You’re starting the process of buying a house and just visited your mortgage broker on a Friday afternoon. On the way home, you stop at a furniture store, just to look around because you’re so excited about the prospect of owning your first home.
Browsing around the beautiful showroom and envisioning everything in your new floorplan, the nice salesperson comes over to you.
“You know, we have a sale right now on that set. And you can actually buy it now and pay later.”
Sounds good, right? No problem! So, you go for it and purchase the furniture set with Buy Now Pay Later (BNPL) financing. How convenient!
That is, until the next week when you get a call from your mortgage guy, exasperated because your credit score took a dive. Apparently, the BNPL financing reported on your credit report – and the bureaus did not look at it too kindly.
Your scores went down, the mortgage is suddenly more complicated (and expensive) and your plans of buying a home have to be put on hold. In fact, with your score drop, your credit card interest rates may go up, your next auto loans or student loans will come with higher rates, and even insurance premiums can skyrocket.
That’s the scenario we may see repeated again and again, upending good credit scores and derailing finances accordingly.
Buy Now Pay Later offers are essentially just installment loans, but with a catch. They’re also frequently offered at retailers, furniture stores and the like, allowing people to make purchases immediately that perhaps are less than financially responsible.
The pro is that they usually don’t come with interest or fees on that financing. However, unlike credit cards, where you can take years to pay off your purchases, BNPL plans usually make you pay in full within 12 weeks or some similar timeframe. And if a consumer does miss a payment or deviates from the full payment plan by one dollar or one day, they’ll be walloped with additional fees and charges, which happens often.
Essentially, BNPL lenders are setting up consumers to fail and hoping they do, a fact that brought the Consumer Financial Protection Bureau to crack down on BNPL last year. And from a credit standpoint, BNPL will start impacting your scores – often negatively.
Equifax recently announced that they’ll start recording BNPL accounts on their credit reports starting early this year (2022). Since BNPL have such contracted and aggressive repayment schedules, with many consumers falling short of a perfect repayment record, this could seriously blindside a good number of people.
60% of consumers say they’ve used BNPL financing, and 51% did so during 2021. That’s more than half of all US consumers who are buying now and paying later, who may see the consequences of that easy, convenient financing impact their credit scores.
Of course, BNPL financing may help improve credit scores for a portion of consumers who pay on-time and in-full. But there are far better ways to increase your score and standard, reputable credit cards or even secured accounts may be a better method.
To protect and improve your credit score, stick to the fundamental best practices that all credit bureaus promote, such as paying all bills on time, keeping balances low compared to available credit, having a good mix of credit, having well-seasoned accounts, and minding your new credit.
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If you need any advice or even help improving your credit score, just contact Blue Water Credit!
