Does Afterpay Build Credit?

What is Afterpay? How does Afterpay work?

Afterpay is a "buy now, pay later" (BNPL) service for online shopping. These payment plans let you get items right away and pay over time. Most plans split costs into four equal payments. You pay the first one at checkout, then three more every two weeks from your linked card.

BNPL options like Afterpay, Klarna, and Affirm make online buying easier. But it's worth knowing how they might affect your credit report and score.

How do "buy now, pay later" services work?

BNPL services split purchases into several payments instead of one. You make the first payment at checkout, then pay the rest in equal, interest-free amounts until you've paid in full.

These services work for items from under $100 to several thousand dollars. You can usually apply when checking out online.

Unlike regular loans, most BNPL companies don't do hard credit checks, and many don't check credit at all. They just ask for basic info and a card number.

Miss a payment? You'll likely pay late fees. Afterpay doesn't charge interest, but they do charge fees if you don't pay on time.

How could Afterpay or other "buy now, pay later" services affect your credit?

It depends on which BNPL service you choose.

Many BNPL plans only run a soft credit check (or none at all). So applying probably won't affect your credit. But each service is different, so check the terms before signing up.

Some BNPL services don't report payment info to credit agencies, or they only report to certain ones.

Equifax was first to create a standard way to report BNPL services on credit reports. Their study found that paying BNPL loans on time helped consumers' credit. Equifax now encourages BNPL providers to report credit info to reward good payment habits.

Can "buy now, pay later" services help you build credit?

When included on your credit report, BNPL loans can help people with thin credit files (two or fewer credit lines) or young credit histories (less than two years). Limited credit history often means lower scores, making it hard to get credit cards or traditional loans.

BNPL might help here. The Equifax study showed users gained an average 13-point FICO Score increase with on-time BNPL payments. People with thin or young credit files saw even bigger gains of 21 points on average.

These services can also help people trying to improve damaged credit. BNPL plans are typically easier to qualify for than other credit options. Making on-time payments can help build good credit habits.

There are drawbacks, though. BNPL loans are usually short-term, which might not lengthen your credit history much. Credit scores consider the average age of your accounts and time since opening new accounts. And because reporting can be delayed, your loan might be paid off before it even shows up on your credit report.

What are some potential impacts of "buy now, pay later" services?

Used wisely, BNPL plans can be helpful tools. But they have risks. Shoppers might get excited about buying things they couldn't afford before and end up spending too much. Some services charge late fees and high interest if you miss payments.

As with any debt, make sure you can pay back your purchase before using BNPL. While these plans can boost your credit with on-time payments, they can hurt your score if you miss payments and rack up fees and interest.