Buy Now, Pay Later Are Apps Hurting Your Credit Score?
The answer depends on which app you choose and whether you make your payments on time.
When shopping online, you will likely come across Buy It Now, Pay Later (BNPL) apps. Instead of paying for a big purchase in full, you can use one of these finance plans to pay it off over time, often with an interest-free offer. Ascent’s research found that apps bought now, paid for later quickly gained in popularity, to the point where more than half of Americans said they had used one. But before you sign up, it’s good to know how a BNPL app can impact your credit.
A BNPL application can lower your credit score in several ways. First of all, the service provider can perform a rigorous credit check when you apply. It could also report your payment history to the credit bureaus. And if you default, this will probably be reported as well. You can read more about each potential effect on your credit score below.
Some BNPL applications check your credit report when you apply. If they do, it will put a harsh credit check on your credit report. You can usually find out if a BNPL app is doing a rigorous credit check on their website.
A rigorous credit check lowers your credit score, but only by a small amount. The average consumer’s FICO® score (the type of credit score most widely used by lenders) drops by less than five points from a thorough survey.
An important thing to remember is that several serious credit applications can further reduce your credit score. A single BNPL application won’t make much of a difference. If you used four or five BNPL apps to make multiple purchases, your credit score would drop much more. To protect your credit, it is best to use BNPL applications sparingly.
Your payment history with a BNPL application
A BNPL app can report your payments to one or more of the three consumer credit bureaus: Equifax, Experian, and TransUnion. These credit bureaus each calculate credit scores for you based on the information they have. Payment history is the most important factor in determining your credit score.
If you are using a BNPL app that reports your payment history, it can help or hurt your credit score. Paying on time is good for your credit. Late payments can dramatically lower your score, but only if they are at least 30 days late. Payments made within 29 days of the due date are considered on time according to the credit bureaus.
Although a late payment will not affect your credit, unless it is 30 days or more past due, you may be charged a late fee whenever you miss a payment. To avoid additional charges, make sure you always pay on the due date.
Fault on a BNPL application
Just like with loans and credit cards, you can default to a BNPL app if you don’t make your payments. While BNPL apps will usually give you a chance to get caught up, they will eventually send debt to collections.
When you have an account in collections, it almost always gets reported to the credit bureaus. This puts a number on your credit because it can cause your credit score to drop by more than 100 points. And it often takes years to rebuild your credit from this kind of problem.
Assuming you pay for a BNPL app on time, it won’t hurt your credit score much. This might put a tough demand on your credit report, but it will only have a minor impact. You don’t need to worry about a BNPL application damaging your credit if you pay at least 30 days late or default.
Keep in mind that just because your credit score will be good doesn’t mean you should get into a BNPL deal. You will still be in debt and adding another bill to pay. These apps can be helpful, but you need to know how to buy now, pay later so you can make an informed decision.