The downsides of using buy now, pay later services

Yahoo Finance Contributor Vera Gibbons joins the Live show to review the effects "buy now, pay later" services have on consumers' credit scores and spending habits.

Video transcript

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- Well, we all know holiday shopping can get a bit expensive, especially in today's economic environment. But one way consumers are getting around burning a hole in their pockets is turning to a new option that has now been abbreviated so you know it's legit. Buy now, pay later, BNPL. But while it sounds like an easier choice off the bat, it may not be the best choice for everybody in the long run.

So to determine whether or not it's the best choice for you, want to bring in Yahoo Finance contributor Vera Gibbons, joining us here with a closer look at BNPL. And Vera, I gotta say, I was given the opportunity to maybe use one of these, so I went for it. But what should people know about the new option on the block?

VERA GIBBONS: That's good. You tried. You tried it. Yeah, you're jumping on the bandwagon like millions of other Americans. I think, initially, people jumped on the buy now, pay later bandwagon during the onset of the pandemic. They were at home. They were landlocked. They were shopping online. And this was a nice alternative. So millennials and Gen Zers, in particular, are spending a fortune using these services, spending $100 billion this year alone. That's up considerably from 24 billion from last year, 20 billion the previous year.

And I think that they can work very well for responsible users. I think people get into trouble when they're irresponsible and they miss payments, because then their credit takes a hit. But for responsible users, it can be a viable option for those big-ticket purchases, whether a vacation, home goods, things of that nature. And people like it because it's easy. There's no interest. You make your payments, you know, four payments, six payments, over a certain period of time.

You also get the item right up front. So unlike layaway, you don't have to wait. You get the item when you make that first payment. And you just schedule the payments from there on out. So it is easy. There's no barrier to entry, and there's no credit check, a hard credit inquiry when you sign up. So people like that, as well.

- Yeah, let's talk about credit building. I mean, you know, you pointed out that the initial check, it's just a soft credit check, so you don't get a hit. If you miss the payment, you do. But what's the benefit of going for this versus a traditional credit card, if it is about sort of building out your credit, especially with the younger buyers?

VERA GIBBONS: That's one of the big downsides to these is because you're not rewarded for good things, like when you pay your bills on time. You're not rewarded for that. But if you do anything wrong, if you miss a payment, for example, if you miss several payments, you could very well go into collection, and you could-- your credit could actually take a ding.

So that's one of the big downsides to these, is that it's not doing anything to actually help build your credit. As Zack pointed out during the commercial break, too, you're also not getting points, miles, and some of the other perks that come with credit cards, nor are you getting credit card protection. So something goes wrong with your purchase, something fraudulent happens, there's very little recourse, which is why there's a lot of complaints right now filed with the Better Business Bureaus-- Better Business Bureau as it pertains to these buy now, pay later services, because things can and do go wrong quite frequently.

- Yeah, Vera, I was just looking right now to make sure I set up my direct payment. I'm not sure if I did. So I've got to go back and look and see if my mattress is going to ding my credit score. But when we look at maybe how those regulations could intensify around maybe, I guess, trying to protect consumers because, you know, behavioral economics would say it's a very easy way to overspend because, you know, the farther along we shift away from cash, there's a real salient feeling when you're giving it to whoever is working the cash register. Then came credit cards, now this, where it's literally click a button, I don't have to pay for six months. I mean, what are you expecting to see when regulators maybe look closer?

VERA GIBBONS: [INAUDIBLE] because a lot of people are overextending themselves financially using these buy now, pay later services. In fact, survey after survey shows that people buy more than they can afford using these services. They think it's almost like funny money because you make the initial payment, thinking, oh, well, that's easy. But there are other payments coming down the pipeline, so you have to prepare for that.

Now, in terms of regulation, not much going on now. I did speak with the Consumer Financial Protection Bureau, and they said they are monitoring the situation, checking things out. But they're taking basically a wait and see approach. And some of the other consumer advocates I spoke to said, hey, we need some sort of regulation now. Why wait for more problems to actually arise and escalate? So nothing now, but down the line, particularly as these become more popular and volume continues on this upward trajectory, we probably will see some sort of regulation.

- Yeah, I just confirmed everything is going fine with my payment over here. So we're all good there.

VERA GIBBONS: Vera Gibbons, Yahoo Finance contributor, bringing us the latest there on the buy now, pay later push. Appreciate that.