Buy now, pay later (BNPL) loans — the payment plans that allow you to break up a purchase into smaller installments — typically have no bearing on credit score. But that is about to change.
In mid-June, Fair Isaac Corp., the company behind the commonly used FICO score, announced that it “would start including a person’s ‘buy now, pay later’ payment history” in its credit-scoring models, said The New York Times. These loans currently “do not show up on credit reports,” which has resulted in banks having an “incomplete picture of how much debt people have, along with their ability to pay it off.”
How will buy now, pay later affect credit going forward?
According to a yearlong analysis that FICO completed in tandem with BNPL company Affirm, it is projected that “Affirm customers with multiple BNPL loans would ‘most likely’ see their scores increase” once the models incorporate BNPL data, said Fast Company. However, for that to be the case, timely payment is a must. You will “need to stay on top of your BNPL payments to avoid late fees and potential negative impacts on your credit score,” said Bankrate.
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Additionally, the inclusion of buy now, pay later loans in credit scoring could give ”borrowers who have blemished, limited or no credit history'” a path toward building a better one, said Ethan Dornhelm, the vice president of FICO Scores and Predictive Analytics, to Fast Company.
That said, one of the risks of BNPL is that it generally lacks the “guardrails” that “more traditional methods of building credit” have in place to “help prevent consumers from overextending themselves financially,” said Douglas Boneparth, a certified financial planner and the founder of Bone Fide Wealth, to CNBC Make It. This may lead users to “overspend or take on numerous loans at once,” which could have negative credit implications.
When will BNPL credit reporting begin?
The new FICO scores — FICO Score 10 BNPL and FICO Score 10 T BNPL — that will incorporate BNPL data “become available in the fall,” said Money. From there, it’s “up to the three major credit reporting agencies (Experian, Equifax and TransUnion) to determine when to make the information available to consumers.”
It is unlikely you will see an immediate change to your credit. “Change comes slowly in the credit scoring world,” said Ted Rossman, a senior industry analyst for Bankrate, to the Times. “We’ll see gradual progress in the coming months, but this rollout will probably be measured in years, ultimately.”
What can you do to avoid negative credit effects from BNPL?
Managing buy now, pay later responsibly is similar to any other loans you may have. It is critical to “stay on top of your BNPL payments to avoid late fees and potential negative impacts on your credit score,” and “ensure you can comfortably afford the installment payments without overstretching your budget” before entering a plan, said Bankrate.
As BNPL enters your credit scoring equation, you will also want to keep an eye on it in your credit report. Make sure “all BNPL activity is accurately reflected,” and if you spot any errors, “notify the BNPL service provider and the credit reporting agency right away,” said Bankrate.
