Layaway is making a huge comeback this year, as retailers launch their layaway programs earlier than ever and more and more stores offer layaway payment options.
For consumers, the primary draw of layaway is the ability to pay for gifts over time. Using layaway is sort of like implementing a forced savings plan for your shopping goals. You’re putting aside a little bit of money — every two weeks or so — to pay for a purchase or purchases you know you’re going to make.
But layaway has another surprising benefit: it can help you maintain a good credit rating.
Before you dismiss this idea as fluff or impossible, let me explain the link between layaway, especially holiday layaway programs, and credit.
For starters, layaway is a “cash only” type of deal. So you’re not opening any credit accounts or establishing any loans. As mentioned, you’re simply paying over time for merchandise. And once you make all the payments that are required, you take possession of the goods. Simple enough.
So how can layaway bolster your credit — or keep it in tact?
Here are 3 ways you may not have considered that layaway can have a positive direct or indirect impact on your credit, particularly leading up to and following the holiday season.
1. No credit card debt
During the run-up to the December holidays, and even in the first month or two of the year, it’s not uncommon for banks and other credit card issuers to offer a variety of offer deals enticing you to spend more and use more credit.
Some examples of these promotions include: cash advance checks, 0% or low-interest promotions, cash-back deals for spending more, or “no payment” plans around the holidays.
Amid the holiday shopping frenzy, any of these offers can be appealing – particularly if you’re on a tight budget. And who isn’t these days?
The problem with taking advantage of these deals, though, and certainly with using them to excess, is that they can all impact your credit negatively.
According to FICO, the credit scoring company, 30% of your credit score is based on the amount of credit card debt you have outstanding. So the more debt you rack up, the more your credit rating suffers.
With layaway, you avoid the pitfall of credit card debt. Simply put: using layaway frees you from worrying about any potential hit your credit rating.
By using cash to do your shopping via layaway, instead of relying on credit cards, you boost the chance of keeping your credit score high — or at least at its current level.
Unfortunately, too many people mindlessly use credit cards during the holiday, and at other points during the year.
In fact, a study from Javelin Strategy & Research notes that in this post-recession era, credit card use is once again dramatically on the upswing. By 2016, credit card use for online purchases is predicted to rise by 63%, compared to an increase of only 2% for debit cards.
2. No credit inquiries
When you’re out shopping for the holidays, or for any purpose, if you pull out a national brand credit card, like a Visa or MasterCard, or if you begin to pay with cash, you can certainly expect some nice cashier to offer you a store credit card.
Beware that getting 10% off that $50 purchase will hardly be worth it in the long run.
Sure, you may save $5 by applying for the store credit card right there on the spot, but that modest savings will likely be eaten up by two other factors: a department store card with a high interest rate, and the damage to your credit rating that will occur as a result of a credit “inquiry.”
Whenever you allow someone to check your credit for the purpose of obtaining credit or a loan, that’s considered a “hard” inquiry. And such an inquiry stays on your credit report for two years, and it counts against you, for the purpose of calculating your credit score, for one year. FICO officials say inquiries comprise 10% of your credit score.
Just one “hard” inquiry can lower your credit score, depending on whose statistics you believe, anywhere from five to 35 points. (A “soft” inquiry is when you check your own credit report or credit score; that doesn’t hurt your credit at all).
So here’s where layaway offers another big benefit to the credit-aware consumer. With layaway, you don’t supply a retailer with your Social Security number, and there is no credit check, so there is no inquiry to ding your credit.
If you think this isn’t important, think again. That’s because you’re not just going to be enticed by credit card offers from clerks in stores. Your mailbox is going to be chockfull of credit card offers too.
Credit card issuers mailed nearly 4.1 billion credit card offers in 2011 — a record high year, according to Ipsos Mail Monitor.
Sadly, many people who take advantage of a slew of these credit card offers are unaware of the damage they are doing – over and over again – to their credit ratings.
But even those who have multiple layaway accounts don’t get negative marks on their credit due to their payment method.
3. Improved fiscal discipline
Using credit cards is a fast and easy way to overspend.
In fact, studies show that the average person spends far more when whipping out a credit card, as opposed to paying with cash or using a debit card.
Javelin researchers found that consumers spend an average of $58.29 on a single online transaction when paying with a debit card. But when paying with a credit card people spend about 40% more, or $82.10 per transaction online.
Additionally, credit cards and charge cards often deprive us developing a very necessary financial skill: the art of delayed gratification.
Be honest, how many times have you made a purchase even when you didn’t have much money – if any – in the bank, but you did have room on your credit card? Many of us (myself included) have probably done this more times than we care to remember.
But if you had to rely solely on cold, hard dollars you likely wouldn’t have overspent and/or purchased something prematurely – before you could actually afford to pay for it in cash.
So with layaway, you become a more disciplined consumer.
Psychologists say it takes at least 30 days for a person’s actions to become a habit.
Therefore, practicing delayed gratification, consciously watching your spending, and making it a habit to use cash instead of credit all help you to develop good fiscal habits.
Such positive economic traits aren’t built in a vacuum. They carry over – or definitely are more likely to carry over – into other spending areas too.
So even if you have credit, but choose not to use it in favor of layaway, you are developing good credit skills and smarter spending habits.
Does Layaway Build Credit?
Now, if you have no credit at all – perhaps for one reason or another you’ve never had a credit card, taken a car loan or student loan, or had a mortgage, etc. – then you’re considered in the credit scoring world to be a person with a “thin” credit or you’re labeled as having “no credit.”
Unfortunately, layaway won’t help you to “establish” a credit rating and it won’t “build” a credit rating for you – not like you can “build” a credit rating in traditional ways when you do, in fact, taken on credit or take out a loan.
But if you’re a person who does have a credit track record, then layaway can be a smart way to make it through the holidays – and beyond – all the while keeping your credit stable or strong.
The Future of Layaway and Your Credit
Finally, I predict that in the not-too-distant future using layaway itself will become tied to your credit rating in yet another very direct way: Merchants and retailers will likely begin reporting your payment history to credit bureaus and other data-gathering firms that track credit behavior.
The idea of your layaway payments being reported to a credit bureau isn’t so far fetched. After all, other non-traditional payments, such as those for rent or payday loans, have already begun to be reported to credit bureaus.
Additionally, banks and other institutions are looking at ways to better identify and service the needs of the country’s 10 million unbanked households, who operate largely outside of the traditional credit mainstream.
So it’s probably only a matter of time before layaway transactions — like rent payments — start to be closely tracked, monitored, and potentially used as a basis in credit scoring or credit analysis.
Q: Can putting something on layaway hurt my credit score?
A: I don’t see how a layaway plan can help or hurt a consumer’s credit — mainly because no credit or loans are being provided.
With a credit card, you charge what you want, take immediate possession of the merchandise, and then pay the bill AFTERWARDS.
In other words, you’ve been granted credit which allows you to take something today that you haven’t yet paid for.
But with layaway it’s the exact opposite. You put up cash and make small incremental payments BEFORE taking possession of your purchase.
You only get your merchandise when its paid in full. So no credit is extended to the consumer.