Credit 101

Does Layaway Affect Your Credit?

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If you’re looking at a tight holiday budget again this year, the ads retailers are rolling out for layaway may have caught your attention. With no interest, no credit check and relatively inexpensive fees, putting an item on layaway can appear to be a good way to spread out your holiday spending and make sure you don’t go into debt buying the gifts you really want to give.

But what about your credit? Will layaway affect your credit scores? What happens if you can’t keep up with the required payments?

First, a quick overview of how layaway works: To put an item on layaway, you must pay an initial minimum deposit, which varies by company. You’ll also likely be charged a service fee, usually $5 to $10. You will then have a certain amount of time to make payments toward the total purchase price; typically between one and three months. Once you’ve paid in full, you take your purchase home: It’s yours.

If you change your mind or can’t make the scheduled payments, your layaway will be canceled. The item will be returned to the store’s shelves and you may have to pay a cancellation fee. Again, the amount of that fee depends on the store’s policy.

Layaway is credit-neutral. No companies I could find report layaway plans to the major credit bureaus. As a result, it doesn’t help or hurt your credit scores.

In one sense, that can be good. It won’t be listed as a “debt” on your credit reports, so you don’t have to worry about the amount you still owe on the item affecting that factor when your credit scores are calculated.

In another sense, it’s not so good. Consumers who are finding it difficult to establish credit could potentially benefit from having these plans appear on their credit reports.

There are some efforts to include layaway in what’s called “non-traditional” credit data; information that normally doesn’t show up on credit reports compiled by Equifax, Experian and TransUnion. But so far, those efforts don’t have much of a direct impact on consumers, so you shouldn’t count on building credit with layaway.

That’s too bad. If stores did report layaway payments, it would be a relatively risk-free way to help their customers build credit. After all, the store wouldn’t have to worry about consumers running off with items they hadn’t paid for, because a buyer doesn’t take possession until an item is fully paid for. In fact, this could be a case where no negative reporting is required: Consumers payments on layaway are reported, and if they cancel the balance on the “account,” it returns to zero!
However, until layaway plans are routinely shared with credit reporting agencies, you’ll have to continue to look at layaway as a budgeting tool. Weigh the costs against the benefits to decide if it is right for you.

And if you need to build or rebuild credit, consider a secured credit card instead.

2013 Major Retailers’ Layaway Terms

Kmart

  • Down payment: $15 or 10%, whichever is greater for an 8-week contract; or $30 or 10%, whichever is greater for a 12-week contract. No minimum purchase required.
  • Payments required: 4 payments for 8-week contract, 6 payments for 12 weeks
  • Set-up fee: $5 for 8-week plans, $10 on 12 weeks; waived through Nov. 23, 2013
  • Cancellation fee: $10 for 8 weeks; $20 for 12 weeks
  • Notes: 7-day grace period after payment is due or canceled

Wal-Mart

  • Down payment: $10 or 10%, whichever is greater
  • Payments required: N/A – see store
  • Set-up fee: None
  • Cancellation fee: $10
  • Notes:  Items must be paid for and picked up by Dec. 13.

Sears

  • Down payment: $20 or 20%, whichever is greater for 8-week plan; $35 or 20%, whichever is greater for 12-week plan. No minimum purchase required.
  • Payments required: Every two weeks
  • Set-up fee: $5 for 8-week layaway contracts, $10 for a 12-week layaway contract; waived Oct. 25 – Nov. 25, 2013.
  • Cancellation fee: $15 for new layaway contracts
  • Notes: 7-day grace period after payment is due or layaway is canceled

ToysRUs

  • Down payment: 10% of total cost
  • Payments required: Payments must be made bimonthly, total of 90 days to pay off.
  • Set-up fee: $5 service fee, waived during free layaway promotion
  • Cancellation fee: $10
  • Notes: Holiday layaway items must be paid for and picked up by Dec. 15.

TJ Maxx

  • Down payment: $10 or 10%, whichever is greater
  • Payments required: Up to 30 days
  • Set-up fee: $5 non-refundable create fee
  • Cancellation fee: $5

Marshalls

  • Down payment: $10 or 10%, whichever is greater
  • Payments required: Up to 30 days
  • Set-up fee: $5 non-refundable create fee
  • Cancellation fee: $5

Terms as published on retailer’s websites as of October 15, 2013. Keep in mind that in your state, certain terms and fees may be different due to state law. Be sure to read the in-store disclosure provided for current terms that apply.

Image: Hemera

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