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The Catch With Buy Now, Pay Later Could Be Your Credit

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By Jackie Veling Nov 22, 2021

Buy now, pay later, or BNPL, is a payment plan that lets you break up your total purchase at checkout into a series of smaller installments.

Though these plans aren’t new, they’ve recently catapulted into the mainstream, with major U.S. retailers like Amazon, Walmart and Target now offering them. But with promises of convenience, zero interest and minimal fees, many shoppers are wondering, “What’s the catch?”

It could be your credit.

BNPL providers don’t typically report on-time payments to the major credit bureaus, so unlike with credit cards or loans, you can’t build credit with this type of financing. Some providers will report missed payments, though, which could end up hurting your score.

BNPL and the credit bureaus

Afterpay, an Australian company that provides BNPL payment plans to over 16 million shoppers in the United States alone, doesn’t interact with the credit bureaus at all, including when shoppers first apply for approval.

According to Nick Molnar, co-founder and co-CEO of Afterpay, checking a shopper’s credit file has “no positive correlation” to the company’s ability to reduce losses. Instead of conducting a soft or hard credit pull, the company applies safeguards like pausing a shopper’s account after one missed payment, which Molnar says customers appreciate.

“I think this next generation is looking for these products that have their best interest at heart,” he says. “At its core, that’s why we’ve been able to grow as fast as we have.”

Though this approach means easier approval for those with no credit or bad credit, shoppers can’t use Afterpay payments to demonstrate responsible use of credit to the bureaus. On-time payments are the largest contributor in determining FICO credit scores.

Afterpay isn’t alone. BNPL companies Klarna and Affirm also don’t typically report payments for their no-interest plans.

This practice is especially harmful for young people who may need to access credit to lease or buy a car, rent an apartment or buy a house, says Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling.

“There are so many circumstances in the life of a younger consumer where credit checks are required,” McClary says. “It’s very difficult to work around the types of situations where your credit report may be a consideration.”

BNPL providers may report missed payments

Though BNPL providers may not report on-time payments, some still report missed payments.

For example, Zip, previously Quadpay, doesn’t report payments to the bureaus, but it will send past-due accounts to collections, which can affect your score.

Pamela Capalad, a certified financial planner based in Brooklyn, New York, says missed payments are the biggest risk when using a BNPL service. Because the installments can be automatically billed to your debit card, you could overdraw your account, resulting in penalty fees, before ultimately defaulting on the loan. This can hurt at a time when you’re particularly vulnerable.

“Often the people who are using these types of plans need to break up the payments for one reason or another,” Capalad says. “To have that affect their credit at the same time, I don’t think that’s a good thing.”

McClary notes how one missed payment could also lead to costly financing in the future, since interest rates will likely increase for borrowers with lower credit scores.

“Once the debt collection account shows up on the credit report, it creates a more significant barrier to overcome,” he says. “The cost of borrowing goes up as your credit score goes down.”

Alternative ways to build credit

Both Capalad and McClary acknowledge that BNPL payment plans can be a valid way to budget for large purchases, particularly if the plan charges zero interest and you can make the payments. But if you’re focused on building credit, it’s best to look elsewhere.

secured credit card is a smart alternative. It requires a cash security deposit, usually equal to your line of credit — a $300 deposit for a $300 spending limit, for example — and you don’t need good credit to qualify. Once you’re able to upgrade to an unsecured card, you’ll receive your deposit back.

For those new to credit cards, Capalad recommends putting a small recurring expense on the card, like your Netflix subscription, and setting it to autopay. This approach allows you to use the card consistently without overspending.

Another option is a credit-builder loan, which you can find at credit unions, banks and some online lenders. Unlike a traditional loan, you’ll make payments first then receive the money. Payments are reported to the credit bureaus.

By showing a history of responsible financial behavior, you can build your credit profile and access more affordable financing in the future.

This article was written by NerdWallet and was originally published by The Associated Press. Jackie Veling writes for NerdWallet. Email: jveling@nerdwallet.com.

The article The Catch With Buy Now, Pay Later Could Be Your Credit originally appeared on NerdWallet.

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Michigan license number:   DM-0016282 Available to the public and licensed in Michigan.

Section 13(1)  When a licensee establishes a debt management plan for a debtor, the licensee may charge and receive an initial fee of $50.00

Section 13(2)  A licensee shall attempt to obtain consent to participate in a debt management plan from at least 51%, in number or dollar amount, of the debtor’s creditors within 90 days after establishing the debt management plan. If the required consent is not actually received by the licensee, the licensee shall provide notice to the debtor of the lack of required consent and the debtor may, at its option, close the account. If the debtor decides to close the account, any unexpended funds shall be returned to the debtor or disbursed as directed by the debtor.

Sec. 14. (1) A contract between a licensee and debtor shall include all of the following:

(a) Each creditor to which payments will be made and the amount owed each creditor. A licensee may rely on records of the debtor and other information available to it to determine the amount owed to a creditor.

(b) The total amount of the licensee’s charges.

(c) The beginning and termination dates of the contract.

(d) The principal amount and approximate interest charges of the debtor’s obligations to be paid under the debt management plan.

(e) The name and address of the licensee and of the debtor.

(f) Any other provisions or disclosures that the director determines are necessary for the protection of the debtor and the proper conduct of business by a licensee.

Sec. 18. (1) In addition to the fee described in section 13(1), a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.

(2) A licensee may offer a debtor the option to purchase credit reports or educational materials and products, and charge a fee to the debtor if the debtor elects to purchase any of those items from the licensee.  Fees charged under this subsection are not subject to the 15% limitation on fees described in subsection (1).

(3) Except for a cancellation described in subsection (4), in the event of cancellation of or default in the performance of the contract by the debtor before its successful completion, a licensee may collect $25.00 in addition to any fees and charges of the licensee previously received by the licensee. This $25.00 fee is not subject to the 15% limitation on fees and charges under subsection (1).

(4) A contract is in effect when it is signed by the licensee and the debtor and the debtor has made a payment of any amount to the licensee. The debtor has the right to cancel the contract until 12 midnight of the third business day after the first day the contract is in effect by delivering written notice of cancellation to the licensee. A cancellation described in this section is not subject to, and a licensee shall not collect, the fee described in subsection (3).

(5) If a debtor fails to make a payment of any amount to a licensee within 60 days after the date a payment is due under a contract, the licensee may, in its discretion, cancel the debt management contract if it determines that the plan is no longer suitable for the debtor, the debtor fails to affirmatively communicate to the licensee the debtor’s desire to continue the plan, or the creditors of the debtor refuse to continue accepting payments under the plan.

(6) A licensee shall not contract for, receive, or charge a debtor an amount greater than authorized by this act. A person that violates this subsection, except as the result of an inadvertent clerical or computer error, shall return to the debtor the amount of the payments received from or on behalf of the debtor and not distributed to creditors, and, as a penalty, an amount equal to the amount overcharged.

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