Buy now pay later apps (BNPL) are a way to pay for short-term financing of purchases. These apps are accepted online or in some stores and they allow consumers to get their purchase right away but pay over time. This is usually done in four biweekly installments. Let’s look at buy now pay later: how it affects your credit.
How Does Buy Now Pay Later Work?
Buy now pay later is similar to old layaway plans where consumers could put money down on a purchase and pay it off over time, but they couldn’t take an item on layaway home until it was paid in full. BNPL purchases can be brought home after paying the initial installment. Several different companies, such as Klarna, Afterpay and Affirm, offer BNPL financing on purchases from participating merchants.
In many cases, BNPL financing is interest-free, but there are some companies that charge an interest rate of up to 30 percent. You may also be charged a late fee if your payment is late.
BNPL and Credit Inquiries
When you apply for a personal loan or a credit card, the potential lender does a hard credit inquiry, which can cause a small drop in your credit score. Many BNPL companies only do a soft credit inquiry, which means their inquiry won’t be reflected on your credit report. For consumers with poor credit or no credit, it may be an option for financing purchases since there’s no minimum credit score.
Some BNPL services offer special financing options, such as making payments over 12 months or 36 months. These options are considered an installment loan, and the lender will do a hard credit inquiry before approving them.
Does Buy Now Pay Later Report to the Credit Bureaus?
Some buy now pay later providers report your payment history to one of the major credit bureaus, but many don’t. If you’re hoping to use BNPL as a tool for credit building, find out whether your payment history will be reported to the credit bureaus. If you’re able to obtain BNPL financing that does report to the credit bureaus, be sure to make all your payments on time.
Even if a provider doesn’t typically report to a credit bureau, if you have late or missed payments, your account may be sent to a collections agency. If this happens, the collections agency may in turn report the account to the credit bureaus. This action would create a negative tradeline that can stay on your credit report for up to seven years.
Taking Care of Your Credit
BNPL financing can be helpful if you need to make a major purchase that you weren’t expecting, but it’s important to remember that it’s adding to your debt. Make sure you understand what you’re agreeing to, whether there is an interest charge or fees, and whether it’s being reported to the credit bureaus.
Be proactive about checking that the information on your credit report is accurate. If you find any errors, Dovly can help you dispute them. Dovly is an AI credit engine that works to empower consumers to get ahead. Try it risk-free with our free membership tier.
