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When Ryan Stanton moved into his new apartment after graduating from college, he chose to purchase some of the household items he needed through “buy now, pay later” suppliers. To affirm, Klarna and After payment.
Rather than paying a lump sum or putting it on a credit card, he chose to split the cost of his gym equipment, clothes, pillows, and a watch into installments every two weeks or so. every month. Stanton felt secure in financing his purchases with 0% BNPL loans because he knew he would be able to make his installment payments on time and in full.
Buy now, pay later loans – also known as point-of-sale loans – offer consumers the option of paying off their purchases over a fixed period of time with installment payments typically due every two weeks or monthly.
If you’ve recently made purchases from Target, Walmart, Sephora, or ASOS websites, you’ve probably noticed the BNPL option every time you go to the checkout page. The recent acquisition of Square from a popular BNPL provider, based in Australia AfterPay, for nearly $ 30 billion, reflects the growing popularity of BNPL providers. In fact, a recent report by CB Insights predicts that the industry will grow 10 to 15 times its current size by 2025.
It’s easy to see the allure of point-of-sale loans: while traditional credit cards require consumers to pay their monthly bill in full and on time every month or be hit by high interest rates and fees. late, some BNPL loans offer loans to consumers with 0% interest. and no penalty for late payment.
But are these loans as simple as they seem? Select spoke to a number of financial experts to see how this new method of financing could negatively impact your credit score whether or not you are a smart credit user making your payments on time and in full. each month.
Depending on your loan provider, taking out a POS loan may increase, decrease, or have no impact on your credit score. Some of the most popular POS loan providers – AfterPay, To affirm and Klarna – report some loans to the credit bureaus while others do not.
“If reported, a missed payment can be noted on your credit report for up to seven years and will negatively impact your credit score,” says Rod Griffin, senior director of consumer education and advocacy at Experian. At the same time, if a ‘buy now, pay later’ lender discloses account information to credit bureaus like Experian, and you manage debt responsibly, these services can be a useful tool. to increase credit. “
Affirm is a BNPL provider that report information to Experian on certain loans. It does not report loans with 0% APR and four biweekly payments or loans where people have been given the option of a three month payment term with 0% APR.
For other Affirm loans, the entire loan history is reported to Experian. This means that both positive and negative payment history will be reported only to Experian and not to other credit bureaus. Your payment history, the amount of credit you used, how long you had the credit, and any late payments will all be reported to Experian.
If you don’t pay off your Affirm loan or make late payments, you risk lowering your credit score. But your credit score could take a hit even if you pay off your POS loan on time.
There are several reasons why a POS loan could hurt your score. For starters, there are many factors that make up your credit score, and your score can go down even if you pay your bills on time, if there are other areas that are missing.
Here are the five factors that make up your FICO score:
- Payment history (35%): If you paid your old credit accounts on time
- Amounts due (30%): The total amount of credit and loans you are using against your total credit limit, also known as the usage rate
- Length of credit history (15%): The duration of your credit
- New credit (10%): How often do you apply for and open new accounts
- Credit composition (10%): The variety of credit products you have available including credit cards, installment loans, finance company accounts, mortgages, and more.
Some of the factors that determine your credit history are the average age of your accounts, the age of your oldest account, and how long ago you opened an account. (This is one of the reasons many people worry that closing a credit card will hurt their score.)
“While the on-time payment record can boost your credit, you might see a big blow to your score by using the [BNPL] service, ”says Leslie Tayne, Founder and Managing Director of Tayne Law Group. “Each purchase you make with a POS loan is considered a separate account on your credit report that is closed after you have paid off the balance. Since these loans are short term (usually six weeks), they can significantly reduce the average age of your credit history, especially if you are a regular borrower. “
Since 15% of your FICO credit score is determined by the length of your credit history, repeatedly taking out point-of-sale loans can lower your credit score because it lowers the average age of your accounts, says Tayne.
At Credit KarmaAffirm has a 2.9-star customer rating, and reviewers have complained about the impact of their loans on their credit score, even when they are in good standing.
“Each loan, regardless of its size, will count as a separate account on your Experian credit report. I have used Affirm about 15 times, to take advantage of their 0% finance offers. Surprise! The calculation of the average age of the Experian account on my credit report has gone from 11 years to approximately 2 years. This has a negative impact on your credit score. You must beware,” a reviewer wrote.
Affirm discusses the impact of its loans on consumer credit scores in his help section, noting how much credit you’ve used, how long you’ve had credit, late payments, and your payment history with Affirm can affect your score.
Each BNPL loan handles credit checks and reports to credit bureaus differently.
Although AfterPay does not consider itself a point-of-sale provider, AfterPay does no credit check at all, which makes it a solid option for people who have poor or bad credit and struggle to get a loan otherwise (it won’t improve your credit score either). He does not report loans to the credit bureaus.
Klarna also does not share information with credit bureaus about its point-of-sale loans, according to Klarna. Klarna will perform a soft credit check, which will not affect your credit score, if you take out a “Pay in 4” loan or a “Pay in 30 days” loan. Additionally, if a consumer requests a branded open line of credit product offered by Klarna’s partner bank, a serious investigation can be conducted.
Your score won’t be affected if you take an Affirm loan that charges 0% APR and has four bi-weekly payments, or loans that people have the option of taking a three-month payment term for with an APR. of 0%. If you take out a longer loan with interest, the loan will be reported to Experian.
Before taking out a BNPL loan, make sure you know the terms and conditions so that you fully understand the interest rate and repayment schedule.
Make sure you regularly review your credit report
Everyone should strive to develop the habit of regularly reviewing their credit reports, especially if you’re opening new financial products, whether it’s a POS loan or a new credit card.
Due to the pandemic, each of the three credit bureaus – Experiential, Equifax and TransUnion – now offers a free credit report every week. (They usually each offer one free report per year.) Just go to annualcreditreport.com, a website licensed by federal law, to request your credit report at any of the bureaus. If you have an Affirm loan, you will want to request your Experian credit report.
There are also a number of free services that allow you to track your credit score. Most credit card companies allow you to check your score on their apps or website. You can also use a free credit monitoring program like CapitalOne CreditWise Where Experian Free Credit Tracking.
While taking out a POS loan doesn’t necessarily improve your credit score, there are a few quick ways to improve it. Experience boost, for example, is a free service that offers consumers the ability to connect their utility and streaming service accounts to their Experian credit report. This means that if you pay your Internet, water or Netflix® bill on time, you could see your FICO score improve.
At the end of the line
Ultimately, POS loans could have an unexpected effect on your credit score. If you don’t read the terms and conditions of your specific loan, you might be surprised to find that even when you make your payments on time and in full, your credit score might drop due to the effect of these short loans. term. have over the life of your credit history.
While Stanton has paid off his Klarna and AfterPay loans (both go unreported to the credit bureaus), he still has one Affirm loan left to repay: a loan that will be reported to Experian. Stanton saw no change in his VantageScore over the past year, but when he heard about the effect an Affirm loan could have on his credit score, he said, “… damn it, I should have looked at this a bit more . “
Correction: This article has been updated to correct the amount Square paid to acquire AfterPay. It has also been updated to correctly reflect loans that Klarna is thoroughly investigating.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.