Buy now pay later options do not generally affect peoples credit and do not yet routinely appear on most credit reports. The credit bureaus; TransUnion, Equifax, and Experian are each working through this relatively new system and how to report on these services in the context of credit worthiness and a borrowers financial obligations.
This means that a good record of payment on your buy now, pay later accounts will not help build your credit. It also won’t hurt your credit unless your account is sent to collections. This payment option is popular with younger generations, as they are least likely to have built their credit. For now, it is a good way to practice building your credit.
How Buy Now, Pay Later Works
When you purchase something online, some stores may offer to divide your purchase into smaller installment payments. Most often into four payments, every two weeks. The most used options are Affirm, Afterpay, Klarna, Paypal, and Zip. They partner with retailers who pay them commission.
Approval is partially based on data that includes address stability, public records and previous history you may have with the lender and banking information.
Opportunities for Credit Building
The credit bureaus are working hard to incorporate this method into their formulas. Consumers are using these accounts online more frequently than traditional credit cards and loans, especially young consumers. This could prove to be most beneficial to build up credit.
There are Risks
Since buy now, pay later loans are new and unregulated they are often paid late, most often by consumers of the age group 18-30. BNPY lack the typical protections you would have under a credit card such as dispute resolutions. The easy access to the application causes the consumer to impulsively purchase and buildup debt faster than they normally would. The consumer may also rack up multiple BNPL accounts on multiple sites that could potentially lead to collection accounts. Once sent to collections, it will end up on credit reports.
The Credit Bureaus
It has been decades since a new type of credit has been in the market. The BNPY system does not fit perfectly within the two categories they have in place now: Installment loans that span months or years and revolving credit like credit cards.
The bureaus are working together to find a format that fits and are figuring out a common ground.
Current Plans:
Experian has announced it plans a specialty bureau to hold buy now, pay later data. Information from the specialty bureau will be “promoted” periodically into the consumer’s core credit file.
Equifax plans to add the information to regular credit reports.
TransUnion has said it will partition off the data on core credit reports.