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Affirm, other Buy Now, Pay Later apps 'won't help you build your credit score,' expert says: What you need to know

“Buy Now, Pay Later is largely outside of the traditional credit scoring system.”

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Many holiday shoppers want the gift of convenience this year, which is why lots are turning to "Buy Now, Pay Later" tools. Like layaway, these apps let you buy pricey items online or in-store now and split the total cost into smaller installments due over the following weeks.

Affirm, one of the more popular services, recently made a deal with Amazon. Walmart and Target inked deals with providers like Sezzle and Zip. Macy's recently jumped in the mix and PayPal launched its own service.

More than 40% of U.S. shoppers have used Affirm, Afterpay, or another BNPL service in December 2020, according to a Credit Karma/Qualtrics survey. And consumers this year are eager to shop: Holiday sales are projected to increase up to 10.5% from last year, notes National Retail Federation.

Spreading out the cost of gifts with BNPL is similar to paying with a traditional credit card, but there's a significant difference: It likely won't boost your score, and buying with one of these apps could even hurt your score if you aren't careful.

"Buy Now, Pay Later is largely outside of the traditional credit scoring system," says Ted Rossman, an analyst at CreditCards.com. "The fact that these plans are easier to obtain from a credit perspective is a potential pro for consumers, though a con is that they usually won't help you build your credit score, even if you use it responsibly."

Working on your credit? BNPL programs 'won't do you much good'

As an alternative to credit, BNPL has advantages, Rossman says: It "appeals to young adults who may not have much money saved up [or] are dealing with a lot of student loans." Another plus is "being able to access this financing even if you have a low or nonexistent credit score."

The most common plan comes with about four interest-free payments over six weeks, adds Rossman, though "it's important to be aware of your specific terms before committing. They vary by the provider, the merchant, and your specific financial circumstances."

There are some downsides to look out for, too. Each BNPL loan you take out counts as a separate account on your credit report. When you pay off that loan and close it, it decreases the average age of your credit history.

Taking out multiple BNPL loans and then paying for and closing them can seem responsible. But since the length of your credit history makes up 15% of your FICO score, having too many could be risky.

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Many pay-later options don't report your timely payments to the three major credit bureaus. They will, however, charge you for late or missed payments that could damage your score.

"If you are trying to build a good credit history or improve your credit history, most of the Buy Now, Pay Later programs won't do you much good," Julie Ramhold, a consumer analyst with DealNews.com, told CNBC last month.

Here's what you need to know about five of the most popular Buy Now, Pay Later services.

Affirm

APR: 0% to 30%
Fees:
No late charges
Credit check:
Soft inquiry
Terms: Loans from 1 month to 48 months with a $17,500 limit
Available merchants:
12,000 including Amazon, Peloton, and Target

Afterpay

APR: 0%
Fees:
$8 or 25% of the transaction, whichever is less, on late payments
Credit check:
No
Terms: Four installment payments over six weeks. Limit based on how long you've been a customer
Available merchants:
Roughly 100,000, plus in-store Afterpay Card option at some retailers like CVS

Zip (formerly Quadpay)

APR: 0%
Fees:
$4 transaction fee on each purchase, or $1 per payment. $7 fee for each late payment (amount may vary by statute and state)
Credit check:
No
Terms: 4 interest‑free installment payments over 6 weeks. Typical amounts between $35 and $1,500, but limit can vary by retailer
Available merchants:
Over 51,000, including Target, North Face, and Wrangler

'Pay in 4' with PayPal

APR: 0%
Fees:
No late charges
Credit check:
Occasional soft inquiry
Terms: 4 installment payments due every two weeks with limit between $30 and $1,500
Available merchants:
Millions of retailers that are integrated with PayPal

Sezzle

APR: 0%
Fees:
$10 fee if your payment method fails, $5 if rescheduled (amounts may vary by state)
Credit check: Soft inquiry
Terms: 4 installments over 6 weeks with $2,500 limit
Available merchants:
41,800 including Target and GameStop

Buy Now, Pay Later is largely outside of the traditional credit scoring system.
Ted Rossman
CreditCards.com

How to take advantage of Buy Now, Pay Later programs

While using BNPL may help you expense your shopping in the short term, make sure you have a clear idea of what you're buying, experts say, since the apps may lead to overspending.

"To use these programs safely, shoppers might consider putting a planned, budgeted-for, big-ticket purchase on a Buy Now, Pay Later plan to give themselves some breathing room," Kristin McGrath, shopping expert at RetailMeNot, previously told Grow. On the flip side, she adds, "putting a slew of impulse buys on these plans throughout the season can get dangerous."

Think of it as a loan, experts say: You still need to make payments on time and in full.

"Some people really like installment plans, which isolate certain purchases and incorporate a built-in light at the end of the tunnel," says Rossman. "Just make sure you get a good deal, you can make the payments you're agreeing to and you're not overspending in the process."

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