Do Buy Now, Pay Later Services Affect Your Credit?

Do Buy Now, Pay Later Services Affect Your Credit?

Written by Corrina Murdoch
Fact-checked by Caitlin Wood
Last Updated November 12, 2021

When making a purchase online, you might be asked whether you wish to make payment in full or to make payments over time. Referred to as ‘buy now, pay later’ financing, retailers began to offer these programs as an incentive for customers. The idea is to make shopping more convenient and accessible as consumers don’t have to pay the full amount upfront. However, it is important to have a thorough understanding of this sort of payment arrangement and how it can impact your credit. Equipped with these details, you can determine whether it really is worth it to buy now, pay later. 

What is Buy Now, Pay Later (BNPL)?

Buy now, pay later services are a relatively new, yet still popular offering mainly prevalent online. The service enables you to make a medium or large purchase and pay it in installments, often without interest. 

Service Details

The BNPL service is a financing option offered through a wide range of retailers, though it is most prevalent in electronics and clothing stores. It enables you to shop in the moment and make a purchase right away and pay for it at a later date. In effect, it is a short-term loan that covers the upfront cost of your purchase. You then repay the loan provider according to the BNPL terms. 

Service Benefits

Often, it is more cost-effective than making a purchase on a credit card. Retailers let you split the payment into four parts, paid bi-weekly until the amount is repaid in full. It is geared toward those with limited disposable income, allowing them to make a larger purchase which may not otherwise be possible. 

An Example of BNPL Using PayBright

Let’s say you wanted to purchase a new, $800 television, though the upfront cost may otherwise preclude you from it. At PayBright, a provider of these services, you can make a purchase of the television, paying instead in four biweekly, interest-free payments. This means, every two weeks, you will repay $200 until the full $800 is paid.  

While you can use BNPL services on larger purchases, spreading the cost over the course of six or more months, you are usually expected to pay interest on the loan. 

How Does BNPL Work?

The process of BNPL services is quite straightforward, particularly when it is used during online shopping. Depending on the retailer you’re shopping with, they will offer a BNPL payment option in the form of a specific company. Some of the most popular BNPL companies are PayBright, Afterpay, Sezzle, Klarna, QuadPay, Splitit, and Affirm.

Choose the BNPL payment option at checkout and fill out the necessary information. The site will likely prompt you to link either a credit card or your bank account. This is how the payments will be automatically processed at regular intervals per the BNPL agreement. 

BNPL services are offered through a third-party business that profits by charging merchants a percentage of the sale, in addition to gathering both interest and fees from the customer. 

What Happens if You Miss a Payment? 

Naturally, it is never a good thing to miss an agreed-upon payment. When dealing with BNPL arrangements, if you miss a payment, you will incur late fees. This amount varies based on the merchant. When you add new accounts to your credit file, you are impacting calculations like the average age of your credit accounts. Your credit profile showcases when you initiated a loan, and BNPL services are included in this metric.

There are further effects, too. 

Missed payments can affect your credit score in a negative way. When your credit is checked for a purchase or a loan, the missed payment shows up. This can cause you to get rejected for BNPL services in the future. Missed payments stay on your credit report, informing potential lenders that you are a higher-risk borrower. If you continue to miss payments, particularly if the amount is not repaid within 90 days, the retailer can send your account to collections.

Benefits of BNPL

Buy now, pay later (BNPL) services have attracted a lot of recent attention amongst consumers for the host of benefits. As a result, more retailers continue to add this option to their digital services as a way to incentivize new customers. 

Improves Affordability

There are several advantages to using buy now, pay later services. The key benefit is the added affordability of purchases since it puts a less immediate strain on your finances. By making products more affordable right away, companies can incentivize you to make larger purchases than you would otherwise be able to if you had to pay all at once. 

In need of money quickly? Check out how a personal loan can help. 

Use Instead of Credit Cards

In many cases, buy now, pay later services take the place of credit card arrangements. Particularly if you are looking at payments over the short term, where BNPL enables you to avoid interest, it is a way to circumvent the high rates offered by credit cards. It also helps if you are looking to leave a good balance on your credit card since it prevents you from using this amount for the purchase. 

