Popular loan program could hurt your credit score starting this fall

💲 Buy Now Pay Later will be a part of credit scoring starting this fall

💲 This could harm a person's credit score or boost it

💲 Find out how the loan program may affect your credit

Buy Now Pay Later. The loan program that allows customers to help break up purchases into installments, usually four, have become increasingly popular, particularly among young shoppers.

The program is interest free, too. Sounds great, right?

For some it is, but for most shoppers, it is not, said Paul Oster, president of Better Qualified in Eatontown.

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What’s the problem?

“A lot of people are defaulting on these loans. Let’s face it. Most of the people that are using these loans already have poor credit. They’ve already maxed out on their credit cards. There’s a reason why they’re using a Buy Now Pay Later program,” Oster said.

As a result, Fico, the company that assigns credit scores, says starting this fall, it will incorporate BNPL purchases into its scoring formula, which, in turn, could damage many peoples’ credit scores, Oster said.

Some defaults are up 17% year-over-year. The market is about $46 billion in these plans and loans. The average loan is now over $700, he explained.

“The problem is, a lot of people, they do some mental math, they think they’re going to be able to pay this off, and they can’t,” Oster said. So, they wind up defaulting.

What are credit ratings companies planning?

The BNPL program has been unregulated so far. So, if they are treated like credit cards, they will need to be regulated, and consumers need to understand, this will impact their credit.

Experian is thinking of doing a BNPL bureau. Transunion is going to have a separate spot on the credit reports for BNPL and Equifax is going to report it the way the creditor wants it reported, whether that be a revolving account or an installment loan, he said.

For the average person, this won’t be good, Oster said. The average person has to realize there is a tremendous risk when using this plan. They have to ask themselves, “why do I need to use it? Should I use it? Can I really pay it off in four payments?”

If they can’t, they are going to get hit with deferred interest and late fees, leading to a negative impact on their credit, Oster explained.

Even though the BNPL installments are supposed to be automatic withdrawals from a person’s account, Oster said unfortunately, these people are living paycheck to paycheck. They don’t have the money in their accounts. Their credit cards are maxed out and they simply can’t make the payments.

Can BNPL be good for credit ratings?

Fico said having BNPL averaged into a person’s credit score can actually could be beneficial to those who have been diligent in paying BNPL loans, especially those who have limited credit history. Getting these accounts added to people’s credit reports who don’t have traditional creditors and financing, this can be a big win for them, Oster agreed.

But again, the people who are using these plans are the ones who should not be using these plans because they have not allocated the funds correctly to make sure they have enough to cover these payments when the hit their accounts.

How to keep your credit rating intact?

To make sure that BNPL options don’t wreck your credit rating, Oster suggested creating a budget. Put money away into a savings account so the money is always available to make the installments. “You can’t do mental math. You have to have a budget in place,” he said.

Overall, BNPL could be a great loan option for the person who can’t afford to make the purchase today, but they need to make the item immediately.

Use the plan. It’s free money. It’s interest free. But, they have to make sure they have the funds to make the payments every month in full, Oster warned.

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