Buy now, payment loans later (BNPL) are beginning to appear in credit reports, but they still do not affect their credit score. However, lenders can see their BNPL loans and can use them to evaluate their refund capacity.
Key control
- Experian will add BNPL loans to credit reports as more lend to report them.
- These loans currently do not take into account credit rating models (such as Fico or Vantagescore), but that is changing soon.
- The lenders can see the BNPL activity when evaluating their solvency, even if their score is not affected.
What is changing with BNPL and credit reports?
BNPL services such as AFFIRM, Afterpay, Klarna and others offer short -term loans that allow consumers to make a credit purchase and pay in small interest without interest later. In recent years, they have exploited in popularity.
Until recently, BNPL transactions did not appear in credit reports and, therefore, did not affect their solvency. But policies are changing, at least in Experian, one of the three main credit offices.
“AFFIRM informs us of its BNPL loans,” said Rod Griffin, senior director of Public Education and Defense of Experian. Currently, the company only shows BNPL loan data to the consumer and not companies due to lack of sufficient information. Once more available data, Experian will share the consultation for the BNPL loan with the lender, but BNPL data will not affect the credit rating models, Griffin said.
This means that BNPL loans will not directly take into account the calculation of your credit score for now, but a lender can still see that you have taken multiple BNPL loans and consider it when evaluating your refund capacity.
Why BNPL loans need monitoring
Recent reports show that lenders are concerned about how BNPL debt contributes to the risk of a borrower, especially for younger consumers and those who begin to build their credit history.
The investigation of the Consumer Financial Protection Office (CFPB) found that borrowers under 25 years of age had about 30% of their total debt through BNPL compared to almost half (17%) for other borrowers.
The study also showed that more than 60% of BNPL users had simultaneous loans and one third had loans from several suppliers. In addition, consumers used two thirds of BNPL loans with lower credit scores, which may not be able to access terms of favorable loans through traditional loan models.
BNPL loans are being monitored to evaluate the risk of borrower now so that financial institutions can make loan decisions based on their detailed loan history.
When can BNPL loans affect credit scores?
According to current policies, simply taking out a BNPL loan does not directly affect consumer credit scores, but there are situations in which they can cause a negative impact. First, if you lose a BNPL payment, it can be sent to a collection agency, in which case it will appear in your credit report and harm your score just like any other unpaid debt.
The second key consideration is that BNPL data could be used to calculate credit scores in the future as financial institutions solve how to inform and use the data.
The companies behind the Fico and Vantagescore scores, the methodologies used to calculate credit scores, are working on how BNPL’s story can be incorporated into the calculation of the score.
“We are actively in the process of obtaining and analysis of BNPL data to determine the potential impact that this could have on the FICO score, including if any change resulting from the inclusion of BNPL data really reflects a difference in consumer credit risk,” said Ethan Dornhelm, vice president of predictive stages and predictive analysis, in a CNBC interview.
The final result
Although BNPL loans currently do not affect credit scores directly, since financial institutions begin to monitor them in their credit report, BNPL data will affect loan decisions. So treat BNPL like any other debt. Pay it on time and avoid loan stacking.
Be attentive to changes as companies begin to incorporate BNPL data into score calculations. Consider talking to a financial advisor to obtain guidance on your specific situation, especially if it is new in the world of credit construction.
