As buy now, pay later programs become more common, some shoppers are using this payment structure to make ends meet. Americans owe $17.5 trillion across credit cards, mortgages, auto loans and other forms of debt, according to the Federal Reserve Bank of New York. About $1.12 trillion of that is on credit cards. Buy now, pay later loans, which often don’t show up on your credit report, are a kind of “phantom debt” that isn’t reflected in those tallies. Such short-term financing plans are the second-most-used form of credit payment among consumers in the U.S., according to a new report by NerdWallet.
Credit cards are the most commonly used form of credit, with 66% of respondents using them in the past 12 months. Meanwhile, 25% said they had used BNPL services in the last 12 months. NerdWallet polled 2,061 U.S. adults in early April. While this type of line of credit has turned into the lifeline for many consumers, some changes to the payment structure are on the horizon. BNPL firms might soon be required to comply with federal protections that cover credit card use in the U.S. The Consumer Financial Protection Bureau announced on May 22 that such companies must provide customer protections like refunds for returned products, look into merchant disputes and pause payments during such investigations.
Returns and disputes are a “notable pain point” for consumers, about 18% of U.S. adults have had difficulties returning items or getting a refund through a BNPL plan, according to an April Bankrate survey. Some BNPL plans already have such provisions in place if a consumer needs to make a return. “It depends on the provider,” said Sara Rathner, a travel and credit cards expert at NerdWallet. But the BNPL space needs “some consistency and some predictability,” said Matt Schulz, chief credit analyst at LendingTree. “For many years, buy now, pay later was a bit of a wild, wild West situation,” he said, as one BNPL service might operate differently to another.
With more changes to BNPL structures expected to materialize in the coming months, it’s important for consumers to understand the terms before they use such financing, experts say. “You always want to know what your rights are, and that’s something to study up on before you’ve committed financially,” Rathner said. While Americans’ credit card debt is down from $1.129 trillion in the fourth quarter of 2023, according to Fed data, it’s still the highest figure since 1999. “Nobody should expect that to continue to fall going forward into the year,” said LendingTree’s Schulz. About 44% of credit cardholders carry balances from month to month, Bankrate found. “That’s where we worry,” said Ted Rossman, a credit card analyst at Bankrate.com.
Low-income households, parents of minor children, and younger consumers are bearing the brunt of the financial challenges associated with buy now, pay later programs. About 38% of cardholders who make $100,000 a year or more carry a balance, while 56% of cardholders who earn $50,000 or lower carry a balance, Bankrate found. Parents of minor children are more likely, 61%, to have paid a late fee over the past year than adults without children (28%), NerdWallet found. And 12% of Gen Z adults, or those age 18 to 27, used BNPL to pay for necessities in the past 12 months, NerdWallet found. A similar share, 11%, of the cohort expect to do so in the next year.
While buy now, pay later programs offer convenience and flexibility for consumers, it is crucial to understand the potential risks and challenges associated with these financial tools. As the popularity of BNPL services continues to grow, regulatory changes and consumer education will play a vital role in ensuring responsible usage and protecting individuals from falling into debt traps.