Buy Now, Pay Later (BNPL) services are more popular than ever, especially during the holiday season.
The programs have essentially become ubiquitous, in large part thanks to companies like Affirm and Afterpay – which lend money to users to purchase products immediately, then allow them to pay for the items in a predetermined number of installments.
Of the 20% of U.S. adults who plan to use BNPL in 2021, 80% plan to use it to pay for vacation purchases, according to a recent poll from data company Morning Consult.
Retailers love Target and Amazon have made it very easy to sign up for such services on their checkout pages. And, as CNBC Make It reported in August, these programs can easily get you to spend more than you can afford.
Here’s what you need to know about BNPL ahead of the holiday shopping season, and what you should consider before using it at checkout.
Many consumers don’t realize that using BNPL can hurt your credit score in a number of ways, says Nirit Rubeinstein, CEO of the credit repair company. Dovly.
Before agreeing to the terms of any BNPL purchase, Rubenstein recommends reading the fine print to make sure the program does not exert a âhard pullâ on your credit.
“A lot of the BNPL [providers] pull your credit, “she says.” The first thing they do is see if you’re even eligible, so if they pull your credit, it could potentially be a problem if that’s what’s considered a “hard draw”. “
This process, which involves pulling your credit report from one of the three major credit bureaus – Experian, Equifax, or TransUnion – can affect your credit score whether you are approved or denied.
The fine print can also tell you if your payments would be reported to the credit bureaus. A missed BNPL payment, if reported, can hurt your credit score in the same way that a missed credit card payment would.
âA 30-day late payment, for example, can dramatically damage your credit score,â says Rubenstein. “It is very important for you to understand this.”
If you are careful, however, BNPL can actually help you preserve your credit score by lowering your credit utilization rate. Since BNPL is not treated as credit card debt, it does not affect your credit utilization rate – the percentage of your line of credit that you use – which may represent up to 30% of your credit score.
In other words, if you lower your usage rate by making a necessary purchase on BNPL instead of a credit card, your credit score could improve.
BNPL is also useful if you don’t have access to a credit card, which usually happens when you’re young and have a rare credit history, or when you’re new to the US and you don’t. have not yet established credit.
âUsually, you don’t need to have established credit to be able to buy now, pay later,â says Rubenstein.
What other fine print should you look for?
In short: excessive interest and late fees.
Like CNBC does reported in August, most BNPL companies don’t charge interest if you pay on time. But if you miss a payment, you’ll likely have to pay late fees – and what you owe could be sent to a debt collector, warns the Consumer Financial Protection Bureau (CFPB).
âJust because you’re eligible for BNPL, or any other credit product, doesn’t mean you have to use it,â the agency said. wrote in a July blog post.
You should also read the fine print to make sure you don’t sign up to pay interest beyond the cost of the product you’re buying, Rubenstein says.
“You have to do the math, you have to say ‘OK, how much is this $ 100 item going to cost me in the end? Is it $ 110? Is it $ 120?’ she says. âIn other words, what is the increase I pay by taking advantage of this service? “
Because BNPL programs do not offer the same protections to consumers as credit cards, they often do not include chargeback rights. This means that repayments can become difficult.
Suppose, for example, that a retailer reports that your package has been delivered, but it never shows up at your doorstep. With a credit card, your bank could help force the retailer to issue a refund. But if you ordered the package from BNPL, you will need to ask the merchant to reimburse you yourself.
“It’s you and the merchant who are going to fight,” says Rubenstein. “And BNPL washes its hands of it completely.”
If you want to use a BNPL service, Rubenstein recommends that you stick to retailers you trust. Unfamiliar websites with poor customer service can leave you holding the bag, leaving you in a worse situation than you started out with.
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