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Sleek, New Credit Apps Target A Young Generation Already Drowning In Debt

Sasha Hupka Los Angeles Times

WWR Article Summary (tl;dr) As Sasha Hupka reports, "The apps are taking off among millennials and Generation Z consumers attracted by the ability to bypass traditional credit cards and still delay payments with no interest."

Los Angeles

Alana Voechting, a 27-year-old nursing student, had never heard of Klarna when she noticed its bright pink logo while checking out at with $165 in skin care products.

Mounting medical debts from chronic health conditions left Voechting with money problems, so she was thrilled to learn the app would allow her to break the purchase price into four installments over six weeks — with no interest, fees or credit inquiries to ding her already subpar credit score.

"It's like your brain thinks, 'Oh, I'm getting this product for cheap,' because you really only look at that first payment, and after that you kind of forget about it," she said. "So psychologically, it feels like you're spending so much less when you're not."

Soon Voechting began regularly using not just Klarna but also similar services, including Quadpay and Affirm, to buy makeup, clothing, airline tickets and expensive lounge wear she acknowledged she "would not have purchased otherwise."

Voechting is one of millions of young Americans with scant or subprime credit histories who are using so-called buy-now-pay-later apps every month.

The smartphone-based services are an updated version of the old layaway plan, except users can do it all on their phones and — most appealingly — get their purchase immediately rather than having to wait until they've paid for it.

The companies act as intermediaries between retailers and consumers, making most of their profit by charging merchants 2% to 8% of the purchase price, similar to the retailer fees levied by credit card companies.

The apps are taking off among millennials and Generation Z consumers attracted by the ability to bypass traditional credit cards and still delay payments with no interest.

Retailers such as Macy's and H&M have jumped to partner with the services, which soared in popularity during the COVID-19 pandemic. Roughly 42% of Americans report using the apps at least once, according to a Credit Karma survey from February.

U.S. regulators are taking a wait-and-see approach, saying they don't want to stifle a new financial product that could help consumers who might otherwise fall into predatory lending schemes.

But regulators in Europe and Australia, where many of the companies first launched, are increasingly concerned the apps are extending credit irresponsibly.

Using celebrities such as A$AP Rocky and Keke Palmer to portray the services as a hip alternative to the "gotcha" fine print of credit cards, the apps could promote overborrowing in a generation already struggling with high debt and poor credit, consumer advocates warn.

And despite claims that users' credit ratings won't be affected and that there are no hidden fees, experts say consumers can still face late charges, overdraft fees and debt collection. Some apps, such as Quadpay, charge a $1 transaction fee on every payment made, regardless of the amount.

"It sounds too good to be true, and it is, in many ways, because there are perils for people who use this," said Jamie Court, president of Consumer Watchdog.

The apps offer different repayment options, but the most common links to a user's debit card and makes automatic withdrawals every two weeks.

Problems quickly arise when there is not enough money in the account, potentially resulting in charges by both the user's bank and the app.

Voechting said that for the most part she has been able to control her spending and keep track of when her payments will be withdrawn, a challenge when dealing with multiple purchases and multiple apps.

But this year, she missed a payment with Quadpay on a $120 order from Beautycounter because she failed to change her payment information in the app after receiving a new debit card.

Sixty days later, she was informed the installment would go to collections unless she paid off the full remaining balance of $54, plus a $10 late fee. Voechting promptly gathered the money, fearing more damage to her credit.

Services boast that users' activity and debt are not regularly reported to major credit bureaus. That's appealing to consumers under pressure or already cut off from traditional lenders.

But not reporting on-time payments also means that users don't see their credit scores increase as they demonstrate a track record of responsible borrowing, a crucial hurdle for younger consumers.

And the apps may report missed or late payments for some payment plans, which can hurt users' credit scores, according to a clause buried deep in terms and conditions agreements for Quadpay, Affirm and Klarna.

The Credit Karma survey found about 38% of buy-now-pay-later customers had missed at least one payment, and 72% of those users reported seeing their credit score drop afterward, though many factors can cause fluctuations.

Buy-now-pay-later users also don't benefit from many protections applied to credit cards.

For instance, if a credit card company refuses to offer credit to a potential customer, it must disclose why the application was declined. No such rules apply to the apps, which authorize every purchase on a case-by-case basis. That means users have no assurance a transaction will be approved.

"They don't know what the issue is," said Angela Hunt, 31, of Hampton, Va., part of a Facebook group devoted to Klarna, in which members frequently complain they are denied approval for purchases in a seemingly random manner.

App users also don't enjoy the same billing-dispute protections they would with other payment methods, so returning merchandise, resolving fraudulent charges and requesting refunds can be difficult.

In January, Brittany Conn, 30, was moving into a new apartment in Melbourne, Fla., and used Klarna on Wayfair to buy a bed frame, headboard and bookcase for $450.

The bookcase never arrived, so she reached out to Klarna to get a partial refund. Multiple agents promised a supervisor would contact her, but the call never came. When she tried to publicly request help on Klarna's Facebook page, she said, her comments were deleted.

If Conn had made her purchase with a credit card, the lender would have been forced to respond immediately, launch an investigation and explain its final determination within two billing cycles. During the process, she would be entitled to withhold payment on the disputed amount.

It took Conn, who works in customer service, nearly two months and many emails and online chats to get her money back. She filed a complaint with the Better Business Bureau.

"It was just an uphill battle, just email after email and chat after chat, and it got to a point where my chats weren't being answered anymore," she said. According to the Better Business Bureau, Klarna — the largest buy-now-pay-later app in the U.S. with 15 million customers in 2020 — received 676 complaints in the last 12 months.

Quadpay received 979. Affirm had 227, and Afterpay and Sezzle saw more than 100 complaints each.

By comparison, Discover, a well-established credit card brand with more than 55 million customers, saw 532 complaints with the Better Business Bureau in the same period.

The rise in users — and complaints — has brought more scrutiny to the apps.

Credit card giant Capital One barred its customers worldwide last year from linking its cards to fund buy-now-pay-later purchases, citing the lack of consumer protections.

Class-action lawsuits in California, Connecticut and New York allege plaintiffs suffered from large bank overdraft fees due to automatic withdrawals, undisclosed late fees and deceptive marketing.

Consumer complaints prompted regulators in other countries to crack down. Sweden enacted a law last year that bans online checkout portals from making the apps the default payment option.

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