Why 'Buy Now, Pay Later' Plans Can Hurt Your Credit Score -- Even if You Pay on Time

You may want to proceed with caution before using these plans.

There's a reason consumers frequently turn to credit cards to pay for purchases they can't cover outright -- it's an easy way to complete a transaction and deal with the payment aspect after the fact. But credit card purchases that aren't paid off in full can be costly. Credit card companies are notorious for charging lots of interest, and if you carry a balance forward long enough, you could end up spending more on interest than on the item you initially charged.

That's why "buy now, pay later" plans, or BNPL plans, have become a more popular option for consumers in recent years. These plans allow you to pay off a purchase in installments over a limited time frame -- usually 12 weeks or less. But unlike credit cards, you don't accrue interest on BNPL plan payments if you make them on time.

Now the danger of signing up for a BNPL plan is falling behind on your payments. In that scenario, you risk not only interest and penalties on the sum you borrow, but also, credit score damage.

But even if you manage to pay for your BNPL plan purchases on schedule, signing up for one of these plans might still hurt your credit score. Here's why.

It's all about your credit history

There are different factors that go into calculating credit scores. Your payment history, for example, carries the most weight, and it speaks to how good a job you do of paying bills when you're supposed to.

Another factor that goes into calculating your credit score is the length of your credit history. Having long-standing accounts in your name can boost your credit score, which is why you'll often hear that it's best not to cancel a credit card you've had for a long time but no longer use.

So how do BNPL plans factor in here? Well, the major credit bureaus are working to incorporate BNPL plan activity into credit reports. And while that could work to your benefit if you pay in a timely manner, it could hurt you from a length of credit history standpoint.

BNPL plans are, by nature, short-term loans. As mentioned, you'll commonly pay off a BNPL purchase within three months. But when you pay off a loan and close out that line of credit, it can reduce the average age of your open accounts and potentially drag your credit score down. This is even more likely to happen if you're new to the working world and therefore don't have many long-standing credit accounts in your name.

Let's say you've been a credit card holder for 10 years and you decide to pay for a purchase with a BNPL plan. Paying off that loan may not hurt your credit score so much if you have credit cards in your name that have been open for a decade. But if you only first opened a credit card a month ago and you close out a BNPL line of credit by paying off your purchase on time, it could have a negative impact on the length of your credit history -- and your score on a whole.

Be careful with BNPL plans

While BNPL plans may be convenient, it's important to be aware of how they might impact your credit. While you'd think that paying off a loan is a good thing from a credit score perspective, doing so can sometimes pull your score down. This holds true whether you're talking about a BNPL plan, an auto loan, or any other line of credit you no longer have open.