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It’s not surprising that Afterpay, Affirm, Klarna, and other buy now, pay later (BNPL) consumer financing plans continue to soar in popularity. After all, what’s not to like?
Like credit cards, BNPL plans offered by these third-party lenders let shoppers pay for merchandise in installments rather than in one lump sum. A typical BNPL arrangement is a pay-in-four: The cost is split into four payments that are spread over a period of six weeks, with the first payment usually coming due immediately.
But unlike most credit cards, many BNPL plans charge the customer little or no interest on the unpaid balance. At bottom, BNPL plans are installment loans that typically charge 0% interest as long as you make all the payments on time.
And as with all loans, they can have an impact on your credit score.
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Credit Reporting From BNPL Plans May Vary
Credit card issuers, banks making car loans and other traditional lenders follow credit reporting norms, but BNPL companies may not. BNPL plans approach credit reporting in a variety of ways.
So depending on the provider, your payments may or may not be reported to the credit bureaus.
For example, popular BNPL provider Afterpay doesn’t report payment information to credit bureaus. So, regardless of whether your payments are on-time or late, your account activity won’t affect your credit score.
Affirm, on the other hand, does report payments to Experian and “may report to other credit bureaus in the future,” according to its website.
Sezzle may be the best option for people who want to build credit. Its opt-in Sezzle Up program reports payment behavior to credit bureaus. Users who handle their finances responsibly can benefit: According to Erin Foran, Sezzle’s media relations lead, Sezzle Up customers have seen their average credit score rise by 20 points within four months.
Meanwhile, some BNPL providers may not report on-time payments to credit bureaus but may still report late payments.
“Many people are surprised when missed BNPL payments are reported,” says Teri Williams, president and chief operating officer of One United Bank. “Check the disclosures and FAQs or even ask directly whether good or bad performance is reported.”
While some BNPL providers offer longer loans, sometimes with interest rates, the classic model is four interest-free payments over six weeks. Here are several popular BNPL options.
| BNPL Provider | Number of Payments | Payment Frequency | Payment Information Shared With Credit Bureaus? |
|---|---|---|---|
| Affirm | Four | Every two weeks | Yes (Experian) |
| Afterpay | Four | Every two weeks | No |
| Apple Pay Later | Four | Every two weeks | Yes (Experian) |
| Klarna | Four | Every two weeks | Not unless you are in default |
| PayPal Pay in 4 | Four | Every two weeks | No |
| Sezzle | Four | Every two weeks | Yes, with optional Sezzle Up upgrade |
| Zip | Four | Every two weeks | No |
How BNPL Can Trip You Up
There are several ways BNPL can help and hurt your credit score. For example, if your BNPL plan reports on-time payments, that can boost your credit score. However, late payments or delinquencies that get reported to credit bureaus can knock down your credit score.
“Not only can late fees and penalties get as high as 30%, but BNPL accounts are more likely to be turned over to collection agents, which adds stress and further expense to the delinquent payment status,” says Peter C. Earle, senior research fellow at the American Institute for Economic Research.
Late payments aren’t the only way your credit score can be affected by BNPL loans.
Your credit score is also influenced by the average age of your accounts, the age of your oldest account and the time elapsed since you last opened an account. Having several BNPL plans may hurt your score. Also, BNPL loans are short-term, so they can significantly reduce the average age of your credit history, especially if you use them frequently.
Bottom Line
Before you jump into a BNPL plan, make sure you read the terms and conditions. Since most pay-in-four plans won’t be reported to credit bureaus as a matter of course, consumers who want to build credit may want to opt for a credit card or a program like Sezzle Up, which will report pay-in-four payments to all three credit bureaus, Equifax, Experian and Transunion.
If you’re considering BNPL as a way to boost your credit score, you may be better off using an existing credit card, because that won’t affect the average age of your credit. Also, if you’re able to pay off the balance before interest charges kick in, you may reap credit card rewards and cardholder perks that you won’t get with BNPL.
However, if you need to make a purchase and are confident you’ll be able to cover the cost of the item within a few weeks, using a BNPL plan could work for you. Making four equal interest-free payments within six weeks is preferable to paying a credit card’s double-digit interest rate.
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