“Buy now, pay later” is a popular payment method for younger consumers, but a growing share of BNPL users appear to be suffering negative consequences, including lower credit scores.
Some 24% of buy now, pay later users said their credit scores declined in February “as a result of a missed or late BNPL payment,” according to a recent Morning Consult report. That was up 3 percentage points from the previous month and 3 percentage points from the previous year.
That’s far from ideal — lower credit scores can make it harder for consumers to obtain loans down the road, or make the loans they get more expensive, because they may not qualify for lower interest rates.
The declining credit scores for BNPL users come as consumers are already coping with higher borrowing costs. A series of interest rate hikes by the Federal Reserve has helped push rates higher on everything from auto loans to mortgages.
Buy now, pay later products allow consumers to split a big purchase into smaller chunks over a period of time. Most BNPL providers don’t charge interest, but some charge late-payment fees and other types of fees. Typically, BNPL payments span six weeks, but PayPal offers payment timelines of up to 24 months and Affirm
AFRM,
goes up to 60 months. BNPL has gained steam in the past few years because of its convenience, especially among millennials and Gen-Zers, and among people who have lower incomes.
Late payments are not uncommon: 42% of BNPL users said they have made a late payment on one of their BNPL loans, a separate 2022 survey from LendingTree found.
There’s evidence that more BNPL users are seeing negative consequences from missed or late payments, said Nicki Zink, industry analyst team lead at consumer-insight company Morning Consult. In its survey, 22% of consumers said they had received a call from a debt collector about their missing BNPL payments within the last month, up 5 percentage points from a year prior.
Consumer debts are rising, especially for younger generations
As a whole, Americans are taking on more debt. Credit-card debt climbed to a historic high at the end of last year, with balances reaching nearly $765 billion in the final quarter of 2022, up by more than $100 billion from the previous year, according to the Federal Reserve Bank of Philadelphia data on the largest financial institutions in the U.S., which represent about three-quarters of total U.S. bank card balances.
The fastest growth is among younger generations. Members of Generation Z had an average credit card balance of $2,889 in February. That was up 55.6% from $1,857 in February 2022, a LendingTree survey found.
The Gen Z debt trends may sound worrying, but millennials have the most debt and the lowest financial health score of any age group, according to Morning Consult data. They are more likely than other generations to carry all types of debts that the survey asked about, including mortgages, credit cards, BNPL, auto loans and personal loans.
“They are in their expensive years,” Zink said. Millennials, the oldest of which are now in their early 40s, are at the stage in life where many are purchasing homes and paying for child care, she added.
They’re reaching that chapter as prices on goods and services have marched upward with high inflation, but wages haven’t kept up. Rents and the price of child care have seen notable increases, testing household budgets.
“Contrary to the view that BNPL is an alternative to credit cards, some shoppers are using it to stretch their last remaining credit on their nearly maxed-out credit cards.”
Climbing prices are one reason younger Americans are turning to BNPL as a way to extend their budgets, said Andrew Housser, co-founder and co-CEO of digital personal-finance company Achieve. Contrary to the view that BNPL is an alternative to credit cards, some shoppers are using it to stretch their last remaining credit on their nearly maxed-out credit cards, he said in an email to MarketWatch.
Among Achieve’s own customers, those with BNPL accounts are likely to use credit cards more frequently and more likely to have lower average credit scores than those without a BNPL account, according to recent Achieve data.
While BNPL is often marketed as a tool to help shoppers afford aspirational purchases (think cashmere sweaters) more consumers are starting to use it for basic expenses such as groceries. In the first two months of 2023, the share of online grocery orders made using buy now, pay later grew by 40% compared with the same period a year ago, according to Adobe Analytics data.
That’s a worrying sign about the state of American consumers, said Michael Hershfield, the CEO and founder of Accrue Savings, a company behind a platform that helps consumers save for specific products, an alternative to BNPL services. It goes in line with the trend of rising credit delinquency, he added.
“People are probably taking on more debt than they can afford [and] then just ‘peanut-butter spreading’ it all over a broader surface area,” said Hershfield.
As debts grow, consumers are struggling more to pay them off. The delinquency rate on credit cards for all commercial banks reached a historic low at the end of 2021, and started rising in 2022, according to the Federal Reserve data. In the last quarter of 2022, credit-card delinquency rates reached 2.08% for all banks, the highest since the start of the pandemic, the latest data shows.
Credit reporting is still a murky field for BNPL providers
While a growing share of BNPL users say their credit scores are being negatively affected, the connection between BNPL and users’ credit scores isn’t always clear.
At the moment, BNPL companies do not have a consistent approach when it comes to reporting users’ missed or late payments to credit-reporting agencies.
Among the major providers, few report consumers’ payment history of their short-term installment payment products — the six-week kind — to credit bureaus. Zip and Klarna do not report any of their users’ transaction behavior to credit bureaus, their spokespeople told MarketWatch via email.
At the BNPL provider Sezzle
SEZNL,
credit reporting is voluntary, meaning that consumers can choose to sign up for Sezzle Up, the version that reports payment history to credit bureaus. Sezzle Up reports account activity to TransUnion
TRU,
Experian
EXPGF,
and Equifax
EFX,
Consumers can build their credit history this way, but they cannot reverse their sign-up. This means that if they miss a BNPL payment, it will be reported to credit bureaus and negatively affect their credit score.
PayPal
PYPL,
and Affirm do not report their shorter-term loans to credit bureaus, but it’s a different case for their longer-term products. Affirm reports its loans that have multiple-month terms to Experian, including whether the user has paid on time and whether they are delinquent on the loan.
BNPL providers say they are working actively with credit-reporting agencies to come up with a system that works for their current products and consumers. Existing models used by credit bureaus are based on traditional loans, some BNPL companies say, and do not accurately reflect responsible BNPL usage.
What to know before using ‘buy now, pay later’
Though BNPL products are marketed as a fast, convenient payment option, consumers should be aware of the potential long-term impacts.
Read the terms and conditions carefully and note the timeline of the payments and stick to it, said Justin Passalaqua, country director of payment system company Worldline.
Experts noted that scheduled payments could also incur overdraft fees if the user is using a checking account or debit card to pay with a low balance.
It’s best to use BNPL sparingly, and to make sure the payments fit into your overall budget before you sign up, he said in an email to MarketWatch. It’s also best to tie the payments to a debit card rather than a credit card, so you don’t pile up high-interest debt while using BNPL.
The convenience and fast sign-up process for BNPL, which is often presented to shoppers as they shop online, can make it easy for people to take out multiple loans within a short period of time. Known as “loan stacking,” taking out several BNPL loans simultaneously within a short period of time can lead to financial difficulties, according to a Consumer Reports white paper.
“While some borrowers can afford to pay for multiple loans, others are likely to run out of money when the payments are due, and incur multiple late fees and overdraft charges,” Consumer Reports wrote. Unpaid loans can be sent to debt collectors or “potentially be reported to credit bureaus, and stay on the borrower’s credit report for up to seven years,” the report said.
“BNPL financing is often interest-free,” Housser from Achieve said, “but interest-free debt is still debt.”
