What Is Buy Now Pay Later and How Does It Affect Your Credit?

If you are a regular online shopper, the rise of Buy Now Pay Later (BNPL) options likely hasn’t escaped your notice. When you reach the checkout of most major online retailers, you’ll have the opportunity to spread out your payment through a BNPL service. 

The service can be convenient for those on a tight budget. But how do these BNPL services affect your credit? Let’s take a closer look to see how this payment option with rising popularity could impact your credit scores. 

What Is Buy Now Pay Later (BNPL)?

Although the exact details of each Buy Now Pay Later offering vary a bit, the overarching concept is relatively simple. As a customer of a retailer that works with a BNPL service, you’ll be offered the option to space out your payments over the course of several weeks or months. 

Generally, the amount of your purchase will impact the number of payments you can make. For example, let’s say that you make a $500 purchase. Many BNPL services would allow you to stretch that cost out for months. But if you only make a $100 purchase, the repayment term could be shortened to just a few weeks. 

In many cases, BNPL services allow some customers to qualify for 0% interest rates. Although that low rate is not guaranteed, borrowing through a BNPL service could be one way to avoid the high interest rates attached to credit cards.

As the customer, your purchase can be easily divided into multiple payments that fit into your budget for the next several months. You won’t have to save up for months to afford the items you need.

Do BNPL Services Require a Credit Check?

For anyone with a relatively tight budget, it is easy to see why BNPL services are attractive. However, many consumers agree to a BNPL payment structure without considering the potential impacts on their credit scores. 

The first way that a Buy Now Pay Later service could impact your credit scores is through a hard credit inquiry. With each hard credit inquiry, you could see a small drop in your scores. Typically, the drop won’t be more than 5 points for each credit check, but regularly acquiring hard credit checks could lead to a significant drop in your scores. 

With that, regularly using a Buy Now Pay Later service that requires a hard credit check could lead to problems for your credit scores. 

The good news is that not all BNPL providers require a credit check. But if you are working with a BNPL service that does require a credit check, then you might see a hit to your credit score each time to choose to break up your purchase into smaller payments. 

Ultimately, whether or not a BNPL service will add a hard credit inquiry to your credit reports depends on the service provider. Below, we will take a look at the most popular BNPL services that require a credit check and which ones don’t.

Which BNPL Services Require a Credit Check?

Here’s a quick look at the Buy Now Pay Later services that require a credit check. 

• Affirm.  Affirm requires a soft credit check to grant approval for all customers using the service to break their purchase into four payments. But if you opt for a longer term, Affirm may run a hard credit check. 
• PayPal. PayPal’s “Pay in 4” program offers the option to break up your purchase into four equal payments. The “Pay in 4” option requires a soft credit check, which shouldn’t impact your credit scores. However, if you opt for PayPal Credit, you’ll have to allow for a hard credit inquiry. 
• Klarna. Klarna will perform a soft credit check if you choose to pay in 4 installments or pay in 30 days. But if you opt for the monthly financing plan, Klarna will run a hard credit check.

Of course, a single hard credit inquiry will not cause your scores to plummet. But if you regularly use these services, a series of hard credit inquiries could lead to a bigger dip in your credit scores.

Which BNPL Services Don’t Require a Credit Check?

Here’s a quick look at the BNPL services that don’t require a credit check. 

• Afterpay. Afterpay doesn’t require a credit check at all. 

• Zip. Zip doesn’t require a hard credit check—but the company states that it may use credit-related information when approving your account.  
• Sezzle. You won’t encounter a credit check when working with Sezzle.

Avoiding too many hard credit inquiries will help to keep your credit scores intact. 

Do BNPL Services Report to Credit Bureaus?

After you’ve made it through the credit inquiries, BNPL services can still impact your credit scores if your BNPL account is reported to the credit bureaus. The impact can stem from two different points. 

First, if your BNPL accounts are posted to your credit reports, the average age of your accounts may decrease. Typically, BNPL accounts are only open for 6 to 8 weeks. With that, too many of these accounts could dramatically lower your average account age.

The length of your credit history accounts for 15% of your credit scores. So, if you have too many of these short-term accounts, your credit scores could suffer. 

Second, if a BNPL service is reporting your payments to the credit bureaus, that will impact your credit scores. If you are making on-time payments, you might see a boost to your credit scores. If you are missing payments, however, then your scores will likely suffer. 

Since your payment history accounts for 35% of your credit scores, this reporting could have a big impact. As with any loan, you’ll want to make on-time payments consistently. Otherwise, you might find that your credit scores takes a big hit. Even if your credit score is not impacted, BNPL services may stop working with you if you regularly miss payments, which could lead to a pinch on your budget. 

When working with a BNPL service, it is important to determine whether or not your loan details and payment history will be reported to the credit bureaus. Without gathering this information ahead of time, you might be in for a surprise when you check your credit scores. 

Which BNPL Services Report to Credit Bureaus?

Below you’ll find more information about the BNPL services that report to credit bureaus. 

Affirm

Affirm reports some, but not all loans, to Experian. 

The company will not report your loans to Experian if you are making four biweekly payments at 0% interest. Additionally, Affirm will not provide credit reporting if you were offered only a three-month payment term with 0% interest. 

All other types of BNPL loans provided through Affirm will be reported to Experian, however. According to Affirm, the credit reporting for your loan may include your payment history, how much credit you’ve used, and the length of your loan term. 

