This is likely to be a positive and negative change.
the main points
- Buy now, pay later plans allow consumers to pay for their purchases in installments.
- Soon, payments under these plans will be added to the Payment History section of Consumer Credit Reports.
Consumers who cannot pay for purchases directly often turn to credit cards to pay over time instead. But there is an immediate drawback to doing so – reaping the benefits and increasing the cost of purchases.
That’s why “buy now, pay later” plans, or BNPL plans, are often touted as a better solution. BNPL plans allow consumers to pay their purchases in installments. While it’s possible to hold a credit card balance for years, with BNPL plans, consumers usually have about 12 weeks to finish paying off their items. But the plus side is that no interest or fees are charged, provided consumers stick to their payment schedules.
As BNPL schemes have grown in popularity, they have also come under more scrutiny and criticism. That’s because these plans don’t require a credit check as credit companies do. Thus, it is very easy for consumers to qualify for a BNPL arrangement, even if they are not in the best financial condition.
In fact, the Consumer Financial Protection Bureau announced late last year that it would crack down on BNPL providers in an effort to ensure consumers are adequately protected. Meanwhile, credit bureau Equifax will begin recording BNPL activity on credit reports in early 2022. That could end up being a mixed bag for consumers.
The Importance of Having a Strong Pay Record
Consumer credit scores are made up of several factors, each with a different amount of weight. The most important factor is the payment history, which speaks of the timely commitment of consumers to pay their bills and debts. A bad payment history can lead to a poor credit score, while a strong payment history can lead to a strong credit score.
Soon, Equifax will add BNPL activity to consumer payment records in their credit reports. The aim is to give lenders a fuller picture of consumers’ repayment patterns and their financial obligations. But while this is a move that can help consumers, it can also harm them.
Consumers who enroll in BNPL plans and stick to their agreements can see their credit scores improve as a result. But those who are late on their BNPL payments could see their credit scores take a hit once this negative activity is added to their payment records.
How to use BNPL plans safely
BNPL plans are a good option for consumers who want or need to make purchases they can’t directly cover, but expect to be able to pay off within weeks. However, it is not a good option for consumers who are already in debt and know that they cannot afford the items they buy.
Consumers who have signed up for a BNPL plan should read the terms carefully before committing to the agreement. From there, they should note the payment due dates to avoid late payments. Likewise, once these agreements are made, consumers must include the premium payments in their budgets to ensure that they are above them.
While BNPL plans give consumers a great deal of flexibility, they are easy to abuse. The fact that they’re about to start showing up on credit reports may lead to more consumer accountability, which isn’t a bad thing. But it is essential that BNPL users realize that while these plans can actually help their credit, the opposite may also happen.
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