The hidden dangers of “buy now, pay later” for your credit

Quick insights

• “Buy now, pay later” (BNPL) services allow you to pay for a retail item over multiple installments so that you can purchase big-ticket items without having the full amount up-front.
• By breaking up a single purchase into multiple payments, you may be introducing more opportunities to miss payments and harm your credit or opening yourself up to extra costs in the form of service-related fees.
• If you're likely to miss paying BNPL installments, you may want to consider budgeting for the item and making a full payment at the time of purchase.

Picture this: You’re doing some online shopping for some new shoes. The ones you like are a bit expensive, but you see an icon at checkout that says, “buy now, pay later,” and suggests that you spread the cost out over several smaller payments. Four payments of $29.99 might sound better than $119.96, but there are certain risks to using this solution, including potential service fees and effects on your credit score.

In this article, we’ll explain how these services work along with their potential advantages and disadvantages. By the end, you may understand the risks and be able to determine if “buy now, pay later” works for you.

Understanding "buy now, pay later” services

Modern “buy now, pay later” services provide a way to pay over time and are most commonly used when making purchases online. BNPL may remind readers of a certain age of “layaway” purchasing, a once-common practice that involved reserving an item in a store while the customer paid for it in installments. With BNPL, the item is purchased and acquired in full and then repaid to the lender in installments over time.

Spreading the payment over multiple installments can be appealing for someone with a constrained budget. Without BNPL, someone on a tight budget might instead need to settle for a lower cost option or save for the desired item over multiple months.

Is “buy now, pay later” bad for your credit?

While the potential advantages of BNPL services are clear, “buy now, pay later” can be bad for your credit if you miss payments.

Missed payments can harm your score

With BNPL, the introduction of multiple payments means more opportunities to miss them and see that reflected on your credit score. One missed payment can cause a drop in your credit score and could potentially stay on your report as a negative mark for months or years.

Timely payments are also a high-impact factor on credit scoring, making it very important to make all payments on time. Down the line, having these kinds of negative marks on your credit report can make it more challenging to be approved for future lines of credit, such as car or home loans. It can also take a substantial amount of time and effort to improve your credit.

The impact of hard credit checks

Using “buy now, pay later” services can negatively impact your credit because a hard credit check is performed. The type of credit check conducted when approving a BNPL service can vary based on the specific company or the size of the purchase. While soft credit checks have little-to-no impact on your score, hard credit checks are more likely to make an impact. Although one hard credit check may not make a major difference, several can add up and begin to drag down your credit score.

Issues with budget management

There may be a temptation to overspend with BNPL due to the perceived affordability of low monthly payments. Especially if you purchase multiple items this way, it could become more difficult to keep track of how much of your budget will be leftover for higher priority expenses. General financial strain, worsened by BNPL payments, could make it difficult to manage costs for essentials and cause missed payments elsewhere, like rent or utility bills.

Other considerations regarding “buy now, pay later” services

While some BNPL services advertise that there’s no interest added when you buy with them, this isn’t the case for all services. It’s important to check that the service does not charge interest by reading the fine print, rather than to assume it will not. Additionally, it’s common for BNPL services to charge late fees, service fees or other kinds of hidden fees you may not have been expecting. You may end up paying more for the item when using this type of service; carefully reading the terms and conditions before buying can help you anticipate such costs.

Bottom line

By now, you understand some of the risks that may come with using this service, which can help you answer for yourself whether “buy now, pay later” can be bad for your credit. If you decide to use this service, making timely payments is one way to avoid impacts to your credit score. You may want to consider enrolling in Chase Credit Journey^®. Credit Journey^® is a free online tool that lets you monitor your score for changes.