When shopping online or in stores, you have various payment options: cash, debit, and credit. In addition, a new option recently popped up at some registers and shopping carts: "buy now, pay later.”
Though new, the “buy now, pay later” (BNPL) payment option is growing in popularity. According to a 2021 survey by Credit Karma and Qualtrics, 42% of Americans have used some sort of BNPL or pay later service.
The opportunity to buy something now and pay for it later is nothing new. After all, that's the appeal of credit cards. Like credit builder programs and getting a credit builder card, BNPL services can be more accessible to consumers with poor credit and low income. In the case of BNPL, however, it may not be good for some individuals’ debt load.
Buy now, pay later providers or BNPL service providers, partner with online shopping and brick-and-mortar retailers to offer customers a way to pay for their purchases in installments. Depending on the BPNL provider, the consumer may have anywhere from 30 days to 12 months to pay for their purchase.
In many cases, as long as the customer makes all payments on time and pays off the balance within the given timeframe, they won't pay any interest or fees. However, BPNL platforms charge hefty fees for missed payments.
The sign-up process and steps to use BNPL services vary from company to company, but the process typically goes like this:
There are many reputable BNPL providers and some big-name merchants, including Bed Bath & Beyond, Overstock, Sephora, and Target, offer buy now, pay later options. In addition, some banks and credit card issuers are now offering their version of BNPL deals.
Buy now, pay later may not be available everywhere you want to shop — the store or online merchant must partner with a BPNL provider. However, if you're at a brick-and-mortar store or shopping online, you may see offers to split your purchase into four payments with a BNPL company like Afterpay, Klarna, Zip, Splitit, Affirm, or Sezzle. These lenders’ websites also have a directory of stores that offer BNPL payment method options.
But, does Affirm affect your credit score, and does Klarna help build credit? Asking these questions will be important before trying one of these BNPL programs.
In addition to the BPNL providers listed above, many well-known banks and payment processing companies offer services that let customers pay for transactions in fixed installments, including:
Buy now pay later is a form of credit because you're being lent the item's price and paying back the amount you borrow over time. That's why some BNPL lenders run credit checks before deciding whether to approve your account. If you have bad credit, the lender may turn you down for a BNPL plan.
Some BNPL lenders check credit but not all do. According to the Consumer Financial Protection Bureau (CFPB), most BNPL providers only require you to:
Depending on the lender you use, using a buy now, pay later deal may or may not affect your credit. According to CNBC, some of the most popular BNPL lenders, including AfterPay, Affirm, and Klarna, report some loans to the credit bureaus, while others do not.
If your BPNL lender reports to one or more of the credit bureaus and you make your payments on time, a BPNL deal can improve your credit. But, likewise, late payments can harm your credit score.
But you could see a drop in your credit score even if you make on-time payments. That's because each time you take advantage of BPNL payment terms, it's considered a new account on your credit report. This brings down the average age of your credit history considerably, especially if you use BPNL deals often.
BPNL lenders can also send your debt to a collection agency if you fail to repay the loan, which can seriously harm your credit score.
The advantages of buy now, pay later services are what attract most people. These are:
BNPL services may be convenient for some shoppers, but there are a few downsides.
BPNL can make paying for purchases predictable, but it can also lead to overspending, racking up late fees, and harming your credit score. If you want to take advantage of buy now, pay later offers, consider signing up for automatic payments to make sure you don't miss one and get hit with a late fee. Then make sure you actually have the money available to "pay later."
Credit Karma. “72% of Americans Saw Their Credit Scores Drop After Missing a ‘Buy Now, Pay Later’
Payment, Survey Finds”. https://www.creditkarma.com/insights/i/buy-now-pay-later-missed-payments - Accessed August 25, 2021
CFPB. “Should you buy now and pay later?”
https://www.consumerfinance.gov/about-us/blog/should-you-buy-now-and-pay-later/ - Accessed August 25, 2021
CNBC. “Buy Now, Pay Later Loans Can Decrease Your Credit Score Even if You Pay On Time”.
https://www.cnbc.com/select/how-buy-now-pay-later-loans-can-decrease-your-credit-score/ - Accessed August 25, 2021
Consumer Reports. “The Hidden Risks of Buy-Now, Pay-Later Plans”.
https://www.consumerreports.org/shopping-retail/hidden-risks-of-buy-now-pay-later-plans/ - Accessed August 25, 2021
Janet Berry-Johnson is a Certified Public Accountant and personal finance writer. Her work has appeared in numerous publications, including CreditKarma and Forbes. See Janet on Linkedin and Twitter.
Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.
Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).