How does ‘buy now, pay later’ affect your credit score?

If you’ve done any shopping lately, you’ve probably been offered the option to “buy now, pay later” (BNPL) — in other words, split your transaction into installment payments. Having some extra time to pay for your purchase can sound like a great deal if you’re on a tight budget, but this payment option may not be risk-free regarding your credit.

Installment payment services are popular among consumers, and credit card issuers are also starting to offer their own versions. Not all BNPL programs work the same way. Before signing up for one, ensure you understand exactly what you’re getting into.

How does buy now, pay later work?

Buy now, pay later is a financing option that allows you to split your purchase payments into multiple installments, often without interest, as long as you make the payments on time. BNPL services are typically offered during check-out when purchasing online or in-store.

The process is straightforward:

1. Choose the BNPL option at checkout.
2. Make the initial payment at the time of purchase.
3. Pay the remaining balance in a series of scheduled installments.

For example, if you buy a $200 item, you might pay $50 at checkout and then $50 every two weeks until the balance is paid off. Consumers often use this option to manage their budgets more effectively by spreading out the cost of a purchase.

Does BNPL require a credit check?

Many people use BNPL services as an alternative to credit cards, assuming no risk to their credit.

Mary Rosado, a Staten Island, New York, resident, says she uses the BNPL services Afterpay and Klarna all the time. “They don’t ask for your Social Security number, so I can’t see how they can pull your credit report,” Rosado says. “I use them, to be honest, because I have bad credit and can’t get credit cards.”

Rosado is correct. The services she uses perform a soft credit pull that doesn’t ding your credit score. Soft credit checks verify your identity and evaluate your financial behavior. Since they don’t involve a full review of your credit report, they are less intrusive and won’t leave a mark on your credit history.

However, some BNPL services do use a hard credit check. For example, Affirm offers a 0 percent APR option with four biweekly payments and no credit check, but its longer-term installment loans rely on a hard inquiry. PayPal’s “Pay in 4” only uses a soft credit pull, but PayPal Credit does a full credit check.

How hard credit checks affect your score

When you’re presented with different payment options at checkout, it’s important to understand how they affect your credit. Applications for a new credit account for 10 percent of the FICO score calculation.

“Analysis of millions of credit files that we use to build our FICO scores consistently shows that those with higher numbers of recently applied-for accounts and recently acquired accounts do represent a slightly elevated risk of nonpayment down the line,” says Ethan Dornhelm, vice president of Scores and Predictive Analytics for FICO.

Of course, one hard inquiry isn’t going to tank your score. “We generally say that one inquiry is unlikely to impact the score by more than five points,” says Dornhelm. “But for a rare segment of the population, that could be a meaningful impact.”

If you’re applying for a mortgage or refinancing, for example, just a few points could put you in a different interest rate tier.

A bigger issue may occur if you’re using hard inquiries regularly. “If they report and you go out and get five of these loans, it looks like you’re desperate for credit,” says Howard Dvorkin, CPA and chairman of Debt.com. “You have to be very careful.”

How does BNPL affect credit reporting?

Besides credit inquiries, another important variable is whether BNPL account activity has the potential to end up on your credit report — and if it will impact your credit score.

In December 2021, Equifax announced its plan to include BNPL loans on credit reports, and Experian and TransUnion followed suit. To add accounts to your credit report, credit bureaus must receive the information from BNPL providers.

While some providers report account activity to credit bureaus, many don’t. This may also vary depending on the loan product.

For instance, Affirm does not report activity on its four biweekly payments offer, but longer-term loans are reported as installment loans. However, the company only reports your first installment loan, not subsequent ones, unless your account is 30 days or more overdue.

Some BNPL products, like PayPal Credit, may offer revolving lines of credit rather than fixed loan payments. With revolving accounts, the amount of available credit you use (called credit utilization) also significantly impacts your credit score — accounting for 30 percent of it.

In April 2024, Apple became the first major BNPL provider to report account histories for all of its “pay in four” customers to a credit bureau (Experian). Currently, this information is coded so that it is not visible to lenders, and it’s likely to be some time before it’s factored into a borrower’s credit score.

