Money Monday: Financial Fatal Attraction

Buy now pay later financial deal for shopping on loan tiny person concept. Bank credit card agreement for purchases without money vector illustration. Spend cash on discount deals in retail stores.
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Buy Now Pay Later plans (BNPL) is one of the growing financial attractions or addictions taking place today. When you examine the data, it reveals that financially challenged households are more likely to use these programs than those with stronger finances and greater literacy. But what is the attraction, and even the addiction with these plans? Let’s examine it closer.

BNPL Rules

You might be familiar with this common or frequently used expression, “ it is, what it is!” But when it pertained to BNPL plans, while compliant with the Federal Trade Commission Act, they fell through regulation loopholes which disadvantaged consumers.  On May 22, 2024 the Consumer Federal Protection Bureau (CFPB) issued rules that essentially state that BNPL plans are nothing more than “ Credit Card” transactions and should be subjected to Regulation Z disputes and refund policies. In other words, consumers of BNPL should be afforded the same protections as credit card users.

This loophole existed because BNPL plans were generally spread over four or fewer payments and no interest was being charged on items purchased in full within the four payment agreement. This action, while significant, is only a small step in the right direction.

BNPL plan rules have varied from provider to provider and therefore consumers have been disadvantaged in the absence of governing structures in place. A recent Bankrate report regarding BNPL plans revealed that 30% of plan users overspent, 18% of consumers experienced difficulties obtaining refunds, 17% of consumers regretted making the purchase and another 17% were dissatisfied with their purchase or experience.

Attraction and Addiction

Instant Gratification! Unlike layaway plans which deny consumers possession of their purchase until the item is paid in full; BNPL plans offer full enjoyment and satisfaction of the purchase instantly.

Perhaps the most significant upside to BNPL plans is that interest rates do not apply if the payments are made on time or within the four payment structures agreed upon. Along with no interest is the promise that these transactions will not appear on consumers’ reports and impact their credit. The addiction is incentivized  when you consider the fact that BNPL providers such as Klarna and Afterpay currently have no plans to report delinquent plan customers to debt collectors which could significantly impact a person’s credit.

BNPL Reality

According to the CFPB, BNPL plans are disproportionately affecting African American households. The CFPB reports indicate that 63% of African American households are more likely to use the BNPL plans than those of their white counterparts.

In a 2023 Survey of Consumer Expectations Credit Access Survey, conducted by the Federal Reserve Bank of New York, it was noted that 89% of financially unstable households ( households with low credit scores) used BNPL plans multiple times. Individuals with good or stable credit who participated in BNPL plans average purchases were less and did not engage in multiple purchases.

BNPL plans provide a false sense of reality. Because these transactions are not reported to credit reporting agencies, lenders do not actually know a person’s true debt and therefore provide credit to over extended individuals. The results are increased bankruptcy filings, debt collection, poor credit and limited financial options.

The party may be coming to an end as Apple Inc. BNPL plans now show payments made on your Experian credit report although not yet being factored into your credit score calculation. However, credit reporting agency Experian, has stated that BNPL plans will be factored into your credit score in the future as new credit scoring models are developed. The most effective way to improve your finances is to build your credit using a credit card, pay your bills on time and and keep your credit limit to 20% or less.

WHAT’S UP!

Today’s What’s Up is about getting ready for the Federal Reserve (Feds). At the beginning of the year the prediction was that the Feds were going to cut interest rates several times this year and the market would take off. Well that has not happened. So here are two things you can do as you get ready so that when they cut interest rates, you will be in a position to take advantage of the economy.

Improving your credit score to the highest it can be will position you for the best deals when the Feds begin lowering interest rates. According to a Bankrate survey in March, credit scores of 670 and below, were rejected the most.

Finally, stay in contact with your creditors. Many people only seek assistance from their creditors when they are in trouble. Given that credit card companies have discretion when and how much to increase your credit card rate, it is therefore to your advantage to communicate with lenders when interest rates are high, so that when the Feds begging to lower rates, you are in position to get the best deals. And that’s what’s up!

Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC. Give2Get Rich, LLC 2024. All Rights Reserved. Any distribution or reproduction of part or all of the contents in any form is prohibited.

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