Why “Buy Now, Pay Later” Plans Can Hurt Your Credit Score, Even If You Pay On Time

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There’s a reason consumers frequently turn to credit cards to pay for purchases they can’t directly cover – it’s an easy way to complete a transaction and manage the payment aspect after the fact. But credit card purchases that aren’t fully refunded can be costly. Credit card companies are notorious for charging a lot of interest, and if you carry a balance long enough, you might end up spending more in interest than on the item you originally charged.

This is why “buy now, pay later” plans, or BNPL plans, have become a more popular option with consumers in recent years. These plans allow you to pay off a purchase in installments over a limited period – usually 12 weeks or less. But unlike credit cards, you don’t accrue interest on BNPL plan payments if you make them on time.

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Now the danger of subscribing to a BNPL plan is to fall behind on your payments. In this scenario, you not only risk interest and penalties on the amount you borrow, but also damage to your credit score.

But even if you manage to pay your BNPL plan purchases on time, signing up for one of these plans could still hurt your credit score. Here’s why.

It all depends on your credit history

There are different factors that go into calculating credit scores. Your payment history, for example, carries the most weight, and it shows how good a job you’re doing at paying your bills when you’re supposed to.

Another factor that goes into calculating your credit score is the length of your credit history. Having long-standing accounts in your name can boost your credit score, which is why you’ll often hear that it’s best not to cancel a credit card you’ve had for a long time but no longer use.

So how are BNPL plans factored in here? Well, the major credit bureaus work hard to incorporate BNPL plan activity into credit reports. And while it might work to your advantage if you pay in a timely manner, it could hurt you from a credit history perspective.

BNPL plans are, by nature, short-term loans. As mentioned, you will usually refund a BNPL purchase within three months. But when you pay off a loan and close that line of credit, it can lower the average age of your open accounts and potentially lower your credit score. This is even more likely to happen if you’re new to the working world and therefore don’t have many long-standing credit accounts in your name.

Let’s say you’ve had a credit card for 10 years and decide to pay for a purchase with a BNPL plan. Paying off that loan might not hurt your credit score as much if you have credit cards in your name that have been open for a decade. But if you only opened a credit card a month ago and you close a BNPL line of credit by repaying your purchase on time, it could have a negative impact on the length of your credit history – and on your overall score. .

Beware of BNPL packages

Although BNPL plans can be convenient, it is important to be aware of the impact they can have on your credit. Although you may think that paying off a loan is a good thing from a credit score perspective, it can sometimes lower your score. This is true whether you’re talking about a BNPL plan, a car loan, or any other line of credit you no longer have open.

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