The rise of “buy now, pay later” (BNPL) services has made it easy for consumers to take out small, short-term loans to make purchases and pay them back in installments (typically four, with a payment due every two weeks).
Until recently, BNPL loans have had little to no impact on consumers’ credit because the information on those purchases—including your payment history—hasn’t been sent to the three major credit bureaus (Equifax, Experian, and TransUnion). However, that’s changing: Apple is now reporting all BNPL loans to the bureaus, while others, like AfterPay, Affirm, and Klarna, are sending on at least some information about these accounts too.
But although BNPL loans are beginning to appear on credit reports and will be visible to both consumers and lenders who pull your credit, they aren’t being factored into scores yet. Even still, you can use BNPL to positively affect your credit.
How to use buy now, pay later to build your credit
Responsible use of BNPL loans—paying them off on time and in full—can offer consumers with limited credit histories the opportunity to build credit, which in turn makes them eligible for other credit products and lower interest rates in the future. Even though these loans won’t directly impact your scare, your history of on-time payments and your proven ability to manage credit (and a specific type of credit—i.e. an installment loan) will still be visible to lenders/creditors that are actually reviewing your credit report rather than just pulling your score.
This isn’t a quirk exclusive to BNPL loans. For example, reported rent payments aren’t factored into all credit scoring models either. But a history of making scheduled payments on a loan demonstrates to creditors that you are a lower risk for holding a credit card, car loan, or mortgage.
BNPL loans may be particularly useful for those who are just establishing credit, though there are a variety of other ways (like rent reporting) that may be safer than taking out a short-term loan.
In terms of credit building, BNPL is best for those who have money in the first place, according to Andrew Herzog, a certified financial planner based in Texas. He recommends using these services on relatively small, non-recurring purchases that you have the cash for and can easily keep track of.
(Again, this only works if your installment loan and payment history are being reported to credit agencies, which isn’t currently the case for all BNPL providers.)
Use caution with buy now, pay later
Of course, BNPL can still be risky: if you get carried away with the convenience, it’s easy to spend far more than you can actually afford. There are also hidden costs, like late fees, transaction fees, and interest fees (if you fall behind), which can quickly increase your monthly payments and sink you further into a financial hole. Nearly 20% of consumers using BNPL have missed payments, and 30% have overspent, according to a Bankrate survey.
Missed payments can hurt your credit and, as CNBC points out, short-term BNPL loans can also lower the average age of your credit history, which can indirectly—and negatively—affect your score. And no matter how responsible you are, BNPL is still a form of debt.
In general, you should avoid relying on these services for everyday necessities (like groceries) or excessive spending, and use them instead (and infrequently) for financing medium-sized purchases for which you have the funds as well as a clear and realistic repayment plan.
