A benefit of Buy Now Pay Later services is going away, as a delinquent borrower’s credit score will now be affected.
Buy Now Pay Later (BNPL) is a service that companies offer that allow you to break up a purchase into multiple payments (usually four) and pay once a month, thus reducing the payment at the time of purchase.
It’s basically a new version of “layaway”, that feature of department stores in times gone by where you could set aside an item in advance and pay for it over time.
As I’ve written about before, I am not a fan. I think it is pointless for people who are on good financial footing, and disastrous for those who aren’t. I’ll explain more below.
But one perk of BNPL services, for those who are struggling, is that if you have a rocky repayment history of BNPL loans (missed payments, etc.) those actions will not show up as part of your credit score. This contrasts with credit cards, where if you miss payments, it will indeed affect your credit score.
But that is changing, which has implications to anyone who might be thinking about using Buy Now Pay Later services.
And hopefully, by the end of the post, you’ll hopefully not be in that camp.
Table of Contents
Buy Now Pay Later recap
So why are people using Buy Now Pay Later services?
Well, the appeal for certain buyers is obvious. You could pay (as an example) $200 now to get the thing you want, but you may not have $200. But you do have $50. So if you could click a button and get the thing for $50 today, that’s a lot more appealing. Plus, no interest is charged.
And as for that other $150? You can figure that out another time.
But there’s another appeal at work here. Buy Now Pay Later services compete with credit cards, even though they are slightly different products. But if you have poor credit or no credit, you probably won’t be approved for a credit card, or you might not have a very high credit limit. But because Buy Now Pay Later services aren’t credit cards, you don’t even need a credit check to get approved to use them. So you can access those services even when credit cards are not accessible to you.
Great, right?
Why BNPL is terrible for everyone
Buy Now Pay Later services are a bad idea for basically everyone. I’ll divide my reasoning into two categories, namely, for those who are on a good financial footing, and those who are more challenged financially.
If you’re in a good financial place, then there’s not really any benefit to you here. You probably have the money, and there’s no real benefit to pushing off a purchase you’re going to have to make anyway.
And if you don’t have the money, save up 25% each month and then pay for the whole thing at once. Easy.
If you’re struggling with money, Buy Now Pay Later is not actually going to benefit you either. This is because you’re probably not using a BNPL service once; you’re going to use the service over and over. Over time, the various 25% payments you have will start to add up. And without proper tracking, the total could become even larger than what you would have spent if you bought everything in full.
And that’s bad news, because those who don’t pay back their BNPL loans are going to be charged fees and penalties. They may even have their debts sent to collections.
In short, BNPL is a temptation that is best resisted.
What about credit scores?
Since Buy Now Pay Later loans are technically not “credit products”, for the longest time, they didn’t feature in credit scores.
You could take out a million BNPL loans, pay them all back late, and as long as nothing went to collections, none of this would be evident to lenders who look at your credit score. Great for the delinquent!
But this is now changing. As the Wall Street Journal reports (and other sources that aren’t behind a paywall) Fair Isaac Corp (the “FI” in “FICO” score) will soon start to take into account BNPL loans in credit scores. So if you’re delinquent in your BNPL loans, it’ll be the same as if you were delinquent on any payment.
So it looks like the BNPL party is slowly ending. To which I say, hooray.
But do credit scores matter?
Yes, longtime readers will point out that I’ve said for years that most people don’t need to worry about their credit scores. Except in very limited circumstances, such as needing to move, buy a home, or applying for a debt product, it doesn’t really matter.
For everyone else, just pay your bills on time, keep your credit usage low, and you’ll be fine.
So why do I care here? Well, my goal is to discourage you from using Buy Now Pay Later services; they won’t serve you in the long term. And so anything that can dissuade you from signing up is a good thing.
Any credit product adds risk, and risk has a cost, if not always an obvious and upfront one. Someone who is a good steward of money is going to spend simply, and save up for purchases. There is no financial risk to that plan whatsoever, which over time will benefit you greatly.
So if potentially affecting your credit score gives you enough pause to rethink your usage of these services, so much the better.