Sezzle

Sezzle offers the option for borrowers to have their payments reported to TransUnion. However, you’ll have to upgrade to Sezzle Up to have your loan activity reported. 

If you opt to have your payments reported, Sezzle will share your information, credit limit, date opened, current balance, and amount past due with TransUnion each month. 

If you don’t want to run the risk of negative information reaching your TransUnion credit report, you can opt not to have your payments reported. But this decision has to be made upfront. You won’t be able to change your mind if you realize later that you cannot make a payment. 

Klarna

Klarna offers two different services. If you opt for the “Pay in 30 days” or “Pay in 4” options, the company will not report any of your loan details, including your payment history, to the credit bureaus. 

However, everything changes if you opt for the monthly financing route. In that case, Klarna will report your payment history if you fail to make your payments on time. With that, your credit score could suffer if you cannot keep up with the monthly payments. 

Which BNPL Services Don’t Report to Credit Bureaus?

Here’s a look at the BNPL services that will not report your loan to the credit bureaus. 

Afterpay

As we mentioned above, Afterpay will not run a hard credit inquiry when approving your BNPL loan. Additionally, the company will not report any late payments. 

According to Afterpay’s website, the company doesn’t “believe that missing a payment with Afterpay should result in a bad credit history – especially when the average purchase is only around $150.” Instead, their “main aim is always to help you spend responsibly, and we take a lot of steps to help ensure this, including pausing your account when you miss a payment.”

With that, missed payments will not affect your credit scores—but you might not be able to work with Afterpay in the future due to multiple missed payments.

Zip

Zip, formerly known as QuadPay, doesn’t regularly report your BNPL loans to any credit bureaus. With that, you won’t see your Zip activity on your credit reports.

But there is a catch. According to the Zip Privacy Policy, the company may report late payments, missed payments, or defaults to the credit bureaus. 

Essentially, Zip’s policy means that you won’t see any positive impact on your credit reports if you are making on-time payments. But if you miss payments or default on the loan, the company reserves the right to report that negative information to the credit bureaus. 

PayPal Pay in 4

PayPal’s Pay in 4 option doesn’t typically report your payments to the credit bureaus. But if you fail to pay off the loan, the company may report this failure to pay to the credit bureaus. 

How BNPL Services Can Boost Your Credit Scores

If you choose to work with a BNPL service that regularly reports your payments to the credit bureaus, there is an opportunity to give your credit scores a boost. 

Remember, your payment history accounts for 35% of your credit scores. With that, making consistent on-time payments to your BNPL loan could lead to increased scores.

Additionally, BNPL loans are generally easier to qualify for than traditional loans. As someone looking to build your credit history, this could be an option to get the ball rolling.

How BNPL Services Can Hurt Your Credit Scores

BNPL services also have the potential to hurt your credit scores. 

As with all loans, not making on-time payments could lead to negative impacts on your credit scores. When those missed payments are reported to the credit bureaus, you should expect to see a significant hit to your scores. 

Beyond the potential for missed payments, regularly using BNPL services that are reported to the credit bureaus may lead to a series of short-term loans appearing on your report. With that, the average age of your accounts could shrink. Since the length of your credit history accounts for 15% of your credit scores, that could lead to a score drop. 

Ultimately, responsible management of any BNPL accounts can help you avoid the worst of any negative impacts on your credit scores. But making regular on-time payments to all of your BNLP accounts to prevent potential negative effects can be easier said than done. 

Is a BNPL Service a Good Idea for Your Finances?

A BNPL service can help you get your hands on the items you need right now, even if you don’t have the funds to cover the whole purchase.

The ability to spread out the cost of a big purchase can be helpful for your budget. Since most BNPL services offer a 0% interest rate, you won’t have to worry about overpaying for interest charges. That could be a big savings if you were going to use a credit card that has a sky-high interest rate.

Unfortunately, the ability to spread out your purchase cost can be a double-edged sword. The smaller payments will be easier to fit into your budget, but you may be tempted to spend more than you should on purchases if you know that you can spread out the costs.

If you are considering using a BNPL service, consider saving up over time as an alternative. Although saving with each paycheck will mean having to wait longer before receiving the item, you’ll be able to make your purchase with the peace of mind of knowing you have the funds saved up. You might even decide that you can hold off on the purchase altogether. 

Beyond your budget, BNPL services can impact your credit scores. If your scores are negatively impacted, the long-term effects can be expensive. For example, lower credit scores will lead to more expensive financing options when shopping for a mortgage or auto loan.

Instead of jumping into a BNPL service, read the terms and conditions to ensure that the loan fits your credit needs. If you don’t want there to be any potential for negative impacts on your credit, don’t work with a service that will report to the credit bureaus. If you want to use a BNPL service to improve your payment history, opt for a service that regularly reports your payments. 

 BNPL services could be the right fit for your finances. However, you’ll have to weigh the different options to decide which one is the best solution for your situation.

The Bottom Line: Buy Now Pay Later Services Can Impact Your Credit Scores

BNPL services promise to ease the strain of a big purchase on your budget. But if used incorrectly, you might find that your credit scores take a hit. 

With that, it is critical to work with a service that fits your credit needs. Depending on your situation, you might want to work with a BNPL service that doesn’t make any reports to the credit bureaus. Or you may want a service that promises to report every payment so that you can add to positive payments along the way. 

If you are looking to increase your credit scores, BNPL services are likely not the best solution. Instead, credit repair and adding information to your credit report are tried and true ways to work on your credit.