Are “buy now pay later” plans really helping to raise people’s credit scores?

With the season for buying gifts along with inflation, record numbers of Americans is turn to buy now pay later (BNPL) plans to avoid paying the full cost of items in advance. And according to a recent survey by data company PYMNTS, more than a third of them think it helps their credit scores.

Sezzle, a BNPL company that collaborated with PYMNTS on the study, even advertises its services as a way for consumers to build credit. But experts say the answer is more complicated. BNPL can help consumers’ credit scores in some cases…or it can really hurt them.

What is buy now pay later?

Buy now pay later is a alternative payment method which allows customers to pay for their purchases in installments over a set period of time.

BNPL companies like Klarna, PostpaymentSezzle, Confirm, and PayPal allows customers to pay for more expensive goods – or anything, really – in four interest-free installments or through long-term payment plans with variable interest rates. Essentially, these companies offer short-term microloans to their customers.

Sometimes retailers like Macy’s, Target, Amazon and BestBuy offer BNPL options at checkout. Consumers can also shop directly for retail items through BNPL apps offered by companies like Klarna and Afterpay.

How buy now pay later can boost your credit score

Of the 3,177 BNPL users surveyed by PYMNTS, 17% said they choose to use BNPL specifically to improve their credit score. There are several reasons why, at least for some people, this strategy makes sense.

With average credit card interest rates at about 28%, paying off four, interest-free BNPL installments is usually much cheaper than paying off a credit card bill. Using BNPL services can also help consumers maintain lower balances on their credit cards, which typically is good for their credit scores.

“For consumers who are savvy enough and concerned enough about their credit, being able to stretch their cash flow a little bit will probably help them stay on top with their other creditors,” said Ted Anders, head of payments solutions. at Affinity Federal Credit Union.

Customers’ credit scores also don’t take as much of a hit from late payments on BNPL balances as they would from late payments on a credit card. This is because not all BNPL companies send their customers’ data to the big three credit bureaus – TransUnion, Equifax and Experian. Affirm provides data only to Experian, and Sezzle allows consumers to choose whether or not their data is shared with bureaus. Meanwhile, Klarna, PayPal and Afterpay do not share their customers’ data with credit reporting agencies, the companies told Quartz.

Even when BNPL companies share their data with credit bureaus, none of the major credit bureaus currently include that information in consumer credit files, which then feed into credit-worthiness models like FICO. “As long as this is the case, your BNPL account information will not affect your FICO score,” says FICO.

But if BNPL were ever to be included, people with little credit history or multiple missed payments on their credit report could see a bump in their FICO scores if they pay their BNPL installments on time.

How BNPL can hurt your credit

If customers take too long to pay BNPL installments, they may be turned over to a debt collector, which can seriously harm their credit score, noted Martha Callahan, a certified financial planner at FBB Capital Partners.

“Especially if they start using the buy now pay later feature across multiple purchases, I can see the purchases piling up or snowballing so that on the other hand they still have cash flow challenges to pay them on time,” she said.

And the people who use BNPL are typically the type of consumers who face these issues. One study this year by the US Consumer Financial Protection Bureau found that BNPL borrowers had, on average, more debt and delinquent credit products, as well as less liquidity and lower savings.

Another note: If credit bureaus include BNPL information on consumer credit reports in the future, the balances could taint someone’s credit score by lowering the average age of their accounts, which in turn lowers their credit score, John Ulzheimer, a credit specialist who previously worked. for Equifax and FICO score creator Fair Isaac Corp., told Quartz.

“Every time you add something new to your credit report, you decrease the average age of your accounts,” Ulzheimer said. “When you have so many brand new accounts on your credit report, it’s going to take a long time for those to age to a point where they’re no longer problematic.”

Tips for building credit

At the end of the day, experts say the best ways to build credit are simple: use a credit card and budget.

“A credit card can be a great way to build credit if you implement it the right way, which means paying off the balance each month so you don’t get charged interest,” Callahan said. “Stick to your budget so you don’t have cash flow challenges in the future.”

If customers use BNPL, “don’t let the attractiveness of how you’re going to pay outweigh the fact that you want to be careful with your money and make sure you don’t overcharge,” Anders said.