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If you’ve made an online purchase in the past few years, you may have seen alternative payment options at checkout. Instead of adding credit or debit accounts, you may notice the option to pay with a series of installments called Buy Now, Pay Later. While installment loans have largely existed without being reported to credit agencies, a new scoring model is changing things. Let’s go over what these loans are and how they may affect your credit.
Buy Now, Pay Later (often shortened to BNPL) is a type of deferred loan that allows consumers to complete a purchase and pay it back in a series of scheduled installments. For example, a $100 item could be purchased for an initial $25, followed by three later payments of $25.
FICO, the company that developed the credit scoring model of the same name, released a new scoring model earlier in 2025. This new calculation incorporates Buy Now, Pay Later data into credit reports—providing lenders a view into consumers’ repayment behavior.
Reportedly, FICO is the most widely used credit scoring company for creditors and lenders. According to FICO, its scores are used in 90% of lending decisions, although this counts for both the latest and older scoring models.
Experts say that upgrading credit scoring models is a slow and highly regulated process, so you may not see it taking effect just yet. By knowing what could be in store with the new credit scoring model, Buy Now, Pay Later users can understand how their usage affects their overall health.
According to Federal Reserve data, 14% of American adults used a BNPL loan in 2024.
Finance experts say that installment loans being recorded on reports can be a credit builder for some. A Chief Credit Analyst at Bankrate believes that BNPL loans may be useful for younger users or people without long, established histories.
In another study by Lending Tree, data revealed that 25% of millennials and Gen Z use BNPL options on a regular basis. 50% of all young consumers prefer BNPL loans over credit cards. Some consumers have been using installment payments for everyday purchases, such as groceries. Experts advise to be wary, however.
Installment loans may create phantom debt, or debt that isn’t seen by other lenders. Unlike other credit issuers, BNPL companies are not required to check if your finances can handle more debt.
Frequent opening and closing of credit accounts can be hard on your credit report and score. Your credit utilization ratio is the measurement of the amount of available credit you’re using divided by the total amount of money loaned to you. In general, keeping a low credit utilization ratio may help you earn and keep a better score.
Buy Now, Pay Later payments operate as new lines of credit during each payment cycle. Essentially, they operate by maxing out a short-term credit line that you then pay down.
Installment loans may make it easier for people to spend beyond their means—especially if they have multiple installment loans at the same time. In a Bankrate survey from May 2025, nearly half of all BNPL users experienced at least one problem with their payments, with overspending at the top of the list. Based on the data collected by the Federal Reserve, 24% of users were late making a payment—almost 10% more late payment users from 2023.
Each company has its own repayment terms and options. While some may offer interest-free repayments, every company is different. Before agreeing to a sale, be sure to read the agreement in its entirety, including the details of your payment plan, interest rates, and any associated fees.
Giving yourself time between seeing the item or service and buying it will help you determine if you really want or need it. Waiting also helps reduce buyer’s remorse. Instead, put away the money you would have used to make your installment payments into a savings account. This way, you’re saving the funds necessary to make the full purchase when you’re ready.
Be sure you’re spending money you have. Once you know how much your installment payments will be and how long you have to pay them, include this debt into your monthly budget. Be sure to set up autopay or create payment reminders for yourself so you don’t miss anything.
When you apply for a mortgage, your credit score and report are closely examined by your lender. Having a high credit score may even help you receive a better interest rate than if you had a lower score. Before house hunting, contact us to connect with a Loan Originator to start your pre-approval.
Homestead Funding offers exceptional customer service and a convenient mortgage process. Whatever your financing needs, our goal is to exceed your expectations.
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