Stacking blocks with the letters B N P L

As the holiday season approaches, you’re likely to encounter increasing offers to use Buy Now Pay Later (BNPL) programs. These services promise split payments and 0% interest, often making them look like an attractive alternative to traditional credit cards. For many Americans, especially those navigating record levels of credit card debt, these offers can seem too good to pass up.

But before diving into holiday shopping with BNPL, it’s essential to understand how these programs work and their potential financial impacts. Let’s break down the basics so you can make informed decisions this season.

Who Offers BNPL?

BNPL programs are spearheaded by a growing number of companies disrupting the finance industry. According to a 2021 C+R study, major players include PayPal Credit, AfterPay, Affirm, and Klarna, with many others emerging. While their terms and fine print differ, these services typically allow consumers to make purchases and split the cost into equal installments, often interest-free if payments are made on time.

Who Uses BNPL?

These programs appeal to a broad audience but are especially popular among financially fragile consumers according to the Federal Reserve Bank of Boston (FRBB). The FRBB’s research offers some telling insights into the financial characteristics of BNPL users compared to non-users:

Checking Account Balances: BNPL users, on average, had significantly less in liquid assets:
- BNPL Users: $2,179
- Non-Users: $6,638

Credit Card Behavior: In 2023, BNPL users were more likely to carry a revolving credit card balance:
- BNPL Users: 71% revolved credit card debt.
- Non-Users: 40% of revolved credit card debt.

Credit Scores: Consumers with FICO scores under 700 are 6–10 percentage points more likely to use BNPL compared to those with scores between 700–749.

Keep in mind that under FICO 8 (the most used credit scoring model) managing revolving credit makes up the second largest portion of your credit score at 30%.

These indicators suggest that BNPL users often have less available savings and limited financial flexibility, increasing their vulnerability to financial stress.

While these statistics are informative, it’s important to note that being financially fragile isn’t a fixed state. Financial health is an ongoing journey. With a focus on developing a financial wellness lifestyle, you’ll begin building savings, manage credit wisely, and have a better approach to managing financial stress.

When Are the Consequences of BNPL Worth It?

One of the most significant risks of using BNPL programs is missing payments. Even though many BNPL services advertise no interest, they impose fees or penalties for late payments, and these can add up quickly.

Late Fees: These can range from flat fees to a percentage of the installment amount, depending on the provider.
Credit Impact: Some BNPL services report late payments to credit bureaus, which can harm your credit score.
Debt Snowball Effect: Using BNPL to purchase non-essential items can lead to overextending your budget, especially if payments overlap with other financial obligations.

A “snowball effect” refers to when a small snowball starts rolling down from the top of a mountain, and on its journey to the bottom it becomes exponentially large as more snow sticks to it. In the same way with finances, overextending a budget with split payments can lead to a larger reliance on credit and BNPL programs. This leads to more payments, which when reaching the breaking point, can then add late fees, extra interest charged, or accounts being closed and turned over to collections. Even though some BNPL services can offer their programs without a hard credit hit, late payments or collections can still be reported leading to a lower credit score. Keep in mind that negative remarks on a credit report, like missed payments, can remain on a credit report for seven years. This in turn can make it harder to borrow money when needed for life milestones like purchasing a vehicle or buying a home.

And before you say, “Couldn’t be me, I don’t plan on making late payments,” a LendingTree survey found that a third of BNPL users have missed a payment in the last year.

That’s why it’s important to ask yourself before committing to a BNPL plan:

Can I afford the payments within my monthly budget alongside my existing expenses and savings goals?
Am I purchasing something I truly need, or is it an impulse buy?
Do I have a backup plan if unexpected expenses arise?

The answers to these questions can help determine whether the potential risks of BNPL are worth the convenience.

Why Should You Consider Alternatives?

While BNPL can be a helpful tool when used responsibly, it’s not always the best option. According to the study done by LendingTree, 43% of BNPL users say they’ve regretted a BNPL purchase. And for those that regret their purchase, the same study reported that 51% of users agree that returning a BNPL purchase is much more challenging than returning an item bought with cash, credit, or debt.

Here are some alternatives to consider:

Save Before You Spend: The best way to avoid debt is to save for purchases ahead of time. Even small, consistent savings can help you avoid financial strain.
Credit Union Loans: Credit unions often offer personal loans with competitive interest rates and clear terms. These loans can be a more structured and predictable alternative to BNPL programs. These can help build a credit score due to payments being reported (35% of your credit score), established credit history (15% of your credit score), and improved credit diversity (10% of your credit score).
Traditional Credit Cards: For consumers with good credit, a low-interest credit card may offer more flexibility and fewer penalties for late payments than BNPL services.
Budgeting Tools: Use budgeting apps to track expenses and set aside funds for holiday shopping, reducing the need to rely on BNPL.

By exploring these options, you can make purchases without the stress of juggling multiple installment plans.

Tips for Using BNPL Responsibly

If you decide to use a BNPL program, here are some tips to minimize risk and maximize benefits:

Set a Budget: Only use BNPL for purchases you’ve already budgeted for and can afford to pay off within the installment period.
Understand the Terms: Read the fine print carefully, including late fees, interest rates (if applicable), and repayment schedules.
Limit Usage: Avoid using multiple BNPL services at once to prevent payment overlaps and confusion.
Track Payments: Set reminders for due dates to avoid late fees.

Conclusion

Buy Now Pay Later programs can be a convenient tool for managing holiday spending, but they come with risks that shouldn’t be overlooked. By understanding the basics of BNPL, recognizing the financial impacts if not managed well, and considering alternatives, you can make informed decisions that align with your larger financial goals.

This holiday season, prioritize financial health over instant gratification. Whether you choose BNPL or explore other options, remember that patience and thoughtful planning are the key to stress-free shopping and long-term financial well-being.

Additional Financial Wellness Resources

To learn more about what you can do to improve your financial health through CAFCU, schedule a free financial coaching session with one of our certified financial wellness representatives.