How do you use Buy Now, Pay Later? It likely depends on your credit score
One in five shoppers have now used Buy Now, Pay Later services like Klarna, Affirm and others that let people pay for purchases in installments over weeks.
That's according to the Federal Reserve Bank of New York, which is studying how people use this relatively new option. Because these companies share little information with credit bureaus, there's a lot we don't know about how risky or beneficial their services are proving for people.
Overall, shoppers are increasingly using Buy Now, Pay Later like they might a credit card — frequently and on everything.
"The whole point is to try to not pay interest," says Miguel Kercado from Columbus, Ohio, who first tried Klarna to grab a plane ticket at 30% off to visit family in Puerto Rico.
"It allowed me to act in the moment without tying up my money," says Kercado, 56. He's since used Buy Now, Pay Later to buy a suitcase and replace a broken sofa. "That way, my credit card line was just there if I had to use it for something else."
While credit cards charge interest if you don't pay the full bill at the end of the month, a typical Buy Now, Pay Later offer lets you pay for something in four or six installments interest-free — and doesn't require a credit check.
The New York Fed found that people with good access to credit tend to use the service as a way to avoid interest on a single pricey purchase. But most users are not like that.
New research shows the shoppers fueling the growth of Buy Now, Pay Later tend to have limited access to credit, regardless of their income. They could have a lower credit score, missed credit-card payments or a rejected application for a higher credit limit.
People with limited credit access are three times more likely to use Buy Now, Pay Later five or more times a year, the data show. Their purchases are predominately under $250.
Worth noting, the survey also finds that pretty much anyone who's used the service once will use it again.
"It can snowball so dang quickly," says Maricris Buzzell, 32, who uses Buy Now, Pay Later installments to spread out the financial stress of holiday shopping. She's set up autopay straight from her bank account.
"I budget myself by using my debit card," says Buzzell, from Houston. "With the debit card, you can't spend more than you already got."
That's the biggest danger, experts often warn, including the risk of overdraft fees. And Buy Now, Pay Later companies are starting to act more like credit cards themselves: adding new interest fees and higher late penalties.
Plus, the service rarely helps to build up a credit score, but can hurt it. Missed payments can be reported to credit bureaus.
"The level of risk you're taking on to use Buy Now, Pay Later really depends on how you're using it," says Kimberly Palmer, a personal finance expert at NerdWallet.
"It can be a useful tool to purchase things that you really need in a pinch and you just don't have the cash," she says. "But where you can run into trouble is if you start using [it] to buy optional or luxury items and then you end up getting in over your head."
The main thing to remember is that Buy Now, Pay Later is still a form of debt, Palmer says, that requires careful tracking.
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Transcript
JUANA SUMMERS, HOST:
One in 5 shoppers now uses buy now, pay later. The service lets people pay for purchases in installments over several weeks, and it is clearly growing. And new research finds that how you use buy now, pay later likely depends on your access to credit. NPR's Alina Selyukh reports.
ALINA SELYUKH, BYLINE: The first time Miguel Kercado used buy now, pay later he came upon an airline ticket from his home in Ohio to visit family in Puerto Rico on sale for 30% off.
MIGUEL KERCADO: Trying to get the best deal on the airfare and sometimes that one ticket that pops up when you don't have the money or you don't want to tie up the money right away.
SELYUKH: He didn't want to tie up his money, so he used the service called Klarna to split the airfare into four payments over time. And it worked so well, he did it again with a suitcase.
KERCADO: Normally, I would try to get something, you know, a little bit cheap - inexpensive.
SELYUKH: But he thought, time to get higher-quality luggage.
KERCADO: I can get what I want, as opposed to having to settle.
SELYUKH: Kercado has now paid off both those purchases and become a buy now, pay later pro, joining about 20% of shoppers who've used services from Klarna, Affirm and other similar companies. That's according to the Federal Reserve Bank of New York, which has been studying how people use these relatively new payment options. Kercado illustrates one strategy, which is using buy now, pay later to keep his credit line for more urgent needs.
KERCADO: The whole point is to try to not pay interest. You don't want to put yourself in a situation where you keep buying stuff, and you don't have much of a credit line left.
SELYUKH: The distinction is this, where credit cards charge interest if you don't pay the full bill at the end of the month, a typical buy now, pay later offer lets you pay for one purchase in four or six installments, interest-free. The New York Fed found that people with good access to credit tend to use the service for that reason - to avoid interest on big-ticket items. But the majority of users are not like that.
KIMBERLY PALMER: A lot of younger consumers without credit history find it just very convenient to have that option.
SELYUKH: Kimberly Palmer has been tracking this as a personal finance expert at NerdWallet.
PALMER: Buy now, pay later is most appealing to people that either have limited credit, or they don't want to use their credit cards.
SELYUKH: These are the folks who have fueled the growth of these services, including people with lower credit scores or missed credit card payments. They use buy now, pay later for smaller purchases under $250. The New York Fed says they are also much more likely to be frequent flyers, using buy now, pay later five or more times a year. Although the survey shows pretty much anyone who's used the service once will probably use it again.
MARICRIS BUZZELL: And when the options started popping up, I was like, yeah, this is awesome. It's convenient.
SELYUKH: Maricris Buzzell is from Houston. She uses buy now, pay later to spread out financial pain of holiday shopping. She has set up autopay straight from her bank account.
BUZZELL: I limit myself and I budget myself by using my debit card because with the debit card, you can't spend more than you already got.
SELYUKH: And that is the danger of buy now, pay later, as all experts will warn.
PALMER: When you're saying, oh, yeah, for this $200 purchase, you only have to pay 50 bucks today. And then, you know, you make other big purchases, perhaps, and that can add up really quickly.
SELYUKH: Palmer at NerdWallet says buy now, pay later companies are starting to act more like credit cards, adding new interest fees and higher late penalties. And missed payments can be reported to credit bureaus. That means buy now, pay later rarely helps to build up a credit score, but can hurt it, depending on the situation.
PALMER: It can be a useful tool to purchase things that you really need in a pinch, and you just don't have the cash. But where you can run into trouble is if you start using buy now, pay later to buy optional or luxury items, and then you end up really getting in over your head with the payments.
SELYUKH: And so she says the main thing to remember is that buy now, pay later is still debt that requires careful tracking. Alina Selyukh, NPR News. Transcript provided by NPR, Copyright NPR.
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