What to know before opting to 'buy now, pay later' this holiday season


As the holidays draw closer and you gear up for some shopping, you might begin to notice new "buy now, pay later" options when you're checking out at stores including Kylie Cosmetics, DSW, Steve Madden, and Urban Outfitters.

Services like Afterpay, Klarna, and Splitit that offer you the chance to buy something you want now and pay for it over time without the burden of high interest rates or potentially damaging effects to your credit score are becoming increasingly popular with both stores and consumers.

Eligibility requirements vary between platform, but overall have a lower barrier for entry than traditional credit cards. And millennial and Gen Z shoppers are already embracing the payment model: The younger demographic makes up 80% of Afterpay's users.

For these shoppers, the "buy now, pay later" alternatives offer some of the benefits of a credit card, such as spacing out installment payments over time, with what seem like fewer drawbacks or risks.

"A lot of young adults are debt-averse and could be intrigued by this ability to spread purchases out and buy on credit without having a credit card," says Ted Rossman, an analyst at Bankrate. "But it's not a forever kind of payment model."

While paying for gifts or big-ticket purchases in interest-free installments instead of all at once might seem like a great way to make a costly season less painful, there are downsides to these payment models that may not be obvious. Here's what you need to know before signing up to pay later:

Zero-interest payments doesn't mean free

Klarna, Afterpay, and Splitit all boast interest-free models, but you can still incur late fees with some of these services.

On Afterpay, for example, each late payment could result in a late fee of up to $8. The total of the late fees are capped at 25% of the original order.

Splitit does not charge any late fees, but if you miss a payment the company will charge you the full outstanding balance after seven days, according to customer support.

You can't expect to boost your credit with these apps

Even if you do use these services responsibly, many won't have any kind of positive impact on your credit. Sezzle, for instance, does not report any positive or negative payment history to the credit bureaus.

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"If you're avoiding credit cards altogether and using services like Afterpay, you might be missing out on an opportunity to help build your credit history," says Gerri Detweiler, education director for Nav, which helps business owners manage their credit and get access to financing.

If you're trying to build your credit, Rossman says, you might benefit more from getting and using a secured credit card. Secured cards require a cash deposit equal to their credit line in case you miss a payment.

Returns may get more complicated

If you're the kind of shopper who likes to purchase multiple items at once with the intention of returning them, this kind of payment model may not be for you.

Because these are all third-party sites, your returns will first go through the retailer you've purchased from. That retailer will refund your money to the app you used, which will then put a stop to your payments and refund any money owed. That could mean it takes more time for a refund to land in your account.

You may end up spending more money

At the end of 2018, Americans racked up more than $1,000 in holiday debt each, on average, according to MagnifyMoney's annual post-holiday debt survey. Analysts expect holiday spending to rise 5% this year, according to a survey from The Harris Poll and OpenX, an ad exchange network, of 2,000 shoppers in August.

Spending limits on these sites vary. Afterpay requires a minimum purchase of $35. Exact limits are not listed, though, and Splitit leaves that up to the discretion of the individual merchants.

"With smaller purchases made with Afterpay, millennials who are afraid of accruing more debt may feel more confident in their ability to pay it off, but the biggest concern is that it could lead to impulse buying and overspending," says Detweiler.

Smaller payments can sound tempting, but you would be wise to be realistic about your spending based on what you can manage to pay back within your own budget. And when you can, Detweiler says you should aim to pay for a purchase out of pocket: "If you can eat it, drink it, or wear it, you should pay for it upfront, and in full."

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