Buy Now, Pay Later loans have gained popularity at store (and online) checkouts. Last year, 45 million Americans used BNPL services, an increase of 220% since 2020. But soon, BNPL loans may affect credit scores. Here’s what you need to know:
What Is BNPL?
Buy Now, Pay Later (BNPL) services have become a popular financing option among consumers in the past couple of years. While the idea has been around for decades, BNPL services are more relevant in recent times due to the coronavirus pandemic’s financial effects on borrowers. BNPL services have created their market in the world of loans. The service divides a purchase into installment loans of multiple equal payments. Often these payment plans include interest charges and fees; however, some providers charge neither. Hence the appeal among borrowers, especially Gen Z.
Some of the big names in the BNPL industry include fintech companies like Affirm and Klarna. But credit card providers also serve their customers with the convenience of BNPL options. For example, there’s Slice by First National Bank of Omaha (FNBO), Plan It (from Amex), My Chase Plan (from Chase), and more. In the same vein, all Upgrade Credit Cards work in installment loans promising fixed rates and predictable payments.
How BNPL Loans Will Affect Your Credit
Today’s credit scoring models are designed to assess risk based on payment behaviors for mainstream credit products, unlike BNPL loans. However, the three major credit bureaus – Experian, Equifax, and TransUnion – will start collecting data from BNPL purchases, according to their press release. To clarify, the collected data will not negatively influence consumer credit scores just yet.
Major Credit Bureaus and New BNPL Reporting
Credit Bureaus have a plan in place to avoid negative credit score impacts. For instance, in the spring of 2022, Experian will unveil the Buy Now, Pay Later Bureaus ™. Its purpose is to give lenders visibility into financial inclusion and risk assessment while preventing a negative effect on consumer credit scores.
Similarly, TransUnion has introduced its new Point-of-Sale Suite of Solutions. Liz Pagel, Senior Vice President and Consumer Lending Business Leader at TransUnion explained, “TransUnion’s approach helps lenders and consumers ensure credit activity is captured in a manner that maximizes benefits for consumers and to the overall credit ecosystem.” The Point-of-Sale Suite of Solutions is meant to help people get credit for payments made towards BNPL loans.
Moreover, Equifax will be the only one of three bureaus to include BNPL loans in core credit score calculations. Ultimately, it is the BNPL provider’s choice to report the BNPL data to Equifax or how to incorporate it.
What Does This Mean For You?
BNPL users may think the service can easily replace their credit cards, and that may be because of how easy it is to use. The equally divided installment loans make a more manageable monthly payment for purchases that may not fit your budget. However, the financial access BNPL loans provide doesn’t come without penalty. These types of loans may still charge fees for late or missed payments, but as mentioned previously, not all BNPL services charge interest. Above all, the majority will not impact your credit scores. However, it’s easy to get carried away and dig a debt hole in your pockets. For these reasons, it’s crucial to practice discipline when paying back BNPL loans, mainly because it may affect your credit score in the future.