“Buy Now, Pay Later.” It’s convenient, quick, easy. But does it make sense for someone in college or starting their career? Is there something better?
Why do you, or maybe not you, but your friends, subscribe to BNPL services? Here are three reasons you might want to tap into an account on a purchase of $1,000 or less:
- No interest costs. Make your repayments on time, and on most BNPL plans, you will pay no interest. That’s much cheaper for short-term borrowing than carrying a credit card balance (20% APR, on average) or taking out a payday loan (finance charge = 400% APR).
- No credit check, maybe. Some BNPL providers do not conduct a traditional credit check to approve a purchase. If your credit score sits in the fair or poor categories, you could have your purchase approved if you meet all the requirements.
- Happiness today. Once approved, you can immediately finance concert tickets, a hot fashion item, or other must-haves. BNPL plans divide the payments into bite-sized installments that can fit your paycheck schedule.
So, are BNPL loans a good deal? Think again. You could:
- Incur late-payment penalties and high interest costs. Missing payments can trigger interest rates of 30% to 36% depending on the lender, and late fees can be a flat $7 or $8, or a percentage of the amount owed.
- Damage your credit score. More and more BNPL services report loans, missed payments, and other financial information to credit bureaus. In June, FICO announced it would include BNPL usage in its credit scoring models starting this fall.
- Fall deep in debt: The payment at the time of purchase is usually only one-quarter of the total amount borrowed. That can lead to overspending and overuse on impulse items. A recent Lending Tree survey of BNPL users found that two-fifths of respondents held multiple loans at one time. Almost one in four juggled three or more repayments at the same time.
There are smarter ways to manage your money and raise your credit score:
- Use AI to find 0% APR credit cards. And use them wisely. The rate will be in effect for a limited time. You will need good credit to qualify for the card and self-discipline to pay off the balance to get the most from the card.
- Save for big purchases. Want to see Beyoncé or Billie Eilish in concert? Set aside a portion of each paycheck. You’ll feel better knowing that the tickets you scored didn’t dent your checking account.
- Tap your credit card with care. Regular use, a low balance, and on-time payments build your credit history. The reward will come later when your good-to-excellent credit score earns you a better car loan or home mortgage rate.
Before you jump on the BNPL bandwagon, explore safer, smarter financial tools designed to help you build credit and reach your goals. Check out our video discussion also breaks down the pros and cons of BNPL, including how it compares to other payment options. Check out resources on www.tropicalfcu.com to see what options are right for you.