6 Min Read | May 2, 2022
Can Using Buy Now, Pay Later Improve My Credit?
Buy now, pay later arrangements could soon help you build your credit score – but only if you pay on time. Learn how to make these services work in your favor.
At-A-Glance
Credit bureaus are beginning to pay attention to buy now, pay later services.
On-time buy now, pay later payments could help you build credit. Late or missed payments can hurt your credit.
Creating a smart buy now, pay later strategy will help you stay out of all sorts of financial trouble.
Buy now, pay later (BNPL) solutions are looking like an answered prayer for cash-strapped online shoppers and those without credit cards. A recent survey found that nearly three out of four American shoppers have used a BNPL loan.1 And now, making on-time payments could soon help buy now, pay later devotees improve their credit scores.
But it also means that if you use BNPL and miss payments or fail to fully pay, your credit could take a dip. Here’s what you need to know to make sure that using BNPL services will help build your credit history, not hurt it.
The Rise and Rise of Buy Now, Pay Later
An estimated 45 million Americans used a BNPL service in 2021, an increase of more than 80%, year over year.2 And expectations are that this fast and easy way to pay less up front when making an online purchase will continue to grow.
It’s easy to see why. Paying for a $500 television with four equal $125 payments under a BNPL plan – made biweekly or monthly – can be a lot easier to swing than having $500 debited in one swoop from a debit card, even if the plan charges a small fee or a low interest rate. It can also seem easier and more practical than using a credit card when you have yet to establish the credit score typically needed to land a credit card with low interest or a generous 0% introductory APR period.
Credit Bureaus Get on the BNPL Bandwagon
In the past, the ability to report BNPL payments to the three major credit bureaus – Equifax, Experian, and TransUnion – was spotty at best, and sometimes only happened when payments were missed. The holdup? Until now, existing credit scoring models have not been designed to support the frequent payment and transaction data associated with buy now, pay later – such as biweekly payments. This requires developing new solutions that factor in BNPL without having an unwarranted effect on existing scoring systems.3
But that’s all about to change, with each major credit bureau tweaking its system to allow BNPL payments to be listed in consumer credit files. That means making on-time payments through a buy now, pay later service could soon help you improve your credit score.
Equifax and Experian have each announced plans to launch new reporting systems by spring 2022 that will make it routine for BNPL providers to report users’ payment history. That means your track record making payments on a BNPL purchase will begin to show up in both your Equifax and Experian credit reports – and therefore be used to calculate your credit score. Meanwhile, TransUnion has also expressed plans to incorporate BNPL payments into consumer credit files sometime in 2022.
How Much Can Buy Now, Pay Later Improve Your Credit?
Once credit bureaus officially start tracking BNPL payment data, these solutions might indeed help you increase your credit score – but only if you’re careful about making on-time payments.
Equifax, for example, tested how BNPL reporting could impact consumer credit scores and found that the majority of consumers would benefit. On average, adding BNPL payment data could increase a BNPL user’s FICO credit score by 13 points, according to their study.4
Adding BNPL data to credit files can be an even bigger credit score boost if you are new to building credit. Consumers with a credit history of less than two years, or with only a few credit card or loan accounts, would get a 21 point increase in their FICO credit score if on-time BNPL tradelines are part of their credit file, according to the same Equifax study.
How Buy Now, Pay Later Could Hurt Your Credit Score
Your track record making payments on loans and credit card bills accounts for 35% of your FICO credit scores. If you consistently pay bills on time bill, that excellent habit will help you build a solid credit score whether you use BNPL services or not. But if you make a habit of not paying on time – or not paying, period – the hard truth is that it’s going to hurt your score.
And late or missed payments seem to be an issue for many online shoppers who use buy now, pay later solutions. More than one-third of BNPL users who participated in a recent survey said they have been late with a payment.5 And of those surveyed with more than one BNPL arrangement in play, nearly half said they have missed a payment.
Hurt credit scores aren’t the only potentially negative financial effect of late or missed BNPL payments – these occurrences also typically trigger penalty fees, which can be costly.
How to Make BNPL Work for You and Your Credit Score
Making it easier to pay for big-ticket items is an undeniable lure of BNPL. But “easy” can also lead to problems, if you’re not careful. These tips can help you get the most out of the opportunity to buy now and pay later:
- Be a mindful online shopper. Don’t let BNPL be your gateway loan to common online shopping mistakes, like impulse buying. Focusing your spending on needs before wants can help you shop smarter.
- Make sure BNPL purchases fit in your budget. If a BNPL purchase would throw your budget out of whack, that’s a warning sign. You do have a monthly budget, right?
- Only take on what you can manage. As noted earlier, folks juggling multiple loan payments are more likely to miss a payment. It may be financially wise to only make as many BNPL purchases as you can manage at any given time, logistically and economically – after all, it’s possible not every payment plan will have the same due date.
- Set up alerts for a week before payment is due. Even if you have autopay set up, it can help to make sure that your bank account has enough cash to cover the upcoming payment. The on-time payment can help build your credit, prevent late-payment fees from your BNPL provider, and keep you from triggering an overdraft fee at your bank. Triple win.
The Takeaway
Starting soon, your credit file – which is used to calculate your credit score – will include your buy now, pay later payment history. That means on-time BNPL payments will likely help you improve your credit score, while late or missed payments can hurt it.
1 “Buy Now, Pay Later is surging, but many consumers overextend their credit,” Breeze
2 “Unpacking the top five BNPL Happenings of 2021,” E-marketer
3 “BNPL growth prompts change from credit bureaus,” Payments Dive
4 “Buying into the Concept of ‘Buy Now, Pay Later',” Equifax
5 “Buy Now, Pay Later is surging, but many consumers overextend their credit,” Breeze.com
Carla Fried is a freelance journalist who has spent her entire career specializing in personal finance. Her work has appeared in The New York Times, Money, CNBC.com, and Consumer Reports, among many other media outlets.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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