Buy Now and later use (BNPL). Shop online and in person, big and small purchases, even groceries and takeout.
Now, when you apply for credit, imagine your lender. If you’re enthusiastic and hardworking about timely repayments, it’s not a big deal, but that’s another story if you’re late or defaulted.
What was previously not reported (and therefore invisible) to future lenders is that BNPL’s activities have entered the credit report. More and more providers share BNPL data with the Credit Bureau, and a new scoring model is ongoing to allow this data to affect credit scores.
If you’re a bit bnpl-happy and you’re paying 4 for everything from Amazon purchases to Doordash tacos, these developments are worth giving some idea. That’s because your future lender can potentially consider using BNPL, whether they approve you for a loan or a new credit card.
I spoke with Rod Griffin, Senior Director of Consumer Education and Advocacy at Experian. Arkali, senior director of predictive analytics at FICO, discussed the implementation of BNPL data in credit reporting and scoring. This is what you need to know about BNPL about your credit report and the impact on your credit.
BNPL has reached your credit report
For a long time, BNPL loans have been in credit coverage. Many providers only require soft credit checks and until recently they have not reported their payment history to the credit department. This means that it is relatively easy for such a loan to be approved, but no credit benefits are provided. BNPL usage (and critical usage) is not reported unless it is a result by default.
Last year, the Consumer Financial Protection Bureau (CFPB) determined that BNPL providers should be treated like credit card issuers and should provide the same legal protection and rights to consumers. This prompted a lawsuit from the Financial Industry Association. Now, as the fate of the CFPB is in the air, the department has said in court that it will revoke the rules.
Despite the uncertainty of the CFPB, some of the major BNPL lenders are already moving in this direction and working with the Credit Bureau.
positive
One of the leading BNPL companies is currently reporting all payment time plans to Experian and Transunion. This includes Pay-in-4 plans in addition to existing reporting for long-term loans.
For now, this information will only be displayed to you. However, according to AFFIRM, lenders requesting Experian or Transunion credit reports can see the history of consumer payment times, just as more BNPL providers report their account information to the credit department.
Clear
Another popular BNPL provider, Klarna, also reported to Transunion. However, those who use Klarna to pay Doordash or Instacart orders don’t have to worry about credit reporting yet. According to Klarna, only progressive loans are currently being reported over time. For at least now, products paid with 4 payments and 30 payment products will not reach your credit report.
As both companies are actively working with the Credit Bureau, it is safe to assume that it is only a matter of time before it continues on more.
“We cannot normally comment on the reporting practices of certain Experian clients, but we can ensure that the BNPL provider that reports payment time payment activities to Experian is not the only BNPL provider. We are actively talking to major BNPL providers to expand our reporting of this information,” says Griffin.
Does BNPL affect your credits?
What exactly will that change for you as BNPL data slowly sneaks up on your credit report?
Not so much – for now.
“The recent addition of BNPL credit reports… appears only in consumers’ own education,” explains Ted Rothman, senior industry analyst at Bankrate. “Lenders cannot see this information, and therefore it does not affect your credit score or lending decisions at this time.”
The credit reporting industry is moving slowly. We are now beginning to overcome our first hurdles. This is to begin with include BNPL in your credit report. Griffin says this information will be available to lenders once the larger BNPL providers begin reporting to Experian. However, he has not mentioned the time frame.
Another hurdle is to implement BNPL data into your credit score. Today, the most commonly used scoring models are not designed with BNPL in mind, says Griffin.
“What makes BNPL more different from traditional credit products is the frequency and duration of these loans,” says Arkali. “BNPL loans can have only six weeks’ requirements, allowing consumers to open many of these loans in a short period of time.”
FICO has developed a unique treatment of BNPL data that allows lenders to incorporate BNPL data into their credit valuation process. The company is currently working on solutions to bring this treatment to the credit scoring market.
Incorporating BNPL data into lenders’ credit scoring helps to drive more accurate lending decisions, says Arkali. Additionally, lenders can rate consumers whose traditional credit experience is not limited.
The final hurdle is implementation. It takes time for credit scoring models to become commonly used. According to FICO, FICO 8 remains the most widely used version. It was introduced in 2009. The company has since released several scoring products, but if you upgrade to a later model it’s up to the lender. As with FICO 8, this process can take years. This is especially true in highly regulated industries, such as mortgage lending.
Still, don’t take it as a sign to pay attention to the wind when using BNPL. Perhaps your lender will not see any of your Pay-in-4 loans yet, but BNPL still can affect your credit, but it’s not a positive way to do it.
Buying BNPL will help you become smarter
As long as you make your BNPL payments on time, your credit score will not be affected in any way. Once you catch up, even some late payments may not be an issue. After all, your future lenders can’t see them yet.
However, in the case of BNPL loan defaults, your account may be sent to the collection. This will appear as a negative item in your credit report and reduce your score. Payment history is the most influential credit score factor, so its decline can be significant.
Sadly, it’s very easy to get hooked on BNPL. Almost one in four US adults (24%) (24%) who used the BNPL service say they spent more than they should have paid for a later survey, according to their purchases now. Additionally, 16% reported missing payments.
To avoid negative consequences from using BNPL, whether it’s your credit or budget, maintain the following responsibility:
- Avoid immediate satisfaction: Buy at least a week to avoid impulsive buying.
- Consider other options: For example, a 0% APR credit card can provide a much longer time frame to repay a purchase without profit.
- Creating a repayment plan: If you decide to sign up for a BNPL plan, you’ll decide how it fits your budget. It will be added to your debt – see if you need to cut other expenses to pay it off. Make sure your plans are realistic and don’t let you get into a financially demanding place.
- Read fine print: Always understand what you signed up, including interest and fees.
Conclusion
BNPL slowly but surely appears in credit reports, but it is likely that it will take some time for this type of loan to appear on lenders or directly affect your score. Still, you need to be careful using BNPL. If you notice that there are too many such loans, you may have issues in your hands, regardless of whether your future lender sees it or not.
