Buy Now, Pay Later, or BNPL, is a payment plan that allows you as a buyer to split your total purchase at checkout into a series of smaller installments.
While these plans aren’t new, they’ve recently catapulted themselves into the mainstream, with big retailers like Amazon now offering them. But with promises of convenience, zero interest, and minimal fees, many buyers are wondering “what’s the catch?” “
BNPL providers typically do not report payments on time to major credit bureaus, so unlike credit cards or loans, you cannot create credit with this type of financing. However, some providers will report missed payments, which could end up hurting your score.
BNPL and credit bureaus
Afterpay, an Australian company that offers BNPL payment plans to millions of buyers, does not interact with credit bureaus at all, including when buyers first seek approval.
According to Nick Molnar, co-founder and co-CEO of Afterpay, checking a buyer’s credit report has “no positive correlation” with the company’s ability to reduce losses. Instead of doing a soft or hard credit extraction, the company enforces safeguards like suspending a buyer’s account after a missed payment, which Molnar says customers appreciate.
“I think this next generation is looking for those products that have their best interests at heart,” he says. “Basically, that’s why we were able to grow as fast as we did. “
While this approach means easier approval for those without or bad credit, buyers cannot use Afterpay to demonstrate responsible use of credit to agencies. One-off payments contribute the most to determining credit scores.
Afterpay is not the only one. Other BNPL companies around the world, like Klarna and Affirm, also generally don’t report payments for their plans interest-free.
This practice is particularly harmful for young people who may need access to credit to rent or buy a car, rent an apartment or buy a house, says Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling, the largest and longest-serving nonprofit financial advisory organization in the United States.
“There are so many circumstances in the life of a young consumer where credit checks are required,” says McClary. “It’s very difficult to get around the types of situations where your credit report may be taken into account. “
BNPL providers can report missed payments
Although BNPL providers may not report payments on time, some still report missed payments.
For example, US-based Zip, formerly Quadpay, doesn’t report payments to offices, but it will send overdue accounts to collections, which can affect your score.
Pamela Capalad, a certified US-based financial planner, said missed payments are the biggest risk when using a BNPL service. Since the installments can be automatically charged to your debit card, you could overdraw your account, which would incur penalty fees, before you ultimately default on the loan. It can hurt at a time when you are particularly vulnerable.
People who use BNPL plans have to stop their payments for one reason or another. That this affects their credit, I don’t think that’s a good thing.
– Pamela Capalad
“Often times, people who use these types of plans have to stop payments for one reason or another,” Capalad added. “For it to affect their credit at the same time, I don’t think that’s a good thing.”
McClary notes that a missed payment could also lead to expensive financing in the future, as interest rates will likely rise for borrowers with lower credit scores.
“Once the collection account shows up on the credit report, it creates a bigger hurdle to overcome,” he added. “The cost of borrowing increases as your credit score decreases. “
Alternative ways to create credit
Capalad and McClary both recognize that BNPL payment plans can be a valid way to budget for large purchases, especially if the plan charges no interest and you can make the payments. But if your focus is on building credit, you better look elsewhere.
A secure credit card is a smart alternative. This requires a cash security deposit, usually equal to your line of credit – a deposit of $ 300 (1,100 Dh) for a spending limit of $ 300 (1,100 Dh), for example – and you do not have need good credit to qualify. Once you are able to switch to an unsecured card, you will receive your deposit back.
What is a secured credit card?
A secured credit card is a type of credit card backed by a cash deposit from the cardholder. This deposit serves as a security on the account, providing the card issuer with security in case the card holder is unable to make payments.
For those new to credit cards, experts recommend putting a small recurring expense on the card, like your Netflix subscription, and paying it automatically. This approach allows you to use the card consistently without spending too much.
Another option is a credit builder loan. Unlike a traditional loan, you will make payments first and then receive the money. Payments are reported to the credit bureaus.
What are homebuilder loans?
A constructor loan is a loan for which the borrower does not have access to the money until it is fully paid. Fixed payments must be made each month on the total loan amount. You will finally receive the fund amount by accessing a savings account containing the loan amount once the total amount, as well as the interest, is repaid. At this point, you will have a good credit rating with regular monthly payments.
Plus, applying for a smaller loan is also one of the easiest ways to improve your credit score and have a better credit history. The best way to go about it is to apply for a small cash loan of up to 5,000 Dh and pay back the loan amount in 6 months or over a longer period. If you have enough money to close your small loan, you can pay off the loan amount in bulk, but remember not to close the loan before the loan is due. This will quickly improve your credit score.
Loans are not just for financial emergencies. If used effectively, they can be a valuable tool in building credit scores. That being said, you need to understand your financial situation before applying for a loan and be very careful about paying the loan amounts. If you are unable to repay a loan, avoid falling into the debt trap as it will only hurt your credit score instead of improving it.
Always remember that with a higher credit score comes better financial options. By displaying a history of responsible financial behavior, you can build your credit profile and access more affordable financing in the future.