Can Buy Now, Pay Later Plans Help You Build Credit?

Concept art of someone using BNPL technology

(Image credit: Getty Images)

Apple recently announced that loans made through its buy now, pay later program will be reported to Experian, a major credit reporting company. If more lenders follow Apple’s lead, the change could help consumers who use these loans build a credit history — but it could hurt their credit scores, too.

BNPL services allow consumers to spread payments on their purchases over a few weeks or months, typically without interest if payments are made on time. Unlike layaway plans of the past, which required buyers to wait to claim a purchase until they had paid it off, BNPL provides instant gratification, which has made the loans popular with consumers. More than 40% of U.S. adults have used at least one BNPL service, according to a survey by Bankrate.

However, the simplicity of BNPL plans can obscure potential pitfalls. Fees for late payments can be steep, and consumer advocates worry that the easy availability of the loans encourages consumers to purchase things they can’t afford. Nearly 30% of consumers who have used BNPL said they have spent more than they should, according to the Bankrate survey.

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Because BNPL payments usually aren’t reported to the three major credit reporting companies — Equifax, Experian and Trans-Union — consumers have less incentive to curb spending and pay on time (although if you fail to pay for an extended period, the BNPL provider may turn your debt over to a debt collector, which can heavily damage your credit). At the same time, with most BNPL providers, using your loan responsibly doesn’t help you build a good credit history.

So far, most other BNPL providers, including Klarna and Afterpay, haven’t announced plans to report their loans to the credit reporting companies. Affirm says it reports some longer-term loans to Experian, but it doesn’t report its plans that offer four interest-free payments, a common BNPL structure.

In addition, most credit scoring models haven’t adapted to incorporate the way BNPL payments are made. For example, unlike credit card payments, which are typically made once a month and are reported to the credit reporting companies, many BNPL borrowers make small, biweekly payments.

While Apple BNPL payments will appear on Experian credit reports, the information won’t be factored into borrowers’ credit scores, Experian says — and a credit score is a key measure that lenders use to judge a potential borrower’s creditworthiness for a credit card, mortgage or other loan. Experian says that BNPL loan information may factor into credit scores in the future “as new credit scoring models are developed.”

For now, while BNPL services provide a convenient way to spread out payments, consumers shouldn’t rely on them to develop a positive credit history. The most effective way to build credit is to apply for a credit card, pay your bills on time and keep the balance to less than 20% to 30% of the card’s limit.

BNPL pitfalls

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Problems users have experienced:
None	44%
Overspent	29%
Difficulty obtaining a purchase/refund	18%
Regretted a purchase	17%
Dissatisfied with purchase or experience	17%
Other	1%

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Ashlyn Brooks is a financial writer and former civil engineer. She's on a mission to show others how to save and spend smarter through purposeful money habits. Her work has been featured on Investopedia, Bankrate and Yahoo Finance.