Buy now Pay later: what you need to know

If you’ve been shopping online recently, you’ve probably come across the “buy now, pay later” option at checkout. Klarna, Afterpay, and Affirm are just some of the apps that offer buy now and pay later to split online purchases into multiple payments — usually four — and automatically debit them from your bank account. They have no interest and no hard investigation into the shopper’s credit report.

This particular form of credit and lending has been around in the United States for about five years, according to the US Consumer Financial Protection Bureau. But the attention and prevalence of companies offering it has only increased in recent years.

Klarna announced its 20 millionth customer in the US in August 2021, an increase of 17.6% in four months. In an August 19 release, Afterpay said purchase now, pay later spending among Americans has increased 230% since January 2020, “compared to a 43% increase for debit and an 8% increase for credit card spending.”

Buy now, pay later apps are especially popular with millennials and Gen Z, according to Jim Rice, deputy director of the CFPB’s Office of Servicemember Affairs. He said the shift of consumers to online shopping during the Covid-19 pandemic has further fueled interest.

How to use Buy now Pay later responsibly

Make a budget that you can stick to.

While buy now pay later amounts seem small, multiple purchases can lead to surprising deductions when payments are due.

Keep in mind the rules and costs associated with apps that buy now and pay later:

Buy now pay later apps with no interest or financing fees, but that can change if a payment is late or missed. Keep in mind when they can file a report on your creditworthiness and when they will assess the charges. Conversely, paying on time will not help build your credit.

As with all debts, you pay on time.

BNPL can be harmless – and even beneficial – to shoppers who don’t overspend and make their payments on time. If you use the apps responsibly, you can avoid interest rates that a credit card or other loan can incur without affecting your credit score.

Be aware of your protection as a service member.

Depending on how the loan you are purchasing now pays off, it may be subject to the guidelines of the Military Lending Act, which generally says that the interest on a loan should not exceed 36%, in order to include other costs associated with the loan, or the Servicemembers Civil Relief Act, which provides additional financial and legal protection for service employees.

For credit and debt assistance, service personnel can visit their facility’s Personal Financial Manager or seek a personal financial advisor through the Department of Defense’s Office of Financial Readiness.

Buy now Pay later Risks and disadvantages

Mark Steffe, president and CEO of First Command, a military finance company, called buy now, pay later services “temptations” for many customers.

“These temptations can become major barriers to developing positive and disciplined financial behavior,” he said.

According to a recent survey by Qualitrics and Credit Karma, 38% of US customers who buy now, pay later missed at least one scheduled payment. Nearly 75% of customers who missed a payment noticed a drop in credit score.

In addition to lower credit scores, many of these services assess late fees. The amounts vary by company and state, but they range from flat fees to percentages of each term. In general, the maximum total interest would be 25% of the total purchase.

As with any financial product or service, experts recommend factoring in split payments into your budget to avoid unexpected charges.

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Can Buy Now Pay Later Apps Increase Your Credit Score?

The CFPB cannot take into account buy now pay later service usage because many BNPL companies do not conduct hard credit investigations.

The services are usually not reflected in credit reports. So if you buy responsibly, you won’t pay later, but missing a payment could hurt it, Rice said.

That may soon change as the three major credit bureaus (Experian, Equifax and Trans Union) plan to include BNPL loans in their credit reports. Equifax announced that it would start reporting BNPL loans in the first quarter of 2022. Experian and Trans Union will also be reporting them, but in a separate section of their reports – at least for now.

Buy now Pay later and the military

Conscripts use debt differently than the civilian population, according to a July 2020 report by the CFPB. It also said military members’ use of debt also depends on the length and timing of their service.

“Compared to civilians, soldiers [between ages 18 and 24] are more likely to have a car loan or credit card, slightly more likely to have a mortgage, and less likely to have a student loan or third-party collection account,” the report said.

Military personnel make more online purchases when deployed or on active duty in remote locations, according to Laura Udis, payday and small dollar loan program manager at CFPB.

In July 2021, the CFPB and the Department of Defense Office of Financial Readiness published a blog post on buy now pay later services in July 2021, after the CFPB found that 18- to 24-year-old service workers had higher credit utilization and revolving debt than that same age group. in the civilian population.

The blog pointed military members to financial protections such as JAG legal assistance and the local attorney general’s office.

DOD cannot specify whether BNPL services have had a direct impact on service members because the Financial Readiness Office does not monitor how service members use individual credit products, Kim Myers, a financial readiness program analyst for DOD’s deputy assistant secretary of defense for force education and training said in an email.

Buy now, pay later credit products and other emerging FINTECH issues are and will remain on the Ministry’s ‘radar’ to ensure that the Ministry’s financial literacy efforts remain current and relevant to such emerging areas. with factual and unbiased education that can impact members and families’ “overall financial well-being,” Myers said.