Understanding the implications of Buy Now, Pay Later (BNPL) loans on your financial health is crucial, especially now that they can appear on your credit report.
On Tuesday, the BNPL lender Affirm initiated the process of reporting details of all its lending products, including the widely used “Pay in 4” BNPL option, to the credit bureau Experian. On the same day, TransUnion, another key credit bureau, confirmed that it, too, is receiving BNPL transaction data from various lenders.
According to Experian, this initiative aims to enhance transparency within the BNPL sector, which has historically functioned outside the conventional credit framework, often not being reflected on credit reports, leading to a lack of comprehensive financial visibility for consumers.
The credit bureaus indicated that while these changes won’t have an immediate impact on credit scores, new scoring models are being developed to incorporate BNPL payment information.
“Currently, this data is only accessible to consumers,” TransUnion commented, adding that there’s a strong likelihood that BNPL data will eventually be integrated into broader credit scoring and modeling frameworks.
In March 2024, Experian made a similar move by adding data from Apple Pay Later to its credit reports, indicating a trend towards greater inclusivity in credit reporting.
As the credit bureaus enhance their tracking of BNPL products, it is possible that your credit score may soon be influenced by these loans.
“The major credit bureaus have been advocating for BNPL providers to share this data,” explained Chi Chi Wu, a senior attorney at the nonprofit National Consumer Law Center (NCLC). “Data is their primary asset, and the more they can gather, the more comprehensive their insights become.”
Understanding How BNPL Affects Your Credit Score
The BNPL lending phenomenon surged in 2019, gaining significant traction during the pandemic. Lenders such as Affirm, Klarna, and PayPal provide consumers with a straightforward method to divide their purchases into manageable installment payments at checkout, often with interest rates as low as 0%.
These BNPL companies generate revenue partly by charging retailers a fee for providing the installment payment option at checkout, which in turn boosts the retailer’s overall sales. Additionally, BNPL lenders may impose interest charges on consumers for using their services.
A key advantage of BNPL is the swift approval process, absence of late fees, and typically lower interest rates compared to conventional credit cards. Until recently, purchases made through BNPL programs were not included on credit reports, meaning they had no bearing on credit scores, unlike traditional loans or credit card transactions.
Critics within the lending sector have raised concerns that this exclusion creates an incomplete picture of a borrower’s financial health, as borrowers might hold multiple BNPL loans without lenders being aware of their total debt obligations.
However, this landscape is beginning to evolve.
Data from TransUnion indicates that nearly 130 million consumers in the U.S. have utilized a BNPL loan within the last year. Depending on the BNPL provider, these loans may now appear on both Experian and TransUnion credit reports.
Although the credit bureaus clarify that BNPL loans are not currently factored into credit score calculations, they have indicated that BNPL will likely play a role in future scoring models. Given the widespread use of BNPL, any changes could significantly impact consumer credit scores, positively or negatively.
The credit bureaus have committed to sharing only positive BNPL payment data, omitting any information regarding missed or late payments, for credit scoring purposes. However, this may not fully shield borrowers from potential adverse credit implications associated with BNPL loans.
Payment history significantly influences your credit score, but it is not the sole factor. Other critical aspects include the total debt amount, the length of your credit history, the number of new credit accounts, and the diversity of loan types.
Wu emphasizes that the entire credit reporting framework is based on monthly payment schedules. Since BNPL loans are typically repaid quickly with bi-weekly payments, they do not fit neatly into this existing system. It remains uncertain how incorporating BNPL data into credit scores will ultimately benefit consumers.
A representative from Experian stated, “We are dedicated to promoting transparency in the BNPL sector while ensuring that consumer credit scores remain unaffected negatively.”
Challenges Faced by BNPL Borrowers in Managing Credit
A report from the Consumer Financial Protection Bureau (CFPB) revealed that many BNPL users often find themselves in financially precarious situations, frequently classified as “subprime” or “deep subprime” borrowers. This means they typically possess credit scores ranging from 300 to 619, which disqualifies them from obtaining traditional personal loans.
The CFPB’s findings indicate that the average BNPL borrower is taking out over nine loans annually, with 63% of users holding multiple loans simultaneously. The average loan amount for BNPL is approximately $140, which may seem manageable but can accumulate quickly.
The credit bureaus assert that sharing BNPL data could potentially assist financially vulnerable individuals, especially those categorized as “credit invisible,” by contributing positively to their credit files.
The term “credit invisible” refers to about 25 million Americans—often low-income individuals and people of color—who lack a credit history altogether. This absence of a credit file hampers their ability to secure fundamental financial products such as credit cards, mortgages, and other forms of financing. However, the CFPB report indicates that only about 4% of BNPL users are truly credit invisible, suggesting that most BNPL borrowers already have established credit files.
In general, Wu advises caution when it comes to using BNPL services. She believes individuals should ideally avoid making purchases they cannot afford to pay outright. In her opinion, utilizing a credit card may provide a more secure option.
“If I were to advise a consumer on whether to pay with a credit card or BNPL, I would recommend using a credit card due to the federal protections it affords,” she explains.
For example, consumers have the right to dispute charges made on their credit cards, a privilege that is not available with BNPL transactions.
“Ultimately, the true beneficiaries of this situation are the credit bureaus,” Wu states.
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