How to tell if you should use a Buy Now, Pay Later program for your holiday gifts this year

Buy now, pay later (BNPL) services are more popular than ever, especially during the holiday season.

The programs have essentially become ubiquitous, due largely to companies like Affirm and Afterpay — which loan users money to buy products immediately, and then allow them pay for the items in a predetermined number of installments.

Out of the 20% of American adults who have planned to use BNPL in 2021, 80% are planning to use it to pay for some holiday shopping, according to a recent survey from data firm Morning Consult.

Retailers like Target and Amazon have made it very simple to sign up for such services on their checkout pages. And, as CNBC Make It reported in August, those programs can easily tempt you into spending more than you can afford.

Here's what you need to know about BNPL ahead of the holiday shopping season, and what you should consider before using it at checkout.

How can buy now, pay later affect your credit?

Many consumers don't realize that using BNPL can harm your credit score in multiple ways, says Nirit Rubeinstein, CEO of credit repair company Dovly.

Before agreeing to the terms of any BNPL purchase, Rubenstein recommends reading the fine print to make sure the program isn't conducting a "hard pull" on your credit.

"A lot of the BNPL [providers] pull your credit," she says. "The first thing they do is they actually see if you're even eligible, so if they pull your credit that could potentially be an issue if it's what's considered a 'hard pull.'"

This process, which involves pulling your credit report from one of three main credit bureaus — Experian, Equifax or TransUnion — can ding your credit score, regardless of whether you're approved or denied.

The fine print can also tell you if your payments would be reported to the credit bureaus. A missed BNPL payment, if reported, can hurt your credit score the same way a missed credit card payment would.

"One late payment of 30 days, for example, can cause significant damage to your credit score," Rubenstein says. "It's very important for you to understand that."

If you're careful, though, BNPL can actually help you preserve your credit score by keeping your credit utilization rate down. Since BNPL isn't treated like credit card debt, it doesn't affect your credit utilization rate — the percentage of your line of credit that you use — which can account for up to 30% of your credit score.

In other words, if you lower your utilization rate by putting a necessary purchase on BNPL instead of a credit card, your credit score could improve.

BNPL is also useful if you don't have access to a credit card, which typically happens when you're young and you have a sparse credit history, or when you're new to the U.S. and haven't yet established credit.

"Usually, you don't need to have established credit to be eligible for buy now, pay later," Rubenstein says.

What other fine print should you look out for?

In short: excessive interest and late fees.

As CNBC Make It reported in August, most BNPL companies don't charge interest if you pay on time. But if you miss a payment, you're likely on the hook for a late fee — and what you owe could be sent to a debt collector, the Consumer Financial Protection Bureau (CFPB) warns.

"Just because you qualify for BNPL, or any other credit product, doesn't mean you should use it," the agency wrote in a July blog post.

You should also read the fine print to make sure you're not signing up to pay interest beyond the cost of the product you're buying, says Rubenstein.

"You need to do the math, you need to say 'OK, this $100 item is gonna cost me how much at the end of this? Is it $110? Is it $120?" she says. "In other words, what is the increase that I'm paying by leveraging this service?"

Are there any other reasons to be careful with buy now, pay later?

Since BNPL programs don't offer the same consumer protections as credit cards, they often don't include chargeback rights. That means refunds can get tricky.

Say, for example, that a retailer reports your package as delivered — but it never shows up at your doorstep. With a credit card, your bank could help force the retailer to issue a refund. But if you ordered the package with BNPL, you'd need to get the merchant to refund you on your own.

"It's you and the merchant going to bat," Rubenstein says. "And BNPL washes their hands of it altogether."

If you want to use a BNPL service, Rubenstein recommends, stick to retailers you trust. Unfamiliar websites with subpar customer service may leave you holding the bag, leaving you worse off than when you started.

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