Data Finds Consumer Credit Is Taking a Hit as BNPL Surges in Pandemic

·4 min read

Buy now, pay later solutions, which were already gaining in popularity prior to the pandemic, have thrived in the last year and a half. Young consumers, especially, who have shown to dislike credit cards, have looked to the flexible payment option to finance larger purchases that they can pay for in installments.

According to a new survey by Credit Karma, 44 percent of consumers have used BNPL services to acquire an item that they needed during the pandemic. While the company’s findings revealed consumers were using the payment option to make purchases across all categories, at the beginning of the pandemic a hugely popular trend came from fitness enthusiasts who looked to purchase at-home equipment like the Peloton while fitness studios and gyms remained closed.

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Moreover, of those who have used BNPL, 75 percent said they have used the solution at least twice, indicating that they were satisfied with the experience. In part, Credit Karma found that consumers found the experience satisfying for its convenience, with 80 percent saying using BNPL was somewhat or very easy.

However, according to Credit Karma’s findings not all experiences were positive. In fact, 34 percent of those who have used BNPL said they have fallen behind on one or more payments. And of those who admitted to having missed at least one payment, 72 percent said they believe their credit score had declined as a result, with 31 percent saying their credit score had declined significantly.

At the same time, Credit Karma found that younger generations may be more likely to miss payments with the survey finding more than half of Gen Z and Millennial respondents who have used BNPL services reporting they have missed at least one payment, compared to 22 percent of Gen X and just 10 percent of consumers of the Baby Boomer generation and older.

Notably, the company said not all missed payments are equal with the survey showing that of those who had used BNPL, 25 percent of Millennials having missed one payment compared to 30 percent of Gen Z respondents reporting they have missed two payments.

“The idea of buy now, pay later programs have been around for ages,” said Colleen McCreary, financial advocate at Credit Karma. “Similar to layaway programs used by previous generations, buy now, pay later services can be a great tool for people who wish to make a purchase and break up their payments into smaller, more manageable dollar amounts. Unlike layaway plans, however, missing a payment toward BNPL loans can have a negative impact on your credit score, which can make it harder for you to borrow in the future.”

McCreary also points out that while consumers could experience a negative impact, BNPL services do not reward for good financial behavior. “For example, if you make regular on-time payments, which normally signals to a lender that you’re a good borrower, it’s unlikely it will be reported to the bureaus, which means you won’t see a positive shift in your credit score. Ultimately, there are pros and cons to every financial product. Be sure to weigh your options and read the fine print before agreeing to the terms.”

As BNPL continues to gain in popularity, home and furniture purchases were found to be the top spending categories for consumers using the payment option at 42 percent, followed by electronics at 30 percent and apparel at 24 percent. Other notable categories included purchases of accessories at 14 percent, fitness gear at 12 percent and luxury items at 10 percent. For Gen Z consumers, in particular, apparel was revealed as the top category at 40 percent.

Across all generations, the majority (65 percent) said they have used BNPL to purchase products or experiences amounting to $500 or less, on average. One-third reported they used BNPL to help them finance purchases of $100 or less, on average. Using BNPL to buy low-cost purchases was most common among Gen Z respondents with nearly half saying they used the payment option to make a purchase under $100.

Still, more than a third of respondents said they have used BNPL to make purchases over $500, with nearly 10 percent saying they used it or purchases $3,000-plus. These higher-cost purchases were more commonly made by consumers from generations Gen X and above.

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