By: Evelin Fajardo-Alvarez

Darian Mozo was told by her parents at an early age to not mess with credit cards, as they can immediately throw a person into heavy debt. But one day in 2021, while online shopping for an iPhone case, she noticed a new option, Klarna, which would let her pay only $10 up front and then three more equal payments over time.

She was hooked. She quickly indulged in purchasing Kate Spade purses, Nike Shoes and even more phone cases. By 2022, her overindulgence caught up to her — she missed a couple payments and had her bank account overdrawn.

“Buy now, pay later” services like Klarna are booming, offering themselves as a better alternative to credit cards. But they are luring many young people into overspending. A large number of BNPL users are young, inexperienced or not economically stable enough to manage multiple loans. A survey by the Federal Reserve Bank of Philadelphia Consumer Finance Institute found that in Q4 of 2023 48.5%, of BNPL users were ages 18-36. 

BNPL is a readily available payment plan service that companies like Klarna, Affirm, Afterpay and more offer as a payment option at checkout, online and in stores. These companies allow consumers to make a purchase and pay back the amount in interest-free installments over a short period of time — usually in 4 payments over a set number of weeks. The approval process is fairly quick and does not have an effect on the person’s credit score, since they only run a soft credit check. 

Mozo, now a 22-year-old college student and social media manager in New Jersey, continues to use Klarna even now, but has learned to manage it better to keep up with the payments. According to a BNPL survey released in June 2022 by the Federal Reserve Bank of Philadelphia Consumer Finance Institute, 11.2% of BNPL users ages 18-35 missed payments but paid off the debt completely, while 2.6% missed payments and did not finish paying off the loan.

Buy now pay later programs are popular in part because inflation, the state of the job market and the current credit card interest rates have pushed consumers to consider alternatives to traditional financing. Ted Rossman, senior industry analyst at Bankrate noted that “Inflation is squeezing people, also credit has been tightening.” 

For some uses, buy now pay later works out fine.

Sage Thingue, a 24-year old accountant, loves a good splurge, but hates watching the money leave her account. On one of her Forever 21 shopping sprees, she decided to give Afterpay a try for her $200 purchase. She has used Afterpay many times and has managed to make every payment on time. Thingue believes “If you can’t pay for it outright then you shouldn’t be purchasing it”. 

For people who misuse the programs, however, the consequences can be severe. A missed BNPL payment can result in late fees, an interest rate charge and even a report to the credit bureau, depending on the company’s terms. That can affect people’s ability to buy a home or a car, take out student loans, or even rent an apartment. 

Young people have typically started their credit journeys with credit cards. Banks like Chase, Wells Fargo and more have offered these services on college campuses to target the younger generation. However, it seems the younger generation has a harder time managing credit card debt. According to the New York Fed’s quarterly report on household debt and credit, released in May 2024, the average credit card debt delinquency rate for the 18-29 age group at 9.21% almost doubles in comparison to the average rate for all age groups at 5.89%. The 18-29 age group holds significantly higher delinquency rates, the piling credit card debt can result in long term credit score damage.

In some cases, BNPL services can be a better alternative to credit cards, said Michael Sullivan, a personal financial consultant, at Take Charge America, a nonprofit credit counseling and debt management agency based in Arizona that serves clients across the U.S. 

But in many cases, clients who have spending problems are piling BNPL loans on top of their existing credit card debt. In a survey by the Federal Reserve Bank of Philadelphia, 38.5% of BNPL users reported borrowing more money to pay their existing debt.

“The people who we talk to are not using it [BNPL] as an option to credit cards, they’re using it as an addition to credit cards, so it’s more debt,” Sullivan said.

Despite the differences from credit card debt, the consequences for defaulting on a payment can be the same, impacting a person’s credit score negatively. However, with credit cards, debt-relief organizations can sometimes negotiate deals with the credit companies. With BNPL services, there’s no interest rates or additional fees to negotiate with – so the buyer either has to make their payment or the company will withdraw the money out of your account automatically. 

Although BNPL debt can be dangerous, it can also be good for people who have experience, a strong financial discipline and a steady cash flow, or someone who doesn’t want to affect their credit score. 

““[BNPL] it’s a stepping stone that maybe you can do for a while as a workaround but it’s not necessarily meant to be a long term substitute.” said Rossman.