If you haven't used a buy now, pay later (BNPL) service in the past year, odds are the person next to you has. TransUnion estimates that nearly 40 percent of American adults used a BNPL service in the past year, and a survey by C+R Research estimates that figure to be closer to 60 percent.
BNPL providers like Affirm, Afterpay, Klarna and PayPal's Pay in 4 allow consumers to receive short-term financing at checkout. Until recently, BNPL loans didn't appear on consumer credit reports. Now that they do, what does that mean for your credit score and personal finances?
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How Does Buy Now, Pay Later Work?
Buy now, pay later (BNPL) is a short-term loan offered to shoppers at the point of sale. When shopping online, you may have noticed a third-party lender giving you the option to pay in installments. Or, when completing a purchase with PayPal, you may see the Pay in 4 option. These options are also available in-store and via mobile apps.
BNPL services allow shoppers-turned-borrowers to get their goods immediately and pay off the bill in several installments. Pay-later loans are attractive to many consumers because BNPL plans charge little to no interest. However, most BNPL lenders do charge late fees.
Retailers can offer buy now, pay later by paying the lender a transaction fee that is often less than credit card processing fees. The ease of gaining credit with a few clicks causes some people to shop more. An AfterPay study by Accenture noted that retailers noticed a 17 percent increase in shopping basket totals.
McKinsey & Company estimates that, boosted by pandemic shopping trends, BNPL transactions grew 300 to 400 percent in 2020 and are projected to reach 10 percent of all e-commerce transactions by 2024.
A borrower could find themselves in trouble, having been extended more short-term loans than their creditworthiness warrants.
Is BNPL Good or Bad?
Other qualities that make BNPL plans attractive to consumers are the easy application process and the lack of a hard credit check.
Borrowers with subpar credit don't have an issue getting approved. And many consumers see BNPL as a way to budget for large purchases. Consumer agencies, including the Consumer Financial Protection Bureau (CFPB), are more skeptical of these "benefits."
The CFPB has launched an inquiry into BNPL business practices to evaluate the impact on consumers' personal finances and data privacy, as well as on retailers and traditional lenders. Australia and the United Kingdom have launched similar inquiries and initiated further regulations on BNPL.
Consider also: Will 'Buy Now, Pay Later' Cost You in the End?
Pay Later Services and Credit Reporting
Because BNPL payment plans use soft credit checks and were previously not reported to the major credit bureaus, they haven't hit consumers' credit scores positively or negatively. If you had late payments, no one but the lender knew. On the other hand, if you had all on-time payments, you didn't see a boost to your credit score.
Without centralization of BNPL data, a buy now, pay later lender could offer an installment loan to a consumer without regard for other unrecorded BNPL loans. A borrower could find themselves in trouble, having been extended more short-term loans than their creditworthiness warrants.
Including BNPL activity in consumer credit reporting will help avoid the overextension of short-term credit and might help consumers build credit. If a shopper is already using BNPL loans and paying them back, they may as well have that positive activity recorded.
Consider also: Credit Score for Mortgage Rates: How It Works
Can BPNL Impact Credit Scores?
Because traditional credit scoring models aren't set up to incorporate BNPL transactions into a consumer credit score, credit reporting agencies will have to update their credit models and algorithms to understand the loans and correctly figure them into scores.
Equifax was the first to announce the recording of BNPL loans in consumer credit reports and wrapping BNPL activity into FICO scores. The company began this effort in February 2022.
Transunion reports that they will begin recording BNPL transactions in 2023. But these short-term loans will not yet be included in scores. Senior Vice President of TransUnion, Liz Pagel, believes this shift can help consumers build credit.
Experian's new Buy Now, Pay Later Bureau will collect this data separately from Experian's core credit bureau data.
While the BNPL installment loans won't harm credit scores, the accessibility of BNPL data can help protect consumers from being overextended.
Will Credit Reporting Help BNPL Users?
The positive aspects of BNPL in credit reporting include tracking a consumer's BNPL payment history. As with other credit use, positive activity looks good on credit history. But if BNPL isn't contributing to the payment history used to calculate 35 percent of your FICO score, it isn't doing much for you.
Other forms of credit tend to do more for your credit score. For instance, credit cards, lines of credit and other revolving credit positively impact your credit utilization percentage, which accounts for 30 percent of your FICO score. These forms of credit also add to your credit history length, which is 15 percent of your score.
Until buy now pay later is recorded toward your payment history with all three major credit bureaus, its impact won't be earth-shattering, one way or the other.
Consider also: 3 Ways to Improve Your Credit Score
- Consumer Financial Protection Bureau (CFPB): CFPB Opens Inquiry into “Buy Now, Pay Later” Credit
- Pew Research: Regulators Scrutinize Buy Now, Pay Later Plans
- CFPB: (Follow-up) Our Inquiry on Buy Now, Pay Later
- Congressional Research Service: Rapidly Growing "Buy Now, Pay Later" (BNPL) Financing: Market Developments and Policy Issues
- Afterpay: The Economic Impact of Buy Now, Pay Later in the US
- McKinsey & Company: Buy now, pay later: Five business models to compete
- Federal Reserve Bank of Kansas City: The Appeal and Proliferation of Buy Now, Pay Later: Consumer and Merchant Perspectives
- TransUnion: BNPL and Point-of-Sale Lending
- American Banker: Buy now/pay later could help young consumers build credit histories