We live in an aspirational, technology-driven world. It’s easier and more tempting than ever to make purchases with just a click. Buy-now-pay-later (BNPL) services have become the latest way to snag that new gadget, trendy outfit, or even everyday essentials.
Fortune.com recently reported that more shoppers than ever were on track to use BNPL plans during the 2024 holiday season. The report cited an Adobe Analytics forecast that shoppers would purchase $18.5 billion worth of goods using the third-party services for the period of Nov. 1 to Dec. 31.
At first glance, they seem like a great idea. Split your payments into smaller chunks over time with no interest? What could go wrong?
But behind the glossy promises, BNPL services often come with pitfalls that can wreak havoc on your finances and credit. If you’ve found yourself overextended with buy-now-pay-later services, there’s help available. On the CredEvolv platform, our certified nonprofit credit counselor partners are here to guide you toward financial stability and long-term success.
How does Buy-Now-Pay-Later work?
Buy-now-pay-later services like Afterpay, Klarna, Affirm, and Zip offer consumers the chance to break up a purchase into smaller, manageable payments. Typically, the process looks like this:
- You make a purchase. At checkout, you choose BNPL as your payment option.
- You split your payments. The total amount is divided into equal installments, often over 4-6 weeks.
- Your payments become automatic. Payments are automatically charged to your debit or credit card.
- There’s (presumably) no interest. Many BNPL services promise zero interest if payments are made on time.
Behind the glossy promises, BNPL services often come with pitfalls that can wreak havoc on your finances and credit
What are the potential problems associated with BNPL?
Buy-now-pay-later sounds simple and budget-friendly, right? Unfortunately, these services can lead to several financial headaches that aren’t always obvious until it’s too late.
- It’s easy to overspend. When a $200 purchase suddenly feels like “only four easy payments of $50,” it’s tempting to add more items to your cart. BNPL encourages spending beyond your means, often leading to multiple overlapping payment plans. Before you know it, you’re juggling payments for purchases you didn’t truly need or budget for.
- Hidden fees and interest. While many BNPL services advertise “no interest,” they make their money in other ways. Miss a payment, and you could be hit with late fees ranging from $5 to $10 or more. And don’t forget, if you tie your BNPL payments to credit cards, they can accrue interest on those accounts. This is absolutely true if you don’t pay your balances in full each month. These combined costs can quickly snowball if you’re unable to catch up. Suddenly, your simple purchase has turned into a costlier one.
- Impact on your credit. Some BNPL providers conduct a soft credit check when you apply, which won’t affect your credit score. However, if your payments are tied to one or more of your credit cards, they can and will affect your debt-to-income and credit utilization ratios, which can lower your credit score and make it harder to qualify for other loans. Throwing these ratios out of whack by having too many BNPL accounts can make it look like you’re over-reliant on borrowed money, which lenders view as risky behavior.
- No long-term benefits. Unlike using a traditional credit card responsibly, BNPL payments don’t help you build credit. Even if you pay on time, those payments typically aren’t reported to credit bureaus. This means you’re taking on financial risk without reaping the rewards of improving your credit profile.
- Disruptions to your budget. BNPL payments are automatic, meaning they come out of your bank account or credit cards whether you’re ready or not. This can throw off your monthly budget, especially if unexpected expenses arise. You could also be susceptible to overdraft fees if you tie your payments to your debit card or checking account. If they’re tied to a credit card, your BNPL payments could be denied if they push you beyond your credit limits. Over time, managing multiple BNPL payments can feel like juggling financial landmines.
How can buy-now-pay-later snowball into debt?
It’s easy to underestimate the cumulative effect of BNPL purchases. One payment plan for a pair of shoes might seem harmless. But when you add another for a new phone, one for holiday gifts, and another for groceries, the total adds up quickly.
A recent Consumer Financial Protection Bureau (CFPB) report revealed that buy-now-pay-later users often end up spending more than they can afford, with nearly 11% of users incurring late fees. Worse, about 40% of consumers reported struggling to keep track of payments across multiple BNPL services, which increases the likelihood of missed payments and financial stress.
Over time, BNPL services can lead to a cycle of debt, where you’re constantly borrowing from other credit sources and your future income to cover today’s expenses. This cycle is not only financially draining but also emotionally exhausting.
How can CredEvolv help me take control of my finances?
If you’re feeling overwhelmed by BNPL payments or struggling to regain control of your finances, there’s a way out. At CredEvolv, we connect you with certified, nonprofit credit counselors who can help you build a plan to recover. Here’s how they can help:
- They’ll review your financial situation. Our credit counselor partners will take a close look at your overall financial picture, including BNPL payments, credit card balances, and monthly expenses. By understanding where your money is going, they can help you identify opportunities to simplify and save.
- Together, you’ll create a budget that works. The counselor you connect with on the CredEvolv platform will work with you to develop a realistic budget, one that prioritizes your financial goals while ensuring you can meet your BNPL obligations. With a clear plan, you’ll feel more confident managing your money and avoiding overspending in the future.
- They’ll help you build a path to better credit. Our counselor partners will help you transition away from BNPL dependence by focusing on strategies that improve your credit score. This could include responsibly using a credit card, paying down existing debts, and understanding how to avoid financial pitfalls in the future.
- They can provide long-term support. Credit improvement isn’t a one-time fix. It’s a journey over the long haul. Your counselor will be available to guide you every step of the way, offering encouragement and expertise to keep you on track toward your financial goals. Once you reach them, you can always resume working with your counselor if your finances get dicey again.
CredEvolv: A smarter way forward
Buy-now-pay-later services may seem convenient, but they often come with hidden risks that can derail your financial health. If you’ve found yourself stuck in the BNPL cycle, know that you have options. By working with certified, nonprofit credit counselors on the CredEvolv platform, you can regain control of your finances, improve your credit, and set yourself up for a brighter financial future.
Take the first step today! Enroll now and discover how we can help you break free from the buy-now-pay-later quagmire and elevate your financial standing. Together, we can build a plan for lasting success and peace of mind – both of which are priceless!