Get ready for a big change impacting how lenders see your financial habits! Starting this fall, FICO, a leading credit scoring company, will begin factoring “Buy Now, Pay Later” (BNPL) activity into its widely used credit score models. This marks a significant shift, as these popular short-term installment plans have historically operated outside traditional credit reporting systems. Millions of Americans use BNPL, often for quick purchases like groceries or clothing, splitting costs over a few weeks. Now, responsible use could help build credit, while missed payments will likely hurt your score. Understanding this change is essential for managing your financial health.
The Rise of Buy Now, Pay Later
Buy Now, Pay Later services have surged in popularity across the United States. Companies like Affirm and Klarna offer easy-to-access installment plans. Users typically split purchases into four interest-free payments over about six weeks. Longer-term options may also be available, sometimes with interest.
Why is BNPL so popular? Many consumers cite convenience and the ability to spread costs without relying on traditional credit cards. Federal Reserve data shows 15% of American adults used BNPL in the past year. Usage is notably high among younger generations, particularly Gen Z and millennials. Low- and middle-income individuals, women, and minority groups also use these services frequently. The average BNPL loan is relatively small, around $142.
Despite its convenience, BNPL has created a “blind spot” for lenders. Since this payment activity wasn’t typically reported to credit bureaus, lenders lacked a complete picture of a consumer’s total debt and repayment behavior. FICO’s decision aims to close this gap.
How BNPL Data Will Affect Your Credit Score
FICO’s new scoring models will incorporate data reflecting your Buy Now, Pay Later payment history. This means making payments on time, just like with a credit card or loan, can potentially benefit your credit score. For young consumers or those with limited credit history, responsible BNPL use could serve as an entryway to building a positive credit profile. FICO’s study with Affirm data showed that most responsible users saw minimal score changes, but it could help establish a score.
However, the impact is a “double-edged sword.” If you miss or are late on BNPL payments, this negative activity will now appear on your credit report and lower your FICO score. Payment history is the biggest factor in credit scoring, accounting for 35% of your FICO score. Data indicates this is a significant risk: almost a quarter of BNPL users reported a late payment in the last year.
A lower credit score can make it harder and more expensive to get approved for important loans like mortgages, car loans, or even apartment rentals. It can also influence insurance rates and credit card approvals.
Potential Benefits for Some Users
For individuals who consistently make all their BNPL payments on time, the inclusion of this data could be positive. It provides a new pathway for demonstrating creditworthiness, especially if you don’t use traditional credit cards frequently. Some BNPL users who manage multiple accounts responsibly might even see stable or increased scores under the new model, according to a FICO study.
Risks of Missed Payments and Loan Stacking
A major concern is the prevalence of late payments and “loan stacking.” Loan stacking happens when consumers take out multiple BNPL loans simultaneously from different providers. Since this debt hasn’t always been reported, it could create “phantom debt” – obligations hidden from traditional credit checks. Managing several different payment schedules across various apps can be difficult, increasing the likelihood of missing a payment. A survey found 60% of users held multiple BNPL loans at once, with nearly a quarter managing three or more.
Missed payments on these stacked loans, now being reported, could significantly harm a score. Experts worry this change could disproportionately affect vulnerable populations, including those already facing financial constraints or with existing debt, like some women of color who use BNPL more frequently.
What This Means for Consumers
The key takeaway is clear: treat Buy Now, Pay Later like any other form of credit. While its ease of use is appealing, the financial obligation is real and will soon be widely visible to lenders.
Actionable Advice for BNPL Users
To protect your credit score in light of this change, consider these steps:
Budget Carefully: Only use BNPL for purchases you know you can comfortably repay on time. Integrate BNPL payments into your monthly budget.
Limit Multiple Loans: Avoid taking out numerous BNPL loans at once. Juggling several repayment schedules increases the risk of missing a payment.
Know Your Repayments: Be aware of upcoming payment due dates for all your BNPL plans. Set reminders or use auto-pay if possible.
Check Reporting Status: While not all BNPL providers report data yet, major ones are starting. Assume your activity could impact your credit score.
Audit Finances: Review any open BNPL loans now. Catch up on any missed payments immediately before the new scoring models take full effect.
The Road Ahead: Adoption and Transparency
The new FICO scores incorporating BNPL data are set to become available to lenders in the fall. However, widespread adoption may take time. Not all BNPL companies currently report consumer data to credit bureaus, and not all lenders will immediately switch to the new FICO models. This means the full impact across the lending industry may unfold gradually.
Increased transparency is a positive outcome of this change. Lenders will gain a more accurate view of a consumer’s total financial picture. This can help prevent individuals from taking on more debt than they can manage. However, concerns remain about consumer protections, as BNPL services haven’t historically offered the same dispute resolution rights as credit cards, although the CFPB is working towards aligning regulations.
The inclusion of BNPL data in credit scores is a significant evolution in consumer finance. It reflects the growing prominence of these payment methods and aims to provide lenders with better tools to assess creditworthiness. For consumers, it underscores the importance of responsible repayment across all financial obligations, big or small.
Frequently Asked Questions
How will Buy Now Pay Later affect my FICO credit score?
Beginning this fall, FICO will incorporate BNPL payment data into some scoring models. Making your BNPL payments on time can potentially help your score, especially for those with limited credit history. Conversely, missing payments or paying late will* likely cause your credit score to decrease, similar to late payments on credit cards or loans.
Which Buy Now Pay Later companies report data to credit bureaus?
Historically, most BNPL providers did not report data to the major credit bureaus (Experian, TransUnion, Equifax). However, this is changing. Major providers like Affirm have begun reporting to Experian and TransUnion. Klarna is also sending some data to TransUnion. This trend is expected to continue as FICO and other scoring models integrate this information.
How can I use Buy Now Pay Later without hurting my credit score?
To use BNPL responsibly and protect your credit score, treat it like any other loan. Only use it for purchases you can definitely afford to repay on time. Avoid taking out multiple BNPL loans simultaneously, as managing many payments increases the risk of missed deadlines. Budget for your BNPL repayments and set reminders or use auto-pay to ensure payments are never late.
