If you have done any shopping recently, you must have probably been given the option to “Buy now, pay later” (BNPL). That is, to divide your purchase into instalment payments. If you are on a tight budget, getting some extra time to pay may sound like a great deal, but going that payment route may not be risk-free for your credit.
Instalment payment services have exploded in popularity. All the credit card providing companies are beginning to offer their own versions. However, not all BNPL programmes operate in the same manner. Before you sign up for one, make sure you’re not jeopardizing your credit score.
Buy now, pay later is not a familiar concept, unlike traditional layaway programmes in which the seller holds onto an item until you can afford to pay for it. These are the new services that allow you to walk out of the store with your item while using a payment plan to pay for it over time.
During the coronavirus pandemic, these services thrived as the ensuing economic downturn forced consumers to tighten their belts and look for alternative ways to cover costs. According to one study, BNPL apps increased their monthly active users by 186 per cent over the previous year. With the help of such services, both the customer and the users are benefitted. And it becomes a win-win situation for both. However, while BNPL programmes are a quick way to get what you want, there are some potential pitfalls to be aware of. If you are not cautious, the services may hurt your credit. If you’re concerned about the impact on your credit score, you can use a tool like Credible to check and track your credit.
What do “buy now, pay later” services entail?
As the name implies, BNPL services are a modern form of layaway that allows you to purchase your home without making an upfront payment. In some cases, retailers may provide this service on their own or collaborate with a third-party provider.
You may be able to set up terms to pay off your purchase over weeks or months, depending on the arrangement. While some BNPL Service providers may not charge an interest rate. Others may charge rates comparable to personal loans, ranging from the low single digits to as much as 30 per cent.
What effect does the BNPL service have on your credit?
Because buying now and paying later is a type of credit, it can affect your credit score. You are effectively borrowing the item’s price for the duration of the delay period.
If you buy now, pay later wisely and make your payments on time, your credit score should not suffer. In fact, it may enhance it. Using credit wisely demonstrates to lenders that you are a dependable borrower. If you miss a payment or fail to repay what you owe when the due date arrives, it will be recorded on your credit report. This mark may then remain on your credit report for six years, lowering your credit score. You may check your credit score for free from many third-party applications,
This means that if you apply for a loan, credit card, or mortgage in the future, how you used Buy now pay later may impact whether your application is approved.
Applying for a plethora of Buy now, pay later deals may also be detrimental to your credit score. When you use for Buy now pay later, the company will conduct a complex search of your credit report, visible to other lenders. Many of these searches worry lenders when they check your credit report because they show that you are desperate for credit.
How can I avoid damaging my credit?
Before agreeing to anything, always read the fine print. That is where you will find information on whether the agreement will impact your credit score with the specific service provider.
For example, suppose they run a hard inquiry. In that case, you must avoid using the service multiple times in a short period, as this can have a negative compounding effect on your score. When lenders consider you for a loan, one of the first things they look at is your credit score. Enrol in a credit monitoring service to ensure you’re constantly updated on your credit situation.
Also, make it a point to pay your bills on time and in full every month to avoid having missed payments or even a loan default listed on your credit report. It is also not good to pay off your balance as soon as possible. Borrowing responsibly and making on-time payments will help you improve your credit score.
Finally, for some people, the best way to avoid negative credit consequences may simply be to wait and buy when they can afford it. Assume you’re about to make a more significant purchase. In such cases, you must look into a credit card with a 0% APR promotion, which can offer interest-free periods of up to 15 months or even longer with particular cards.
How do I check my credit report?
Before applying for any type of credit loan, you should check your credit to see where you stand. It is advised to have a strong credit history to qualify for more cheap financing than certain BNPL services provide. Many service providers allow you to check your credit score for free. You will also be able to see which factors influence your score, which can help you address potential problems and improve your score.
The bottom line.
If you are in a hurry, know you will be able to make your payments, and the terms are reasonable, buy now, pay later services may be worth considering. However, suppose you set yourself up for failure by purchasing something you cannot afford to pay for, even over time. In such cases, you can find yourself in trouble.
If you have several options to choose from, take your time reading the fine print on each and determining the best approach for you. Whatever you do, you must prioritize establishing and maintaining a solid credit history. It will make it easier to not only qualify for better loan products but also to obtain the appropriate type of financing when it is required.