Billions of dollars are on the line — hundreds of millions of Americans use BNPL loans. Soon these financial products will affect their credit scores. Congress the big three credit reporting bureaus—Experian, TransUnion, and Equifax—must remember. They are even getting ready to include BNPL loans in their scoring models. Nearly half of borrowers use these loans to purchase clothes, furniture, concert tickets, and other forms of takeout. BNPL’s new inclusion in borrowers’ credit reports, experts say, may cause unintended consequences to the credit ecosystem.
Yet, to date, the three major credit bureaus have publicly failed to set a standard way for including BNPL loans in their reports. As these short-term loans continue to gain popularity —especially among younger consumers —the effect they have on credit scores becomes more relevant. Nadine Chabrier is senior policy and litigation counsel at the Center for Responsible Lending. She described her worries about how the new regulations would further harm people who are already limited in credit availability.
“There isn’t a lot of information out there about how integrating BNPL into credit scoring will work out.” – Nadine Chabrier
FICO, a prominent credit scoring company, is rolling out a new model that will factor in BNPL loans when calculating consumer credit scores. Photo courtesy of FICO Julie May, vice president and general manager of business-to-business scores at FICO, underscored the increasing usage of BNPL loans. Yet these loans are increasingly becoming the lifeblood of consumers’ financial lives.
“Buy Now, Pay Later loans are playing an increasingly important role in consumers’ financial lives.” – Julie May
While the use of these loans has grown significantly over time, the industry remains opaque. Without reporting their data to one of the largest three credit bureaus, consumers can face “phantom debt”—unexpected harm to credit scores or other financial reputations—by BNPL companies. This term describes these shadow liabilities that can mask consumers’ real financial pictures.
Chabrier referenced studies showing that most BNPL consumers already have revolving credit card debt and lower credit scores. These people are likely to be worse off if their BNPL loans harm their credit profiles. Including Buy Now, Pay Later (BNPL) in credit scores could result in dramatic swings in those credit scores. These updates will make credit card offer terms, as well as interest rates on other loans, more transparent.
“FICO simulated the effect on credit scoring through a study. They saw that some users’ scores increased. But if you factor in something that, last week, didn’t affect your credit, and this week, it does, without having very much information about the modeling, it’s a little hard to tell what the consequences will be.” – Nadine Chabrier
Experts, meanwhile, were cautiously optimistic over the potential impact of adding BNPL loans to consumers’ credit scores. Adam Rust, director of financial services for the nonprofit Consumer Federation of America, agreed that BNPL loans have the potential to improve credit access for underserved consumers. He added that the mass adoption of FICO’s new model will be a process.
“Are we at a point where using BNPL loans will dramatically alter your credit profile? Probably not.” – Adam Rust
Rust stressed that expectations need to be set about how BNPL loans may affect borrowers’ credit scores. For users, he said a few will be able to see their credit scores improved due to BNPL integration. That doesn’t necessarily mean their overall creditworthiness has suddenly shifted in a very negative direction.
“I think it’s important that people have reasonable expectations.” – Adam Rust
Lenders are now beginning to determine the creditworthiness of consumers who use BNPL products. Even so, no one is clear on how these changes will affect the industry at-large. Not all lenders will necessarily choose to use FICO’s new models right away. Thus, even as some consumers start enjoying the benefits of credit assessments done more accurately with jobs, others still could be dealing with significant doubts.
“It‘s not about going from 620 to 624. It’s about going from 620 to 780.” – Adam Rust
As lenders begin to evaluate the credit readiness of consumers who utilize BNPL products, it remains unclear how these changes will unfold across the industry. Not all lenders are likely to opt into using FICO’s new models immediately. Therefore, while some consumers may benefit from improved credit assessments, others might face lingering uncertainties.
