Buy Now, Pay Later: A Closer Look
Here are the takeaways for Buy Now, Pay Later services:
Encourages people to spend more than they would without BNPL (usually 3x more).
These services are unregulated by the government.
They do not charge interest or fees unless you make a late payment
They do not positively impact your credit score (i.e. they cannot be used to build a good credit score like credit card payments)
They negatively impact your credit score, even if you make all the payments on time.
These services make it hard to return the merchandise and often you still have to make the payments even though the item was returned.
Personally, I don´t see any reason to use Buy Now, Pay Later services and am alarmed at the rate of usage by Gen Z. Please read below for the full story and details.
Companies like Affirm and Afterpay have exploded over the past few years and many consumers are a fan of these services. As you can see in the examples below, buy now, pay later services appear when you are adding something to your cart and as an option to pay when you check out
Here is how it works: the Buy Now, Pay Later company will divide your purchase into 4 payments. The U.S. government does not regulate Buy Now, Pay Later companies because they define credit/loans as 5 payments or more. So BNPL companies are currently flying under government regulation!
Buy Now, Pay Later companies do not charge interest or fees if you make your payments on time. This is why a lot of Gen Z is using BNPL services instead of a credit card. However, if you make a late payment (and 42% of all users have made a late payment), you can be charged up to 36% and $7-8 for a late payment.
In addition to late charges, BNPL companies make a percentage of what you buy. The reason they are able to take a percentage is most consumers spend 3 times more when using a buy now, pay later service! BNPL companies are making money by getting you to overspend.
BNPL negatively impacts your credit score.
Many of the BNPL companies do not run a credit check to get approved for these services which makes approval easy. Some companies report the opening of BNPL accounts to the credit bureaus and some do not. All companies will report if you have a late payment.
If you use BNPL and make all of your payments in full and on time, this good behavior will not improve your credit score unlike making payments to a credit card.
If the BNPL company reports your new account to the credit agencies, this will have a negative impact on your Debt Accumulation (as it is a new account) and the Length of Credit (as this is a short term loan). If you have multiple BNPL accounts, the negative impact will be more substantial. Even if you make all of your payments on time and in full, you could see a negative impact to your credit score. Some BNPL companies do not report the opening of a new account the the credit agencies. If that is the case, and you make all your payments, there may not be any impact to your credit score.
If you make a late payment, all BNPL companies report this to the credit agencies and you will see a hit to your Payment History.
Credit Score Takeaways: BNPL services cannot be used to build up your credit score, unlike a credit card. These services may leave your credit score unscathed but in all likelihood, you open yourself up to massive credit score hits that are not worth it.
To all of Gen Z that has forgone credit cards for BNPL, I urge you to reconsider. If used correctly, credit cards are a great way to build a good credit score and by paying the statement balance, you don´t pay interest
If you need more help on using credit to your advantage, please take my credit course. Credit is an important part of your wealth building journey.
Disclaimer: I am an educator, not your personal financial advisor. Information in this newsletter is intended for educational purposes only. Please make sure to do your own research before moving forward with any actions discussed in this newsletter.
Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won't experience any loss when investing. Past performance does not guarantee future performance. Always remember to make smart decisions and do your own research!