Editorial Policy

What to know before using PayPal's Bill Me Later

Allie Johnson

January 28, 2014

If you shop at big online retailers, or use eBay or PayPal, you've probably gotten an offer to pay with Bill Me Later. But watch out: experts say you should learn how the service works before you click.

So, what exactly is Bill Me Later? It's a service that allows consumers shopping at many online retailers to buy items on credit without pulling out a card. Consumers can apply (using their birth date and the last four digits of their Social Security number) as they're checking out (or in advance, for future purchases) and get accepted or declined on the spot for a line of credit or even a 0 percent financing deal. PayPal, which owns the service, touts it as a “secure, instant and reusable credit line without the plastic.”

But experts say many consumers have run into snags.

“We've gotten quite a few complaints,” says Linda Sherry, director of national priorities for Consumer Action.

Other organizations have, too: The Better Business Bureau of Greater Maryland, where Bill Me Later headquarters are located, has received 995 consumer complaints, most of which involved billing or collection issues, in the past three years. The BBB states that 848 of those issues were resolved with BBB help.

Many of those problems stem from consumer confusion about the terms and conditions of the service, Sherry says. So, here are six things you should know before deciding to use Bill Me Later:

1. It's a third-party service. Some consumers get confused by the name Bill Me Later and think that the merchant, or PayPal, is actually just billing them later like a local service provider might, Sherry says. The reality: Although Bill Me Later is owned by PayPal, it's a bank, Comenity Capital Bank that is opening a line of credit in your name. “Don't take the name too literally,” Sherry says.

2. You have to get approved. If you choose to pay with Bill Me Later and you don't already have an account, you're applying for credit. The bank that extends credit will review your credit history and make a quick decision. According to PayPal, the process takes “a matter of seconds as part of the checkout process.” If you get approved, you will be informed of the amount of your credit line, which will be at least $250, according to the Bill Me Later website. That credit line will remain  your limit until you ask for an increase (usually when you want to purchase something that costs more).

3. You could get multiple inquiries on your credit report. Your credit gets pulled once as part of the Bill Me Later application process, just as it would if you were applying for a credit card. But what if you later try to use Bill Me Later for a purchase that costs more than your available credit? In that case, the bank will consider the purchase attempt a request for a credit line increase, which could result in another inquiry on your credit reports, according to Bill Me Later's terms and conditions. But are those hard or soft inquiries? PayPal did not respond to requests for information for this article, but some consumers have complained of “hard pulls” on their credit after they already had a Bill Me Later account. One consumer posting on an anti-PayPal site complained that his mortgage broker got “furious” after a Bill Me Later purchase resulted in a hard pull on his credit while he was in the process of buying a house. How does an inquiry affect your credit score? It depends on the circumstances, but each “hard pull” – when a lender reviews your credit report for the purpose of deciding whether to extend credit – could cause a dip of about five points in your FICO score, according to myFICO.com.

4. Your transaction could get denied. For various reasons, Bill Me Later purchase attempts sometimes get rejected, even if the consumer has enough available credit on the account. In fact, it's one of the most common consumer complaints about the service, Sherry says. One consumer wrote on a forum on eBay — which owns PayPal — that he had tried to purchase an $800 boat using Bill Me Later via PayPal. When the charge was rejected, it was passed to the primary payment method he had listed with PayPal — his bank account, which didn't have enough funds to cover the transaction. A Bill Me Later employee who responded online to the complaint wrote, “We have many security policies in place, and if one of those is tripped, the transaction will be declined.”

5. Deferred interest deals can cost you. When you make a purchase of $99 or more via PayPal, using Bill Me Later as your payment method, you'll be eligible for a deal that offers no payments and no interest if the purchase is paid off in full within six months, according to a Bill Me Later's FAQ. Sounds good, right? But these deferred interest deals can cause big problems for consumers, whether they're offered by Bill Me Later or retailer credit cards (which often offer these kinds of deals), says Chi Chi Wu, a staff attorney for the National Consumer Law Center.

“It's a trap for consumers,” she says. Many consumers don't understand that if they don't pay the full amount off during the promotional period, they'll get charged interest (19.99 percent in the case of Bill Me Later) on the entire amount, dating back to the purchase. Even a consumer who understands that might have good intentions, but then become unemployed or get sick and miss a payment, Wu says.”Life happens, they can't pay the whole thing off and they end up getting socked with this retroactive interest,” she says.

What's worse, she says, is that some Bill Me Later deals offer no payments during the promotional period, which makes it more likely that the consumer won't pay off the balance in time to avoid interest. In contrast, if you have to make minimum payments, as you typically do on retailer credit cards with deferred interest, “you won't pay off the balance, but at least you're making some payment,” Wu says.

6. You might get hit with fees. Consumers should know that if they use Bill Me Later to send money to friends or family via PayPal, they'll pay fees just as they would if they used a credit or debit card, Sherry says. According to PayPal, when you send money with Bill Me Later, you pay a flat fee of 2.9 percent of the total plus 30 cents per transaction. And when you use Bill Me Later to pay for an item in installments — for example, three equal payments — you'll also pay an installment transaction fee of 2 percent of the total amount, according to the Bill Me Later terms and conditions. If you miss a payment, the Bill Me Later late fee can range from $5 to $35 a pop, depending on the amount of your minimum payment and whether you've been late before. The company charges a return check fee of up to $25 and a $10 fee to provide a copy of any past billing statement, unless they're required by law (such as a court order) to provide it.

Experts say consumers who want to finance a purchase would be better off using a credit card. But what if you don't have a credit card? Put enough money to cover the purchase in an account tied to a debit card, and use debit for the purchase.

“If it's just a want and not a need, save up for it,” Sherry says.