Does 'Buy Now, Pay Later' Financing Affect Your Credit?

Woman opening a package with her dog watching
•••

Westend61 / Getty

When you’re making a purchase, you may be offered the option to “buy now and pay later.” This type of financing option allows you to make your purchase today and pay for it with installment payments over several months. Before you choose "buy now, pay later" financing, though, it’s important to understand how it may affect your credit.

Your credit score is a three-digit number influenced by your borrowing and payment history as reported to one or all three of the major credit bureaus—Equifax, Experian, and TransUnion. If you choose a financing servicer that reports to any major bureau, your credit may be affected.

Applying for "Buy Now, Pay Later" Financing

Making a loan application can affect your credit if the business pulls your credit information to approve your application. Some retailers that offer "buy now, pay later" financing may not require you to fill out a formal credit application. In that case, there won’t be a credit check or an inquiry on your credit report.

If you’re asked to enter your social security number to apply—either your full social security number or the last four digits—that signals your credit will be pulled to approve the application. The credit check results in a hard inquiry to your credit report and may cause your credit score to drop a few points. Inquiries are about 10% of your credit score and remain on your credit report for the next two years, though they only affect your score for 12 months. 

Retailer Financing vs. Point-of-Sale Installment Loans

Some retailers offer their own "buy now, pay later" option directly from their websites or in stores. There are a few companies offering online payment plans that you can use with a variety of websites. At checkout, you can choose the option to apply for this third-party financing. These payment plans are known as point-of-sale installment loans. The payment plan is broken down into a fixed monthly payment over a period of time, based on the total amount of your purchase.

Knowing When Your Loan Is Reported

"Buy now, pay later" loans may or may not be reported to the credit bureaus, depending on the service you use. It’s important that you read through the fine print to understand how the loan may affect your credit. If you use a service that does report to the credit bureaus, your payments will affect your credit score. Generally speaking, on-time payments will help your credit score while late payments may cause your credit score to drop.

Having a newly opened account can also cause a drop in your credit score because it lowers your average credit age. Over time, your credit score can rebound as the account gets older, as long as you handle your other credit obligations responsibly.

Check your credit report to verify the payment plan is reported accurately. You can order a free credit report each year through AnnualCreditReport.com. You can also use a free service such as Credit Karma or Credit Sesame to watch how your installment plan is being reported. You can dispute errors with the credit bureaus or directly with the financing company.

Otherwise, if the loan isn’t reported to the credit bureaus, your monthly payments will have no bearing—good or bad—on your credit score. Defaulting on the loan, however, can hurt your credit score if the lender ultimately sends the account to a third-party debt collector for payment.

Always Borrow Responsibly

It may not feel like you're taking out a loan, but "buy now, pay later" financing creates a new debt obligation. Some people may be tempted to overuse it, especially if the payments aren’t reported to the credit bureaus. You may feel like you can borrow repeatedly without affecting your credit score.

Before you take on any new financial obligation, it’s important to consider your ability to pay, regardless of the impact on your credit. You should also compare the total cost of financing to the cost of paying in full. Often, the installment payments include a certain amount of interest that means you’ll pay more for your purchase over time than if you paid in cash upfront.

Article Sources

  1. TransUnion. "The Difference Between Hard and Soft Credit Inquiries." Accessed Jan. 31, 2020.

  2. Equifax. "How Credit History Impacts Credit Scores." Accessed Jan. 31, 2020.