As the holiday season approaches, more shoppers than ever are expected to turn to “Buy Now, Pay Later” (BNPL) services, attracted by the ability to spread payments over time.
For Gen Z, who are often faced with lower credit scores or limited credit histories, BNPL options like Klarna, Afterpay, and Affirm present an appealing alternative to traditional credit cards. However, this growing trend has raised concerns among consumer advocates, who warn that young shoppers may be overextending themselves financially.
According to Adobe Analytics, BNPL spending is predicted to rise by 11.4% this holiday season, with shoppers expected to spend $18.5 billion through third-party payment plans between November 1 and December 31. This includes a notable $993 million in purchases made on Cyber Monday alone. While BNPL can offer a way for consumers to manage their finances, especially amidst rising inflation and record-high credit card debt, it also carries risks, particularly for younger generations like Gen Z.
One of the main appeals of BNPL for Gen Z is that these services often only perform soft credit checks, meaning they don’t require traditional credit scores. This makes them an attractive option for those with no credit history or lower credit scores. Additionally, BNPL services are not required to report loan payments to credit bureaus, unlike credit cards, which allows some shoppers to avoid impacting their credit score. This has led many Gen Z consumers to increasingly rely on BNPL services for both small and large purchases.
However, consumer experts caution that while BNPL services may seem like a harmless way to finance purchases, they can quickly lead to overspending. Shoppers may feel more inclined to make additional purchases when they don’t need to pay the full price upfront, and this can lead to accumulating debt.
“Buy Now, Pay Later can be an innovative tool for purchases you’re going to make anyway… The challenge is that it does fuel overspending,” said Mark Elliott, Chief Customer Officer at LendingClub.
Further complicating matters is the potential for shoppers to rack up additional fees if they miss payments. BNPL services typically come with late payment fees or penalties for missed installments. Consumer watchdogs also warn that using a credit card to pay for BNPL purchases can create a double burden, as the consumer may face interest charges from both the credit card company and the BNPL service itself, leading to even higher costs.
Despite these risks, BNPL services continue to be popular, particularly with Gen Z, who are increasingly reliant on these options to manage their finances. Internal data from Credit Karma revealed that credit card balances for Gen Z have risen by more than 50% since March 2022, when the Federal Reserve began raising interest rates. This increase in credit card debt, paired with the growing use of BNPL, paints a concerning picture of rising financial pressures on younger consumers.
Despite criticisms of Gen Z’s financial habits, some studies suggest that the group carries less total debt compared to older generations. The Federal Reserve Bank of New York notes that the total debt balance for Gen Z is smaller than that of millennials, Gen X, or baby boomers, which may reflect their younger age and stage in life. According to Credit Karma, the average total debt for Gen Z is $16,283, significantly lower than the $48,611 average debt for millennials. However, with growing reliance on BNPL services, it’s possible that this figure could rise as Gen Z continues to navigate their financial futures.
For merchants, offering BNPL services is often a strategic move to boost sales. Research has shown that customers are likely to spend more—up to 20% more—when BNPL options are available, which can significantly increase a retailer’s bottom line. The appeal of BNPL for consumers is clear: it allows them to manage immediate costs while deferring payments. But for younger consumers, the growing reliance on these services may be leading them down a dangerous path of accumulating debt without fully understanding the long-term consequences.
