How Phantom Debt From 'Buy Now Pay Later' Programs Can Actually Hurt You

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This Phantom Debt was super popular last year, but it might be making the debt problem worse.
Updated Jan. 9, 2024
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Phantom Debt From Buy Now Pay Later

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As the excitement settles from the holiday season, there's one thing that doesn't seem to fade away — the surge in "Buy Now, Pay Later" (BNPL) transactions. The financial trend has been making waves, but beneath the surface, there's a murky reality that many shoppers might not see coming.

Over the holidays, BNPL loans hit an all-time high, marking a 14% increase year over year. However, the allure of convenient installment payments might be casting a shadow of "phantom debt," and the consequences could be more haunting than we realize.

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Buy Now, Pay Later hit an all-time high during the holidays

The echoes of BNPL transactions during the holidays are still resonating. According to Adobe's latest online shopping data, installment payments reached an all-time high, marking a 14% surge compared to the previous year.

The convenience of splitting payments into bite-sized chunks has propelled BNPL to become one of the fastest-growing categories in consumer finance, according to a report by Wells Fargo.

Why BNPL is considered a “phantom debt”

The term "phantom debt" isn't from a suspense thriller; it's a real concern with BNPL. This financial phenomenon is challenging to track because, unlike credit cards, BNPL loans are not reported to major credit-reporting agencies.

Tim Quinlan, a senior economist at Wells Fargo, warns that this lack of centralized monitoring could imply that total household debt levels are higher than traditional measures suggest. With BNPL operating in the shadows, it's hard to gauge the magnitude of this debt hanging over consumers.

The problems with using BNPL

While the appeal of BNPL lies in its accessibility to capital without exorbitant costs, it brings its own set of challenges. Ted Rossman, senior industry analyst at Bankrate, describes BNPL as "shadow debt" looming over people. Managing multiple BNPL loans with different payment dates can be a logistical nightmare.

Additionally, these loans can stretch on longer and even charge interest, making it difficult to get out of debt. These loans resemble credit cards more than the interest-free, equal payments we often associate with them.

Furthermore, the lack of regulation for BNPL products raises concerns about consumer protection. Quinlan points out that BNPL operates in "de facto stealth mode," flying under the radar of regulators and policymakers.

The Consumer Financial Protection Bureau (CFPB) has initiated an inquiry into BNPL lenders, expressing concerns about the lack of clear disclosures of loan terms and the potential impact on consumer debt accumulation.

Dangers to your credit

Another way to think of BNPL phantom debt is “bracing for the consequences.” Since BNPL does not report to credit agencies and there is a regulatory gray area surrounding it still, you can actually be on the hook for far more than is showing up in your monthly credit report.

For example, you can check your credit report and see a 650, but that number does not reflect the amount you owe to BNPL companies. Depending on whether you’ve made your payments on time and how many BNPL loans you’ve taken, your “real” debt might put you closer to 600.

Most believe the government will eventually enforce reporting requirements to BNPL companies, and when they do, it could have catastrophic effects on Americans’ credit scores. If you fail to make payments on time, BNPL companies will begin reporting you to all major credit bureaus regardless.

This is concerning, given that Americans’ credit card debt has been steadily rising over the last year — and that’s just the debt reported. According to the U.S. Government Accountability Office, over the summer of 2023, American credit card debt hit a new milestone, surpassing $1 trillion.

Alternatives to using BNPL

For those wary of falling into the BNPL trap, exploring alternatives is crucial. Traditional credit cards let you earn rewards on everyday purchases and despite high interest rates, offer clearer tracking and reporting to credit agencies.

Creating a budget, seeking financial advice, or opting for layaway programs can provide structured alternatives to the allure of BNPL.

Bottom line

As BNPL continues to flourish, it's essential to lift the veil on its potential pitfalls. The 'phantom debt' it generates could lead to unforeseen problems for individuals and the broader economy. The lack of regulation, coupled with the CFPB's inquiry, emphasizes the need for consumers to approach BNPL with caution.

In a financial landscape where transparency is paramount, being aware of the hidden dangers can be the key to avoiding a debt-laden nightmare. While the Buy Now Pay Later option seems harmless at first, in reality, it can cause far more damage than good and is simply not worth the potential hit to your credit and overall finances.


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