Buy Now, Pay Later Keeps People Spending—Without Credit Agencies Knowing
S - https://www.wsj.com/personal-finance/credit/buy-now-pay-later-industry-watchdog-groups-beed96c8
A - https://archive.is/Rtno0
Priscilla Rodriguez, an overnight stocker at a Walmart, has a strategy to protect her credit score as she and her husband look to buy a house.
The Sunland Park, N.M., resident uses installment loans from Afterpay to buy groceries, her pricey skin-care products and art supplies for her 10-year-old son, which keeps the balance on her two credit cards low—and the credit agencies in the dark.
“Afterpay doesn’t report to Equifax,” Rodriguez, 31, said. “That was very appealing to me.”
Consumers are shifting more of their spending to so-called buy now, pay later lenders, a trend that is only accelerating as high interest rates dent budgets and pandemic savings dry up. That is sounding alarms at consumer-advocacy groups that say companies like Afterpay, Affirm and Klarna provide fewer protections than credit cards and encourage shoppers to take on more debt than they can afford.
A quarter of all American adult consumers have used buy now, pay later loans, according to LexisNexis Risk Solutions. Over Black Friday and Cyber Week, such payment plans accounted for 7.2% of all online sales, a 25% jump from last year, Adobe found. (They were also a big factor in the declining use of store credit cards.)
Buy now, pay-later firms can extend loans as large as $25,000, offering annual interest rates ranging from 0% to 36%. The rates offered are dynamic and depend on the borrower’s standing, payment timeline and the item being purchased. Retailers can also pay fees to offer better terms, such as 0% interest, at checkouts. In comparison, the average annual interest rate on credit cards is 21.19%, according to the Federal Reserve.
What started as a payment option mostly for luxuries like beauty products and purses is rapidly expanding to other categories, including groceries and medical procedures. Shoppers’ use of these payment plans for “necessary” and “everyday” purchases expanded 434% from 2020 to 2021, according to the Consumer Financial Protection Bureau.
Paden Brown, a truck driver from Texas, uses Affirm to buy groceries and household essentials on slow driving weeks when his pay is low. A recent bill at Walmart was roughly $465, and Affirm offered him a choice of three payment plans. He chose a six-month loan with a 36% interest rate that didn’t require a down payment.
He has also used the service to buy nearly $4,000 of gaming equipment and $1,100 in tickets to WrestleMania events, both on interest-free payment plans with longer timelines.
Brown, 35, said his father damaged his credit score when he was younger by taking out cards in his name. Though he has built it back up, he is still wary of credit cards.
“The difference between this and a credit card is that Affirm won’t threaten to garnish your wages,” Brown said. “They’ll just say, ‘We’re not doing business with you anymore.’ ”
Stigma around credit cards has driven people away from them, even though they are better regulated and come with fraud protections and other perks, said Peter Smith, senior researcher at the Center for Responsible Lending, a consumer-advocacy group.
His group and others are calling on regulators to develop a framework to oversee the buy now, pay later industry. “We see this as the Wild West right now,” he said.
Roughly a year ago, CFPB director Rohit Chopra said his agency intends to regulate the industry the same way it regulates credit cards, noting, “It’s critical that this growing category does not hide in the shadows.” Putting that into practice has been slow-going, though Affirm has said it is subject to CFPB supervision and supports the agency’s efforts.
Kristina Koltyk, 38, uses credit cards only for essentials such as groceries and gas, which keeps her credit score high. For most everything else, the postal-service worker uses installment loans from Affirm.
Koltyk, who lives in Garden City, Mich., has taken out over $30,000 in loans since 2021 to buy items including car parts for her boyfriend’s Dodge Challenger, a Samsung 55-inch television and Nike Air Force 1s.
“Affirm is cool because it doesn’t mess with your credit score at all,” she said.
Most buy now, pay later companies say they conduct a “soft” credit-check primarily to help determine the interest rates offered. These checks are designed to not affect a borrower’s credit score, unlike the “hard” credit checks typically required for credit cards and mortgages.
That leaves lenders with an incomplete picture of the debts people are carrying when approving them for new credit. It also means shoppers can take out loans at multiple buy now, pay later companies, and each wouldn’t know about the other.
Affirm said the company is motivated to extend credit only to consumers who can pay on time because it doesn’t charge late fees.
While the three major credit reporting bureaus, Equifax, Experian and TransUnion, gave buy now, pay later companies the option last year to report payment-plan activity, the majority aren’t yet doing so. Affirm said it reports some longer-term loans to Experian and might report to others in the future. Afterpay—which is owned by Jack Dorsey’s payments company, Block—doesn’t report to U.S. credit bureaus. Neither does Sweden-based Klarna.
Afterpay and Klarna have argued that reporting to U.S. credit bureaus would hurt their customers even when they are making payments on time.
Kerry McKinley, 27, used Afterpay to buy $500 of clothes from Fashion Nova, an online-only retailer. Her payment plan carried no interest and she paid it off using her credit card.
In the following months, McKinley, who lives in Hercules, Calif., had car troubles and an emergency visit to the veterinarian’s office after her dog rifled through the trash. Her rainy-day fund was depleted, and she incurred late fees on her credit card.
McKinley regretted the Afterpay purchase for setting her back. “It’s just an easier way for big companies to convince you to spend money you don’t have,” she said.
Gabriel Racela of Vancouver, British Columbia, in Canada, uses buy now, pay later options as a litmus test. If a purchase qualifies for an interest-free loan, the 27-year-old gaming company project manager will spend the money, which was the case for a recent $4,300 laser eye surgery. Otherwise, he will pass.
But he does make exceptions. He and his sister recently bought two sectional sofas for around $2,700 using a one-year loan with a 17% interest rate.