However, as BNPL services become more popular, the relationship between service providers and credit bureaus will likely continue to evolve.

How can BNPL affect your credit?

Missed payments can be harmful to your credit, but remember: not all BNPL programs report your activity.

If you miss a couple of payments but then catch up, your score might come away unscathed. However, if you default on your remaining balance, the debt can be sent to collections, and the credit bureaus will be notified. This typically happens when an account is 90 to 120 days overdue and can vary depending on the provider’s policy.

Once a BNPL provider reports missed payments to the credit bureaus, it will likely show up as a negative item on your credit report and trigger a score drop. Since payment history is the most important factor in the FICO calculation, comprising 35 percent of your score, missing BNPL payments can have a significant impact.

On the positive side, if a BNPL provider reports your on-time payments to the credit bureaus, it can help build your credit history and improve your credit score. Consistent, timely payments demonstrate responsible credit behavior. That can be helpful if you’re trying to establish or rebuild your credit. BNPL accounts can also diversify your credit mix, which accounts for 10 percent.

What are the other risks of BNPL loans?

Beyond potential credit risks, there can be other drawbacks to using BNPL services.

For example, splitting payments into smaller installments can make purchases seem more affordable, potentially leading you to buy more than you can comfortably afford. This can quickly result in accumulating debt, especially if you use multiple BNPL services simultaneously. Missing payments can add to this burden, as late fees pile up, increasing the overall cost of your purchases.

Returning items bought with BNPL can also be complicated. You might still be responsible for making payments until the return has been processed and added to your account, even if you’ve already returned the item. Additionally, some BNPL providers charge extra fees for services like rescheduling payments or early repayment, adding hidden costs to your purchases.

Inconsistent reporting practices among BNPL providers can also create confusion about how your BNPL activity affects your credit, making it harder to manage your credit health.

How can you avoid BNPL pitfalls?

Before using any BNPL service, read the terms and conditions carefully to understand the credit check requirements and reporting practices.

To ensure you don’t inadvertently put your credit score in jeopardy, ask yourself the following questions:

• Does the BNPL program require a credit check?
• Will your payment activity be reported to the credit bureaus?
• Does the service run a hard inquiry or soft inquiry when you apply?
• What happens if you make a late or missed payment?

Regularly monitor your credit report to ensure all BNPL activity is accurately reflected and catch any errors early. If you notice any discrepancies, notify the BNPL service provider and the credit reporting agency right away.

Remember, you’ll need to stay on top of your BNPL payments to avoid late fees and potential negative impacts on your credit score. Consider setting up automatic payments, and use BNPL services wisely to make sure you can comfortably afford the installment payments without overstretching your budget. Following these guidelines can help you use BNPL services responsibly, so you can maintain a healthy credit profile.

The bottom line

BNPL offers could be helpful tools, especially for consumers who don’t have access to other kinds of credit. When used carefully, they can offer some repayment wiggle room with no credit downside, especially if there’s no hard inquiry or reporting.

Bankrate InsightWhen used carefully, especially if there’s no hard inquiry or reporting, BNPL plans can offer repayment wiggle room with no credit downside.

“For me, BNPL is more manageable as long as I don’t get carried away,” says Rosado, who, as a rule, tries to keep spending under $400 so her payments aren’t more than $100 at a time.

Choosing BNPL options that do run credit checks and report payment activity is a bit more risky credit-wise, but as long as you use them sparingly and pay on time, they can work in your favor.

Credit issues aside, it’s important not to let BNPL offers tempt you into overspending. “If you can’t afford it, don’t buy it,” says Dvorkin. “Consumers are very optimistic and sometimes get themselves in trouble.” But if you use a BNPL offer, he recommends automating your payments so you don’t get tripped up and forget to pay.

As with any credit product, your main goal should be to keep debt levels low and pay that debt on time, adds Dornhelm: “Those behaviors, whether it’s on a BNPL loan or a credit card or a personal loan, are likely to help the consumer’s FICO score in the long run.”