How Buy Now, Pay Later Loans Can Lower Your Credit Score

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When Ryan Stanton moved into his new apartment after graduating from college, he chose to purchase some of the household items he needed through the “buy now, pay later” vendors Affirm, Klarna and Afterpay.

Rather than paying a lump sum or putting it on a credit card, he chose to split the cost of his gym equipment, clothes, pillows, and a watch into installments every two weeks or so. every month. Stanton felt secure financing his purchases with 0% BNPL loans because he knew he would be able to make his installment payments on time and in full.

Buy now, pay later loans – also known as point-of-sale loans – offer consumers the option of paying off their purchases over a fixed period of time with installment payments typically due every two weeks or monthly.

If you’ve recently made purchases from websites like Target, Walmart, Sephora, or ASOS, you’ve probably noticed the BNPL option every time you go to the checkout page. Square’s recent acquisition of a popular BNPL provider, Australia-based AfterPay, for nearly $ 30 million, indicates the growing popularity of BNPL providers. In fact, a recent report from CB Insights predicts that the industry will grow 10 to 15 times its current size by 2025.

It’s easy to see the allure of point-of-sale loans: while traditional credit cards require consumers to pay their monthly bill in full and on time every month or be hit by high interest rates and fees. late, some BNPL loans offer loans to consumers with 0% interest. and no penalty for late payment.

But are these loans as simple as they seem? Select spoke to a number of financial experts to see how this new method of financing could negatively impact your credit score whether or not you are a smart credit user making your payments on time and in full. each month.

How Some POS Loans Could Lower Your Credit Score

Depending on your loan provider, taking out a POS loan may increase, decrease, or have no impact on your credit score. Some of the more popular point-of-sale loan providers – AfterPay, Affirm, and Klarna – report certain loans to the credit bureaus, while others do not.

“If reported, a missed payment can be noted on your credit report for up to seven years and will negatively impact your credit score,” says Rod Griffin, senior director of consumer education and advocacy at Experian. At the same time, if a ‘buy now, pay later’ lender gives out account information to credit bureaus like Experian, and you manage debt responsibly, these services can be a useful way to ‘increase credit. “

Affirm is a BNPL provider that forwards information to Experian about certain loans. It does not report loans with 0% APR and four biweekly payments or loans where people have been given the option of a three month payment term with 0% APR.

For other Affirm loans, the entire loan history is reported to Experian. This means that both positive and negative payment history will be reported only to Experian and not to other credit bureaus. Your payment history, the amount of credit you used, how long you had the credit, and any late payments will all be reported to Experian.

If you default on your Affirm loan or make late payments, you risk lowering your credit score. But your credit score could take a hit even if you pay off your POS loan on time.

There are several reasons why a POS loan could hurt your score. For starters, there are many factors that make up your credit score, and your score can go down even if you pay your bills on time, if there are other areas that are missing.

Here are the five factors that make up your FICO score:

  1. Payment history (35%): If you paid your old credit accounts on time
  2. Amounts due (30%): The total amount of credit and loans you are using against your total credit limit, also known as the usage rate
  3. Length of credit history (15%): The duration of your loan
  4. New credit (10%): How often do you request and open new accounts
  5. Credit composition (10%): The variety of credit products you have available including credit cards, installment loans, finance company accounts, mortgages, and more.

Some of the factors that determine your credit history are the average age of your accounts, the age of your oldest account, and how long you’ve opened an account. (This is one of the reasons many people worry that closing a credit card will hurt their score.)

“While the on-time payment record can boost your credit, you might see a big blow to your score by using the [BNPL] service, ”says Leslie Tayne, Founder and Managing Director of Tayne Law Group. “Each purchase you make with a POS loan is considered a separate account on your credit report that is closed after you have paid off the balance. Since these loans are short term (usually six weeks), they can significantly reduce the average age of your credit history, especially if you are a regular borrower. “

Since 15% of your FICO credit score is determined by the length of your credit history, repeatedly taking out point-of-sale loans can lower your credit score as it lowers the average age of your children. accounts, explains Tayne.

On Credit Karma, Affirm has a 2.9-star customer rating, and reviewers have complained about the impact their loans have on their credit score, even when they are in good standing.

Each loan, regardless of its size, will count as a separate account on your Experian credit report. I have used Affirm about 15 times, to take advantage of their 0% finance offers. Surprise! The calculation of the average age of the Experian account on my credit report has gone from 11 years to approximately 2 years. This has a negative impact on your credit score. Be careful, “wrote one reviewer.

Affirm discusses the impact of its loans on consumer credit scores in its Help section, noting the amount of credit you’ve used, the length of your credit, late payments, and your history. Payments with Affirm may affect your score.

Need a BNPL loan that won’t impact your credit score?

If you want a loan that won’t impact your credit score, you might want to consider Klarna and AfterPay, as neither do thorough investigations and report loans to the credit bureaus, to with the exception of the longer term Klarna financing. Point-of-sale providers like AfterPay and Klarna are known for their 0% interest rate loans that customers pay back over one month, two months, or six weeks.

AfterPay does not perform any credit checks, which makes it a solid option for people with low or bad credit who have difficulty getting a loan otherwise (it won’t improve your credit score either). Klarna, however, will perform a smooth credit check if you take out a “Pay in 4” loan or a “Pay in 30 days” loan.

And your score won’t be affected if you take out an Affirm loan that charges 0% APR and has four bi-weekly payments or loans where people have the option of a three-month payment term with 0% APR.

Before taking out a BNPL loan, make sure you know the terms and conditions so that you fully understand the interest rate and repayment schedule.

Make sure you regularly review your credit report

Everyone should make a habit of reviewing their credit reports regularly, especially if you’re opening new financial products, whether it’s a POS loan or a new credit card.

Due to the pandemic, each of the three credit bureaus – Experian, Equifax and TransUnion – now offers a free credit report every week. (They typically each offer one free report per year.) Just go to annualcreditreport.com, a federally licensed website, to request your credit report from one of the bureaus. If you have an Affirm loan, you will want to request your Experian credit report.

There are also a number of free services that allow you to track your credit score. Most credit card companies allow you to check your score on their apps or website. You can also use a free credit monitoring program like CapitalOne’s CreditWise or Experian Free Credit Monitoring.

While taking out a POS loan doesn’t necessarily improve your credit score, there are a few quick ways to improve it. Experian Boost, for example, is a free service that gives consumers the ability to connect their utility and streaming service accounts to their Experian credit report. This means that if you pay your Internet, water or Netflix® bill on time, you could see your FICO score improve.

At the end of the line

Ultimately, POS loans could have an unexpected effect on your credit score. If you don’t read the terms and conditions of your specific loan, you might be surprised to find that even when you make your payments on time and in full, your credit score might drop due to the effect of these short loans. term. have over the life of your credit history.

While Stanton has paid off his Klarna and AfterPay loans (both go unreported to the credit bureaus), he still has one Affirm loan left to repay: a loan that will be reported to Experian. Stanton hasn’t seen any change in his VantageScore over the past year, but when he learned about the effect an Affirm loan could have on his credit rating, he said: “… damn it, I should have looked at this a bit more. “

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.

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