Consumer debt rebounded in the second quarter of this year after falling off during the pandemic. Much of this recent activity was driven by mortgages. Credit card debt is up a bit, but still $140 billion below December 2019 levels. (Reuters) Many are still struggling to pay their balances, and have seen credit limits decreased and accounts closed. (ABC7news)

BNPL (Buy Now, Pay Later).

With that as background, the credit management tool talked about most in the news in recent months has been BNPL.

• According to a June Amazon Web Services survey, usage has grown 85% in fifteen months.
• In the U.S., these short-term installment-like loans saw a 215% jump year-on-year in the first two months of this year, according to data from Adobe Analytics.
• Consumers using such services placed orders that are 18% larger compared to the same period in 2020, the data showed.

While BNPL made its debut pre-pandemic, the increase in online buying (many of these options/apps appear when completing an online purchase), the increase in the number of companies entering this space, and the number of people wanting to make purchases but struggling to pay for them combined to drive the growth of BNPL during the pandemic.

What is it? This is a payment plan that splits your current purchase into multiple bi-weekly payments (usually 3-4) over a period of time (usually 6 weeks). Users don’t pay a fee for it, and little to no interest. It is usually as easy as checking a box during checkout, and makes it easier for many to budget for the future payments. It is linked to a credit card or bank accounts, (the information goes to the third-party BNPL provider) and the payments are processed automatically.

There are no credit checks run, and the transaction is not reported to credit agencies. The service sits somewhere between traditional installment purchases, which have been used for larger ticket items, and credit card purchases. Most providers offer it on small or large purchases.

Who offers it? The service is offered directly by some credit cards, PayPal or specific BNPL companies such as Afterpay, Affirm, Klarna,and Sezzle. PayPal and credit card options seem to be the most popular, as users already know (and trust) these firms. (Square recently purchased Afterpay.)

Who is using it? And why? BNPL is most popular among Millennials and GenZ. (CNBC). Younger generations are often feeling pressure from peers and social media to buy things (FOMO), and BNPL makes it feel like it is “cheaper” than it really is to buy whatever they feel they “need.”

(Charts from PYMTS)

What are the downsides? For starters, Given that credit checks aren’t being done before hand, and the transactions are not reported, the credit may be offered to folks who won’t be able to handle the payments, and it won’t be seen by anyone checking that person’s credit. The concern is that when people find themselves in trouble meeting payments, they will look for higher interest options to pay it off, or default. In evaluating the BNPL providers as an investment, transaction losses could rise with any downturn (or resurgence of Covid). (CNBC)

While not all of the BNPL providers report accounts to the credit bureaus, or report for only some of them, repeated use of these POS (point-of-sale) financing arrangements can still bring your credit score down. This is because of the impact of these loans on one of the determinants of your credit score: age of your credit history.

“While the record of on-time payments can boost your credit, you could see a blow to your score from using the [BNPL] service,” says Leslie Tayne, founder and managing director at Tayne Law Group. “Every purchase you make with a POS loan is considered a separate account on your credit report that gets closed once you pay off the balance. Since these loans are short-term (generally six weeks), they can bring down the average age of your credit history considerably — especially if you’re a regular borrower.”

(CNBC)

And 72% of people who reported that they missed payments saw their credit score drop as well. (creditkarma)

For a good summary of the things to consider before opting for BNPL, check out this CFPB blog. One aspect mentioned in the blog that is not mentioned above is that they lack the consumer protections that come with using credit cards.

BNPL vs. Rent-to-Own vs. Installment Loan

BNPL doesn’t replace rent-to-own, but is specifically designed for larger, durable goods.   A company like Katapult becomes useful for financially underserved people who may not qualify for traditional installment loans when purchasing a durable good. That is where rent-to-own comes in, and a company like Katapult claims to offer more flexibility in setting up plans for its customers. (PYMNTS)

Credit Card Management/Money Management

If you are looking for a quick article to set up (or summarize) a credit card discussion, this USA Today article gets right to the point by spelling out the three biggest mistakes you can make with a credit card. Review the three don’ts of credit cards:

• Don’t max out your credit card.
• Don’t pay only the minimum amounts
• Don’t be late

What might be of interest to your students who are into cryptocurrency would be the news that Venmo credit card holders will be able to get their cash back earnings in cryptocurrency. (CoinDesk)

Getting That First Credit Card

This article summed up a few ways to help students going off to college get a credit card to start building their credit history. The riskiest for a parent would be to cosign a credit card in the student’s name. This puts all of the risk on the co-signer, and may limit their borrowing ability. One option that would be preferable would be to add the student as an authorized user on one of the parent’s cards. A card with the student’s name will be issued to the student. The parent is still responsible for the ultimate payment, but is in much more control of the situation. Of course, if you can’t trust the student to use the card within your parameters, this isn’t a great idea. However, many cards will separately issue a credit limit for the additional card, which could limit the potential damage. Another option mentioned was a Credit Builder Loan. Not mentioned was working with a bank to get the student a secured credit card, backed up by money in a savings account. (PRNewsWire)

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.

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