‘Buy Now, Pay Later’ Sites Can Hurt Your Chances of Buying a Home
Klarna, Afterpay and Clearpay are a few examples of applications and sites that allow customers to spread out purchase payments over several weeks and months.
It’s popular among young adults from 18 to 34, but it can hurt credit scores and chances of getting a mortgage loan.
If you miss a payment it can result in fees and your credit score dropping.
Credit Karma, a website that offers a free look at your credit scores, conducted a survey that found 42 percent of Americans have used some form of ‘buy now, pay later,’ or BNPL. Seventy-two percent of survey respondents said they missed a payment and it resulted in their credit score declining.
“If you were to use that same tool but then miss a payment or two those would get reported on your credit bureau and they would adversely affect or negatively affect your credit score,” says Bruce Meek, Division Manager for Genisys Mortgage in Cadillac.
Mortgage lenders check credit scores when reviewing mortgage applicants. Multiple outstanding balances – like BNPL accounts – and missed payments can raise red flags. But they aren’t the only things lenders look at.
“We call it dictate income ratio,” says Meek. “What we’re looking at is what your income is for you- the people on the loan or the household. We want to see what that income level is and then we want to see what you already have in debt out there.”
A poor credit rating is typically below a 670 and most lenders will look for a debt to income ratio of 40 to sometimes 50 percent, depending on the situation.
Meek says that young people are more at risk of making poor financial decisions because finances are often not talked about enough throughout high school and even in early adulthood. For example, how to use credit cards to build good credit.
“[People] kind of think of credit cards as being kind of a loan you make payments on and in fact some places will tell you you can build credit by making payments with a credit card that’s not necessarily true,” says Meek.
So when it comes to building credit or making financial goals for the future, such as purchasing a home, it’s important to make smart decisions about where your money is going.
The advice is to start by taking out a small loan, $500 to $1,000, and paying it off. If you take out a line of credit, be sure you trust the institution and pay off those purchases each month.
Buy now, pay later tools can be helpful in building credit if used with caution and paid off sooner rather than later. Miss a payment and it can end up costing you big.