Why consumers should put down their credit cards this holiday season

By Katherine Adkins , Chief Legal Officer of Affirm

Inflation and the high price of goods are weighing on consumers’ minds this holiday shopping season – an understandable reaction to the significant jump in prices we’ve seen over the last year. A recent survey found that just 60% of consumers said they would match or increase their holiday spending this season compared to 78% last year. Survey respondents reported they were concerned about rising costs and affordability as well as the ability to manage their budgets. In fact, almost half of Gen Z (42%) and over a quarter of Millennials (28%) say saving money is their top New Year's resolution.

Why wait until 2023 to start saving??

Consumers have more choices this holiday shopping season when it comes to paying over time and avoiding post-holiday debt laden with compounding interest and hidden fees. With credit card debt in the United States recently surpassing pre-pandemic levels, this is an important consideration. According to the New York Fed, the 15% year-over-year increase in credit card balances is the largest in more than 20 years. And, with all that credit card debt comes fees. Just last year, Americans paid $12 billion to credit card companies in late fees alone.

Buy now, pay later (“BNPL”) provides consumers with another choice and greater flexibility, helping to stretch their dollars further and making money more efficient. In fact, the recent CFPB report noted that: “BNPL imposes significantly lower direct financial costs on consumers than legacy credit products.” The report even went on to acknowledge that “compared to legacy credit predecessors, [BNPL] offers an easy-to-use, accessible product.”

So how does this work? Well for starters, many BNPL companies have done away with junk fees. Some, like Affirm, don’t even charge late fees. Unlike credit cards, which extend a single line of credit and then make money when consumers don’t pay their balances in full, BNPL can assess and extend access to credit at an individual transaction level, earning money when consumers pay on time. And when there are no late fees or compounding interest, customers only pay what they agree to at checkout and not a penny more.?

While it’s clear that BNPL provides a lower-cost and more transparent alternative to traditional credit products, this value could be substantially increased by standardizing industry practices. Junk fees should be eliminated. All loans should be properly underwritten so that there is no reason to make up lost revenue with late fees. Consumers should have control over their privacy choices and never have their data sold. Consumers should also have control over their payment methods, including the ability to enable, disable or, even change their auto payment settings. And Truth in Lending (TIL) disclosures should accompany every transaction.?

Affirm has already put all of these common sense ideas into practice and is also leading the way on another important issue: credit reporting.

Credit reporting and underwriting needs to be modernized for BNPL to ensure consistency, transparency, and accuracy. Consumers should be able to build their credit histories and scores through on-time payments and responsible use, regardless of whether they’re using a credit card or a BNPL loan. And lenders should have a view into consumers’ obligations, including for BNPL, so that they can help prevent folks from owing more than they can afford to pay. Today, the vast majority of BNPL loans are not reported to credit bureaus, but Affirm is working hard at addressing these industry challenges so that BNPL reporting is fair and helpful to consumers.?

Taken together, these reforms would help make the promise of the BNPL industry a reality.?

For individuals and families looking to stretch their dollars further this holiday season without racking up compounding interest or junk fees, Affirm provides a pro-consumer option to help eligible shoppers responsibly extend their purchasing power. In the meantime, collaborating with businesses, regulators, and policymakers, we will continue to work on eliminating junk fees entirely and advocating for consumer-first practices across BNPL so that in future holiday shopping seasons, consumers can confidently choose BNPL over credit cards every time.??