Shoppers face Christmas debt

When she started holiday shopping late last year, Kelly Andersen was struggling to buy gifts for her loved ones. She then turned to a novel solution to get through the season: buy now, pay later.

The 31-year-old freelance copywriter from Los Angeles used Klarna and PayPal Split a variety of purchases into four interest-free payments spread over a series of weeks. At the time, its initial cost was about a quarter of the total purchase price.

But now that January is here and the other installments are starting, Andersen isn't sure how to pay them. She has never missed a payment before and takes debt seriously, but she has found herself buried under a mountain of micropayments and wonders how she is going to cover her bills.

“I've definitely been selling clothes…if I have to sell a pair of shoes to make a payment, I'll do it,” Andersen told CNBC of the roughly $1,700 he's accumulated in buy now, pay later debt. “I'm definitely worried about [the payments]. “It's definitely a concern and I'll definitely have to find a way to get the money.”

Andersen is one of many Americans who opted to buy now, pay later to finance their holiday shopping last year and avoid credit card debt, but are now having trouble paying those bills.

In an era when persistent inflation and record-low interest rates are shaping many shoppers' financial decisions, the service helped fuel a boom in overall online spending that peaked at $222 billion since November 1st until the end of December. During the season, buy now, pay later usage hit an all-time high, increasing a staggering 14% from a year ago and contributing $16.6 billion to online spending.

On Cyber ​​Monday alone, buy now, pay later usage increased nearly 43%, Adobe said.

“Sales, especially online sales, probably increased to some extent due to the use of buy now, pay later,” said Ted Rossman, senior analyst at Bankrate. “Many people are attracted to this financing method as an alternative to something like a credit card, where the average interest rate is a record 20.74%. I would caution that you can still have problems with buy now, pay later. ..can still encourage you to overspend and deceive yourself.”

The rise in the use of buy now, pay later comes as credit card debt hits a record high and delinquency rates have nearly doubled in the past two years. While delinquencies were at record lows during the Covid-19 pandemic, the rate of people who have gone more than 30 days without paying their credit card bill recently surpassed pre-pandemic levels, according to the Federal Reserve.

It's hard to say how buy now, pay later fits into the overall picture of the country's debt. Providers who offer the service typically do not disclose how often those bills go unpaid and debts go unreported to credit agencies. klarna, PayPal and Say all declined to share buy now, pay later delinquency rates with CNBC.

Affirm has said that the short-term, high-speed nature of its buy now, pay later service makes traditional credit metrics less relevant. It pays off those unpaid loans within 120 days, which is why it does not disclose the service's delinquency rates. It does reveal other credit metrics for your longer-term loans.

Klarna and Affirm previously told CNBC that their underwriting strategies ensure that only people who can afford short-term loans can access the service because their business models wouldn't work if people didn't make frequent payments. While Klarna charges late fees that max out at 25% of the purchase price, according to a review of its terms and conditions, Affirm does not.

Klarna said its overall default rate for its overall business, including buy now, pay later, is less than 1%. In the United States, 35% of consumers pay the company back early, she said.

The opacity surrounding the novel service has created the so-called phantom debt phenomenon that has left economists, regulators and even buyers concerned about the effect it could have on the economy.

“It's just this nebulous cloud of debt. No one really knows how it works and it just floats around us all the time and it definitely feels like a pending housing crisis, almost like 2008, but for shopping,” Andersen joked. “That's the myth that Klarna and PayPal sell you, is that you can have this lifestyle, you can have these things, but the truth is you can't.”

Alaina Fingal, a New Orleans-based financial advisor and founder of The Organized Money, typically receives five or six emails in early January from people who spent too much during the holidays and need help managing their finances.

This year, it was closer to 20 or 25.

“Most people would use up all their cash, run out, then put it on a credit card, and then if they maxed out their credit cards, they would turn to other services like buy now, pay later,” Fingal said. . CNBC.

Fingal said she spoke to one customer who had two maxed out credit cards and was using two buy now, pay later services, leaving her struggling to make payments.

“Because he couldn't afford it in the first place, those minimum payments are making it very difficult for him to cover food and his regular bills this month,” Fingal said. “So it just creates this cycle that's harder and harder to get out of.”

While it's unclear how often buy-now-pay-later bills go unpaid, people who use them are more than twice as likely to be in default on another credit product, such as a car loan, personal loan, or a mortgage, according to a 2023 study from the Consumer Financial Protection Bureau. People who use the service also tend to have higher balances on other credit products and lower credit scores, according to the CFPB.

As more buyers use the products, consumers don't know how they feel about it. In the weeks after Christmas, some on the social media platform

Others called it “dangerous” and vowed to stop using it as a New Year's resolution. At least one buyer said he had to use rent money to pay the buy now, pay later bill.

“Buy now and pay later is a beast. It definitely is. But you have to be the bigger beast.” said Hensley Resiere, a loyal Klarna user, in response to the difficulties some shoppers are having with the service.

In an interview with CNBC, the 34-year-old refugee caseworker from Jersey City, New Jersey, said Klarna helped her deliver an “amazing” Christmas for her family. But when she started using buy now, pay later during the Covid-19 pandemic, she had trouble keeping track of payments and found herself hundreds of dollars overdrawn and crushed by fees.

“When I realized I could still get what I wanted, like designer items, and not have to pay for the entire purchase on the spot, I lost my damn mind…I was like a kid in a candy store,” he recalled. Resiere. “Let's say Klarna gave me $1,000. In my head, I thought, 'Oh my God, that's free money.' So I'm spending the thousands, forgetting that I have rent, car bill, car insurance, all these bills, groceries , all”.

Resiere was in a cycle where he had to wait to get paid to cover his overdraft fees. Today, he has a system to manage payments so that they don't interfere with his other bills.

“Even though I'm in my career now and of course making more money, I'm definitely all for any way I can split my payments and not worry about bills,” Resiere said. “They split the payments, so I don't really feel it. Yes, I pay the same amount, but the fact that it's distributed doesn't hurt as much.”

Branika Pride, a mother of three who lives in Birmingham, Alabama, and works in higher education, told CNBC that she used Afterpay. BlockBuy now, pay later service this Christmas to buy your kids an ice machine, a PlayStation 5, and tickets to Drake's concert. Use a variety of suppliers, depending on what the retailer offers. Pride said she found the service useful this Christmas because she waited until the last minute to start shopping and was reluctant to pay the full cost of the purchases at once.

“I've used it in the past, not as much as this time,” he said, adding that he racked up about $1,300 in buy-now-pay-later debt over the holidays. “I didn't really get into the Christmas spirit until Christmas week. So it was kind of funny at the end, when I was doing all the shopping, I thought, 'Ooh, I'm going to regret this in the future.'” two weeks.'”

Pride said he's never had trouble covering his buy now, pay later payments and usually uses the service around payday, so he knows he'll have the funds by the time the next installment arrives. She appreciates the flexibility it offers her, but recognized that it may promote excessive spending or hinder her broader financial goals. Without it, she probably wouldn't buy as many discretionary items as she does.

“Every year I say I don't want to spend New Year's,” Pride said. “But somehow, he always comes with me.”

CLARIFICATION: This story has been updated with additional information about Kelly Andersen.

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