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Buy now, regret later? The tricky relationship between BNPL and credit ratings

  • As BNPL use has surged through the pandemic, consumers’ credit scores have taken a significant hit.
  • Research shows more than a third of BNPL users have fallen behind on their payments and hurt their credit score.

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Buy now, regret later? The tricky relationship between BNPL and credit ratings

Buy Now, Pay Later has grown massively over the last couple of years. Aside from its ease of use and flexible payment terms, BNPL’s popularity surged due to the sustained growth in e-commerce through the pandemic. Store closures and stay-at-home orders compelled people to shop online, which many did out of necessity and others did to cope with stress.

In 2019, Americans spent $20 billion on retail purchases using BNPL programs. This number increased to $24 billion in 2020, and is on track to reach $100 billion this year. All this growth has made BNPL a hot commodity across a variety of industries. Whether it’s banking and fintech heavyweights like Goldman Sachs, Visa, Mastercard, Square and PayPal, or tech and retail giants like Apple, Amazon, Shopify, Walmart, Ikea and Macy’s, everyone wants in.

Meanwhile, the economic uncertainty brought by the pandemic has dented the popularity of credit cards in the U.S., especially among younger consumers who are wary of the downsides of excessive credit card use, such as overspending, impulsive purchases, and mounting debt. These consumers are readily switching over to BNPL, which has marketed itself as a viable, zero-interest alternative.

Yet, recent research suggests that BNPL users may be falling into the same traps that they were hoping to escape by abandoning their credit cards. More than a third of BNPL users (34%) have reportedly fallen behind on one or more payments, according to a study published by Credit Karma. Furthermore, almost three-fourths (72%) of these consumers believe their credit score has declined as a result of missing the payments.

But why are so many BNPL users falling behind on their payments?

“BNPL has made it easier than ever to purchase an item, without even thinking about the implications of the purchase. It’s this disconnect between making a purchase and actually paying for it where consumers can get in trouble,” explained Colleen McCreary, chief people officer and financial advocate at Credit Karma. “For some, it’s even a matter of forgetting to make the payment on time, rather than not having the funds.”

While younger consumers are more likely to use BNPL, it seems they also have a much greater tendency to miss payments. More than half of Gen Z and millennials who used BNPL reported missing at least one payment, compared to 22% of Gen X consumers and just 10% of Baby Boomers. Although it’s not clear what explains these generational differences, McCreary believes it could be because most of the older consumers are more financially stable than their younger counterparts, making it easier for them to budget their money and stick to their payment plans.  

Many BNPL users are unaware that missing a payment can have a lasting negative impact on their credit history and make it harder for them to borrow in the future. Moreover, McCreary points out that BNPL services don’t reward consumers for exhibiting good financial behavior, since most providers don’t report on-time payments to credit bureaus.

“If you make regular on-time payments – which normally signals to a lender that you’re a good borrower – they probably won’t be reported to the bureaus, which means you won’t see a positive shift in your credit score,” she said. “This is an important drawback when you consider payment history makes up roughly 35% of a person’s overall credit rating.”

Kristin Uptain, marketing manager at Redde Payments, says BNPL can be a great tool for the responsible spender who keeps up with payments and regularly tracks their credit score. However, for consumers who aren’t careful about their finances or who can’t resist the urge to overspend, it can easily lead to a debt trap.

Uptain says BNPL gives customers who are not eligible to own a credit card the ability to buy what they want, when they want. While this could be seen as an encouraging step towards financial inclusion, it can become a serious problem for people who struggle with money management or who already have an unstable credit history.

“Many consumers feel like since there’s zero interest and automatic approval, BNPL is essentially a loophole allowing them to purchase goods with no downsides,” said Uptain. “In reality, like any other financial offering, BNPL has downsides that can be detrimental. If it’s repeatedly used for impulse buying with missed payments, it could quickly trap the user in a mountain of debt.”


How can these potentially devastating effects be avoided? Abhi Chaudhary, head of direct-to-consumer products at Green Dot, believes the most effective solution is simply to educate the customer. He says lenders need to take a consumer-centric approach to designing, marketing and managing BNPL, to help customers understand the financial burden they are taking on, and design the product and UX in a way that allows them to utilize BNPL responsibly.

“The easiest way to avoid situations where consumers are missing payments or taking on debt is to be proactive in helping them understand the product before they use it,” said Chaudhary. “Supporting customers with guidance on how their recent debt has been shifting or how it will pan out in the long run are simple ways to ensure that they avoid difficult financial situations and spend responsibly.”

Despite its potential downsides, BNPL is one of the fastest growing payment methods in the e-commerce space, since it provides greater flexibility for shoppers and higher conversion rates for merchants. Although it became popular in the midst of the pandemic, BNPL is likely to stick around long after the pandemic is over, according to Credit Karma’s McCreary.

“If the amount of consolidation and expansion happening in the market is any indication, I think it’s safe to say BNPL is here to stay,” she said. “With that in mind, it will be crucial for consumers to understand the terms and conditions, budget for upcoming payments, and make sure they’re not overextending themselves by taking on too many loans at once. Be sure to weigh your options and read the fine print before you agree to make any kind of purchase.”

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