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BNPL plans, sometimes known as point-of-sale financing, have exploded in popularity over the past few years, as companies like Affirm, Klarna and Afterpay have formed partnerships with retailers, making signing up for one of the payment plans as easy as a few clicks of the mouse.
According to a Sept. 2021 report from Afterpay, usage of the plans has increased an astonishing 230% since 2020. With these short-term loans rapidly becoming commonplace, consumer advocates–including the Consumer Financial Protection Bureau–have expressed concerns about the potential drawbacks of BNPL, including how the loans can affect consumers’ credit reports.
Most BNPL loans aren’t reported to credit bureaus because the current scoring models are designed to predict risk based on payment behaviors of mainstream credit products and have not yet adapted to incorporate BNPL accounts.
Including BNPL data in a consumer’s credit file can be significant because it has the potential to boost credit scores for folks new to credit or rebuilding credit—but it could potentially encourage overspending, opening too many accounts and be reported as risky behavior even if the plans are being used responsibly.
Why Buy Now Pay Later Accounts Are So Popular
BNPL plans, sometimes known as point-of-sale financing, have exploded in popularity over the past few years, as companies like Affirm, Klarna and Afterpay have formed partnerships with retailers, making signing up for one of the payment plans as easy as a few clicks of the mouse.
Buyers, especially younger consumers, have been drawn to the installment plans for both their clear-cut terms and relatively easy approvals. Notably, many BNPL plans don’t require excellent credit or even a hard credit check to qualify, which can add to their appeal.
Some BNPL plans are interest-free for the consumer, and most loan provider fees are sponsored by the retailer as an incentive to make a purchase. A Nov. 2021 YouGov / Forbes Advisor survey found that out of respondents who had used a BNPL plan, 38% said the interest-free payments were what attracted them.
However, a 2021 survey, Buy Now, Pay Later Statistics and User Habits by C+R Research, a market research company, found that 59% of respondents said they purchased an unnecessary item that they otherwise couldn’t afford.
It’s precisely these concerns that spurred the Consumer Financial Protection Bureau (CFPB) to issue orders in Dec. 2021 to several BNPL companies, asking them to collect data on both the good and the bad that could result from signing up for one of these loans.
The Complexity of Adding BNPL Plans to Credit Reports
A large part of the reason it’s taken so long to add BNPL plans to credit reports is that the data doesn’t fit neatly into the current system, which is set up to analyze revolving credit, like credit cards, and long-term installment loans, like a mortgage or car loan.
“A consumer with normal shopping behaviors could take out multiple [BNPL] loans a year,” said Liz Pagel, senior vice president and consumer lending business leader at TransUnion. “Current credit models see that kind of origination behavior as inherently risky, when that’s really how these loans are supposed to be used.”
Incorporating BNPL accounts into a consumer’s credit file creates an opportunity for credit scoring models to adapt to these new payment plans. If someone shows a history of on-time payment behavior on one or more BNPL accounts, it can be a boon for those with subpar or thin credit files. Lenders who may not be able to make lending decisions because of a lack of more traditional credit lines may be able to view a consumer’s BNPL activity to assess their risk as a borrower.
“We believe it’s the biggest financial inclusion opportunity we’ve seen in generations,” said Pagel. “There are a lot of credit-building offers out there, and this one is pretty straightforward. If you use this responsibly, you should be able to build credit.”
How the “Big Three” Are Responding
TransUnion, one of the three main consumer credit bureaus in the U.S., announced it is launching the capability to receive data from BNPL companies. While this data won’t initially be included in the core credit report, a spokesperson said the data will be made available later in 2022 to enhance underwriting decisions and promote financial inclusion.
Pagel says that although TransUnion will be incorporating BNPL accounts into a consumer’s credit file, the data will be tagged and filtered so that potential lenders and credit scoring companies like FICO don’t receive BNPL account information until their respective systems have finished adapting to these new payment plans.
The news came shortly after Equifax, a competing credit bureau, announced a similar initiative, saying they will implement a new “business industry code” for BNPL so that these types of loans will be in their own class and not lumped in with traditional loans like credit cards or mortgages.
Experian, the third of the “big three” credit bureaus, also announced in a blog post they will be rolling out a Buy Now Pay Later Bureau, where information on consumers’ BNPL loans will be stored separately from their other key credit data to avoid any immediate negative impact that reporting these loans could cause.
Benefits of BNPL Accounts for Building Your Credit
Research from Equifax, based on a study of anonymized consumer data from a BNPL provider, has shown that including on-time payment history from a BNPL plan can benefit consumers with a short credit history. It can demonstrate responsible payment behavior and help boost their overall credit score.
“The main takeaway is that consumers, especially those new to credit, can benefit from paying their debt obligations to these lenders that they previously would not have gotten credit for,” says Tom Aliff, risk consulting leader at Equifax, in a call with Forbes Advisor.
However, the key is on-time payment history. If you miss or default on a payment and the provider reports this history to the credit bureau, this will likely have negative repercussions for your credit scores. The Forbes Advisor / YouGov survey found that 27% of respondents said they had missed at least one BNPL payment, with 11% of those missing more than one.
