How buy now/pay later services are boosting American credit card debt

Think of it as “buy now, pay later, pay later … and pay again after that.” 

Nearly a quarter of respondents in a recent Credit Karma survey said that their total debt increased after using “buy now, pay later” — or BNPL —  services, which allow users to pay off purchases in installments over a few weeks. That’s likely because these customers are using their credit cards to pay off their balances, according to an analysis by the credit-score platform. 

Hollie Adams/Bloomberg

“They're making the payments because they're connecting a card to automate the payment, but then their debt load is increasing,” said Colleen McCreary, an executive at Credit Karma. 

BNPL mobile apps from companies like Afterpay and Klarna Bank have spread throughout the retail world in recent years, gaining popularity among consumers for their no-interest, short-term loans that can be paid back in smaller chunks. These services have also been seen as a potential threat to credit card companies, whose high interest rates have long frustrated users.   

The whole point was that regular people could pay off bigger-ticket purchases over time with no hidden fees or interest payments, like the layaway plans of old. 

Yet 22% of survey participants — a nationally representative group of 1,028 American adults — said they are using their credit card to cover their BNPL purchases.  If they fail to pay off those credit card balances in full, there’s a hefty interest rate attached — an average of 16.34%, according to Bankrate. 

Whether BNPL users are accumulating debt is a question the Consumer Financial Protection Bureau is also currently investigating. Some consumer advocates are worried the tool is making it easier for average Americans to overextend themselves financially. 

In addition, the share of consumers using BNPL is on the rise, currently at 61%, compared with 44% in Credit Karma’s September survey. Of those users, 51% said they’d increased their usage in the past six months. 

McCreary said one reason for that is inflation, which currently sits at almost 8% and has been eating into Americans’ budgets.  More than half of respondents said they use BNPL out of necessity. 

The majority reported that the most they’ve ever owed across all their BNPL services was between $51 and $500. But about 20% said their highest-ever balance exceeded $1,001.