Consumer Credit Counseling Service News Articles

Home » News Articles » BNPL?? What the Heck Is It? And What the Heck is It NOT?

Recently, I had a client with a multitude of small payments due that I was wondering what is going on here?  They were adding up SO fast that the client had simply lost track and needed some help.

Welcome to BNPL. Buy now, pay later (BNPL) is a payment plan that lets you break up your total purchase at checkout into a series of smaller installments.

These plans aren’t new…but recently have been catapulted into the mainstream with Amazon, Walmart, and Target now offering them. But with the promises of convenience, zero interest and minimal fees…you have to wonder…what’s the catch?

Guess what BNPL accounts are NOT?  Helpful to your credit.

BNPL providers don’t report on-time payments to the major credit bureaus, so unlike credit cards or loans, you can’t build credit with this type of financing. BUT here’s the catch…some providers DO report missed payments which ultimately hurt your credit score.

Many BNPL providers do not consider your credit file for approval. If an account holder ends up being a risk for payment, some providers will “pause” your account after one missed payment. Kind of like a heads up that you’re on the wrong path.

No credit checks could mean easier approval for those with no credit or bad credit, but shoppers can’t use BNPL payments to demonstrate responsible use of credit to the bureaus. And guess what?  On-time payments are the largest contributor in determining FICO credit scores.

The practice is especially harmful for young people who may need to access credit to lease or buy a car, rent an apartment or buy a home.

BNPL may not report payments to the bureaus, but will send past-due accounts to collections, which will affect your score!

Missed payments are the biggest risk when using a BNPL service. Installments can be automatically billed to your debit card, so you can easily overdraw your account, resulting in penalty fees, and then defaulting on the loan.

One missed payment (on any type of account) can lead to costly financing in the future. Interest rates will likely increase for borrowers with lower credit scores. And that’s the key!! PROTECT YOUR CREDIT SCORE.

Once a debt collection account shows up on the credit report, it creates a more significant barrier to overcome. The cost of borrowing goes up as your credit score goes down.

How about this instead…

BNPL payment plans can be a valid way to budget for large purchases, particularly if the plan charges zero interest AND you can make the payments. It will NOT help build your credit.

A secured credit card is a smart alternative. It requires a cash security deposit, usually equal to your line of credit – a $300 deposit for a $300 spending limit, for example. And you don’t need good credit to qualify. Once you’re able to upgrade to an unsecured card, you’ll receive your deposit back.

For those new to credit cards, put a small recurring expense on the card, like your Netflix subscription, and set it to auto-pay. This approach allows you to use the card consistently without overspending.

Another option is a credit-builder loan, which you can find at credit unions, banks and some online lenders. Unlike a traditional loan, you’ll make payments first then receive the money. Payments ARE reported to the credit bureaus.

By showing a history of responsible financial behavior, you can build your credit profile and access more affordable financing in the future.

Don’t get in over your head with BNPL! You can always review with your credit counselor: ask questions, crunch numbers and make sure you know what you are getting into. You are not alone! We’re here to help!

Excerpted from: Jackie Veling, NerdWallet and Bruce McClary, NFCC.

Holli Lewandowski, Certified Credit Counselor, Educator, and Advocate