BNPL Remains Absent from Most Consumers’ Credit Scores

Experian, Equifax, and TransUnion have recently begun allowing buy now, pay later (BNPL) lenders to report their short-term payment plans for consumers’ credit scores, but many of the largest BNPL companies like Affirm, Afterpay, and Klarna haven’t started doing so. Credit reporting firms and BNPL lenders are concerned that reporting the loans could lower credit scores, even for consumers that pay on time.

Since the pay-in-four plans are typically biweekly over six weeks, they are opened and closed more frequently than long-term loans, which can lower a borrowers’ credit score. The decades-old credit reporting and scoring system was designed before BNPL plans became popular, but last year BNPL companies originated $24 billion of pay-in-four plans.

The Wall Street Journal noted that the Consumer Financial Protection Bureau has urged credit reporting firms to develop ways to report BNPL loans. “We welcome credit reporting that is ‘fit for purpose’ by addressing short-term payment products that do not allow consumers to revolve into debt,” said an Afterpay spokeswoman.

“We have been actively engaged across the industry and with credit-reporting agencies to optimize reporting standards for buy now, pay later transactions, enable consumers to build their credit histories, and have on-time payments accurately and positively reflected on their scores,” said a spokesman for Affirm, a company that does report some longer-term installment loans.

Without reporting the short-term loans, lenders have a difficult time knowing exactly how much debt people have before determining if they should be approved for new credit. The CFPB said that the lack of reporting could have negative effects on consumers, especially those who make on-time payments and are trying to build their credit histories.

After getting BNPL on consumers’ credit reports, executives said it would take time for algorithms and scoring models to adjust to the new data, which “will allow the whole industry to move forward together with a clear understanding of how these loans impact consumers’ credit scores and overall credit risk,” said Ethan Dornhelm, vice president of scores at FICO.