How ‘Buy Now, Pay Later’ Services Impact Your Credit Score

You might have noticed a recent uptick in online retailers offering ‘buy now, pay later’ options. Many platforms offer such services at no cost, or for a fixed fee, allowing you to pay off purchases in smaller installments at a later date—almost like layaway updated for the 21st century.

The use of these payment services exploded in popularity during the online shopping boom brought about by 2020’s quarantine. The idea of buying something on “credit” without actually using your own credit might seem enticing, but it’s important to remember that if something sounds too good to be true, it probably is.

Carrying any kind of debt—whether through a traditional line of credit like a credit card or through an improvised line of credit like a ‘buy now, pay later’ plan—will be reflected in your credit report and can affect your credit score. And here you were thinking you were well on your way toward being debt-free.

Postpaid or embedded finance services may use hard inquiries

Postpaid services—often referred to as “embedded finance services”—are third-party organizations that work with retailers to facilitate ‘buy now, pay later’ services on their online platforms. Some names you might recognize include Affirm, Quadpay, and Sezzle, among others.

When you opt in for a postpaid service while shopping online, a new line of credit from one of these lenders will appear on your credit report. Remember that a hard inquiry on your credit report can potentially lower your score temporarily. If you aren’t asked to enter your Social Security number when applying for a postpaid service, their soft credit inquiry won’t damage your score.

<h2>The ‘buy now, pay later’ mentality can increase unnecessary spending</h2>

Buyer beware; don’t be fooled by the ease with which you’ve been approved or the small size of your purchase. This new line of credit functions exactly like a personal loan. As such, you’ll be expected to make payments on time or risk incurring fees and negatively impacting your credit score.

It’s not all bad, though. Responsible use of ‘buy now, pay later’ services can actually improve your credit score, just like paying your credit card bills on time.

Psychology plays a big role here, too. Retailers recognize that smaller deferred payments are more attractive to consumers and try to capitalize on this. ‘Buy now, pay later’ options aim to increase unnecessary spending under the guise of frugality. Letting purchases and payments snowball out of control is a one-way ticket to damaging your credit score.

Lack of consumer protections

Despite the fact that postpaid services function a lot like short-term lending services, they operate outside of the legal definition of short-term lending, with executives claiming that their embedded finance service products are budgeting tools.

This technicality means that postpaid services aren’t subject to consumer finance regulations like the Truth in Lending Act, which aims to protect you from inaccurate or unfair billing and credit practices. With this in mind, it’s important to do your due diligence when opting into postpaid services: Read the fine print, examine the timetable for your loan, and be cognizant of additional payments and fees to ensure that you don’t fall victim to predatory behavior and damage your credit in the process.