Buy Now Pay Later (BNPL) Loans: What You Need To Know

You’ve probably noticed the ‘Buy Now Pay Later’ loan option when shopping online with major retailers. These debt options help you finance your purchase with fixed installments to be paid overtime with or without interest.

Due to the Covid-19 pandemic, people spent more time shopping online; therefore, Buy Now Pay Later loans and their popularity skyrocketed in the past two years. A recent study by Ascent reported that about 56% of customers used the BNPL service at least once. This showed an increase of almost 48% as compared to the previous year.

Consumers should consider the probable risks and drawbacks of availing such short-term loans. Unlike credit cards and their financial management, BNPL loans are not reported to the credit bureaus. Therefore, the credit scores of subprime borrowers, who opt for BNPL loans, will not be affected by the timely payment of a BNPL debt.

However, the three major credit bureaus in the U.S. will soon change this action plan – Experian, Equifax, and TransUnion. They are seeking to include information regarding BNPL loans in consumer credit reports. The Consumer Financial Protection Bureau requires the five major BNPL providers to submit the information so the public is well informed about the current practices of the industry as well as the potential threats.

Three Major Credit Bureaus & BNPL Loans 

Equifax

Equifax started permitting Buy Now Pay Later creditors to report ‘pay-in-4’ loans as of February 2022. According to a risk consultant at the company, Tom Aliff, consumers opting for BNPL loans will have them listed as installment or revolving accounts on their credit reports.

Unlike the other two major credit bureaus, Equifax allows BNPL providers to include BNPL loan balances while calculating the accumulative credit score as they run bi-weekly reports of these loans. A study done by the credit bureau found that timely payment of BNPL loans resulted in an average increase of 13 points in consumers’ FICO scores.

Experian

Experian announced its Buy Now Pay Later bureau launch in January to collect data regarding an individual’s total number of outstanding Buy Now Pay Later loans, the total loan amount, and the repayment status. Unlike Equifax, Experian will not include information regarding BNPL loans while calculating the credit scores so as to protect consumer credit scores from an immediate negative effect.

According to the Chief Product Officer at Experian, Greg Wright, there is a high possibility that BNPL loans will be reported and listed in a consumer’s credit report in the future. 

Numerous transactions made using various BNPL loans show up as different trade lines on your consumer credit report. Having multiple tradelines can indicate you are a potential risk for certain lenders.

TransUnion

TransUnion announced working with VantageScore and FICO in February 2022 to start including point-of-sale financing in its credit models to be launched in the future. BNPL loans are likely to bring down consumers’ FICO scores regardless of timely payment because these loans are usually short-term installment loans.

Your credit history and length are among the most important factors in calculating your FICO score, as it accounts for 15% of your total score. Paying off a BNPL loan means closing a line of credit, which will reduce the average age of credit, affecting the overall FICO score. TransUnion attempts to address this by not including all BNPL loan amounts while calculating an individual’s credit score.

Senior Vice President of TransUnion, Liz Pagel, stated that BNPL loans will now be recorded in a separate credit report section. As a result of the new change, a consumer’s BNPL loan record will not be used to calculate their score but will remain a part of their credit report.

According to TransUnion’s Senior Vice President, it will be left up to the creditors if they want to find out additional information about an individual’s BNPL history to determine whether they’ll be a good or bad credit risk or to make other lending decisions.

Because of the way BNPL loans are structured, credit bureaus plan to report information regarding these loans on a bi-weekly basis in the future rather than reporting them every month, as many of these loans require a four-installment payment structure over six to eight weeks. 

These loans are usually paid off shortly after appearing on your credit report since credit reporting for Buy Now Pay Later loans is done every month. Thus, TransUnion aims to report details regarding BNPL loans more often so that consumers can notice the positive outcome of making timely payments in full.

What Does This Mean For Consumers?

Using Buy Now Pay Later services will result in the relevant information appearing on your credit report. For those consumers looking to build credit, Buy Now Pay Later included in their credit report can help them establish a good credit history and improve their credit score. 

However, consumers need to depict responsible behavior for this to come into effect and make smart choices such as making timely payments. Despite using the best personal financing tools, consumers must be cautious and not ignore debt, make delayed payments, or miss a payment.

BNPL loans should only be taken out if you can ensure regular and timely payment without harming other financial obligations, as such loans are beneficial but can cause financial stress if not handled carefully. Always be mindful of how your monetary actions can affect your financial status.

Monitoring Your Credit Score

Sign up for a free credit monitoring service to improve your credit score, or keep a check on the information being added to your credit report. Opting for paid credit monitoring services will track and review your credit reports from all three major consumer credit bureaus. Some of these paid services also provide security and protection benefits such as identity theft insurance, tracking your social security number, and alerts or notifications in case of fraudulent or suspicious activity.

Bottom Line

Consumers will soon be able to benefit from BNPL loans as lenders will also review them in consumer credit reports to determine whether an individual is a good or bad credit risk after credit bureaus officially start collecting information on BNPL loans.

However, not every credit bureau plans to use the ‘Buy now pay later’ loan information while calculating consumer credit scores. Experian and TransUnion will be keeping this section separate from the rest of the calculations. At the same time, Equifax will let BNPL lenders select how they want these loans to be reported on the credit reports of consumers.