NEW YORK (AP) 鈥� More shoppers than ever are on track to use this holiday season, as the ability to spread out payments looks attractive at a time when Americans still feel the lingering effect of inflation and already have record-high credit card debt.
The data firm Adobe Analytics predicts shoppers will spend 11.4% more this holiday season using buy now, pay later than they did a year ago. The company forecasts shoppers will purchase $18.5 billion worth of goods using the third-party services for the period Nov. 1 to Dec. 31, with $993 million worth of purcahses on Cyber Monday alone.
Buy now, pay later can be particularly appealing to consumers who have low credit scores or no credit history, such as younger shoppers, because most of the companies providing the service run only soft credit checks and don鈥檛 report the loans and payment histories to the credit bureaus, unlike credit card companies.
This holiday season, buy now, pay later users can also feel more confident if a transaction goes awry. In May, the that govern traditional credit, such as providing ways to demand refunds and dispute transactions.
To use a buy now, pay later plan, consumers typically sign up with bank account information or a debit or credit card, and agree to pay for purchases in monthly installments, typically over eight weeks or more. The loans are marketed as requiring no or low interest, or only conditional fees, such as for late payment. Klarna, Afterpay and Affirm are three of the biggest buy now, pay later companies.
But consumer advocates warn that shoppers who sign up for the payment plans using a credit card can be hit with more interest and fees. That's because the shopper opens themselves up to interest on the credit card payment, if it's carried month to month, on top of any late fees, interest, or penalties from the buy now, pay later loan itself. Experts advise against using a credit card to pay for these plans for this reason.
Consumer watchdogs also say the plans lead consumers to overextend themselves because, for example, not paying full price up front leaves, in the shopper鈥檚 mind at least, more money for smaller purchases. They also caution consumers to keep careful track of using multiple buy now, pay later services, as the automatic payments can add up, and there is no central reporting, such as with a credit card statement.
鈥淏uy now, pay later can be an innovative tool for purchases you鈥檙e going to make anyway,鈥� said Mark Elliott, chief customer officer at financial services company LendingClub. 鈥淭he challenge is that it does fuel overspending.鈥�
For merchants, that鈥檚 part of the appeal. Retailers have found that customers or to convert from browsing to checking out when buy now, pay later is offered. One cited research that found customers spend 20% more when buy now, pay later is available.
鈥淭he reality is that the increased cost-of-living and inflation have put more people in a situation where they鈥檙e already relying on revolving credit,鈥� Elliott said. 鈥淭he psychographics of 鈥榖uy now, pay later鈥� may be different 鈥� people don鈥檛 think of it as debt 鈥� but it is.鈥�
If a consumer misses a payment, they can face fees, interest, or the possibility of being locked out of using the services in the future.
Emily Childers, consumer financial expert for personal-finance technology company Credit Karma, said that internal data shows member credit card balances are up more than 50% for Gen Z and millennial members since March 2022, when the Fed started raising interest rates.
鈥淵oung people are entering this holiday season already in the red,鈥� she said. 鈥淎nd, based on what we鈥檙e seeing in the data, they鈥檙e continuing to bury their heads in the sand and spend.鈥�
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The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.
Cora Lewis, The Associated Press
