You may have seen the option of paying for things like furniture or housewares through things like Affirm, Klarna, or Afterpay. These options will usually appear below the price of an item you are looking to purchase online and will have a note that reads: “Only $ 25 per month with Affirm” or “$ 40 this month with Afterpay” . These are Buy Now, Pay Later, or BNPL loans, and you should approach them with caution as they can hurt your credit in the long run.
See: Which is smarter: “Buy now, pay later” or credit cards?
Find: Affirm Personal Loan Review: No Hidden Fees, Potentially High APR
These loans work the same way as the old-fashioned layaway system. Instead of putting a lump sum on a credit card or paying something cash in full, you can cough up the cost of an item – or multiple items – with payments due every two weeks, or every month. but in smaller amounts. These loans, also known as point-of-sale loans, often offer 0% interest for a specific period.
Not all BNPL loan providers report to credit rating agencies, but the most popular do. Assert, for example, the reports to the credit bureaus, but not for all of their loans. CNBC reports that Affirm does not report loans that pay 0% interest for a three-month period or loans with zero interest and four bi-weekly payments. In other words, if you plan to get off their books soon, they are not interested in reporting you to the credit bureaus.
However, if you do not repay your Affirm loan or make late payments, a report will be filed just like any other payment agency would for late payments. The caveat is that even if you pay off this type of loan on time, your credit score could still take a hit.
“While having a record of on-time payments can increase your credit, you might see a big blow to your score by using the [BNPL] service, ”said Leslie Tayne, founder and CEO of Tayne Law Group to CNBC. “Each purchase you make with a POS loan is considered a separate account on your credit report that is closed after you have paid off the balance. Since these loans are short term (usually six weeks), they can significantly reduce the average age of your credit history, especially if you are a regular borrower.
Although Affirm is one of the most widely used, Klarna and Afterpay are also major loan providers which can be used as alternatives beyond the credit bureaus. AfterPay doesn’t do any credit checks, and Klarna does what she calls a soft credit check.
Afterpay can be a good option for those with bad credit or for anyone who is trying to build up credit and needs to buy something with a little financial leeway. Klarna, while this is also a good option, will signal you to Experian if you take out some of their longer loan options.
It’s important to remember that with any of these loans, you need to keep a meticulous payment history so that you don’t have bigger issues down the line. While these programs can be useful and convenient in a pinch, the best option is always to open a low limit credit card and pay it off immediately so that you can build up lasting credit that can be used in the future.
BNPL loans shouldn’t be viewed as long-term, sustainable payment plans for everyone, as they were created for those who don’t have credit in mind to begin with. It’s also important to note that the majority of these loans are taken out for clothing and electronics – not necessarily daily necessities or emergency purchases.
See: “Buy now, pay later” backfired? One-third of U.S. consumers are behind on payments
Find: Klarna Review: Is This The Right Buy Now, Pay Later Platform For You?
Keep in mind that these companies make money betting that you will exceed the allowable limit on your loan, and not only will they charge you high interest rates, but they will also report missteps to the credit bureaus.
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This article originally appeared on GOBankingRates.com: How To Buy Now, Pay Later Loans Through Affirm & Afterpay May Lower Your Credit Score