Apple Pay Later: Build Credit Record Now?

Dear Ms. Smartphone: My parents got an offer this month  to try out a service called Apple Pay Later. It’s like a credit card on the phone that lets you pay in installments without interest charges or fees. I begged my parents to let me try it but they refused.  Since I’ll be in college next year, I told them that  Apple Pay Later was a modern way to track my purchases. The way I see it I can use Apple Pay Later to build a Credit Record Now. Justin

Dear Justin: Your household is “chosen” even though you were not!  Only a few customers have been invited to join Apple’s pre-release.  Apple Pay Later is a new product joining the ranks of other short term, smartphone-based  financing apps such as Klarna and Affirm.  These are called BNPL’s, short for Buy Now, Pay Later. Apple Pay Later will work like these existing financial services: a purchase can be split into four payments, spread over six weeks and paid back with no interest and fees. Or, per Apple’s press release, users can pay later and apply to Apple for loans of $50.00 to $1,000. Since these will involve a soft-credit pull, it’s your parent’s credit record that would be accessed, not yours. Sorry, there’s no Apple Pay Later to build Credit Record Now!

Behavioral psychologists are not so fond of BNPLs, well that is, unless they work for one of them. When you purchase something with cash, albeit now a rarity, there are multiple steps. First you have to open up your wallet, then count your bills and coins, and finally, hand them physically to the cashier. These steps introduce “friction”  as they slow down the buying process. It also serves as a hard cognitive reminder of the cash flow.  When you use a credit card, it speeds up the process and reduces friction, since there is no physical exchange of money. Using a smartphone, with a debit card stored on the Wallet function, reduces that friction even further. A couple of columns ago, I advocated for grandparents to start a kid’s allowance in cash, not on the phone. 

Friction is not Fiction:

Now, when it comes to Buy Now Pay Later (BNPL), similar to Apple Pay Later, the friction is practically nill. Even if you do not have the money to afford the item right now, you can spread the payment over four periods before the interest payments kick in. It’s perfect for instant gratification- say you wanted to buy a new Apple iPhone 14 today, but you don’t get a paycheck from a part-time job until the end of the month. Apple Pay Later let’s you go home with your new iPhone today. But this is financial literacy in the making: What if you lose your job or get laid off during the month? 

BNPL does not have a good name in the credit marketplace. The people who use it the most seem to have less laxity in their budget: they are more likely to carry a balance on their credit cards, use payday loans, carry a lot of debt, and have delinquencies on their credit report.  One explanation is that the people signing up for it do not have to go through an extensive credit check. Another explanation is that they often use BNPL for groceries and dining out, and with less financial friction they run up higher transactions at the checkout.

Four is the Magic Number:

It’s easy to imagine the benefits of BNPL because features on your phone, like the calendar and reminders help track when payments are due. But, when there’s a cash crunch you can easily slip into some hefty, but undisclosed interest rate fees. The back story is that the Consumer Financial Protection Bureau only requires lenders to post their fees when there are five (5) or more installments. Apple Pay Later follows the lead of other BNPLs, and allows users to spread the payment over four (4)  payments before interest and fees are applied.

Of course, there’s always someone who has to pay for this new type of credit. With Apple Pay Later, it’s likely that vendors will pay the commission when you use the service. With four separate transactions, there are four separate payments to be made. With some BNPL services the buyers, like you, pays the processing fee.  The New York Times reports that a Twitter post went viral when a $19.00 Chipotle BNPL burrito had four $1.00 biweekly service charges tacked on plus an annualized interest rate of 87%!

Rethink Debit:

As a teen, it’s admirable that you want to establish a credit rating for the future and do so with state-of-the-art financial tools. But since the invitation for Apple Pay Later and the phone contract are both under your parent’s name, you will have to find a different way for now. It’s easier, and less risky, to start building your credit record with a debit card. It will let you do the same thing as the Apple Pay Later with two notable exceptions. There will be slightly more friction and that can be uncomfortable. And, you will have to back fill that debit card with cash before you can enjoy the euphoria of bringing home the goods.