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How ‘Buy Now, Pay Later’ Can Dramatically Affect Your Credit Score

Apple computers sit on display in an electronics store on April 11, 2023, in Miami, Florida
Source: Joe Raedle/Getty Images

Generally, people are a little strapped for cash at the end of the year during the holiday months. This has led to an increase in ‘buy now, pay later’ plans, allowing consumers to spread out the payment of an expensive item over time.

BNPL plans have been around for decades and have become increasingly popular around Christmas. The process allows consumers to purchase items such as phones, tablets, fridges, and washers and pay them back over a year.

If the BNPL payments are made on time, then there’s no downside to using one of these agreements. Meanwhile, with a credit card, if you carry a balance forward, it’ll likely result in various interest charges.

Data released by Adobe Analytics surmised that short-term installment loans such as those from BNPL plans led to over $6 billion worth of spending in October alone. Adobe then estimated that around 20% of U.S. consumers intend to use ‘buy now, pay later’ plans to shop for Christmas gifts.

There are a few downsides to consider with BNPL plans, yet these only arise when a customer fails to keep up with their payments. First and foremost, consumers could face penalties and interest on the money they borrowed.

Secondly, if consumers consciously fail to keep up with payments, their credit score could take a big hit. The delinquent activity would likely be reported to the credit bureau, and from there, a whole host of repercussions will arise in the future.

The lower a credit score is, the more difficult t becomes to apply for personal loans, a mortgage or even a car loan. Even if one can get approved for such a loan, it’s highly likely that with a bad credit score, the interest rates will be much higher.

Another frequent problem with low credit scores is the inability to rent a home. Landlords will typically perform a credit check on potential renters to ensure they have a solid payment history. So, a hit to a consumer’s credit score could result in someone with a better history getting offered the house first.

So, while BNPL plans may seem like a good idea around the Christmas period, experts still agree that the best payment method is cash in advance. According to numerous reports, it only makes sense to use a BNPL plan if you have to make a purchase quickly and don’t have readily available cash.

This could happen if someone has recently broken their work laptop and desperately needs a replacement within the day. It’s still a risky situation, but understandable as it’s a requirement for work.

The bottom line is to try to avoid using a BNPL plan to pay for expenses that are not emergencies. This includes new phones or tablets, holiday girls, and entertainment. As falling behind on a BNPL plan will cause severe damage to credit scores.


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