In the short term, Affirm likely does not impact your credit score, but Affirm can affect your credit score over time. Here’s how.
Affirm is a company that offers a buy now pay later financing method for every day purchases. Affirm offers small installment loans as a payment method rather than using a credit card to make a purchase for which you may not have all of the money upfront. You may have seen Affirm as a payment method when you’ve shopped online and rightfully wondered, does Affirm affect your credit score? The short answer is yes, it can. It’s best to lead with a discussion first on how companies like Affirm work.
HOW DOES AFFIRM WORK?
Affirm works by offering you a short term installment loan where you can spread out payments for the product you are purchasing over several weeks or months rather than paying it all upfront. When you go to check out after online shopping, Affirm (or a similar buy now pay later company) may be listed as a payment method. You usually apply and can get approved within seconds to take on a short term loan with Affirm. Once you’re approved, you’ll make a small down payment and then set up an arrangement where you agree to make payments on the rest of the balance over a specified period– usually a few weeks or months.
Let’s pause here for a second. Because holy crap! Taking on a loan to buy every day products. This is wild. Let’s do an example purchase. So, I just logged onto walmart.com and added a BBQ grill to my shopping cart, total of $192. In my shopping cart, it shows me my total, of $192. Below my total it says “$18/mo with Affirm.” So I click it, and it shows me this screen:
It’s wild to me that Affirm doesn’t have to explicitly state that you are taking on a loan. It’s not that you just get to make lower monthly payments to the merchant your buying from (in this case, Walmart) but rather, you’d be taking on a loan with a third party– Affirm. Walmart pays Affirm a fee (and Affirm collects interest from you on the loan) and yet none of that is stated upfront. Just that you can have this expensive product, for only $18/mo.
Affirm boasts interest rates as low as 0% but the average user of Affirm will pay about 18% in interest on their Affirm loan. In fact, Affirm’s business model is essentially that it makes money by charging interest rates on these purchases. Affirm also makes money from merchants such as Walmart who pay Affirm a fee for the use of this payment method.
CAN AFFIRM AFFECT YOUR CREDIT SCORE?
Yes. Using Affirm can affect your credit score. I was frankly appalled when I began researching whether Affirm affects your credit score. Most of the answers, even on websites I would otherwise deem credible like Investopedia, make it seem like Affirm doesn’t impact your credit score.
The only two situations where Affirm would not affect your credit score is first, when you apply to get approved for an Affirm loan. Affirm does a soft pull of your credit history which typically does not impact your credit score. So initially, no, Affirm likely won’t impact your credit score.
The second instance where Affirm would not impact your credit score is if you end up qualifying for a 0% interest loan with only 4 biweekly payments or a 0% interest loan and your only option was a 3 month repayment period. This information comes directly from Affirm’s website here. All other loans through affirm are reported to Experian. Since we know that the average user pays 18% in interest to Affirm, that means the majority of users are not getting 0% interest with Affirm which means the loan is being reported to Experian.
It’s worth noting that Affirm allows the merchant to have a say in the interest rate on purchases made with Affirm.
Does Affirm show on credit report?
Affirm may show on your credit report. If you received an installment loan with an interest rate above 0% with 4 bi-weekly payments or over a 3 month payment period, it likely will not show up on your report. In all other instances, Affirm installment loans will show up on your credit report with Experian.
Do Affirm loans help your credit?
In theory, Affirm loans could help your credit when you make timely payments. That said, one important factor for your credit sore is your credit utilization ratio. What makes your credit score happy is when you have a lot of credit available to you, but you haven’t used a lot of it. For example, having a couple of credit cards with over $10k in available credit, but a low balance that you regularly pay off each month. That would give you a good credit utilization ratio. On the other hand, if you have a lot of credit extended to you and you have high balances on that credit, that can actually harm your score. On top of that, when you actually pay off your loan with Affirm, you are essentially closing off a line of credit extended to you, which could in theory harm your score.
What is the minimum credit score for affirm?
While there is no set minimum credit score for Affirm, credit scores above 640 are most likely to be approved for their installment loans according to their website.
How does Affirm qualify you?
Affirm qualifies you through a number of factors such as:
- current economic conditions
- your credit score
- interest rate set by the merchant
- whether you already have an Affirm account
What I really don’t like about Affirm is that you can wind up with several of these mini loans (especially if you start using other buy now pay later companies in addition to Affirm). It makes debt repayment unorganized at best, and in over your head in debt at worst.
That said, there’s no reason to feel any shame if you’ve tried a company like Affirm. And if you have tried Affirm and are ready to get your finances organized and on track once and for all so you can reach debt freedom, there’s a free app for that! Paidback will help you track your debt in one easy to see place and help you discover ways to save. You can download it on iOS here.
IMHO financing options like Affirm should be avoided when possible. If you can’t afford to pay for a product in full, that means you can’t afford the product. The ideal situation is to save up until you have enough money to afford the product. So long as you have enough money to afford the product, you can even pay for it with a credit card, that way you can earn credit card points and rewards for your purchase.
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