Buy Now Pay Later (BNPL) used to be a fringe benefit, allowing customers to finance large purchases like furniture, farm equipment and automobiles. Today, digital BNPL companies like Klarna and Affirm allow customers from around the world to pay for just about anything in installments.
But while the convenience of these services can’t be denied, there are some drawbacks to using them that you should be aware of. Here are some examples of when using BNPL might not be worth the convenience, along with some tips on how to use it responsibly.
May Affect Credit Score
If the BNPL provider reports late payments to the three credit bureaus, then your credit score could suffer. Payment history is the most significant factor affecting your credit score, and just one late payment could cause your score to drop by more than 100 points.
May Owe Late Fees
When you choose a BNPL service, make sure to sign up for automatic payments if possible. If that’s not an option, then write down the due date and set a reminder in your phone. If you miss a payment, you’ll be assessed a late fee, usually around $7 or $8.
And before you think late payments won’t happen to you, think again. A survey of BNPL users found that about 31% of them had incurred a late fee at some point.
Not only do BNPL programs come with late fees, but you may also be charged interest if you miss a payment. Interest fees vary, but are often higher than most credit cards – up to 30% APR.
May Miss Out on Rewards
If you put a BNPL payment on a credit card, you might think that you’ll earn credit card rewards points. But some credit card companies have a different reward structure for BNPL payments.
For example, let’s say you normally earn three points for every dollar you spend on travel. But if you pay for a flight using BNPL, then that may only count for one point per dollar.
May Be Charged Bank Fees
Another downside to using BNPL is that you need to be aware of how much money you have in your bank account. If a payment goes through and you don’t have enough money in the account, your bank will likely charge you an overdraft or non-sufficient funds fee.
On average, overdraft fees and non-sufficient funds fees each cost about $35.
Can Make You Spend More
One of the main problems with BNPL programs is that it makes people more likely to buy things they wouldn’t buy otherwise. One survey found that 57% of respondents said using a BNPL service had caused them to overspend. When you’re not responsible for the whole payment at once, it can be much easier to spend more than normal.
For example, let’s say you spot a $500 purse. You’ve never spent more than $200 on a purse, so you start to scroll past it until you notice an option to pay with a BNPL service. Now, instead of paying $500 at once, you’ll make four separate payments of $125. The purse suddenly looks a lot more affordable than it did a minute ago, so you put it in your shopping cart.
Using BNPL may also entice people to buy something when they can’t afford to pay for it now.
If you put a BNPL payment on a credit card and don’t pay it off in full before the credit card due date, then you could owe interest on the payment.
It May Not Help You Build Credit
For borrowers with a thin credit report, using buy now pay later services may be worse than using a credit card.
When you charge purchases on a credit card, the statement balance is reported to the three credit bureaus. Using a credit card regularly and paying off the balance on time will help you build credit, which can make it easier to qualify for a loan in the future.
But most BNPL services do not report on-time payments to credit bureaus, so using them won’t help you build a credit history. If you don’t have a long credit history, you should opt for using credit cards instead of BNPL.
When Using BNPL Makes Sense
When You Don’t Have a Credit Card
If you don’t have a credit card and can’t afford to pay for an item right away, then a buy now pay later service may be appropriate. If you can pay off the item on schedule, then you may be able to avoid interest and late fees.
When You’re Investing the Difference
Some people use BNPL services so they can pay less now and invest the difference. If you’re doing this regularly, then you may be outsmarting the system by earning more in the stock market.
How to Use BNPL Responsibly
If you do want to take advantage of a BNPL service, take the following steps to ensure you don’t wind up paying extra fees or hurting your credit:
Track your payments
When you pay for an item using a BNPL program, make sure to sign up for automatic payments and link the payments to a checking account or credit card. If you use a checking account, make sure there’s always enough money to cover the payment.
Understand what you can afford
One of the main problems with BNPL is that consumers sign up for payments they can’t afford. Before you pay for an item, go through your budget and ensure that you can pay for the item comfortably.
Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins.