How does ‘buy now, pay later’ affect your credit score?

If you’ve done any shopping lately, you’ve probably been offered the option to “buy now, pay later” (BNPL) — in other words, split your transaction into installment payments. Getting some extra time to pay can sound like a great deal if you’re on a tight budget, but going that payment route may not be risk-free for your credit.

Installment payment services have really taken off. And credit card issuers are starting to offer their own versions. But not all BNPL programs work the same way. Before you sign up for one, make sure you’re not putting your credit score in jeopardy.

Key questions to figure out before you sign on to BNPL include:

• Will your payment activity be reported to the credit bureaus?
• Does the service run a hard or soft inquiry when you apply?
• What happens with late or missed payments?

Do credit bureaus have access to BNPL data?

Yes — In December 2021, Equifax announced its plan to include BNPL loans on credit reports, and Experian and TransUnion followed suit. But that doesn’t mean that BNPL activity affects credit scores just yet.

Remember, credit bureaus (like Experian, TransUnion and Equifax) simply collect data, while credit scoring models (like FICO and VantageScore) interpret that data to generate a credit score. For now, the bureaus are collecting BNPL data, but FICO and VantageScore are still researching how to best incorporate that data into credit scores.

• VantageScore’s CEO said in March 2022 that the company is “working rapidly” to factor BNPL loan data into its model.
• FICO published an analysis of the potential impact of BNPL data on credit scores in April 2022, finding that BNPL accounts reported as installment loans generally yielded “a modest score change within +/- 10 points, with a slight trend toward lower FICO Scores.”

Do BNPL services use a soft or hard inquiry?

Many people use BNPL services as an alternative to credit cards, assuming no risk to their credit. Mary Rosado, a Staten Island, NY resident, said she uses the BNPL services Afterpay and Klarna all the time. “They don’t ask for your Social Security number, so I can’t see how they can pull your credit report,” Rosado said. “I use them, to be honest, because I have bad credit and can’t get credit cards.”

Rosado is correct. The services she uses perform a soft credit pull that doesn’t ding your credit score. “When a soft credit check is performed, we verify a customer’s identity using the details they provide, and we look at information from their credit report to understand their financial behavior and evaluate their creditworthiness,” explained a spokesperson from Klarna.

But consumers should know that some BNPL services do use a hard credit check. For example, Affirm offers a 0 percent APR option with four biweekly payments and no credit check, but its longer-term installment loans rely on a hard inquiry. PayPal’s “Pay in 4” only uses a soft credit pull, but PayPal Credit does a full credit check.

It’s important to understand those distinctions when you’re presented with different payment options at checkout because applications for new credit account for 10 percent of the FICO score calculation.

“Analysis of millions of credit files that we use to build our FICO scores consistently shows that those with higher numbers of recently applied-for accounts and recently-acquired accounts do represent a slightly elevated risk of nonpayment down the line,” said Ethan Dornhelm, vice president of Scores and Predictive Analytics for FICO.

Of course, one hard inquiry isn’t going to tank your score. “We generally say that one inquiry is unlikely to impact the score by more than five points,” said Dornhelm. “But for a rare segment of the population, that could be a meaningful impact.”

If you’re applying for a mortgage or refinancing, for example, just a few points could put you into a different tier of interest rate qualification.

The bigger issue is if you take out loans that use hard inquiries regularly. “If they report and you go out and get five of these loans, it looks like you’re desperate for credit,” said Howard Dvorkin, CPA and chairman of Debt.com. “You have to be very careful.”

Do BNPL services report payment activity?

The next potential credit impact happens if the BNPL service reports account activity to any of the credit bureaus. Again, some do, and some don’t, and it may vary depending on the loan product. For instance, Affirm does not report activity on its four biweekly payments offer, but longer-term loans are reported as installment loans.

Then there are some BNPL products, like PayPal Credit, that may offer revolving lines of credit rather than fixed loan payments, said Dornhelm. With revolving accounts, the amount of available credit you use (called credit utilization) also has a significant impact on your credit score — accounting for 30 percent of it.

That’s why it’s wise to find out if and how the BNPL service you’re considering reports your activity. Since payment history is the most important factor in the FICO calculation, comprising 35 percent of your score, consumers with thin credit files might even benefit from using these products as a way to demonstrate positive payment behavior, said Dornhelm.

What happens if you miss a payment?

As far as your credit goes, missed payments can be very harmful, but remember: Not all BNPL programs report your activity. So if you miss a couple of payments but then catch up, your score might come away unscathed.

“I was late this week, so they just sent me a notice saying ‘no big deal, we will try again in a few days,’” said Rosado. “They don’t have my Social Security number, so I’m not sure how it can go against my credit.”

Because her services do not report, she’s correct about being in the clear. But let’s say someone ends up defaulting on their remaining balance. Once a debt is sent to collections, then the credit bureaus will be notified. Klarna does this after 82 to 90 days of delinquency, while Affirm waits 120 days.

Of course, if the BNPL does report, once you miss a billing cycle, it will likely show up as a negative item on your credit report and trigger a score drop.

“When it comes to missing payments, the main focus of the score is how recently the payment was missed and how seriously delinquent the payment was,” said Dornhelm. “And so to that end, missing payments is likely to have a significant impact on a consumer score.”

Verdict on BNPL credit impact

BNPL offers could be helpful tools, especially for consumers who don’t have access to other kinds of credit. When used carefully, and especially if there’s no hard inquiry or reporting, they can offer some repayment wiggle room with no credit downside.

“For me, BNPL is more manageable as long as I don’t get carried away,” said Rosado, who, as a rule, tries to keep spending under $400 so her payments aren’t more than $100 at a time.

Choosing BNPL options that do run credit checks and report payment activity is a bit more risky credit-wise, but as long as you use them sparingly and pay on time, they can work in your favor.

Credit issues aside, it’s important not to let BNPL offers tempt you into overspending. “If you can’t afford it, don’t buy it,” said Dvorkin. “Consumers are very optimistic and sometimes get themselves in trouble.” But if you do use a BNPL offer, he recommends automating your payments so you don’t get tripped up and forget to pay.

As with any credit product, your main goal should be to keep debt levels low and pay that debt on time, added Dornhelm: “Those behaviors, whether it’s on a BNPL loan or a credit card or a personal loan, are likely to help the consumer’s FICO score in the long run.”