The rise of buy now, pay later (BNPL) has been a significant trend in the consumer finance market over the past few years. These interest-free microloans, which are mostly paid off in four installments over six weeks, have become increasingly popular, especially among younger generations. However, a recent development has raised concerns about how BNPL may impact credit scores.
The Increasing Use of BNPL
* The use of BNPL has been increasing rapidly, with more and more consumers turning to these services to make purchases online or in-store. * According to FICO, the credit scoring agency will unveil a new version of its credit score this fall, which will include buy now, pay later as a factor in the calculation. * This new version of the credit score will be the first to take into account BNPL loans, providing a more accurate picture of consumers’ creditworthiness.
The Concerns About BNPL and Credit Scores
* At least two major BNPL providers, Klarna and Afterpay, have stated that they will not share their data with credit bureaus until they are confident that it will not harm their customers. * The concern is that BNPL loans are often used for small purchases, and people may take out multiple loans for different items, which can make it difficult for credit bureaus to factor these loans into their credit scores. * Chi Chi Wu, staff attorney at the National Consumer Law Center, notes that traditional credit scoring models have assumed that opening multiple new accounts at once is a sign of financial trouble. * However, Wu argues that this approach may not be accurate, as BNPL loans are typically short-term and paid off quickly.
The Impact on Credit Scores
* The credit bureaus are working on a new model to evaluate BNPL loans more accurately, but there are concerns about how lenders will view these loans. * Wu notes that lenders may draw negative inferences about consumers who use BNPL loans, even if they pay on time. * This could potentially harm consumers’ credit scores, especially if they are not aware of the implications of using BNPL.
The Potential Benefits of BNPL
* Despite the concerns, some experts believe that BNPL can be a positive development for consumers. * Liz Pagel, senior vice president and consumer lending leader at TransUnion, notes that most customers who use BNPL pay on time, which could help their credit scores. * Pagel sees BNPL as a significant financial inclusion opportunity, as it provides access to credit for consumers who may not have had it otherwise.
The Need for Clear Guidelines
* There is a need for clear guidelines on how BNPL loans will be viewed by lenders and credit bureaus. * Until these guidelines are established, consumers may be unsure about the implications of using BNPL. * It is essential that consumers are aware of the potential risks and benefits of BNPL and make informed decisions about their financial choices.
| BNPL Providers | Policy on Sharing Data |
|---|---|
| Klarna | Will not share data with credit bureaus until it is confident it will not harm customers |
| Afterpay | Will not share data with credit bureaus until it is confident it will not harm customers |
“These are very short-term loans, they’re usually paid off very quickly,” said Chi Chi Wu, staff attorney at the National Consumer Law Center.
“Traditionally, credit scoring models have assumed if you’re opening up a whole bunch of new accounts all at once, that’s a sign of financial trouble,” Wu said. “We believe this could be one of the most meaningful financial inclusion opportunities in a generation,” said Liz Pagel, senior vice president and consumer lending leader at TransUnion.
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