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Loans

Can you build credit with a point-of-sale loan?

Point-of-sale financing has become a popular way to pay for purchases over time. However, it's not always guaranteed to help your credit score. Here's why.

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Thanks to companies like AfterpayAffirm and Klarna, more and more retailers are offering customers flexible financing options. You may have seen a logo for one of these brands advertising low- or no-interest pay-over-time plans next to the online payment options when you go to checkout

These payment plans, called "point-of-sale" (POS) loans, might be an easy way to access credit if you don't have a good enough credit score to qualify for a 0% APR credit card or other financing methods, such as personal loans, and you don't have the cash to cover the purchase.

But if you're hoping to use a POS loan to build credit, think again: These lenders are inconsistent when it comes to reporting your information to the credit bureaus. Therefore, it's not a guaranteed way to build your credit.

Like all lending products, POS loans have both risks and rewards. Ahead, we break down how POS financing works, and why it's not the most effective way to build credit.

What is point-of-sale financing?

These days the "buy now pay later" option is showing up in nearly every sector, from clothing to housewares and cosmetics — even on Etsy via Klarna. POS loans are also growing in the travel sector, with numerous airlines letting you book now and pay over time with an installment plan.

Usually, you have to apply for these one-time installment loans. When you apply, the lender will either do a soft pull, which won't impact your score or a hard inquiry, which can ding your score a couple points.

If approved, you get the option to break the bigger total up into smaller monthly payments. Some shoppers will qualify for 0% APR, but others maybe have to pay some interest.

With Klarna, for instance, qualifying customers have the option to pay biweekly with 0% interest over four payments. Klarna partners with stores like Sephora, Adidas and H&M (to name a few), and once you qualify, you can choose the pay-over-time option every time you make a purchase at a participating retailer, assuming your outstanding payment plans are all up to date.

How POS loans impact your credit

POS loans are gaining in popularity, but their impact on credit is a little ambiguous.

If a store or lender requires a hard inquiry, applying for a POS loan may result in a small ding to your score (up to approximately 5 points for every hard pull). Entering your social security number, address, date of birth and other identifying financial information is an indication that the lender is going to perform a full hard inquiry. If you have any doubts, read the fine print or ask a customer service rep.

If a hard credit inquiry isn't required, the lender may still do a soft pull. The better your credit score, the more likely you'll qualify for the most favorable POS financing. Without any credit history to your name, there's no guarantee you'll be approved.

Then, there's the question of whether a POS loan can help you build credit. If the company reports to the credit bureaus, then it might. Making on-time payments could positively impact your credit score, but falling behind on payments will result in a pretty serious hit.

Some POS companies don't report your good behavior to the credit bureaus, but they will report delinquent behavior (a practice called "negative reporting"). Affirm states it will not report your activity to the credit bureaus if the loan is 0% APR and either four-installment payments or a three-month plan. Larger loans that charge interest will probably get reported, and so might delinquent payments.

Afterpay does not report any activity, positive or negative, to the bureaus. Klarna's website does not specify whether the lender reports to the bureaus, but its agreements state that negative actions may be reported if you fail to meet the loan's obligations.

Need to build or repair your credit? Apply for one of these credit-builder cards instead

Also check out Experian Boost™, which links your phone and utility bills to your credit report so you can get credit for your on-time payments. On average, users see their FICO® score increase by more than 10 points after linking Experian Boost.*

Bottom line

POS financing, like AfterpayAffirm and Klarna, may be an easy way to finance a purchase if you can't afford to pay in cash and don't want to charge it to your credit card. However, a POS loan probably won't help you build credit.

If anything, POS lenders might ding your credit when you initially apply for financing if they do a hard credit inquiry, or if the lender practices negative reporting and late payments turn up on your credit report.

Since most POS lenders don't always report your full credit behavior to the bureaus, you're not likely going to see your positive payments or good borrowing history show up on your report. If your primary goal is to build credit, opt for a credit building card instead.

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*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.