A new CFPB report reveals the credit habits of 'buy now, pay later' users—here's what you need to know

"Buy now, pay later" (BNPL) services have firmly established themselves as a credit tool used by millions of Americans. Between the first quarter of 2021 and the first quarter of 2022, 17% of Americans borrowed using BNPL, a new report by the Consumer Financial Protection Bureau (CFPB) on consumer use of BNPL states.

The report, however, paints a not-so-rosy picture of BNPL users' financial and credit health. CNBC Select outlines the bureau's findings and offers advice on how to use BNPL safely, as well as what alternatives can help finance your purchases free of interest.

While the survey found many BNPL users had relatively healthy personal finances, it concluded that "BNPL borrowers were, on average, much more likely to be highly indebted, revolve on their credit cards, have delinquencies in traditional credit products, and use high-interest financial services."

Here are the details of some of these findings:

BNPL users have lower credit scores

A good credit score is key to getting favorable terms on loans and credit cards. So it's not surprising those with lower credit scores would gravitate toward BNPL, which is easily obtained even if you have little or no credit history. The CFPB survey found that BNPL borrowers had an average score in the "subprime" range (580-669) while people who didn't use BNPL had an average score in the "near-prime" range (670-739).

It's important to note that borrowers had on average lower credit scores before and after using a BNPL service, which according to the report suggests "that the group of BNPL users had a lower average creditworthiness rating prior to their first time using the product." In other words, there's nothing in the survey showing that using BNPL itself causes scores to drop.

BNPL users have access to credit — and they use it

The BNPL users surveyed may have had lower average credit scores than non-users, but they used plenty of credit products in addition to BNPL. According to the survey, a higher percentage of BNPL borrowers maintained open accounts in almost all credit products than non-BNPL users. The only exception was with mortgage products, which had more activity with non-BNPL users.

Here's how many more BNPL borrowers used the following credit products compared to BNPL non-users:

• Personal loan — 19% more
• Retail card — 18% more
• Student loan — 16% more
• Credit card — 13% more

To add to that, 88% of BNPL users also had a credit card — and they were 27% more likely than non-users to carry a balance in the past billing cycle, meaning they accrued interest. Further, 69% of BNPL borrowers said they carried a balance on at least one credit card.

BNPL users also seem more prone to using riskier lending products. They were 26% more likely to have had an overdraft and 12% more likely to have used alternative financial services (such as payday and pawn loans).

BNPL users have higher levels of credit card debt and utilization

The survey found that 25% of BNPL users didn't have an emergency fund or any other savings unrelated to retirement. On top of that, about half of BNPL borrowers had less cash and savings than what they paid for the purchases they made using BNPL. It's safe to assume they wouldn't be able to afford those purchases without borrowing.

On average, BNPL users had almost $11,981 less in non-retirement savings and cash compared to those who didn't use BNPL, and $4,057 less available on credit cards.

Given the lack of easily-accessible savings and heavy reliance on credit, it's no surprise that BNPL borrowers had higher levels of credit card debt and utilization than those who didn't use those services.

Credit utilization is the percentage of your available card credit limit you're using. It's the most important component of your credit score after payment history. You want to keep this number under 30% to avoid a negative impact on your scores. According to the report, BNPL non-users maintained a credit utilization rate of 30% between March 2020 and December 2022. Those who used BNPL, on the other hand, had a credit card utilization rate of 40%-50%.

BNPL users are more likely to have been delinquent

Among survey respondents with an open loan or card account, BNPL users were 11% more likely than non-BNPL borrowers to have a delinquency of at least 30 days.

The difference is especially stark for those with store and credit cards. For example, 9% of BNPL borrowers with a credit card had missed payments of 30 days or more, compared to just 3% of non-users. Further, 8% of BNPL users were late making payments on their store card, compared to 1% of those who didn't use BNPL.

BNPL services owe their popularity to their simple approval process, predictable payment schedule, and lack of interest charges (provided you pay on time). Indeed, according to the CFPB, 53% of BNPL borrowers with subprime credit scores would have to pay 19% to 23% in interest if they made the same purchase on their credit card.

At the same time, a missed payment on a BNPL service might result in hefty late fees even more expensive than card interest charges. However, some BNPL services don't have late fees at all, including CNBC Select's top picks Affirm and 'Pay in 4' with PayPal. Sezzle also doesn't charge late fees, but you'll be charged if your payment fails (because you don't have enough money in the account you're paying from, for example) or if you reschedule one of your payments.

If you're planning to use BNPL, make sure you understand the terms and conditions and know exactly what you're getting into. See when late fees kick in and avoid them — many apps will let you set up autopay to help with that. Remember that while your BNPL on-time payments won't show up on your credit report, late payments might.

If your goal is to finance a purchase and pay no interest on it, you have options other than BNPL.

For example, paying with a 0% APR credit card can offer you a zero-interest period longer than a year, plus, some 0% APR cards also offer cash-back rewards for the purchases you make. CNBC Select ranked the best 0% APR cards, here are some of our top picks:

A lengthy no-interest period can be especially helpful if you're making a large purchase and need more time to pay it off. Plus, it's up to you to decide how much to pay each month — as long as you're making at least the minimum payment, you'll be in good standing with your card issuer.

That said, it's best to only take on debt if you have a solid repayment plan. If you still have a balance on your 0% APR card once the promo period expires, you'll be hit with the regular interest rate.

Finally, a credit card gives you access to consumer protections BNPL doesn't offer. For instance, if you're charged the wrong amount or there are issues with an item you've purchased, your credit card issuer might be able to help you — but a BNPL provider isn't likely to step in.

Despite common misconceptions, BNPL users do have access to traditional credit — and they often use these services in addition to their credit cards. Unfortunately, it's unlikely to benefit their credit health as many BNPL borrowers already struggle with lower credit scores and savings while having higher debt levels and card utilization rates.

If the idea of financing a purchase in four equal payments with no interest sounds appealing, make sure the purchase is within your budget and you're not overextending yourself. Like almost every form of credit, BNPL can help you reach your financial goals — but if you're not careful, it can land you in a heap of trouble.

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