This month, Equifax® is adding “buy now, pay later” (BNPL) activity to their consumer credit reports. These point-of-sale financing options can increase the number of consumers who can positively impact payment history without turning to traditional options like credit cards or bank loans.
What is Buy Now Pay Later?
BNPL plans are usually offered at the point of sale, such as on the checkout page of a retail website. They allow consumers to pay for purchases in installments in a relatively short time frame, with the first payment due at checkout. For example, if you were buying a vacuum for $400, a BNPL plan can allow you to buy it with four payments of $100, with the first due at purchase and the other three payments due every two weeks.
To participate in BNPL, you will need to click the option to break up your total purchase into installments. Then, you can fill out a quick application that includes your name, address, birth date and phone number. You also need to include a payment method for the BNPL company to bill. The BNPL company might perform a soft credit check, which doesn’t affect your credit score, and approve or deny your application almost instantly.
Even if you have bad credit or no credit history, you may be able to qualify for BNPL financing. Many BNPL purchases are interest-free and don’t charge fees, but that isn’t true across the board. Late fees may apply as well.
How BNPL Can Affect Your Credit
Equifax is now adding BNPL to its traditional consumer credit reports. This involves creating a new business industry code to classify BNPL companies and their specific form of debt. Payment history for BNPL is going to be included on Equifax credit reports and can be factored into credit scoring models.
According to Equifax, including this information on credit reports can help raise consumer credit scores. Most BNPL companies only perform soft credit inquiries, which won’t affect consumer credit scores. And on-time BNPL payments can help positively affect positive payment history, raising credit scores over time.
Of course, making late BNPL payments or not making payments at all could have a negative effect on credit scores.
The other two major credit bureaus, Experian® and TransUnion®, have said they are rolling out similar BNPL reporting features later this year.
Should You Use Buy Now Pay Later?
BNPL purchases are attractive because they don’t require hard credit inquiries. They allow you to pay for a purchase over time and often don’t include any interest or fees. With BNPL credit reporting, you can build positive payment history without needing a credit card or bank loan, which is beneficial if you have bad or limited credit that is preventing you from accessing traditional credit options.
But there are some considerations to make before you use BNPL. While these plans are usually straightforward and inexpensive, you’re still taking on debt. If you can afford to make a purchase outright, it’s generally a better strategy than adding to your ongoing debt obligations.
If the purchase isn’t essential, or you’re already having trouble paying your bills, avoid BNPL. Because of its simplicity and lack of credit checks, it can be straightforward to overspend and take on too much debt with BNPL. Missing payments can result in late fees, accounts sent to collections and a negative impact to your credit scores.