Here’s what you can do if you’ve maxed out your credit cards

Builds Credit

Another draw is that prudently repaying your BNPL purchase will improve your credit score. Though small, these transactions highlight your ability to responsibly make payments on your file. This tells prospective lenders that you are a lower-risk borrower to whom it would be safer to lend. 

Negotiable Terms

Depending on the size of the purchase, you can access different short-term loan arrangements. Sure, longer terms (such as the discussed six-month period) will come with interest payments. However, the amount of interest is usually substantially lower than it would be with a credit card or even a personal loan

Drawbacks of BNPL

Of course, there are risks associated with entering into a buy now, pay later arrangement. Depending on your situation, the balance of benefits and drawbacks will differ substantially. Getting a full understanding of the disadvantages of this kind of small loan is critical to making responsible financial choices. 

Targets a Specific Audience

Because of the nature of the services offered, young adults and college students are at risk of being unfairly targeted for BNPL arrangements. Since these consumers are less likely to have established credit or have personal credit cards, it can put undue pressure on them to utilize BNPL services. It is a risk to consider, especially for those with less experience dealing with their credit account and poses the risk of generating debt unnecessarily. 

Interest Rates

Though some BNPL suppliers offer very competitive interest rates, not all offer such desirable rates. In fact, the interest rates range from 0% to 30%, a heft difference. The interest levels vary based on everything from the BNPL provider to the nature of the purchase and the credit score of the customer.

Associated Fees

While no one plans to make late payments, they do happen from time to time. BNPL agreements charge fees for late payments. Usually a flat fee per payment, the fee amount varies based on the size of the principal loan. Smaller amounts have fees that are typically in the range of $10. For larger purchases, the fees associated with late payment can be much more substantial, increasing to about $30 per payment.  

When getting a loan don’t forget about origination fees

Impact on Credit Score

Another downside of BNPL loans is the impact on your credit score. While regular payments can help your credit somewhat, even inquiring about the service can negatively impact your credit score. If the merchant requests your Social Insurance Number, they are going to complete a credit check. Since credit inquiries account for 10% of your overall credit score, even the inquiry can cause damage. In fact, inquiries remain on your credit score for two years, though they stop impacting your credit after 12 months. 

Find out more on how long your credit information stays on your credit report.

Snowball Effect 

The final risk of BNPL agreements is the illusion that the consumer can afford more than they are actually able to. An $800 purchase sounds hefty but $200 at every paycheque sounds smaller (despite being the same amount). As a result, consumers risk-taking on more debt than they are able to handle, resulting in further potential detriment to their financial landscape.

Should You Use a Buy Now, Pay Later Service?

Determining whether you should use BNPL services depends on several factors. Before proceeding, it’s important to understand the source of the short-term loan. Is it a service offered directly through the retailer or through a third-party company? Learn whether you are undergoing a credit check and whether the company will report your payments to the credit bureau. The main thing to understand is that anytime you enter into a financial arrangement with interest, you are paying more over the long term. If you are able to pay for the purchase in full, it might be better to buy it outright. 

Final Thoughts

Every household’s finances are different; and, depending on your situation, you can benefit from a BNPL service for small purchases. However, in most cases, you are better to save for the purchase and make full payments at the point of sale. That said, provided the accounts are handled responsibly, buy now, pay later services can give you access to products right away. The most important thing is to consider your options and be sure that the benefits of the BNPL arrangement outweigh potential disadvantages. This way, you can keep your financial landscape healthier over the long term. 

Rating of 5/5 based on 2 votes.

Corrina Murdoch has been a dedicated freelance writer and editor for several years. With an academic background in the sciences and a penchant for mathematics, she seeks to provide readers with accurate, reliable information on important topics. Working as a print journalist for several years, Corrina expanded her reach into the digital sphere to help more people gain insight into the realm of finances. When she's not writing, you can find Corrina swimming and spending time with family.

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