping recently, you’ve probably been given the option to “buy now, pay later” (BNPL) — that is, to divide your purchase into installment payments. If you’re on a tight budget, getting some extra time to pay may sound like a great deal, but going that route may not be risk-free for your credit.
Installment payment services have exploded in popularity. And credit card companies are beginning to offer their own versions. However, not all BNPL programs operate in the same manner. Before you sign up for one, make sure you’re not jeopardizing your credit score. Key questions to consider before signing up with BNPL include:
- Will your payment activity be reported to credit bureaus?
- When you apply, does the service conduct a hard or soft inquiry?
- What happens if a payment is late or missed?
Is BNPL data available to credit bureaus?
Yes — Equifax announced its intention to include BNPL loans on credit reports in December 2021, and Experian and TransUnion followed suit. However, this does not imply that BNPL activity affects credit scores just yet.
Remember that credit bureaus (such as Experian, TransUnion, and Equifax) simply collect data, whereas credit scoring models (such as FICO and VantageScore) interpret that data to produce a credit score. For the time being, the bureaus are collecting BNPL data, but FICO and VantageScore are still figuring out how to best incorporate it into credit scores.
In March 2022, VantageScore’s CEO stated that the company is “working quickly” to incorporate BNPL loan data into its model.
In April 2022, FICO published an analysis of the potential impact of BNPL data on credit scores, discovering that BNPL accounts reported as installment loans generally resulted in “a modest score change within +/- 10 points, with a slight trend toward lower FICO Scores.”
Is BNPL’s service inquiry soft or hard?
Many people use BNPL services instead of credit cards because there is no risk to their credit. Mary Rosado, a resident of Staten Island, New York, said she frequently uses the BNPL services Afterpay and Klarna. “Because they don’t ask for your Social Security number, I don’t see how they can pull your credit report,” Rosado explained. “To be honest, I use them because I have bad credit and can’t get credit cards.”
Rosado is right. The services she employs conduct a soft credit pull, which has no negative impact on your credit score. “When we perform a soft credit check, we verify a customer’s identity using the information they provide, and we look at information from their credit report to understand their financial behavior and evaluate their creditworthiness,” clarified a Klarna spokesperson.
However, consumers should be aware that some BNPL services do conduct a hard credit check. Affirm, for example, has a 0% APR option with four biweekly payments and no credit check, but its longer-term installment loans require a hard inquiry. PayPal’s “Pay in 4” feature only performs a soft credit pull, whereas PayPal Credit performs a full credit check.
Because applications for new credit account for 10% of the FICO score calculation, it’s critical to understand those distinctions when presented with different payment options at checkout.
“Analysis of millions of credit files that we use to build our FICO scores consistently shows that those with a higher number of recently applied-for and recently acquired accounts do represent a slightly elevated risk of nonpayment down the line,” said Ethan Dornhelm, FICO’s vice president of Scores and Predictive Analytics.
Of course, one difficult question isn’t going to ruin your grade. “We generally say that a single inquiry is unlikely to affect the score by more than five points,” Dornhelm explained. “However, for a small subset of the population, that could have a significant impact.”
When applying for a mortgage or refinancing, for example, a few points can move you into a different interest rate qualification tier.
The bigger issue is if you frequently take out loans that require hard inquiries. “If they report and you get five of these loans, it appears as if you’re desperate for credit,” said Howard Dvorkin, CPA and chairman of Debt.com. “You must exercise extreme caution.”
Are BNPL services required to report payment activity?
If the BNPL service reports account activity to any of the credit bureaus, the next potential credit impact occurs. Again, some do, while others do not, and it varies depending on the loan product. Affirm, for example, does not report activity on its four biweekly payment plans, but longer-term loans are classified as installment loans.
According to Dornhelm, some BNPL products, such as PayPal Credit, may offer revolving lines of credit rather than fixed loan payments. The amount of available credit you use (called credit utilization) with revolving accounts also has a significant impact on your credit score, accounting for 30% of it.
That is why it is critical to determine whether and how the BNPL service you are considering reports your activity. Payment history is the most important factor in the FICO calculation, accounting for 35% of your score, so consumers with thin credit files may benefit from using these products to demonstrate positive payment behavior, according to Dornhelm.
What happens if you fail to make a payment?
Missed payments can be very damaging to your credit, but keep in mind that not all BNPL programs report your activity. So, if you miss a couple of payments but then catch up, your credit score may be unaffected.
“Because I was late this week, they just sent me a notice saying, ‘no big deal, we’ll try again in a few days,'” Rosado explained. “Because they don’t have my Social Security number, I’m not sure how it can affect my credit.”
She is correct about being in the clear because her services do not report. But suppose someone defaults on their remaining balance. When a debt is assigned to collections, the credit bureaus are notified. Klarna does so after 82 to 90 days of delinquency, whereas Affirm does so after 120 days.
Of course, if the BNPL does report, missing a billing cycle will almost certainly show up as a negative item on your credit report, resulting in a score drop.
“The main focus of the score when it comes to missing payments is how recently the payment was missed and how seriously delinquent the payment was,” Dornhelm explained. “As a result, missed payments are likely to have a significant impact on a consumer’s credit score.”
The verdict on the credit impact of BNPLs
BNPL’s offerings could be beneficial, particularly for consumers who do not have access to other types of credit. They can provide some repayment wiggle room with no credit downside when used carefully, especially if there is no hard inquiry or reporting.
“BNPL is more manageable for me as long as I don’t get carried away,” said Rosado, who tries to keep her spending under $400 so that her payments are no more than $100 at a time.
Choosing BNPL options that do run credit checks and report payment activity is a bit riskier credit-wise, but if used sparingly and on time, they can work in your favor.
Aside from credit issues, it’s critical not to let BNPL offers tempt you into overspending. “If you can’t afford it, don’t buy it,” Dvorkin advised. “Consumers are overly optimistic, which can lead to problems.” If you do use a BNPL offer, he suggests automating your payments so you don’t get caught off guard and forget to pay.
Dornhelm added that, as with any credit product, the main goal should be to keep debt levels low and debt payments on time: “Those behaviors, whether on a BNPL loan, a credit card, or a personal loan, are likely to improve the consumer’s FICO score over time.”
