Surprise! This is How 'Buy Now, Pay Later' Can Affect Your Credit Score

It's the time of the year when a lot of people are reaching deeper into their wallets to pay for holiday purchases. And if you'd prefer to spread out some of those payments over time, then a "buy now, pay later" plan, or BNPL plan, might seem like a good option for you.

BNPL plans allow you to pay for purchases over a short time frame -- usually 12 weeks or less. If you make your payments on time, there's generally no cost to using one of these agreements; whereas with a credit card, if you carry a balance forward, you'll generally be looking at interest charges.

Data from Adobe Analytics found that short-term installment loans like BNPL plans led to $6.4 billion of online spending in October. Adobe also estimates that 20% of U.S. consumers intend to use BNPL plans to pay for holiday gifts.

But if you're going to sign up for a BNPL plan, proceed with caution. Otherwise, you could end up facing some very unfavorable consequences.

When you fall behind on your BNPL plan

Failing to keep up with a BNPL plan could hurt you in several ways. First, you could face interest and penalties on the sum you've borrowed. Secondly, your credit score could take a big hit if delinquent activity on your part is reported to the credit bureaus. And from there, a host of repercussions could ensue.

The lower your credit score is, the harder it becomes to qualify for a personal loan, mortgage, or car loan. And even if you do manage to get approved for one, you may be looking at a higher interest rate that costs you more money over time.

A lower credit score could also make it harder for you to rent a home. Landlords commonly perform credit checks on tenants to make sure they have a solid payment history. A hit to your credit score could cause a landlord to decide they don't want to take a chance on you.

Your best bet is to stick to cash

BNPL plans might seem convenient. But whether you're signing up for one in the context of holiday gifts or another purpose, you should know that your best bet is generally to pay for your purchases in cash.

Another option? Go ahead and swipe your credit card for the points -- but make sure you have the cash on hand to pay for your purchase. That way, you're able to pay off your balance without having to carry a portion of it forward.

In fact, the only time it really makes sense to use a BNPL plan is if you have to make a purchase in a pinch and don't have the cash. If your laptop breaks and you can't afford to buy a new one outright, but you're self-employed and you also can't work without a laptop, then that's a purchase it could pay to finance with a BNPL plan. You're still taking a risk in that situation, but it's an understandable one because you basically have no choice.

But don't use a BNPL plan to pay for expenses that aren't an emergency. These include holiday gifts, electronics for non-work purposes, and entertainment. Falling behind on a BNPL plan could cause serious damage to your credit score. And from there, the consequences have the potential to linger for a really long time.