Greater Nevada Credit Union aims to educate consumers about increasingly popular programs that could harm credit score

RENO — Holiday shopping season is officially underway and as consumers look to buy gifts for their friends and loved ones, there’s one shopping trend the experts at Greater Nevada are hoping to educate the community about – Buy Now, Pay Later loans.

This type of loan, known as a point-of-sale (POS) loan, gives shoppers the option to pay off purchases with bi-weekly or monthly payments over a period of time. Unlike credit cards, many Buy Now, Pay Later Loans offer 0% interest and no penalties for late payments.

“On the surface, this can sound like a pretty attractive option; especially if your online cart is loaded with big-ticket items such as furniture, gifts or household goods,” Marcus Wertz, chief lending officer at Greater Nevada Credit Union, said. “However, it is very important to be aware of how Buy Now, Pay Later loans can impact your credit score before deciding to use this option.”

According to Wertz, some Buy Now, Pay Later loans can affect consumer credit scores when considering the five factors influencing FICO scores and how each is weighed.

— Payment history (35%): The track record of making on-time payments

— Amounts owed (30%): How much credit and loans someone is using compared to how much they have available, also known as a utilization rate

— Length of credit history (15%): How long someone had access to credit

— New credit (10%): How frequently an individual applies for and opens new accounts

— Credit mix (10%): The variety of credit products someone has, including credit cards, installment loans, finance company accounts, mortgage loans, auto loans, and more

“Changes to each of these factors can impact your credit score negatively or positively,” Wertz said. “In the case of point-of-sale loans, these can affect your credit score in a number of ways.”

The first is payment history. If shoppers make payments on time for their Buy Now, Pay Later loan, it could positively impact their payment history. If not, it can have a negative impact. Additionally, length of credit history is impacted as the credit reporting agencies consider each purchase using a Point of Sale loan as a separate loan.

Once consumers complete the payments, the loan then closes. Having a series of quick loans like this can bring down the average age of someone’s credit history and decrease their credit score as a result. Another factor to consider is that these loans will reflect new credit – repeatedly applying for new Buy Now, Pay Later loans will also demonstrate the frequent opening of new accounts and could hurt someone's overall credit score. Finally, how the company that offers the Buy Now, Pay Later loan reports usage to credit agencies will also impact someone’s credit score.

Various companies offer POS loans, including popular providers such as AfterPay, Affirm, and Klarna. Each handles how they report user activity to the major credit bureaus in a different way, which can make these loans even more confusing.

“It’s crucial to make sure you’re clear on the terms and conditions of any Buy Now, Pay Later loan and understand the interest rate and repayment schedule,” Wertz said. “Managing finances during the holiday season can be really stressful for some people. The last thing they need to experience is a hit to their credit score after they thought they were balancing their budget by spreading out their payments.”

Wertz said one alternative people should consider is a personal line of credit, which gives buyers immediate access to funds whenever they need them. Unlike a traditional lump-sum loan, they do not have to use the line of credit all at once — or at all. And, they only pay interest on what they use.

“Personal lines of credit can also help build someone’s credit score,” he said. “When used responsibly, an open line of credit can reflect positively on personal credit scores by demonstrating the longevity of activity and usage ratio.”

Another option, especially if people are thinking about using a Buy Now, Pay Later loan for holiday shopping or another event they couldn't plan for, is to save strategically for that purchase. For example, a savings account like Greater Nevada’s Christmas Club, will help customers save regularly throughout the year with automatic deposits. Then, come Nov. 1, they’ll receive the money they saved, plus the interest it earned.

For more information about loan types, credit scores, and more, visit GNCU’s Greater Financial Education Center.