JPMorgan Chase, the nation’s largest credit card issuer, will bar customers from using its credit cards to repay increasingly popular “buy now, pay later” installment loans.
Chase said in an emailed statement that buy now, pay later installment loans “are a form of credit” and that the bank did “not generally allow customers to pay for credit products” with their Chase credit cards.
Chase has been alerting customers about the change, which takes effect on Oct. 10, and telling them to link a new form of payment to the pay later accounts to avoid missed payments and possible late fees. The bank declined to say what proportion of its cardholders use third-party pay-later services like Affirm, Afterpay, Klarna, PayPal and Sezzle.
Chase is not the first credit card issuer to make the move. Capital One, the fourth-largest card issuer, barred use of its credit cards for pay later loans in late 2020. In an emailed statement, Sarah Strauss, head of customer services and strategy at Capital One, said the bank “encourages its customers to make responsible decisions when it comes to debt repayment.” She added, “Our longstanding policy is that we do not allow customers to pay other forms of debt on Capital One credit cards, including buy now pay later loans.”
The change at Chase follows the announcement by a federal consumer watchdog agency to regulate the buy now, pay later loans as credit cards. It also comes as delinquencies on traditional credit cards are rising, causing banks to be more cautious even as they face competition from alternative pay-later lenders.
Pay later loans, a modern version of layaway plans, are commonly called “pay in four” loans because they allow shoppers to pay for purchases in four payments, usually over six weeks. Details vary by company, but users typically owe no fees or interest if they make their payments on time. (Some pay later lenders may charge hefty late fees for missed payments.)
The services are offered online during checkout, as well as in some stores or via mobile apps. Shoppers can get quick approval with a cursory credit check. (Some pay later providers also offer more traditional, longer-term installment loans that charge interest.)
To participate, shoppers link their pay later account to a payment method, like a debit card, bank account or credit card. Payments are usually deducted automatically. In October, just over 9 percent of consumers said they had recently used a pay later loan. While that proportion was still relatively low, it was up roughly 40 percent from two years earlier, according to a report from the Federal Reserve Bank of Boston.
The practice of using credit cards to pay off the short-term installment loans is frowned upon, both by financial regulators and by consumer advocates, because of the risk that consumers will dig themselves further into debt. Shifting the required payments to a credit card means users can end up paying double-digit interest if they carry a balance on their credit card instead of paying it in full monthly. (The average interest rate on credit cards is around 22 percent.)
“It makes no sense to use a credit card to service a buy now, pay later loan,” said Lauren Saunders, associate director of the National Consumer Law Center. “It defeats the purpose of the loan.” If users want to put as many purchases as possible on a credit card, to earn points or rewards, Ms. Saunders said, they can also earn them by paying with the card directly rather than by using a pay later loan first.
Given that research suggests financially vulnerable consumers are more likely to use pay later loans, using a credit card for the loans is “highly problematic,” said Jennifer Chien, senior policy counsel at Consumer Reports. Pay later borrowers on average are more likely to be “highly indebted,” to carry a balance on their credit cards and to have lower credit scores, according to a report last year from the Consumer Financial Protection Bureau.
Michael Hershfield, founder and chief executive of Accrue Savings, a financial start-up that gives incentives to users to save for big purchases, said credit card companies preferred that customers used their own “pay later” options, rather than those of competitors. “They want to build that user base,” he said.
Chase, for instance, offers a “pay over time” program that its credit card holders can use to break up payments for some purchases into smaller installments paid over weeks or months for a fixed monthly fee. Chase also offers its own pay-in-four loan to its checking account customers, allowing them to repay in four installments over eight weeks with no fee or interest.
Ms. Chien said it was already “standard practice” for banks to bar credit card holders from using them to make direct payments to pay balances on other credit cards. (There are indirect options, like using balance transfer cards to move debt from one card to another.)
Penny Lee, president and chief executive of the Financial Technology Association, an industry group representing several companies that offer pay later loans, including Klarna and PayPal, said Chase’s new policy was “unfortunate” because it limited consumer choice. Ninety percent of pay later shoppers pay with a debit card, she said, suggesting they use the loans to “smooth their spending and cash flow.”
By contrast, Adam Rust, director of financial services at the Consumer Federation of America, said Chase’s policy would help borrowers. “I applaud Chase for the decision because it will protect consumers from becoming overextended,” he said.
Here are some questions and answers about pay later loans:
Will other credit card companies change their policies?
Policies at other big card issuers vary. Bank of America allows its customers to use its credit cards to pay for pay later loans, said a spokesman, Don Vecchiarello. American Express said its cards currently could be used with a “limited number” of buy now, pay later providers.
Do other credit card companies offer their own version of pay later loans?
Some do. Citi and American Express both offer options for credit card customers to pay for certain purchases over time, in smaller installment payments.
What is the best way to use pay later loans safely?
Consumer advocates recommend limiting the number of pay later loans you have at one time and arranging for automatic payments from a bank account or debit card to avoid missing one and possibly getting a late fee.