A recent YouGov poll found that more than 85% of people under 35 found the idea of being in debt stressful.
If that’s the case, then why does the average American owe $38,000 in debt?
One cause may be the advent of “buy now and pay later” services that have taken over online shopping in recent years. Much like layaway, the services essentially let consumers buy products when they want them, then pay them off in a series of installments later.
For some “shopaholics,” this might be exactly the godsend they were waiting for. However, irresponsible spending could end up hurting you more than it helps. Here’s everything you need to know about the “buy now and pay later” era.
What’s a Credit Score?
If you’ve never had a credit card or just recently got one, you may not be familiar with the ins and outs of credit.
Your credit score is a 3-digit number calculated from a variety of factors: your bill payment history, level of debt, credit history age, types of credit, and number of inquiries.
You can request a free copy of your credit report each year through AnnualCreditReport.com, or you can also monitor your credit score for free through Credit Karma or other similar services that don’t count as “credit inquiries” and therefore don’t lower your credit score.
Buy Now and Pay Later: How Does It Affect My Credit Score?
There are three major credit bureaus: Equifax, Experian, and TransUnion. If you choose an online financing service that reports to any of those three bureaus, your credit score may be affected. This is why it’s important to always read the fine print before signing any credit agreement.
You’ll know if the service is conducting a credit inquiry if they ask for either your whole social security number or the last four digits of it. This can drop your credit score by a few points, but inquiries only account for 10 percent of your overall score and only stay on your report for 12 months.
Even if the financing service doesn’t perform a credit inquiry, your score may still be affected. Without the inquiry, the service won’t how able you are to make payments. Therefore, you could end up taking out more credit than you can afford, which could potentially make borrowing harder in the future.
How Can I Borrow Responsibly?
One of the most important thing to consider before borrowing money is the total cost of financing versus the cost of just paying up front. Usually, payment plans include a certain amount of interest (or an upfront fee) that makes the purchase more expensive than if you were to just pay for it all up front.
Credit Savvy recommends the following for consumers who opt to use buy now, pay later programs:
Limit Your Number of Accounts
Simply put, having multiple accounts makes it harder to keep track of all the payments you owe. Plus, each time you open a new account, it could deduct a few points from your credit score if an inquiry is involved (see above).
Before you agree to use a “buy now, pay later” program, be sure to crunch the numbers. Know exactly how much you can spend after you’ve set aside money for bills, savings, and other expenses. Then, stick to the numbers you set.
Don’t Link to a Credit Card
Linking your account to a debit card will reduce the likelihood of you going into debt. That way, you can’t spend more than you have, and you’ll potentially save your credit score a couple of points.
Monitor Your Accounts Regularly and Set Reminders
Don’t miss a deadline under “buy now, pay later” services.
When you use these services, the balance is automatically deducted from your preferred payment method on the due date. Make sure you have sufficient funding in your account before the deadline so you don’t go into a negative balance and get charged overdraft fees.
Many “buy now, pay later” services send you reminders of when your payments are due. However, it’s not a bad idea to also use a calendar to keep track of your purchases and when each payment is due so you don’t fall behind.
Read the Terms and Conditions
Whenever you enter an agreement, you need to know exactly what you’re signing up for. Look for information on the potential risks of signing up, as well as how your information will be used by the service.
And if the fine print is confusing, as it often is, it couldn’t hurt to read customer reviews or FAQs as well. These can help alert you to issues that other people have had, and how you can avoid them yourself. Visit Bonsai Finance for more information about this topic and how it applies to electronics.
Exercise Healthy Skepticism
Don’t be fooled. Most buy now and pay later policies are designed to get you to pay more in the long run, according to Bonsai Finance.
However, that’s not to say all programs such as these are inherently “bad.” Sometimes, “buy now, pay later” can help get you out of jam — and fast.
If you need to replace an electronic that’s central to your household, “buy now, pay later” can help return that sense of normalcy without much delay. Plus, if a birthday or holiday is coming up, “buy now, pay later” can help you spoil your loved ones while still keeping payments manageable.
A good rule of thumb to follow is that if an offer is too good to be true, it probably is. Words like “buy now, pay later” and “no credit checks” should immediately set off alarm bells in your head.