Been online shopping lately?
If you’ve seen that button next to the price tag that says, “buy now for 4 payments of $$” and wondered what that was, or how it worked… Today’s post is for you!
NOTE: This blog post was amended in January 2022 to incorporate NEW INFO that credit bureau Equifax will begin recording "BNPL" activity on credit reports in early 2022. This is a a must read.
The “Buy Now, Pay Later” (BNPL) trend is taking the credit world by storm. New fintech companies like Affirm, Afterpay and Klarna are making headlines with million-dollar deals and new ways to pay that are easy and affordable.
But, what are they, really? Can this method of payment be trusted? Does it impact your credit score? And is it really worth it for your wallet?
We’ll answer these questions and more, so the next time you come across that button, you can make spender-savvy decisions -- like the true financial boss babe you were born to be. ;)
Remember when you bought your first car, or really expensive furniture, and you were given the option to pay in separate installments, with either low or zero interest fees?
You could take the car home that day, but you’re still paying it off over a few months or years.
Companies like Affirm, Afterpay, and Klarna work the same way - except for EVERYTHING.
(Well, almost. You can use their services to buy clothing, groceries, electronics, and much more. As long as your retailer supports it, they’re game.)
And since most of us are often strapped for cash, or looking for the cheapest deals, they became popular right away.
Now, the BNPL sector established a billion-dollar industry. Affirm alone is worth $13B. Klarna is valued at $46B. That’s a loooot of zeros.
Across the U.S., payments made via the buy-now-pay-later method grew to 123% (vs. a measly 2% only a year before). That’s millions on top of more millions of people.
Thanks to the competition, even long-standing credit giants like PayPal and VISA are now revamping their buy-now-pay-later services.
Truth is, this trend is here to stay.
Affirm, Afterpay, Klarna, and similar companies allow you to select different payment schedules, and most (not all) are completely interest-free.
They’re not quite the same as a credit card, either. In fact, you still need either a debit or a credit card to complete the purchase. But, instead of being charged for 100% of the amount, these companies allow you to “pay later”.
Payment plans depend on which company you roll with, but here are the 3 most popular choices you’ll see at checkout.
This is the most common! You can split any purchase into 4 interest-free payments, every 2 weeks.
Say you are buying a $100 dress. Instead of forking up the full $100 right now, you’ll be charged $25 in 4 bi-weekly payments. You pay $25 now, $25 in two weeks, $25 four weeks later, and $25 six weeks after that. Get it?
All payments are set up auto-magically on the credit or debit card you used to make the purchase.
(Cool? Sorta. We’ll save our thoughts for now. Onto the next options!)
Another option is to pay $0 at the time of purchase, and you’ll be charged the full amount at the end of the month.
Maybe you reallllllllly want to order that dress for the wedding you’re in, buuut you only get paid at the end of the month. And timing-wise, that’s cutting it close, since you need to wait for shipping, and then you gotta make sure it fits!
With this option, you can buy the dress, and your card will be automatically charged at the end of the month. No interest.
IF at the end of the month, you don't have enough money on your debit card, OR your credit card is maxed out, they will start charging you interest.
The last option is to pay for your purchase in 6 months or more.
PLS DON'T DO THIS. THIS IS A LOAN. IT IS NOT INTEREST FREE.
If you don't have the money now, and you won’t have it in a few days, or whenever your paycheck drops in… Please don't buy it.
Borrow from your BFF, or find a creative way to zhuzh up that old LBD in your closet. Instead of paying interest for 6 months, save it to buy new shoes.
Short answer: until 2022, not unless you miss a payment. but starting any day now, using BNPL will hit your credit score (according to this article)
Previously, so long as:
… And the payments will automatically go through, then your credit was not impacted, and interest is not charged.
However, the credit agencies are changing their view on this AS WE SPEAK.
AND AS ALWAYS, if you miss a payment:
YES, it will affect you. Missed payments always have a negative impact on your credit score.
Plus, you’ll also be charged 10-30% interest. Ouch.
We are not fans of anything that negative impact your credit score.
We are also not super-fans of this form of payment. (Not because the companies aren't legit, or that they are a scam -- which they certainly are not!)
We’re not in love with this trend, because we think it skews the way you think about spending.
Are you going to remember 4 months later that you owe that $25 on that dress? Probably not.
And depending on how much you’re spending, and how often, this could get verrryyy dangerous, very fast.
You get ALL these things immediately, at a quarter the cost or for $0… And granted, that’s awesome. But NOT if you start to spend more money without consciously even thinking you are spending more money!
After all, we don’t want you to accidentally end up with 5 different $100-dresses for that wedding, only because “they were just 4 payments of $25!”... And waaay over budget.
See what we mean?
Yes, these companies are trustworthy. But be careful with over-spend and protect your credit score.
Think of it like chocolate cake. Or sweets, in general.
Yes, they’re delicious and we love them.
But eat too much of it, and you end up with a stomach ache, sugar crash, or worse. No, thank you. We like to enjoy our dessert AND feel good after. And we want the same for you.
Signing up for these services once in a while is fine, if you’re really in a bind (or you’re awaiting a paycheck). But doing this all the time is NOT recommended for your wallet.
Of course, that doesn’t mean you can’t ever go shopping…
Apply the mini-budget method, so you can buy that dress guilt-free ;)
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