RENO – The holiday shopping season is officially underway and as consumers look to shop for gifts for friends and loved ones, there is a buying trend that experts in Greater Nevada hope to inform the community about – loans. Buy now, pay later.
This type of loan, known as a point-of-sale (POS) loan, gives buyers the option to repay their purchases in bi-weekly or monthly installments over a period of time. Unlike credit cards, many Buy Now, Pay Later loans offer 0% interest and no late payment penalties.
âAt first glance, this may seem like a pretty attractive option; especially if your online shopping cart is loaded with expensive items such as furniture, gifts, or housewares, âsaid Marcus Wertz, director of loans at the Greater Nevada Credit Union. “However, it is very important to be aware of the impact of Buy Now, Pay Later loans on your credit score before deciding to use this option.”
According to Wertz, some Buy Now, Pay Later loans can affect consumer credit scores when you consider the five factors influencing FICO scores and how each is weighted.
– Payment history (35%): payment history on time
– Amounts owed (30%): how much credit and loans a person uses compared to the amount they have, also known as the utilization rate
– Duration of credit history (15%): for how long a person has had access to credit
– New credit (10%): frequency with which a person requests and opens new accounts
– Credit composition (10%): the variety of credit products a person has, including credit cards, installment loans, finance company accounts, mortgages, auto loans, etc.
âChanges to each of these factors can have a negative or positive impact on your credit score,â Wertz said. âWith point-of-sale loans, they can affect your credit score in a number of ways. “
The first is the payment history. If buyers make payments on time for their Buy Now, Pay Later loan, it could have a positive impact on their payment history. Otherwise, it can have a negative impact. Additionally, the length of credit history is affected as credit reporting agencies treat each purchase using a point-of-sale loan as a separate loan.
Once consumers have made the payments, the loan ends. Having a series of quick loans like this can lower the average age of a person’s credit history and thus lower their credit rating. Another factor to be aware of is that these loans will reflect new credit – repeatedly applying for new Buy Now, Paying Later loans will also demonstrate frequent opening of new accounts and could adversely affect a person’s overall credit rating. anybody. Finally, how the company that offers the Buy Now, Pay Later loan reports the use to the credit reporting agencies will also have an impact on a person’s credit rating.
A variety of companies offer point-of-sale loans, including popular providers like AfterPay, Affirm, and Klarna. Each handles the way they report user activity to major credit bureaus differently, which can make these loans even more confusing.
âIt’s crucial to make sure you’re clear on the terms and conditions of any Buy Now, Pay Later loan and that you understand the interest rate and repayment schedule,â Wertz said. âManaging finances during the holiday season can be very stressful for some people. The last thing they have to experience is an impact on their credit score after thinking about balancing their budget by spreading out their payments.
Wertz said that an alternative people should consider is a personal line of credit, which gives buyers immediate access to funds whenever they need it. Unlike a traditional lump sum loan, they don’t have to use the line of credit all at once, if at all. And, they only pay interest on what they use.
âPersonal lines of credit can also help build a person’s credit rating,â he said. âWhen used responsibly, an open line of credit can positively impact personal credit scores by demonstrating longevity of the business and utilization ratio. “
Another option, especially if people are considering using a Buy Now, Pay Later loan for holiday purchases or some other event they couldn’t plan for, is to strategically save for that purchase. For example, a savings account like Greater Nevada Christmas Club, will help customers save regularly throughout the year with automatic deposits. Then on November 1, they will receive the money they saved, plus the interest they earned.
For more information on loan types, credit scores and more, visit GNCU’s Larger Financial Education Center.