This is how 'buy now, pay later' service affects your credit score
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Ben Luthi has over a decade of experience in personal finance. His work has been featured by U.S. News & World Report, USA TODAY Blueprint, The New York Times, and MSN.
Updated October 16, 2024, 2:45 AM EDT
The concept of “buy now, pay later” (BNPL) isn’t new. But instead of the traditional layaway programs where stores hold onto an item until you can afford to pay it, these new services allow you to walk out of the store with your item while utilizing a plan to pay for it over time.
During the coronavirus pandemic, these services have flourished as the ensuing economic downturn has forced American consumers to tighten their budgets and seek other ways to cover costs. According to one study from September, BNPL apps increased their monthly active users by a staggering 186% over the previous year.
What are "buy now, pay later" services?
As the name suggests, BNPL services are a modern form of layaway that allows you to take your purchase home without requiring an upfront payment. In some cases, retailers may offer this service on their own, or they might partner with a third-party provider.
Depending on the arrangement, you’ll be able to set up terms to pay off your purchase over several weeks or months. While some may not charge an interest rate, others can charge rates that are comparable to personal loans, which can range from the single digits to upwards of 30%.
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How does the service impact your credit?
Not all buy now, pay later services will run a credit check when you set up the agreement. This means there’s no hard inquiry on your credit report and no impact on your credit score. It can also make it more appealing if you have subprime credit.
Even if there’s no hard credit inquiry when you apply, the provider may report late payments to the national credit bureaus, which could drop your credit score significantly. On the flip side, if the provider reports the initial inquiry and your payments, making on-time payments could help your score.
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How do I avoid hurting my credit?
Always make sure to read the fine print before you agree to anything. That’s where you’ll find information about whether the agreement can impact your credit score with the particular service provider.
For example, if they run a hard inquiry, it’s imperative to avoid using the service multiple times in a short period, which can have a negative compounding effect on your FICO score.
Also, make it a priority to pay your bill on time and in full every month, so you don’t risk having missed payments or even a loan default attached to your credit file. It's important to pay off your balance as quickly as possible. By borrowing responsibly and making payments in full on time you will make strides toward improving your credit.
Finally, the best way for some people to avoid negative credit implications may be to simply wait and make the purchase when they can afford it. If it’s a larger purchase, you may consider using a credit card with a 0% APR promotion, which can provide interest-free periods for up to 15 months, or even longer with certain cards.
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How do I check my credit?
Before you apply for credit of any kind, it’s important to check your credit to see where you stand. This is particularly important if you're in good standing and you can qualify for more affordable financing than what some BNPL services provide.
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The bottom line
Buy now, pay later services can be worth considering if you’re on a time crunch, you know you have the means to make your payments and the terms are affordable. But you can get in trouble if you set yourself up to fail by buying something you can’t afford to pay for, even over time.
If you have multiple options from which to choose, take your time to read the fine print on each and determine the best approach for you.
Whatever you do, it’s crucial that you make it a priority to establish and maintain a solid credit history. It will make it easier to not only qualify for better loan products but also to get the right type of financing when needed.