Does BNPL Car Insurance Affect Credit Score?

Understanding Buy Now Pay Later (BNPL) Options for Car Insurance

BNPL for car insurance lets you break your premium down into small payments. When you purchase the policy, you pay an initial amount. After that, you must pay the balance off with regularly scheduled payments. An example of how this works is as follows:

You purchase a $200 BNPL car insurance policy. You provide a $50 down payment at the time of purchase. Then you make $50 payments every two weeks after that to pay off the total premium.

If you have suddenly noticed more insurance brokers are offering BNPL options, there is a good reason for that. The industry is experiencing rapid growth. CB Insights predicted in 2021 that the BNPL industry would balloon to between 10 and 15 times by 2025. That represents a year-over-year growth of 12.3 percent.

Soft credit checks are the norm for many BNPL options and these have little immediate impact on credit scores. Then there are other plans that are structured so that your payment history is shared with credit bureaus. If you make your payments on time, this can help boost your credit.

However, if you miss any payments, it can decrease your credit score. Although BNPL for car insurance provides you with flexible payment options, you still need to know how this type of payment schedule can impact your credit history.

When you break your insurance payments into smaller amounts, it is easier to pay as it instantly becomes affordable. But you must stick to the payment schedule and make your payments on time. That is what keeps your credit score in good standing.

The Impact of BNPL on Credit Scores

A credit check is typical with BNPL car insurance and these checks can influence your credit score. But is it necessary for a credit check to be conducted when you purchase BNPL coverage?

Here’s the deal about credit checks. Not all BNPL providers do them and the ones that do will conduct either a hard or soft check. Hard checks will bring your credit score down by a maximum of 5 points. Soft checks don’t change your credit score. Knowing which type of credit check will be used when you purchase BNPL car insurance will help you preserve your credit history.

This means that to keep your credit score from dropping, you should choose a BNPL plan that uses only soft credit checks. The reason for this is that a soft check does not show on your credit report and that leaves your credit history intact.

But how does a hard check influence your credit score? Let's take a closer look.

As stated, a hard check can drop your credit score by up to 5 points. These checks total about 10 percent of your FICO score and with some BNPL car insurance plans, there will be a hard check.

What happens following a hard check is that the record of it happening stays in your credit report for 2 years. Several of these types of credit checks will cause your credit history to appear shorter than it is and harm your credit score. The downside to this is that you may experience difficulty in being accepted for credit cards or loans. A credit counselor says it clearly with the comment, “Hard inquiries can temporarily lower your FICO score.”

How BNPL Affects Credit Reporting

The way your payments show on your credit report may be influenced by the BNPL option you choose. There are several ways this can impact your credit score. Here is a snapshot of what we mean by that:

Different Reporting by Providers

Long-term loans are reported and short-term ones are not unless you miss a payment by 30 days or more. Also, PayPal credit appears as a revolving credit which has an impact on your credit use totaling 30 percent of your FICO score. Finally, Apple’s “Pay In Four” reports to Experium (as of April 2024) and this adds to your credit history.

How It Affects Credit Use

Revolving credit from PayPal can increase your credit use ratio and with higher use, the lower your credit score can go.

What Happens If You Miss Payments

A BNPL payment that is late by 30 days or more gets reported. Late payments can harm your score as they stay on your credit report.

Building Your Credit History

You can help build your credit history by making your regular BNPL payments on time. This creates a good payment record and these are reported to credit bureaus and can increase your credit score.

Short-Term Loans and Credit Age

Because there is a chance that a short-term BNPL loan may lower the average age of your credit account, your credit score may be harmed. The “younger” your credit history appears, the more negative impact it can have on your credit score.

Variety In Credit Accounts

When you use a BNPL option as a revolving account, it introduces variety to your credit mix, and the more variety your credit mix contains, the more it can increase your FICO score.

Experian Boost Integration

Part of Experian Boost may be attributed to reports from Apple. The upside is that good payment data from this source can have a positive influence on your credit score.

