Financial advisor issues caution on unseen pitfalls of 'purchase immediately, defer payment' schemes
Impact of Buy Now, Pay Later Payment Plans on Credit Scores: Understanding the Implications
As consumers increasingly opt for buy now, pay later (BNPL) options to finance purchases, a rundown of key steps to adopt when utilizing these services has been advocated by financial analyst Richard Barrington. This shift in spending patterns can significantly affect one's credit score, with the three major U.S. credit bureaus planning to incorporate BNPL loans in their calculations.
The proliferation of BNPL services has become apparent, as people aim to split costs associated with their purchases. However, it is essential to responsibly manage these options to avoid potential financial pitfalls.
Barrington emphasizes the significance of budgeting prior to engaging BNPL services. Assessing whether one can afford the expenses related to a purchase and any subsequent debt is key to prevent falling short on payments, potentially incurring late fees. To achieve this, one should determine available income over the term of the BNPL payments and subtract essential expenses during that period to ensure there is enough left over to cover payments.
Missed BNPL payments can have detrimental effects on one's credit score. Thus, understanding the terms of the payment plan one is committing to is crucial. This includes knowing the total amount, payment schedule, interest rates, and potential late fees. Additionally, it is recommended to avoid signing an agreement without the opportunity to review it carefully, especially when the agreement is made at the point of sale.
According to Barrington, late BNPL fees averaged $7 for loans taken out on a $135 purchase, as per the Federal Reserve Bank of Richmond. This highlights the importance of creating reminders or utilizing automatic payment options to avoid late fees, overdraft charges, and missed payments. It is also advisable to avoid enrolling in multiple BNPL agreements at once, as multiple obligations can exacerbate financial difficulties.
Furthermore, BNPL services should not be used for items with a useful life shorter than the duration of the loan. Instead, secured credit cards or becoming an authorized user on someone else's card can serve as viable alternatives, especially for those with less-than-ideal credit scores. Credit requirements can differ from card to card, with Americans having an average FICO score of 715 last year, according to Experian.
In summary, adopting responsible spending habits when using BNPL options is crucial to maintain a positive credit score. Being aware of payment terms, timely payments, avoiding overextension, and regular monitoring of one's credit report are essential to minimize potential financial risks associated with BNPL services.
- When utilizing buy now, pay later (BNPL) options, it's important to budget for the expenses related to a purchase and any subsequent debt to avoid falling short on payments and incurring late fees.
- Understanding the terms of a BNPL payment plan, including the total amount, payment schedule, interest rates, and potential late fees, is crucial to avoid negative impacts on one's credit score.
- Late BNPL fees averaged $7 for loans taken out on a $135 purchase, and it's advisable to create reminders or use automatic payment options to avoid incurring these fees, overdraft charges, and missed payments.
- To manage finances effectively when using BNPL services, one should avoid enrolling in multiple BNPL agreements at once, as multiple obligations can exacerbate financial difficulties.
- For those with less-than-ideal credit scores, alternatives like secured credit cards or becoming an authorized user on someone else's card can serve as viable options instead of using BNPL services for items with a useful life shorter than the duration of the loan.
