Use buy now, pay later? Here's how it could soon help or hurt your credit.
Buy now, pay later has become a popular way to pay for everything from big purchases to groceries and even takeout, but it could soon impact your credit score.
More than half of American consumers report using buy now, pay later services at least once in the past year, with many saying they prefer it over credit cards, according to findings from a recent study by Motley Fool Money.
Buy now, pay later soon to be included on credit scores
These loans let consumers split payments into smaller installments spread out over time. The most common buy now, pay later loans are "pay in four" products, according to the Consumer Financial Protection Bureau.
Buy now, pay later loans have typically been left off of credit reports, but that's about to change in a big way.
The three big U.S. credit bureaus — Experian, Equifax and TransUnion — have all announced they will start including buy now, pay later loans in the calculation of your credit score.
TransUnion said it's working with FICO to include buy now and pay later data in its calculations.
These loan services can also help your credit score
Credit agencies argue that it will provide a more accurate picture of a consumer's financial health. But whether it will help or hurt you depends, according to financial columnist Gene Marks.
"The more examples you can give to a credit agency that you can manage your debts well, the more positive impact that will have on your credit rating," Marks said.
Marks added that it also provides an opportunity for people to build credit who otherwise don't have access to traditional lines of credit.
"But at the same time, you have to make sure you are paying it back within time," Marks said. "Otherwise, you really will be penalized and not just by the buy now, pay later services but also by the credit rating bureaus that are going to be looking that much more closely at you."
Buy now, pay later grows among Americans under 44
Exactly how and when the credit bureaus will start incorporating this data remains unclear. Marks says one challenge for credit bureaus will be determining how to factor in short-term buy now and pay later loans when the length of credit history accounts for a significant share of your credit score.
So far, Affirm is the only major buy now, pay later company reporting to any of the three credit bureaus. But at least for now, Experian and TransUnion say that information is going to stay separate from your core credit data.
The use of buy now, pay later has grown significantly for young people under 44. Lending Tree just found that a quarter of buy now, pay later users are now using installment plans to pay for everyday essentials, like groceries.
Critics of buy now, pay later services have cautioned that some can charge exorbitant rates and large fees when you miss a payment. Unlike credit cards, buy now, pay later loans lack basic consumer protections.
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