Risk of More Debt

There is a risk of adding more debt with the use of BNPL plans and the more debt you carry, the more it can harm your credit score and creditworthiness.

Potential Credit Risks with BNPL for Car Insurance

When you skip a BNPL car insurance payment it can damage your credit score. It can also have an impact on your credit history. Let’s look further into the risks:

Consequences of Missed Payments on Credit Reports

When you miss a payment, it can harm your credit report. But there are other factors to consider. If you miss a payment, your coverage can be canceled after a 30-day grace period has passed. Credit bureaus record late payments which lower your credit score. Cancellation of a BNPL car insurance policy gets reported to credit bureaus.

If your payment is still outstanding after 90 to 120 days, a collection agency may be notified. When a collection agency enters the picture, your credit score can suffer serious damage and when your credit score drops, it can prevent you from qualifying for loans, new insurance, and even favorable interest rates. This is why it is so important to keep your payments made on time as that protects your credit report and score.

How Short-Term BNPL Loans May Lower Credit History Age

Short-term loans can change the age of your credit history. The average age of your credit accounts gets lower with each new loan and your FICO score is determined by the average age of your credit accounts. The younger your history is, the lower credit bureaus may drop your score. The problem with that is it may make it harder to get future loans.

How BNPL Could Positively Influence Your Credit

There is some good news. When you use BNPL for car insurance, and make your regular, on-time payments, it can increase your credit score. It also shows credit bureaus that you are reliable. Here’s more on that:

Regular, On-Time Payments Potentially Improving Credit Score

It makes sense that when you pay on time you receive a reward. In this case, keeping your BNPL policy payments current helps your credit score as each on-time payment updates your credit history with credit bureaus and when you pay on time, insurance companies see you as reliable. The longer you do this, the more it can increase your FICO score. In other words, regular payments made on time give you a good credit mix and improve your credit.

Reporting Positive Payment Histories to Credit Bureaus

Credit bureaus including Equifax, TransUnion, and Experian receive reports on your on-time BNPL loan payment history. It increases your credit score by building your credit history. Because you make the payments on time, lenders see that you are good with credit. As you are considered a low credit risk, your FICO score increases, and you can get loans easily and be offered better insurance rates.

Key Risk Factors of BNPL

The biggest issue to come from BNPL options is that it could lead to carrying more debt. This will lower your credit score. Here’s how:

Potential For Increased Debt Accumulation

Small payments may lead to overspending and BNPL services can add to your debt quickly. This is because, with smaller, affordable payments, it is easy to think that there is more room for extra spending, which can turn into a bigger debt.

The more debt you have, the more it hurts your credit history and drops your credit score. If you carry many different BNPL plans, it may result in more debt causing you to have difficulty in keeping up on payments.

Risks Of Default and Its Impact On Credit Scores

A late payment on a Buy Now Play Later care insurance plan may trigger late fees. If the payment is outstanding by 90 to 120 days, a collection agency will take over. Any activity by a collection agency on your credit accounts is reported to credit bureaus and can cause great damage to your credit score.

Your credit report will show late payments, and this information can remain there for up to 7 years. In addition, short-term loan programs like BNPL plans will make your credit history appear younger. Both will harm your FICO score and may hamper your ability to get future loans. It may also prevent you from accessing better interest rates.

Strategies To Mitigate BNPL Credit Risks

The best way to keep your credit healthy is to choose BNPL plans that only use soft checks on your credit history.

Choosing BNPL Plans with No Hard Credit Checks

Soft credit checks do not show up on your credit history. This means they keep your credit history intact and do not influence your credit score. Hard checks are recorded on your history and can drop your credit score by up to 5 points.

Monitoring Credit Reports Regularly

Each year, get your free credit report online from annualcreditreport.com. Review the reports for errors and use services like CreditWise and Experian Free Credit Monitoring to track any changes. When you monitor your credit history, you will see firsthand how BNPL car insurance affects it. Stay updated at all times by checking reports from all major credit bureaus.