What is Afterpay™, Klarna^® and Affirm^®? | How “Buy Now, Pay Later” Impacts Your Credit

Highlights:

• “Buy now, pay later” (BNPL) plans are payment options for online shopping. They divide your purchases into several payments over a certain period of time.
• In December 2021, Equifax^® became the first nationwide credit reporting agency (NCRA) to formalize a standard process for reporting BNPL services on credit reports.
• When paid in full and on time, some BNPL services can help people looking to establish a credit history.

What is Afterpay™? How does Afterpay work?

*Equifax is not affiliated with nor endorsing Afterpay, Klarna^® or Affirm^® in this article.

Afterpay is a financial technology company offering “buy now, pay later” (BNPL) services. As the name suggests, these payment plans allow users to buy items, then make payments over time. In most cases, the payment plan has four equal payments. You make the first payment when you buy the product. Afterpay then takes the remaining three payments every two weeks from the debit or credit card on your account.

Afterpay, Klarna, Affirm and other BNPL payment options can make it easier to buy online. But it's important to know how BNPL services could affect your credit report and credit score.

How do “buy now, pay later” services work?

BNPL services are sometimes called BNPL loans or interest-free financing. They divide your online purchases into separate payments over an extended period. When you use BNPL services, you generally submit the first payment at checkout. Then, you get billed for the remaining payments in equal, interest-free amounts. You continue to pay this amount until you pay the full amount.

“Buy now, pay later” services may be an option on items that range from less than $100 to several thousand dollars. Shoppers are generally given the option to apply for BNPL services at checkout.

Unlike other types of financing, most BNPL options don't need a hard inquiry into a person's credit. Many may not need a credit check at all. Instead, servicers may collect a shopper's name, phone number and a credit or debit card number.

Depending on which company you use, if you miss a payment you incur late fees. Afterpay does not charge interest on repayments, but there are late fees for users who do not pay on time.

How could Afterpay or other “buy now, pay later” services affect your credit?

The answer will depend on the BNPL servicer you choose to apply for.

Many BNPL plans only run a soft inquiry on your credit report to determine eligibility (or do not run a credit check at all). So, in these cases, your credit score is unlikely to be impacted simply by applying for a BNPL service. However, every BNPL servicer is different. Always carefully review the terms of any BNPL service before applying.

When it comes to reporting, some BNPL services don't report to the NCRAs. Some may only report information to a select number of NCRAs.

Equifax became the first NCRA to formalize a standard process for reporting BNPL services on credit reports. One study found that those who paid their loans on time benefitted from having BNPL payments in their credit file. Equifax encourages BNPL providers to report credit information. This helps to reward consumers for positive repayment habits.

Can “buy now, pay later” services help you build credit?

When added to a credit report, BNPL loans can help people looking to establish a credit history. A thin credit file consists of two or fewer lines of credit. A young file means that the user's credit history is no more than two years old. A lack of credit history may lead to a lower credit score. So, it can be difficult for people in these situations to qualify for credit cards or loans.

That's where BNPL services may help. The average user saw an average FICO^® Score increase of 13 points with the addition of on-time BNPL usage. For those with thin or young credit files, that number jumped up to 21 points.

There are also benefits for users who may need to improve their credit score. This could be from missed payments or other negative information on their report. BNPL plans are often easier to qualify for than other lines of credit. Making on-time payments with a BNPL loan may help build a history of positive credit behavior.

There are some potential downsides to BNPL when it comes to credit. The loans are usually repaid within a few weeks for smaller purchases. This may not help if you are looking to lengthen your credit history. The average age of your accounts and the length of time since you opened a new account are both factored in your credit score. The short-term nature of BNPL plans could impact your credit score. The loan could be completely paid off by the time it makes it onto your credit report.

What are some potential impacts of “buy now, pay later” services?

Under the right circumstances, BNPL plans can be useful tools to online shoppers. But, like all loans, they aren't without their risks. Shoppers may notice they can now access purchases that they couldn't before. When this happens, they end up spending more than they can afford to pay back. Also, some BNPL services may have late fees and high interest rates on payments that aren't made on time.

As with any other loan or debt, be sure that you're able to pay back the amount in full before signing up for a BNPL loan. The plans can help your credit if you pay on time. But, they can also hurt your score if you miss payments and end up racking up more debt in late fees and interest.