Buy Now, Pay Later Credit Reporting: How Does It Work?

Credit cards have long made it easy to buy things and pay for them over time. The problem with credit cards is that when you don't pay your balance in full, you rack up interest—often a lot of interest.

Buy now, pay later programs promise you can pay off purchases over time without accruing interest. That’s why these plans have become increasingly popular. But what's the catch?

For one thing, these programs might be impacting your credit. Let's look at how buy now, pay later credit reporting works so you can understand how to protect your credit score.

Freedom Debt Relief isn't a credit repair organization and doesn't provide, or offer, services or advice to repair, modify, or improve your credit.

What Is Buy Now, Pay Later (BNPL)?

Buy now, pay later (BNPL) is a short-term unsecured financing option that splits up payments for purchases over time. A lot of popular retailers now offer these types of programs right at checkout.

Most buy now, pay later agreements span four weeks to a few months. Typically, you pay for a portion of your purchase upfront, and then make installment payments every two weeks. Buy now, pay later is available for online purchases as well as in-store purchases.

Here's how one of these agreements might work: 

• You want to purchase an $800 TV, but you don't want to fork over all of that money at once. 

• With a buy now, pay later plan, you pay $200 on the spot, then pay another $200 every two weeks until the TV is paid off.

What's the Benefit of Buy Now, Pay Later?

Buy now, pay later plans offer a couple of perks. First, they can help with cash flow. Maybe you can afford to shell out $800 for a TV right now, but you'd rather not part with that much money, just in case a surprise expense arises in the coming weeks. With a buy now, pay later plan, you get to hang onto more of your money.

Also, buy now, pay later plans typically do not charge interest as long as you make your payments on time. This could potentially save you a good bit of money compared to a high-interest financing option like a credit card.

How Does Buy Now, Pay Later Credit Reporting Work?

Your credit reports contain information about your credit history, like when you make credit card payments and how many loans you currently have. Creditors generally report your balances, payments, and account status to the credit bureaus for each credit account.

This hasn't always been the case for BNPL accounts. When buy now, pay later first started to gain popularity, most providers only reported negative payment events, not positive ones. In other words, for a long time, you wouldn't get credit for making on-time buy now, pay later payments. Rather, providers would often only report missed payments. 

With so many people now using these programs, however, more providers are reporting all buy now, pay later activity to the credit bureaus. This means on-time and late payments might appear on your credit report for any BNPL accounts.

How Buy Now, Pay Later Affects Your Credit Score

There are a number of ways buy now, pay later reporting can impact your credit score.

Payment history

Your payment history is a big chunk of your credit score. On-time payments could improve your credit score over time, and that extends to buy now, pay later payments reported to the credit bureaus. On the other hand, late BNPL payments could seriously drop your credit score. 

Credit inquiries

When you apply for a loan or credit card, the creditor does a hard credit inquiry, which could drop your score by a few points. Right now, it's more common for buy now, pay later agreements to only require a soft inquiry. A soft inquiry doesn’t affect your credit score, and is not visible to lenders. However, it's worth checking what type of inquiry the BNPL provider will use before you apply.

How Long Does Buy Now, Pay Later Stay on Your Credit Report?

If a buy now, pay later account appears on your credit report, it generally follows the same timeline as loans and credits cards:

• Accounts closed in good standing can remain on your credit report for up to 10 years.

• Late payments can remain on your credit report for up to seven years.

Even if a creditor doesn’t report your initial BNPL payments to the credit bureaus, if you fall behind and your account is sent to collections, that may appear on your credit report. Once it does, it could stay on your credit report for up to seven years, similar to a late payment.

How to Avoid Credit Score Damage From Buy Now, Pay Later

If you use a buy now, pay later plan to finance a purchase, a few strategies could reduce your chances of hurting your credit score.

Only sign up for payment plans if you have the money already

A lot of people use buy now, pay later plans to finance purchases because they can't afford them outright. You should think twice about doing this if the purchase isn't necessary. You're a lot less likely to miss payments if you already have the money set aside for the purchase.

Treat it like any other debt

Buy now, pay later plans don't involve a hard credit check, but you should take them seriously anyway. At the end of the day, you're still borrowing money you have to pay back. Mark your payment dates on your calendar or set digital reminders so you don't forget.

Don't sign up for too many plans at once

The more BNPL arrangements you enter into at the same time, the harder it could get to juggle and keep up with those payments. Limit yourself to just one or two buy now, pay later plans at a time—if you need to use them at all. 

The Bottom Line on Buy Now, Pay Later Credit Reporting 

All BNPL activity doesn’t automatically appear on your credit report. But you may not know which providers report ahead of time. Go into it expecting that creditors will report your payments—timely or not. 

Realize as well that while paying for purchases over time isn't particularly new, buy now, pay later plans haven't been around for all that long. If they remain popular, credit-reporting rules might change. Be on the lookout for that if you use these plans often.

Finally, if you're in over your head on buy now, pay later payments, know that relief may be available. Consider talking to a debt relief company if you're struggling to keep up with your debt and don't see a way out.