The cons of using buy now, pay later for services

Yahoo Finance contributor Vera Gibbons joins the live show to examine the effects of “buy now, pay later” services on consumer credit scores and spending habits.

Video transcript

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Well, we all know that holiday shopping can get a bit pricey, especially in today’s economic environment. But one way for consumers to clear their pockets is to turn to a new option that has now been shortened so you know it’s legit. Buy now, pay later, BNPL. But while it might seem like an easier choice initially, it might not be the best choice for everyone in the long run.

So, in determining whether or not this is the best choice for you, you want to bring in Yahoo Finance associate Vera Gibbons, who is joining us here to take a closer look at BNPL. And Vera, I have to say, maybe I had the opportunity to use one, so I did. But what do people need to know about the new option on the block?

VERA GIBBONS: Its good. You tried. You have tried it. Yeah, you ride the bandwagon like millions of other Americans. I think people initially jumped on the buy now, later pay the bandwagon at the start of the pandemic. They are at home. They were landlocked. They were shopping online. And it was a good alternative. So millennials and millennials in particular are spending a fortune using these services, spending $ 100 billion this year alone. That’s a huge increase from $ 24 billion last year and $ 20 billion the year before.

And I think they can work very well for responsible users. I think people get in trouble when they are irresponsible and miss payments because then their credit takes a hit. But for responsible users, it can be a viable option for expensive purchases, be it vacations, household items, things of that nature. And people like it because it’s easy. There is no interest. You make your payments, you know, four payments, six payments, over a period of time.

You also get the article directly in advance. Unlike layaway, you don’t have to wait. You get the item when you make that first payment. And you just schedule the payments from there. So it’s easy. There is no barrier to entry, and there is no credit check, a serious credit check when you sign up. So people like it too.

Yeah, let’s talk about building credit. I mean, you know, you pointed out that the initial check is just a soft credit check so you don’t get a result. If you miss the payment, you do. But what’s the benefit of going for this credit card over a traditional credit card if it’s somehow increasing your credit, especially with younger buyers?

VERA GIBBONS: This is one of the big downsides of these, as you are not being rewarded for good things like paying your bills on time. You are not rewarded for it. But if you do something wrong, if you miss a payment, like, if you miss several payments, you might very well get into a collection, and you might – your credit might actually take a hit.

So this is one of the big downsides of these, is that it does nothing to actually help build your credit. As Zack pointed out during the commercial break, you also don’t get points, miles, and some of the other perks that come with credit cards, or credit card protection. So something is wrong with your purchase, something fraudulent is happening, there is very little recourse, which is why there are a lot of complaints going on right now with the Better Business Bureaus. which concerns those buy now, pay later for services, because things can go wrong and go wrong quite frequently.

Yeah, Vera, I was just looking right now to make sure I set up my direct payment. I don’t know if I did. So I have to go back and see if my mattress is going to hit my credit score. But when we look at maybe how these regulations could escalate around maybe, I guess, trying to protect consumers because, you know, behavioral economics looks like it’s a really easy way to overspend. because, you know, the further we get away from cash, there’s a real salient feeling when you give it to whoever works at the cashier. Then came the credit cards, now this where just the click of a button, I don’t have to pay for six months. I mean, what are you waiting to see when regulators maybe take a closer look?

VERA GIBBONS: [INAUDIBLE] because many people are financially exhausted using these services buy now, pay later. In fact, survey after survey, people are buying more than they can afford using these services. They think it’s almost like funny money because you make the upfront payment, thinking, oh, well that’s easy. But there are other payments to come, so you need to prepare for them.

Now, in terms of regulation, not much is happening right now. I spoke with the Consumer Financial Protection Bureau, and they said they were monitoring the situation, checking things out. But they are essentially taking a wait-and-see approach. And some of the other consumer advocates I’ve spoken to have said, hey, we need some sort of regulation now. Why wait for other problems to arise and get worse? So nothing at this time, but down the line, especially as these become more popular and volume continues on that upward trajectory, we’ll likely see some sort of regulation.

Yes, I just confirmed that everything is going well with my payment here. So we’re all good there.

VERA GIBBONS: Yahoo Finance contributor Vera Gibbons brings us the latest buy now, pay later news. I appreciate this.