S - https://www.wsj.com/personal-finance/credit/buy-now-pay-later-industry-watchdog-groups-beed96c8
A - https://archive.is/Rtno0
Priscilla Rodriguez, an overnight stocker at a Walmart, has a strategy to protect her credit score as she and her husband look to buy a house.
The Sunland Park, N.M., resident uses installment loans from Afterpay to buy groceries, her pricey skin-care products and art supplies for her 10-year-old son, which keeps the balance on her two credit cards low—and the credit agencies in the dark.
“Afterpay doesn’t report to Equifax,” Rodriguez, 31, said. “That was very appealing to me.”
Consumers are shifting more of their spending to so-called buy now, pay later lenders, a trend that is only accelerating as high interest rates dent budgets and pandemic savings dry up. That is sounding alarms at consumer-advocacy groups that say companies like Afterpay, Affirm and Klarna provide fewer protections than credit cards and encourage shoppers to take on more debt than they can afford.
A quarter of all American adult consumers have used buy now, pay later loans, according to LexisNexis Risk Solutions. Over Black Friday and Cyber Week, such payment plans accounted for 7.2% of all online sales, a 25% jump from last year, Adobe found. (They were also a big factor in the declining use of store credit cards.)
Buy now, pay-later firms can extend loans as large as $25,000, offering annual interest rates ranging from 0% to 36%. The rates offered are dynamic and depend on the borrower’s standing, payment timeline and the item being purchased. Retailers can also pay fees to offer better terms, such as 0% interest, at checkouts. In comparison, the average annual interest rate on credit cards is 21.19%, according to the Federal Reserve.
What started as a payment option mostly for luxuries like beauty products and purses is rapidly expanding to other categories, including groceries and medical procedures. Shoppers’ use of these payment plans for “necessary” and “everyday” purchases expanded 434% from 2020 to 2021, according to the Consumer Financial Protection Bureau.
Paden Brown, a truck driver from Texas, uses Affirm to buy groceries and household essentials on slow driving weeks when his pay is low. A recent bill at Walmart was roughly $465, and Affirm offered him a choice of three payment plans. He chose a six-month loan with a 36% interest rate that didn’t require a down payment.
He has also used the service to buy nearly $4,000 of gaming equipment and $1,100 in tickets to WrestleMania events, both on interest-free payment plans with longer timelines.
Brown, 35, said his father damaged his credit score when he was younger by taking out cards in his name. Though he has built it back up, he is still wary of credit cards.
“The difference between this and a credit card is that Affirm won’t threaten to garnish your wages,” Brown said. “They’ll just say, ‘We’re not doing business with you anymore.’ ”
Stigma around credit cards has driven people away from them, even though they are better regulated and come with fraud protections and other perks, said Peter Smith, senior researcher at the Center for Responsible Lending, a consumer-advocacy group.
His group and others are calling on regulators to develop a framework to oversee the buy now, pay later industry. “We see this as the Wild West right now,” he said.
Roughly a year ago, CFPB director Rohit Chopra said his agency intends to regulate the industry the same way it regulates credit cards, noting, “It’s critical that this growing category does not hide in the shadows.” Putting that into practice has been slow-going, though Affirm has said it is subject to CFPB supervision and supports the agency’s efforts.
Kristina Koltyk, 38, uses credit cards only for essentials such as groceries and gas, which keeps her credit score high. For most everything else, the postal-service worker uses installment loans from Affirm.
Koltyk, who lives in Garden City, Mich., has taken out over $30,000 in loans since 2021 to buy items including car parts for her boyfriend’s Dodge Challenger, a Samsung 55-inch television and Nike Air Force 1s.
“Affirm is cool because it doesn’t mess with your credit score at all,” she said.
Most buy now, pay later companies say they conduct a “soft” credit-check primarily to help determine the interest rates offered. These checks are designed to not affect a borrower’s credit score, unlike the “hard” credit checks typically required for credit cards and mortgages.
That leaves lenders with an incomplete picture of the debts people are carrying when approving them for new credit. It also means shoppers can take out loans at multiple buy now, pay later companies, and each wouldn’t know about the other.
Affirm said the company is motivated to extend credit only to consumers who can pay on time because it doesn’t charge late fees.
While the three major credit reporting bureaus, Equifax, Experian and TransUnion, gave buy now, pay later companies the option last year to report payment-plan activity, the majority aren’t yet doing so. Affirm said it reports some longer-term loans to Experian and might report to others in the future. Afterpay—which is owned by Jack Dorsey’s payments company, Block—doesn’t report to U.S. credit bureaus. Neither does Sweden-based Klarna.
Afterpay and Klarna have argued that reporting to U.S. credit bureaus would hurt their customers even when they are making payments on time.
Kerry McKinley, 27, used Afterpay to buy $500 of clothes from Fashion Nova, an online-only retailer. Her payment plan carried no interest and she paid it off using her credit card.
In the following months, McKinley, who lives in Hercules, Calif., had car troubles and an emergency visit to the veterinarian’s office after her dog rifled through the trash. Her rainy-day fund was depleted, and she incurred late fees on her credit card.
McKinley regretted the Afterpay purchase for setting her back. “It’s just an easier way for big companies to convince you to spend money you don’t have,” she said.
Gabriel Racela of Vancouver, British Columbia, in Canada, uses buy now, pay later options as a litmus test. If a purchase qualifies for an interest-free loan, the 27-year-old gaming company project manager will spend the money, which was the case for a recent $4,300 laser eye surgery. Otherwise, he will pass.
But he does make exceptions. He and his sister recently bought two sectional sofas for around $2,700 using a one-year loan with a 17% interest rate.
"If they don't see my awful spending habits we will certainly save up for a mortgage down payment and have no issues later on whatsoever!"
