How “Buy Now, Pay Later” Loans Can Lower Your Credit Score
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When Ryan Stanton moved into his new apartment after graduating from college, he decided to buy some household items he needed through “buy now, pay later” providers Confirm, Klarna and additional payment.
Instead of paying a lump sum or writing on a credit card, he chose to split the cost of his exercise equipment, clothing, pillows, and watch into installments, due every two weeks or every month. Stanton felt secure in financing his purchases with 0% interest BNPL loans because he knew he would make his installment payments on time and in full.
Buy now, pay later loans – also known as point-of-sale loans – allow consumers to pay for their purchases over a set period of time in installments that are typically biweekly or monthly.
If you’ve been shopping on the Target, Walmart, Sephora, or ASOS websites recently, you’ve probably noticed the BNPL option when you check out. The recent takeover of Square of a popular BNPL provider based in Australia AfterPay, for nearly $ 30 billion, indicates the growing popularity of BNPL providers. Indeed, there is a recent report from CB insights predicts the industry will grow 10 to 15 times its current size by 2025.
The appeal of POS credit is easy to see: while traditional credit cards require consumers to pay their monthly bill in full and on time each month or suffer from high interest and late fees, some BNPL loans offer consumers loans at 0% interest and none Late Payment Penalties.
But are these loans as easy as they seem? Select spoke to a number of financial professionals to find out how this new method of funding could negatively affect your credit score, whether or not you are a smart loan user who makes your payments on time and in full each month.
Depending on your loan provider, taking out a POS loan can either increase, decrease, or not affect your credit score. Some of the most popular POS loan providers – AfterPay, Confirm and Klarna – Report some loans to credit bureaus and others not.
“If a missed payment is reported, it can be on your credit report for up to seven years and negatively affect your creditworthiness,” said Rod Griffin, senior director of Consumer Education and Advocacy, Experian. “At the same time, these services can be a helpful way to build credit, if a lender gives credit bureaus like Experian their account information and you manage the debt responsibly.”
Affirm is a BNPL provider that does this Report information on some loans to Experian. No loans with an APR of 0% APR and four biweekly payments or loans that have been given the option of three months at 0% APR are not reported.
For other affirm loans, the entire loan history is reported to Experian. This means that both positive and negative payment history will only be reported to Experian and not to any other credit bureau. Experian will be notified of your payment history, the amount of credit you used, the duration of the credit, and any late payments.
If you default on your affirm loan or make late payments, you risk lowering your credit score. But your creditworthiness could take a hit even if you pay off your POS loan on time.
There are a few reasons a POS loan could hurt your score. For starters, there are many factors that make up your credit score, and even if you pay your bills on time when other areas are missing, your score can go down.
Here are the five factors that make up your FICO score:
- Payment history (35%): Whether you’ve paid previous credit accounts on time
- Amounts owed (30%): The total amount of credits and credits you have used compared to your total credit limit, also known as the usage rate
- Loan History Duration (15%): How long you had credit
- New credit (10%): How often do you apply for and open new accounts
- Credit mix (10%): The variety of loan products you have including credit cards, installment loans, financial company accounts, mortgage loans and so on
Some of the factors that determine yours Credit history are the average age of your accounts, the age of your oldest account, and how long it has been since you opened an account. (This is one of the reasons many people fear that closing a credit card could affect their score.)
“While keeping a record of on-time payments can increase your credit score, you could improve your score by using the [BNPL] Service, “says Leslie Tayne, founder and chief executive officer of Tayne Law Group. Because these loans are short-term (typically six weeks), they can significantly reduce the average age of your loan history – especially if you are a regular borrower.
Since 15% of your FICO credit score âBeing determined by the length of your credit history,â explains Tayne, ârepetitive POS credit borrowing can degrade your credit score as it lowers the average age of your accounts.
on Credit karma, Affirm has a 2.9-star customer rating, and reviewers have complained that their credits are detrimental to their creditworthiness, even if they have a good reputation.
“Each loan, no matter how large or small, is counted as a separate account on your Experian credit report. I’ve used Affirm about 15 times to take advantage of their 0% funding offers. Surprise! The Experian average account age calculation in my credit file went down from 11 years to about 2 years. This has a negative impact on your creditworthiness. Beware,” one reviewer wrote.
Affirm looks at how its loans can affect consumer creditworthiness his help area, indicating that your credit, how much credit you’ve used, how long you’ve had credit, late payments, and your payment history with Affirm can all affect your score.
Each BNPL loan handles credit checks and reports to credit bureaus differently.
Although AfterPay does not see itself as a POS provider, AfterPay does no credit check anyway, which makes it a solid option for people who have bad or bad credit and are otherwise having a hard time getting credit (it won’t improve their credit either). It does not report any loans to the credit bureaus.
According to Klarna, Klarna does not report any information about its POS credits to the credit bureaus. Klarna will a gentle credit checkthat does not affect your creditworthiness when you take out a âpay in 4â or âpay in 30â loan. In addition, when a consumer applies for an open branded product with an open credit line offered by Klarna’s partner bank, a hard request can be made.
Your score will not be affected if you take an affirm loan with 0% APR and four biweekly payments or loans where people have the option of a three month grace period at 0% APR. When you take out a longer loan with interest, the loan is reported to Experian.
Before taking out a BNPL loan, make sure you are clear about the terms so that you understand the interest rate and repayment schedule.
Be sure to check your credit report regularly
Everyone should make a habit of doing theirs regularly Credit reports, especially if you are starting new financial products, be it a POS loan or a new credit card.
Due to the pandemic, each of the three credit bureaus – experience, Equifax and TransUnion – Now offer a free weekly credit report. (They usually offer a free report annually.) Just go to annual credit report.com, a federally authorized website to request your credit report from any of the offices. If you have an affirm loan, you should request your Experian credit report.
There are also a number of free services that you can use to keep track of your creditworthiness. Most credit card companies allow you to check your score in their apps or on their website. You can also like a free credit monitoring program. use CreditWise from CapitalOne or Experian free credit monitoring.
While signing up for a POS loan doesn’t necessarily improve your credit score, there are a few quick ways you can improve it. Experian boost, for example, is a free service that allows consumers to link their utility and streaming accounts to their Experian credit report. This means that if you pay your internet, water, or NetflixÂ® bill on time, your FICO score can improve.
Ultimately, POS loans can have an unexpected impact on your credit score. If you don’t read the terms and conditions of your loan, you will be surprised to find that your creditworthiness can plummet due to the impact these short term loans have on the length of your credit history, even if paid in full and on time.
While Stanton has paid off his Klarna and AfterPay loans (both of which are not reported to credit bureaus), he has yet to pay off an affirm loan: a loan that is reported to Experian. Stanton saw no changes to his VantageScore last year, but when he found out about the impact an affirm loan could have on his creditworthiness, he said, “… damn it, I should have looked a little closer.”
Correction: This article has been updated to correct the amount Square paid to purchase AfterPay. It has also been updated to correctly display which loans Klarna is performing a hard query for.
Note to editors: Opinions, analysis, reviews or recommendations expressed in this article are solely those of the Select editors and have not been reviewed, approved or otherwise endorsed by third parties.