Buy Now, Pay Later (BNPL) & Credit Reports: What You Need to Know

This has the potential to be both a positive and negative change.

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Key points

• "Buy now, pay later" plans allow consumers to pay for purchases in installments.
• Soon, payments under these plans will be added to the payment history section of consumer credit reports.

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Consumers who can't afford to pay for purchases outright often turn to credit cards to pay over time instead. But there's an immediate drawback to doing so -- accruing interest and having purchases cost more.

That's why "buy now, pay later" plans, or BNPL plans, are often touted as a better solution. BNPL plans allow consumers to pay off purchases in installments. Whereas it's possible to carry a credit card balance for years, with BNPL plans, consumers typically have about 12 weeks to finish paying off their items. The upside, though, is that no interest or fees are charged, provided that consumers stick to their payment schedules.

As BNPL plans have grown increasingly popular, they've also come under more scrutiny and criticism. That's because these plans don't require a credit check the way credit companies do. And so it's fairly easy for consumers to qualify for a BNPL arrangement, even if they're not in the best financial shape.

In fact, the Consumer Financial Protection Bureau announced late last year that it would be cracking down on BNPL providers in an effort to ensure that consumers are adequately protected. Meanwhile, credit bureau Equifax will begin recording BNPL activity on credit reports in early 2022. That could end up being a mixed bag for consumers.

The importance of a solid payment history

Consumer credit scores are comprised of several factors, each of which carries a different amount of weight. The factor that carries the most weight is payment history, which speaks to how timely consumers are with their bills and debt payments. A poor payment history can result in a poor credit score, while a solid payment history can result in a strong credit score.

Soon, Equifax will be adding BNPL plan activity to consumers' payment histories on their credit reports. The goal is to give lenders a fuller picture of consumers' payment patterns and financial commitments. But while this is a move that could help consumers, it could also hurt them.

Consumers who sign up for BNPL plans and stick to their agreements could see their credit scores improve as a result. But those who fall behind on their BNPL payments could see their credit scores take a hit once that negative activity is added to their payment histories.

How to use BNPL plans safely

BNPL plans are a good option for consumers who want or need to make purchases they can't cover outright, but expect to be able to pay off within weeks. They're not a good option, however, for consumers who are already in debt and know they can't afford the items they're buying.

Consumers who do sign up for a BNPL plan should read the terms carefully before committing to an agreement. And from there, they should take note of their payment due dates to avoid being delinquent. Similarly, once those agreements are entered into, consumers should factor their installment payments into their budgets to ensure they're on top of them.

While BNPL plans give consumers a lot of flexibility, they're also easy to abuse. The fact that they're about to start showing up on credit reports may result in more consumer accountability, which isn't a bad thing. But it's imperative that BNPL users recognize that while these plans can actually help their credit, the opposite could also happen.