Do buy now, pay later services affect consumers' credit?
Buy now, pay later options for shopping have become incredibly popular among consumers. According to the Federal Reserve, over 75% of buy now, pay later (BNPL) users make less than $75,000 in household income. Many consumers, who are watching their wallets, have also become curious over whether this payment method has affected their credit.
MarketWatch Professional Finance Reporter Venessa Wong joins Yahoo Finance to discuss how BNPL offerings affect consumer credits and their broader impacts on consumer spending.
Wong explains the lack of an effect it has on consumers' credit scores: "At this point, it does not show up in your credit score. Experian (EXPN.L) was saying that buy now, pay later transactions, those payments will show up on your credit report, however, it does not get factored into your score at this time. So it won't, at this time, help or hurt you. If you're not making your payments on time, you do have your debt snowballing, which creates other problems."
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Editor's note: This article was written by Nicholas Jacobino
Video Transcript
- Well, if you're trying to watch your funds, consumers might be underestimating how buy now, pay later services impact their credit scores. With that in mind, we're taking a look here about what providers report to credit bureaus. It's not the same across the industry.
To break it down for us, Venessa Wong, MarketWatch reporter, is here. Thank you for joining us, Venessa. So I'm looking at your article here because there does seem to be some misperceptions here around the impact of buy now, pay later services, whether they help or hurt your credit. Break some of that down for us.
VENESSA WONG: It's really interesting. So there was a new New York Fed report that was saying there are some consumers who are turning to buy now, pay later services, thinking that it will help them build credit, which at this point, is still not true. And that's because buy now, pay later providers typically are not reporting their users' payment data to the credit bureaus.
It's inconsistent. There are not standard rules right now for how any of this data is treated. So I reached out to the large buy now, pay later companies. Klarna says that they don't report anything to the credit bureaus. Afterpay also doesn't report anything to the credit bureaus.
Affirm reports some, but not all data to the credit bureaus and not to all the credit bureaus. So there is, at this point, still sort of like a Motley landscape in terms of how buy now, pay later data is dealt with. So specifically, a firm reports monthly installment payments to Experian, but it does not report payments for its pay-in-four plan, in which your total balance is split into four payments to any of the credit bureaus.
Once it gets to the credit bureaus, how they deal with it is also not standard, so I can go into that a little bit if it makes sense. TransUnion says it doesn't-- TransUnion was saying it doesn't--
- It doesn't help your credit, but does it hurt your credit if you don't make those payments in time? Because that's always been a bit of a concern, as well. Where do you take hit?
VENESSA WONG: At this point, it does not show up in your credit score. So Experian was saying that buy now, pay later transactions, those payments will show up on your credit report. However, it does not get factored into your score at this time. So it won't, at this time, help or hurt you. If you're not making your payments on time, though, you do have your debt snowballing, which creates other problems.
- So, Venessa, then, in terms of financial education about this, how much of that falls on some of these companies? How much of that is clear when people are making these purchases of what they're getting into, especially for some of the ones that offer interest like a firm, depending on the size of your payments here? How much do people actually know about what they're getting into?
VENESSA WONG: I think because buy now, pay later is still a relatively new service, there's still a lot of confusion about what is going on. And I think because there are different payment plans, for example, with a firm having a monthly installment payment plan or pay-in-four payment plan, which is dealt with differently in terms of how it's reported to the credit bureaus, it's just rather confusing.
So there are consumer advocates who believe that using a credit card which has established reporting standards with the credit bureaus that most people-- many people are used to how they're dealt with, which actually do help you build credit if you're making on-time payments is a better option for folks who are trying to build their credit.
- Well, certainly appreciate you joining to clarify some of that for us. I know a lot of people are using it for things like-- even small things like groceries, so certainly, important to see how those things add up and affect credit. I appreciate you joining us, Venessa Wong, MarketWatch reporter. Thank you so much.
VENESSA WONG: Thank you very much.
