Major Credit Scoring Changes are Coming to Buy Now, Pay Later Loans

Buy now, pay later (BNPL) loans are increasingly common and very popular. They let you break up your purchases into multiple smaller segments, typically don't charge interest, and may not even require a credit check. You can use them for larger purchases, like appliances, and everyday purchases, like your groceries. 

While technically a credit product, BNPL loans have yet to be accounted for in almost any credit scoring models. In other words, using BNPL loans responsibly to this point hasn't done anything to improve your credit score, and conversely, abusing BNPL loans hasn't hurt your credit score either. But that's about to change.

Later this year, FICO plans to start rolling out two new credit scoring models that incorporate BNPL data. If you use BNPL loans regularly, it's a good idea to be prepared for this change. Here's what you need to know.

Why haven't BNPL loans been on my credit report before?

Credit reporting may seem like a fairly straightforward thing (I do something with a credit product and the credit bureaus know about it immediately), but it's pretty complicated. 

First of all, it's a lender's responsibility to report your credit activity to the credit bureaus in the first place, and many of these new BNPL providers haven't been doing that.

Secondly, BNPL loans are radically different from traditional credit products. The loans are extremely short-term and many consumers use multiple BNPL loans at a time. Consider that opening a new line of credit and maxing out your credit limit are both bad for your credit health, things that would be happening frequently if BNPL loans were treated the same as regular credit products.

So the answer to the question, "Why are we just now factoring BNPL into credit scores?" is that it takes a while for a credit scoring agency like FICO to perfect a model that fairly accounts for the nuances of something like BNPL, all while getting buy-in from the BNPL lenders.

How will this change impact my credit score?

If you've never used a BNPL loan, these updates won't have any impact on you or your credit. It's also really important to remember that there are a lot of credit scoring models out there. A new credit scoring model that incorporate BNPL data is only meaningful to you if you're trying to get credit from a lender that actually uses that model. So in the short-term, at least, even once these models are live there's a good chance that you'll see no impact on your ability access credit.

That said, it's very likely that if these updated models work out, incorporating BNPL data will eventually become the norm in all credit scoring models. So assuming you do run into one of these models in the wild, what does it mean for you?

Using BNPL responsibly may improve your credit score

A study from the Consumer Financial Protection Bureau (CFPB) earlier this year found that approximately two-thirds of BNPL loans went to consumers with poor credit. If you don't have access to traditional credit because of a poor credit score, it makes sense to turn to a lending product that has a very low (or nonexistent) credit requirement.

As such, BNPL could become a pathway to building better credit and gaining access to more traditional forms of credit, but that's only if you use BNPL responsibly and make your required payments on time consistently. That CFPB study also revealed that (unsurprisingly) BNPL loans are most popular with young borrowers, ages 18-24. For young consumers, BNPL could eventually become a routine part of their credit-building journey.

Abusing BNPL may have greater consequences

According to a study from Lending Tree, 41% of users who have used a BNPL loan have been late of their payments at least once in the past year. Meanwhile, that CFPB study also found that consumers who use BNPL loans tend to have substantially larger balances on loans and credit cards compared to consumers who don't use BNPL.

Which speaks to the double-edged sword of BNPL: it can be a gateway to credit for consumers who are otherwise unable to access traditional credit products, but can just as easily be a pit of quicksand that lets overextended consumers get deeper and deeper in debt.

Using BNPL loans that you can't really afford puts your good credit at risk of becoming bad credit, and your bad credit at risk of becoming terrible credit. And the worse your score gets, the farther the consequences can potentially spread to unexpected areas of your life.

So how should I feel about all of this?

Used responsibly, BNPL loans are a perfectly reasonable way to soften the impact of a major purchase or help navigate life in-between paychecks. If you're relying heavily on BNPL, however, you may be setting yourself up for future danger (if things aren't bad already). Ideally, your income matches (or exceeds) your expenses, and you're able to save up for those larger expenses. But life is rarely ideal, so consider the following:

• If you're using BNPL loans because they're convenient...consider adjusting your spending and budget so you can afford to make those purchases all at once without needing to reply on credit.
• If you're using BNPL loans because you have too much debt to use traditional credit products...consider making debt repayment a priority. Getting out of the hole may require short-term sacrifices, but the flexibility and peace of mind you'll gain is priceless. And if you need help making it happen, MMI offers a variety of proven debt relief solutions to fit your unique needs.
• If you're using BNPL loans because you're caught in a loan cycle and need new loans to offset the cost of old loans...consider working with a certified financial counselor from MMI. We can help you review your situation, provide resources, and create an action plan to break the cycle for good.