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When Ryan Stanton moved into his new apartment after graduating from college, he decided to purchase some household items he needed through "buy now, pay later" providers Affirm, Klarna and Postpayment.
Instead of paying a lump sum or putting it on a credit card, he opted to split the cost of his workout gear, clothes, pillows and a watch into installments due every two weeks or every month. Stanton felt secure financing his purchases with 0% interest BNPL loans because he knew he would make his installment payments on time and in full.
"Buy now, pay later" loans – also known as point-of-sale loans – offer consumers the ability to pay for their purchases over a set period of time with installment payments that are typically due bi-weekly or monthly.
If you've shopped on sites like Target, Walmart, Sephora or ASOS lately, you've probably noticed the BNPL option when you get to the checkout page. Square's recent acquisition of a popular BNPL provider based in Australia AfterPay, for nearly $30 million, points to the growing popularity of BNPL providers. In fact, a recent report by CB Insights predicts that the industry will grow 10 to 15 times its current size by 2025.
The appeal of POS credit is easy to see: While traditional credit cards require consumers to pay their monthly bill in full and on time each month or be hit with high interest rates and late fees, some BNPL loans offer consumers credit with 0% interest and no penalties for late payments.
But are these loans as simple as they seem? Select spoke with a number of financial experts to find out how this new financing method could negatively impact your credit score, regardless of whether you are a smart credit user who makes your payments on time and in full each month.
How some POS loans can lower your credit score
Depending on your loan provider, taking out a POS loan can either increase, decrease, or not affect your credit score at all. Some of the most popular POS loan providers – AfterPay, Confirm and Klarna – report some loans to the credit bureaus, but not others.
"If a missed payment is reported, it can go on your credit report for up to seven years and negatively impact your credit score," says Rod Griffin, senior director of consumer education and advocacy at Experian. "At the same time, these services can be a helpful way to build credit if a lender that credit bureaus like Experian shares its account information and you manage the debt responsibly."
Affirm is a BNPL provider that does this Report Experian credit report information on some loans. No loans are reported with 0% APR and four bi-weekly payments, or loans where people have been given the option of a three-month payment period with 0% APR.
For other affirm loans, all credit history is reported to Experian. This means that both positive and negative payment histories are reported only to Experian and not to other credit reporting agencies. Your payment history, the amount of credit you used, the duration of the credit, and any late payments are reported to Experian.
If you default on your affirm loan or make late payments, you risk lowering your credit score. But your credit score could take a hit even if you pay your POS loan on time.
There are a few reasons why a POS loan could hurt your score. For starters, there are many factors that make up your credit score, and your score can drop even if you pay your bills on time if other areas are lacking.
Here are the five factors that make up your FICO score:
- Payment history (35%): Whether you have paid previous loan accounts on time
- Amounts owed (30%): The total amount of credit and loans you've used compared to your total credit limit, also known as your utilization rate
- Length of credit history (15%): How long you've had credit
- New Credit (10%): How often do you apply for and open new accounts
- Credit Mix (10%): The variety of credit products you have, including credit cards, installment loans, financial company accounts, mortgage loans, and so on
Some of the factors that determine your credit history are the average age of your accounts, the age of your oldest account and how long ago you opened an account. (This is one of the reasons why many people fear that closing a credit card could affect their score.)
"While keeping a record of on-time payments can boost your credit score, you could boost your score by using the [BNPL] service," says Leslie Tayne, founder and CEO of Tayne Law Group. Because these loans are short-term (usually six weeks), they can significantly lower the average age of your credit history – especially if you are a regular borrower.
Since 15% of your FICO credit score is determined by the length of your credit history, repeatedly taking out POS loans can lower your credit score because it lowers the average age of your accounts, Tayne explains.
On Kreditkarma, Affirm has a customer rating of 2.9 stars, and reviewers have complained that their loans hurt their credit scores, even if they have a good reputation.
"Every loan, no matter how big or small, is counted as a separate account on your Experian credit report. I have used Affirm about 15 times to take advantage of their 0% financing offers. Surprise! Experian's calculation of the average account age in my loan file has dropped from 11 years to about 2 years. This has a negative impact on your credit score. Take heed," one reviewer wrote.
Affirm goes into how its credit can affect consumers' credit scores its help section, pointing out that your credit, how much credit you used, how long you had credit, late payments and your payment history with Affirm can affect your score.
Need a BNPL loan that won't affect your credit score?
If you want a loan that won't affect your credit score, consider Klarna and AfterPay, as neither hard inquiries nor credit are reported to the credit bureaus, with the exception of longer-term Klarna financing. POS providers like AfterPay and Klarna are known for their 0% interest loans that pay customers back over a month, two months or six weeks.
AfterPay doesn't run through any credit checks at all, making it a solid option for people who have poor or bad credit and have a hard time getting credit otherwise (it won't improve your credit score, either). However, Klarna will do a soft credit check when you take out a loan "payment in 4" or "payment in 30 days".
And your score will not be affected if you take out an Affirm loan with 0% APR and four bi-weekly payments, or loans where people have the option of a three-month payment term with 0% APR.
Before taking out a BNPL loan, make sure you are aware of the terms so you understand the interest rate and repayment schedule.
Be sure to check your credit report regularly
Because of the pandemic, each of the three credit reporting agencies – Experian, Equifax and TransUnion – now offer a free credit report weekly. (They usually offer a free report every year.) Just go to annualcreditreport.com, a website authorized under federal law, to request your credit report from one of the bureaus. If you have an affirm loan, you should request your Experian credit report.
There are also a number of free services you can use to keep track of your credit score. With most credit card companies, you can check your score in their apps or on their website. You can also use a free credit monitoring program like . use CreditWise from CapitalOne or Experian free credit monitoring.
While signing up for a POS loan won't necessarily improve your credit score, there are a few quick ways to improve it. Experian-Boost, for example, is a free service that allows consumers to link their utility and streaming accounts to their Experian credit report. This means your FICO score can improve if you pay your internet, water or Netflix® bill on time.
End Effect
Ultimately, POS credit can have an unexpected impact on your credit score. If you don't read the terms of your particular loan, you'll be surprised to learn that your credit score can decrease due to the impact these short-term loans can have on the length of your credit history, even if you make your payments on time and in full.
While Stanton has paid off his Klarna and AfterPay loans (neither of which are reported to the credit bureaus), he has yet to pay off an Affirm loan: a loan that is reported to Experian. Stanton hasn't seen any changes to his VantageScore in the past year, but when he learned of the impact an affirm loan could have on his credit score, he said, "…heck, I should have looked into that a little bit more."
Editorial Note: Opinions, analysis, reviews or recommendations expressed in this article are solely those of the Select editorial team and have not been reviewed, approved or otherwise endorsed by any third party.