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When Ryan Stanton moved into his new apartment after graduating from college, he decided to buy some of the household items he needed through “Buy Now, Pay Later” providers Affirm, Klarna and Afterpay.
Instead of paying a lump sum or writing on a credit card, he chose to split the cost of his exercise equipment, clothing, pillows, and watch into installments, due every two weeks or every month. Stanton felt secure in financing his purchases with 0% interest BNPL loans because he knew he would make his installment payments on time and in full.
Buy now, pay later loans – also known as point-of-sale loans – allow consumers to pay for their purchases over a set period of time in installments that are typically biweekly or monthly.
If you’ve been shopping at sites like Target, Walmart, Sephora, or ASOS lately, you’ve probably noticed the BNPL option when you check out. Square’s recent acquisition of a popular BNPL provider, AfterPay, based in Australia, for nearly $ 30 million, indicates the growing popularity of BNPL providers. In fact, a recent report from CB Insights predicts the industry will grow 10 to 15 times its current size by 2025.
The appeal of POS credit is easy to see: while traditional credit cards require consumers to pay their monthly bill in full and on time each month, or be plagued by high interest and late fees, some BNPL credits give consumers credit with 0% interest and no penalties for late payments.
But are these loans as easy as they seem? Select spoke to a number of financial professionals to find out how this new method of funding could negatively affect your credit score, whether or not you are a smart loan user who makes your payments on time and in full each month.
How Some POS Lending Can Reduce Your Credit Score
Depending on your loan provider, taking out a POS loan can either increase, decrease, or not affect your credit score. Some of the most popular POS lending providers – AfterPay, Affirm, and Klarna – report some loans to credit bureaus and some do not.
“If a missed payment is reported, it can be on your credit report for up to seven years and negatively affect your creditworthiness,” said Rod Griffin, senior director of Consumer Education and Advocacy, Experian. “At the same time, these services can be a helpful way to build credit, if a lender gives credit bureaus like Experian their account information and you manage the debt responsibly.”
Affirm is a BNPL provider that reports information about some loans to Experian. No loans with an APR of 0% APR and four biweekly payments or loans that have been given the option of three months at 0% APR are not reported.
For other affirm loans, the entire loan history is reported to Experian. This means that both positive and negative payment history will only be reported to Experian and not to any other credit bureau. Experian will be notified of your payment history, the amount of credit you used, the duration of the credit, and any late payments.
If you default on your affirm loan or make late payments, you risk lowering your credit score. But your creditworthiness could take a hit even if you pay off your POS loan on time.
There are a few reasons a POS loan could hurt your score. For starters, there are many factors that make up your credit score, and even if you pay your bills on time when other areas are missing, your score can go down.
Here are the five factors that make up your FICO score:
- Payment history (35%): Whether you’ve paid previous credit accounts on time
- Amounts owed (30%): The total amount of credits and credits you have used compared to your total credit limit, also known as the usage rate
- Loan History Duration (15%): How long you had credit
- New credit (10%): How often do you apply for and open new accounts
- Credit mix (10%): The variety of loan products you have including credit cards, installment loans, financial company accounts, mortgage loans and so on
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 it has been since you opened an account. (This is one of the reasons many people fear that closing a credit card could affect their score.)
“While keeping a record of on-time payments can increase your credit score, you could improve your score by using the [BNPL] Service, “says Leslie Tayne, founder and chief executive officer of Tayne Law Group. Because these loans are short-term (typically six weeks), they can significantly reduce the average age of your loan 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 POS loans can degrade your credit score as it lowers the average age of your accounts, explains Tayne.
On Credit Karma, Affirm has a 2.9-star customer rating and reviewers have complained that their loans are affecting their creditworthiness, even if they have a good reputation.
“Each loan, no matter how large or small, is counted as a separate account on your Experian credit report. I’ve used Affirm about 15 times to take advantage of their 0% funding offers. Surprise! The Experian average account age calculation in my credit file went down from 11 years to about 2 years. This has a negative impact on your creditworthiness. Be careful, “wrote one reviewer.
Affirm covers how its loans can affect consumer creditworthiness in its Help section.
Are you in need of a BNPL loan that won’t affect your creditworthiness?
If you want a loan that doesn’t affect your creditworthiness, you should consider Klarna and AfterPay, as no hard inquiries or loans are reported to the credit bureaus, with the exception of longer-term Klarna financing. POS providers like AfterPay and Klarna are known for their 0% interest loans that customers pay back over a month, two months or six weeks.
AfterPay doesn’t do any credit checks at all, making it a solid option for people who have bad or bad credit and are otherwise struggling to get a loan (it won’t improve your credit either). Klarna does, however, carry out a gentle credit check when you take out a “Payment in 4” or “Payment in 30 days” loan.
And your score won’t be affected if you take a 0% APR affirm loan with four biweekly payments or loans that give people the option of a 3 month APR payment term.
Before taking out a BNPL loan, make sure you are clear about the terms so that you understand the interest rate and repayment schedule.
Be sure to check your credit report regularly
Everyone should make a habit of checking their credit reports regularly, especially when starting new financial products, be it a POS loan or a new credit card.
Due to the pandemic, each of the three credit bureaus – Experian, Equifax, and TransUnion – are now offering a free weekly credit report. (They usually offer a free report annually.) Just go to annualcreditreport.com, a federally authorized website, to get your credit report from any of the bureaus. If you have an affirm loan, you should request your Experian credit report.
There are also a number of free services that you can use to keep track of your creditworthiness. Most credit card companies allow you to check your score in their apps or on their website. You can also use a free credit monitoring program like CapitalOne’s CreditWise or Experian’s Free Credit Monitoring.
While signing up for a POS loan doesn’t necessarily improve your credit score, there are a few quick ways you can improve it. Experian Boost, for example, is a free service that allows consumers to link their utility and streaming accounts to their Experian credit report. This means that if you pay your internet, water, or Netflix® bill on time, your FICO score can improve.
Ultimately, POS loans can have an unexpected impact on your credit score. If you don’t read the terms and conditions for your particular loan, you will be surprised to find that even if you make your payments on time and in full, your creditworthiness can deteriorate due to the impact of these short term loans on the length of your credit history.
While Stanton has paid off his Klarna and AfterPay loans (both of which are not reported to credit bureaus), he has yet to pay off an affirm loan: a loan that is reported to Experian. Stanton hasn’t seen any changes in his VantageScore over the last year, but when he learned of the impact an affirm loan could have on his creditworthiness, he said, “… damn it, I should have looked a little closer.”
Note to editors: Opinions, analysis, reviews or recommendations expressed in this article are solely those of the Select editors and have not been reviewed, approved or otherwise endorsed by third parties.