From Affirm to Perpay and Klarna to Afterpay, BNPL apps are constantly providing consumers with attractive offers in the form of lighter installments and staggered payments. But what’s the real story behind these offers? Can pay later apps help you build your credit score?
Read on as we investigate how pay later apps can affect your credit score.
What Is Buy Now Pay Later?
Buy Now Pay Later or BNPL is a short-term financing service that people with poor or zero credit scores can access.
With BNPL, consumers can either buy or lease products right away and pay off the installments later.
How Does Buy Now Pay Later Work?
Most BNPL service providers work like loan providers.
Customers can get started by applying for credit on various BNPL platforms. After conducting a soft or hard credit check, the BNPL provider typically determines a credit limit for the applicant. While finalizing a purchase, the user receives a detailed repayment schedule which they can accept or deny. The purchase only pushes through if the customer accepts the offer.
Some BNPL providers ask for a downpayment or the first installment right away. With others, the first payment becomes due once the order ships.
Either way, customers are required to pay a percentage of their total purchase amount in a matter of minutes or days. The remaining amount is divided into weekly or monthly installments (depending on the service) and can be repaid over a longer period in smaller amounts.
Can BNPL Help or Hurt Your Credit Score?
Moving on to the main question: do pay later apps help you build credit?
Yes, pay later apps can help you build your credit score but in the same vein, they can also negatively affect it especially if you have late and missed payments.
How Can BNPL Help or Hurt Your Credit?
When it comes to pay later apps, there are lots of factors that can affect your credit score. Some apps report all your financial activity to credit bureaus while others only report late payments.
Check out the aspects that you should look at before using a pay later service:
Policy in Reporting to Credit Bureaus
BNPL providers have complete control over the information they share with credit bureaus. They may choose to share all your payment activities or only report missed payments. Some even choose to avoid reporting until your account has gone to collections and you’ve missed a couple of payments.
Reporting to credit bureaus is not a good or bad feature in itself. If you’re looking to use BNPL to make smaller purchases and improve your credit, then it’s a great feature. But if you’re worried and afraid you might not be able to pay installments on time, then it can drag your credit rating further down.
Considering this and the fact that BNPLs penalize late and missed payments with high fees, the amount adds up quickly. The higher the amount you’re defaulting on, the more negative its impact on your credit score.
Credit checks can also affect your credit score. Pay later providers must conduct a soft or hard credit check when giving you a credit limit. The credit check itself isn’t a problem, but the number of credit inquiries is.
A soft check doesn’t impact your credit score since it isn’t considered a credit inquiry, however, a hard check counts as an inquiry. In the short term, a high number of credit checks on your account can negatively affect your credit.
Average Credit Account History
How long you’ve been using credit constitutes 15% of your credit score. This means that even if you pay your installments on time, a high number of credit accounts can cause your rating to become lower. If you have too many short-term credit accounts in your name, your credit can suffer.
Total Credit Used
The credit you’re currently using is counted against your credit limit. That can be another negative point on your credit score.
New Credit Frequency
The frequency of applying for credit or opening new accounts can affect your credit. Too many new credit accounts opened in a short time will also negatively affect your credit score.
Pay Later Apps and How They Can Affect Your Credit Score
Let’s take a look at some popular pay later apps and whether they help/hurt your credit score.
For starters, Perpay doesn’t conduct a credit check. They ask for details of employment and more to determine a spending limit for every customer. In other words, hard credit checks are nothing to worry about with Perpay — they don’t do them.
What you do need to worry about is your payment activity. Since Perpay reports all of it to all the major credit bureaus such as Experian, Equifax, and TransUnion, you should be diligent about prompt payments and always be aware of your purchases.
Chime is a fintech company offering a modern take on traditional banking services. Users can apply without any credit checks for their Credit Builder Secured Visa Credit Card.
Chime reports all your payment activity to the three major credit bureaus with the exception of credit utilization.
Klarna runs soft credit checks for its Pay in 4 Plan and hard checks for other financing plans.
While Klarna doesn’t report to credit bureaus, it sends default accounts to collections. If your account is sent to collections, it can affect your credit score negatively.
Affirm doesn’t conduct a hard check during your application but it does report the payment activities of some accounts to the credit bureau Experian. You can check if your particular account is among them.
Like Affirm, Afterpay doesn’t do hard checks but it also shares some information with Experian. This information includes:
- Ongoing payments
- Previous payments
- Credit utilization
- On-time payments
- Age of credit account
Splitit is a unique financing BNPL solution because no credit checks are necessary to open an account. It instead relies on the credit limit of the credit card you use it with. Since your credit card activity is directly reported to credit bureaus, all your payment activity using Splitit will affect your credit score.
Good credit is a precious thing. It allows us to take advantage of the most competitive interest rates, gives us lower fees when it comes to loans and credit cards, and lets us receive financing for major purchases like a house or a car.
Among the 6 BNPL services mentioned here, we have to credit Perpay for being the most helpful in building our credit score. They report all your payment activities to the major credit bureaus allowing you to build good credit standing faster even if you don’t have a good credit history.
However, remember that this can act as a double-edged sword. Reporting to all the bureaus means that they’ll also be informed if you miss or default on a payment. If you’re determined to improve your credit score though, this won’t be a problem and Perpay may just be the service you need to build a better credit rating.