You might have seen the option to pay for things like furniture or home goods through things like Affirm, Klarna or Afterpay. These options typically show up underneath the price of an item you’re looking to purchase online and will have a note that reads something like: “Just $25 a month with Affirm” or “$40 this month with Afterpay.” These are Buy Now, Pay Later, or BNPL loans, and you should approach them with caution since they can be a detriment to your credit in the long run.
These loans work similarly to the old-fashioned layaway system. Instead of putting a lump sum on a credit card or paying for something with cash in full, you can spit up the cost of an item — or several items — with payments due every two weeks, or every month but in smaller amounts. These loans, also known as point-of-sale loans, often offer 0% interest for a particular period of time.
Not all BNPL loan providers report to credit rating agencies, but the most popular ones do. Affirm, for example, reports to credit bureaus, but not for all their loans. CNBC reports that Affirm does not report loans that are paying 0% interest for a period of three months or those loans with zero interest rates and four bi-weekly payments. In other words, if you’re scheduled to be off their books soon, they’re not interested in reporting you to the credit bureaus.
However, if you default on your Affirm loan or make late payments then a report will be filed just like any other payment agency would for late payments. The caveat is that even if you are paying this kind of loan off on time, your credit score could still take a hit.
“While the record of on-time payments can boost your credit, you could see a blow to your score from using the [BNPL] service,” says Leslie Tayne, founder and managing director at Tayne Law Group to CNBC. “Every purchase you make with a POS loan is considered a separate account on your credit report that gets closed once you pay off the balance. Since these loans are short-term (generally six weeks), they can bring down the average age of your credit history considerably — especially if you’re a regular borrower.”
While Affirm is one of the most widely used, Klarna and Afterpay are also large loan providers that can be used as alternatives that do not report to credit agencies. AfterPay performs no credit check at all, and Klarna performs what it calls a soft credit check.
Afterpay can be a good option for those with bad credit or anyone trying to build credit up that needs to purchase something with a bit of financial leeway. Klarna, although a good option as well, will report you to Experian if you take out some of their longer loan options.
It’s important to remember with any of these loans that you must maintain a meticulous payment history so as to not have larger problems down the line. Although these programs can be useful and convenient in a pinch, the better option is always to open a low-limit credit card and pay it off immediately so that you can build sustainable credit that can be utilized in the future.
BNPL loans should not be thought of as long-term, sustainable payment plans for everybody, since they were created with those who do not have the credit in mind, to begin with. It’s also important to note that the majority of these loans are taken out to buy clothing and electronics — not necessarily everyday necessities or emergency purchases.
Remember, these companies make money betting that you will exceed the allowable limit for your loan, and then not only charge you high rates of interest but also report missteps to the credit bureaus.
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