JPMorgan Chase, the country's largest credit card issuer, will prohibit its customers from using its credit cards to repay the 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 “generally does not allow customers to pay for credit products with their Chase credit cards.”
Chase has notified its customers of the change, which takes effect on October 10, and urged them to link a new form of payment to the pay-later accounts to avoid missed payments and possible late fees. The bank would not say how many of its cardholders use pay-later services from third-party providers such as Affirm, Afterpay, Klarna, PayPal and Sezzle.
Chase is not the first credit card issuer to take this step. Capital One, the fourth-largest card issuer, banned the use of its credit cards for pay-later loans in late 2020. In an emailed statement, Sarah Strauss, head of customer service and strategy at Capital One, said the bank “encourages its customers to make responsible choices when it comes to paying off debt.” She added, “Our long-standing policy is that we do not allow customers to pay off other forms of debt with Capital One credit cards, including buy-now-pay-later loans.”
The change at Chase follows a federal consumer protection agency's announcement that it will regulate buy-now loans as credit cards. It also comes at a time when delinquencies on traditional credit cards are rising, prompting banks to be more cautious even as they face competition from alternative pay-later lenders.
Pay later loans, a modern version of installment plans, are often called “pay in four installments” because they allow shoppers to pay for purchases in four installments, usually over six weeks. The specifics vary by company, but users typically don't have to pay 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 at checkout, as well as in some stores or through mobile apps. Shoppers can get quick approval after 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 such as a debit card, bank account or credit card. Payments are typically automatically deducted. In October, just over 9 percent of consumers said they had recently used a pay-later loan. While still relatively low, that share was about 40 percent higher than two years ago, according to a report from the Federal Reserve Bank of Boston.
The practice of paying off short-term installment loans with credit cards is frowned upon by both financial regulators and consumer advocates because it risks putting consumers even deeper in debt. Shifting required payments to a credit card means users end up paying double-digit interest if they carry a balance on their credit card, rather than paying it off in full each month. (The average credit card interest rate is about 22 percent.)
“It doesn't make sense to use a credit card to service an instant purchase credit,” said Lauren Saunders, deputy director of the National Consumer Law Center. “It defeats the purpose of the credit.” If users want to make as many purchases as possible with a credit card to earn points or rewards, Saunders said they can also earn them by paying directly with the card rather than using an instant purchase credit first.
Given that research suggests financially vulnerable consumers are more likely to resort to delayed repayment loans, using a credit card for these loans is “highly problematic,” said Jennifer Chien, senior counsel at Consumer Reports. On average, delayed repayment borrowers are more likely to be “highly indebted,” carry a balance on their credit cards and have lower credit scores, according to a report from the Consumer Financial Protection Bureau last year.
Michael Hershfield, founder and chief executive of Accrue Savings, a financial startup that offers incentives to customers to save for big purchases, said credit card companies prefer their customers to use their own pay later options rather than those of competitors. “They want to build that user base,” he said.
Chase, for example, offers a “Pay-Over-Time” program that allows credit card holders to split the payment for certain purchases into smaller installments that they pay over weeks or months for a fixed monthly fee. Chase also offers its own Pay-in-Four loan to checking account customers, which allows them to repay in four installments over eight weeks with no fees or interest.
Chien said it is already “common practice” for banks to prohibit credit card holders from using their cards to make payments directly to pay off balances on other credit cards. (There are indirect ways, such as using balance transfer cards to transfer debt from one card to another.)
Penny Lee, president and chief executive of the Financial Technology Association, an industry group that represents several companies that offer pay-later loans, including Klarna and PayPal, said Chase's new policy is “unfortunate” because it limits consumer choice. Ninety percent of pay-later shoppers pay with a debit card, she said, suggesting they should use the loans to “smooth out their spending and cash flow.”
Adam Rust, director of financial services at the Consumer Federation of America, said Chase's policy would help borrowers. “I applaud Chase's decision because it will protect consumers from over-indebtedness,” he said.
Here are some questions and answers about deferred repayment loans:
Will other credit card companies change their policies?
Other major credit card providers have different policies. Bank of America allows its customers to use their credit cards to pay off loans with pay later, said a spokesman, Don Vecchiarello. American Express said its cards can currently be used at a “limited number” of merchants with buy now, pay later options.
Do other credit card companies offer their own version of pay later loans?
Some do. Both Citi and American Express offer credit card customers the option to pay for certain purchases in smaller installments.
What is the safest way to use deferred repayment loans?
Consumer advocates recommend limiting the number of delayed repayment loans you have active at the same time and setting up automatic payments from a bank account or debit card to avoid missing a loan and potentially incurring a late payment fee.