Buy now, pay later plans could help build your credit history, but missing a payment could hurt your credit score later on.
Viva Tung/CNETHead's up if you use the buy now, pay later plan Affirm: The BNPL service announced it will provide information on all payment activities to the credit bureau TransUnion for its installment loan products issued on or after May 1. It already reports payment information to Experian for any installment loans issued on or after April 1.
Credit reporting agencies receive a record of your transactions, debt and payment history from credit card issuers, banks and commercial lenders to determine your creditworthiness. But unlike borrowing from other traditional financial institutions, BNPL has typically been left off credit reports.
Affirm is the first major BNPL provider to report these popular short-term loans -- which provide convenient, interest-free pay-over-time options -- to the credit-reporting system. Affirm said the move will help lenders make informed decisions about extending credit and help you build your credit history.
But is this change good news for you? And how will it affect your finances moving forward? Here's what to know.
Read more: What Are the 3 Credit Bureaus? Equifax, Experian and TransUnion, Explained
What BNPL means for your credit report
Affirm said, "Consumers will see details about all Affirm transactions on their TransUnion credit files, though these transactions will not be factored into traditional credit scores nor visible to lenders in the near-term." However, this information may be factored into your score in the future as new credit scoring models are developed.
Your credit history is one of the factors that affect your credit score, so paying on time and in full can work in your favor. Conversely, any missed or overdue debt repayment can lower your score.
In a Help Center article, Affirms states that the following factors won't impact your credit score:
- Opening an account
- Checking your purchasing power
- "Pay now" transactions
The following loan activity may impact your score, according to Affirm:
- "Pay over time" plans
- Payment history
- Late payments
- Credit utilization
- How long you've had credit
Keep BNPL plans from hurting your finances
So far, Affirm is the only major BNPL company currently reporting to any of the three credit bureaus. However, other BNPL lenders and other major agencies outside Experian (Equifax and TransUnion) may not be far behind.
As with any form of credit or loan, you should be calculated and strategic about using BNPL. The potential impact on your credit score is only one consideration.
Paying for something in installments is often a bad idea, even if a BNPL plan doesn't charge interest. It can tempt you to purchase things you can't afford, lead to late payments and lock you into a repayment cycle that can restrict your budget.
If you can't pay for something in full a the time of purchase, consider postponing the purchase, finding other ways to afford it (like buying secondhand) or putting the cost on a 0% interest credit card with a plan to pay off the balance before interest accrues.
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