September 19, 2023
Buy now, pay later is an attractive offer if you have bad credit. But how likely are you to get approved?
If you’ve ever bought something and noticed a “buy now, pay later” (BNPL) option, you might have been curious about what it means, how it works, and what kind of credit score you need to qualify. Well, it’s exactly what the name implies. You buy something now and pay for it later, like Wimpy from the old Popeye cartoons who often said, “I’ll gladly pay you Tuesday for a hamburger today.”
While Wimpy never ended up paying, with BNPL you agree on checkout to a series of installment payments. Sometimes you cover the first portion right away, and the rest is divided up into equal parts that you pay over four to six weeks, or even up to 36 months. BNPL arrangements usually have lower interest rates than standard credit card rates, and can sometimes even be interest-free — as long as you make all your payments in full and on time. To ensure this happens, you usually have to provide a funding source up front that gets automatically deducted for each installment payment.
It’s becoming more and more common to see BNPL for online purchases, and sometimes in brick-and-mortar stores as well. Usually these arrangements are installment loans, like mortgages and car loans, rather than revolving credit lines. BNPL services include Afterpay, Affirm, Klarna, Sezzle, and more. While there are many payment schedules available, “Pay in 4” is one of the most popular, requiring four equal payments —usually interest-free, and often due bi-weekly. Choosing a monthly plan lets you spread out payments for a longer time, but you’ll also likely pay interest, which varies depending on your credit score.
Normally you can get BNPL options without having good credit. It doesn’t matter if you’ve been turned down for a credit card, or even denied on past BNPL applications, because each transaction stands alone as a mini loan. And it’s common to be approved, even with fair or bad credit.
Since BNPL breaks your purchase down into manageable installment payments, lenders know that even people who are struggling financially can usually make it work. But while many providers offer 0% interest or low rates if you pay on time every time, and some services don’t charge any fees, the late fees on others can be extremely high — up to 25% of the purchase price. And if for some reason the payment fails or you neglect to pay, the annual percentage rate (APR) could skyrocket as well.
Now that BNPL is becoming more popular, it’s also being reported more to the credit bureaus than it used to be. At one time, BNPL was pretty much invisible to creditors because it wasn’t treated the same as credit cards or loans, but all three credit bureaus have started making it a focus. So besides reducing your APR and fees, on-time BNPL payments could help your credit score increase.
On the flip side, if you don’t make all your payments on time as agreed, it could negatively impact your credit score. The entry might be in its own category or grouped with your installment loans rather than your credit card history, but it’s increasingly more likely to be part of your credit report.
Many BNPL approvals are done without any credit check at all. And the companies that do check your credit before approving you for BNPL usually just go with a soft pull rather than a hard inquiry. That’s similar to what happens when you check your own credit report, or go through a pre-qualification or pre-approval process.
It’s the hard inquiry that counts as a full credit check. That occurs when you go ahead with the full process of applying for a credit card or loan. But since BNPL services don’t need this hard pull — because the payments are normally small and automatically charged to your payment source — then you don’t actually have to get a credit check in most cases.
The opportunity to buy now and pay later in small installments, often without paying interest, is a very attractive concept. But there are some cons to consider as well.
When you buy something, you really have two choices: pay for it outright or finance it through a loan or credit. The former includes cash, a check, or a debit card.
If you don’t have the funds to front the whole payment, there are several financing options besides BNPL:
Store credit card or line of credit
Buy now, pay later is a great option if you have poor credit because it’s one of the few ways you can get an interest-free or low-interest loan. It’s relatively easy to get approved, regardless of your credit history. And it’s convenient since the payments usually happen automatically and on time.
But like anything, there are some drawbacks to consider, like the possibility you won’t have the money when payments are due. If that happens, you could be facing a high APR, large late fees, or a black mark on your credit report.
Another small downside is that you can’t earn points or cash back rewards like you could with a credit card. If you’d like to check out some credit cards that offer rewards programs even for cardmembers who are rebuilding their credit, take a look at the selection available from Credit One Bank.
For over a quarter of a century, Heather has been working as a journalist in all media: TV, radio, print, and online. After establishing her career in Toronto, she has been living, working, and playing in Las Vegas for the past decade. She loves pulling apart complicated topics to make them simple, fun, and easy to understand, especially in the business and financial niches. But she also enjoys writing about the personal side of life, including success, relationships, families, and pets. She approaches everything from a yin-yang perspective, so her passion for wordplay and entertaining metaphors is always balanced with an intense (and some would say annoying) focus on facts and accuracy.
This material is for informational purposes only and is not intended to replace the advice of a qualified tax advisor, attorney or financial advisor. Readers should consult with their own tax advisor, attorney or financial advisor with regard to their personal situations.
When you’re presented with the option to buy now, pay later, what exactly does that mean to your purchase and your credit score?
If you need to borrow money from a lender (financial institutions like banks or credit unions, not your friends or family), you have two main choices: you can take out a loan or get a line of credit. Both a loan and a line of credit provide you with funds, but they work differently. There are pros and cons associate with each, and the option that's the best fit for you may depend on why you need the money in the first place.
If you review your credit report(s)—like you should at least annually—you may notice a preponderance of revolving credit accounts, or tradelines. And the majority of those are probably credit cards, unless you’ve opened a revolving line of credit with a financial institution.