What You Need To Know

When shopping online with a major retailer, you’ve probably noticed the option to utilize a ‘buy now, pay later’ loan to finance your purchase. These loans have a fixed number of installment payments, sometimes with no interest, over the course of several weeks or months.

The popularity of BNPL loans skyrocketed over the past year as people spent more time shopping online due to the pandemic. A recent study by Ascent, a Motley Fool service, found that 56{ac23b82de22bd478cde2a3afa9e55fd5f696f5668b46466ac4c8be2ee1b69550} of consumers reported using a BNPL service at least once, up from 38{ac23b82de22bd478cde2a3afa9e55fd5f696f5668b46466ac4c8be2ee1b69550} the previous year, reflecting an increase of nearly 48{ac23b82de22bd478cde2a3afa9e55fd5f696f5668b46466ac4c8be2ee1b69550}.

Consumers should also be aware of the potential risks and downsides of using these types of loans. Unlike credit cards, many BNPL loans, especially short term loans, are not reported to credit bureaus. As a result, when younger or subprime borrowers opt for BNPL loans, their credit scores usually won’t be affected by an on-time BNPL payment history. 

However, the three major U.S. credit bureaus — Equifax, Experian and TransUnion — are seeking to change this by including information concerning consumers’ BNPL loans on credit reports. 

News of these changes come just months after the Consumer Financial Protection Bureau announced in December that it would be launching an inquiry into the five major BNPL providers, requiring that they submit information so the Bureau could keep the public informed about current industry practices and potential risks.

Below Select looks at how Equifax, Experian and TransUnion plan on reporting BNPL loans on consumer credit reports.

In February, TransUnion announced it was going to work with FICO and VantageScore to include point-of-sale financing in its future credit models.

While it may seem like a welcome change for credit bureaus to use BNPL loans in the calculation of an individual’s FICO or VantageScore, these loans have the potential to reduce consumers’ FICO credit scores even if they are paying them off on time. The reason: BNPL loans are typically short-term installment loans.

The length of your credit history is one factor that is used to calculate your FICO score — it accounts for 15{ac23b82de22bd478cde2a3afa9e55fd5f696f5668b46466ac4c8be2ee1b69550} of your score. When you pay off a short-term BNPL loan, it means you’re closing a line of credit, which can reduce your average credit age and potentially affect your overall FICO score. 

TransUnion is attempting to address this issue by not counting all BNPL loans in the calculation of an individual’s core credit score.

Instead, BNPL loans will be mentioned in a separate portion of the credit report, says Liz Pagel, Senior Vice President at TransUnion. As a result, a consumer’s BNPL loan history will not be used to calculate their credit score but will still be included on their credit report.

While TransUnion plans to use BNPL loans in the calculation of consumers’ credit scores in the future, Pagel predicts that it could take a few years for the credit bureaus and reporting models to adjust. Since BNPL loans can reduce average credit age, she suggests that going forward, credit bureaus should omit any information about a person’s BNPL loans that could unfairly decrease someone’s credit score.

According to Pagel, it will be up to the lender as to whether or not they wish to know more information regarding a consumer’s BNPL history, especially if they think that information is necessary to make lending decisions. 

Pagel says that BNPL loans are currently reported on a monthly basis, however, the credit bureau plans to report information on BNPL loans on a bi-weekly basis in the future because of the way these loans are structured — many require four installment payments over the course of six or eight weeks.

Since most credit reporting is conducted on a monthly basis, BNPL loans may end up being paid off shortly after they appear on your credit report. Therefore, TransUnion intends to report information on BNPL loans more frequently so consumers can see the positive impact of paying on time and in full sooner.

Experian

Experian announced in January that it would launch ‘The Buy, Now Pay Later’ bureau, which will collect information about the total number of an individual’s outstanding BNPL loans as well as their total BNPL loan amounts and the status of payments. Like TransUnion, Experian will not be including information about BNPL loans in the calculation of core credit scores, at least for now. 

According to an Experian press release, “To protect consumer credit scores from immediate negative impact, detailed information related to each BNPL transaction will be stored separately from Experian’s core credit bureau data.”

There is, of course, a future possibility that BNPL loans could be reported in a consumer’s core credit data, according to Greg Wright, Chief Product Officer at Experian.

For now, Experian plans to keep BNPL information separate from core credit bureau information because of how BNPL loans would be reported under traditional methods. In other words, since credit cards are considered to be a revolving line of credit, different transactions on your credit card will appear on one trade line, which shows information about a specific credit account.

On the other hand, multiple transactions made with different BNPL loans appear as different tradelines on your credit report. To certain lenders, having many different tradelines could indicate potentially risky behavior.

According to Wright, Experian created a separate bureau for BNPL loans so that credit information from these loans would not negatively impact credit scores. Experian also plans to report information to this specialty bureau in real-time instead of the typical 30-day timeframe.

Equifax

On Feb. 28, Equifax began allowing BNPL providers to report ‘pay-in-4’ loans. According to Tom Aliff, Risk Consulting Leader at Equifax, consumers who use BNPL loans will have them reported as either revolving or installment accounts depending on how the BNPL provider chooses to list them.

With Equifax, unlike with TransUnion and Experian, your BNPL provider could choose to include BNPL loans in the calculation of your core credit score. 

According to an Equifax press release, “The new industry code will classify BNPL tradelines including payment history and give Equifax customers and scoring partners the ability to view and decide how to incorporate the information into their decisioning to potentially open up new mainstream financial services opportunities to more consumers.”

Equifax runs bi-weekly reporting of BNPL loans. The credit bureau recently conducted a study on the impact BNPL loans have on consumers’ credit reports, looking at individuals who had at least one BNPL loan reported as a line of credit on their report. The average duration was four months, longer than the typical pay-in-4 BNPL loan. The study also found that individuals who paid off their BNPL loans on time had an average FICO score increase of 13 points.

With each of the three major credit bureaus planning to collect information on BNPL loans, consumers who frequently use them could soon benefit from lenders looking at it to determine their creditworthiness.

Yet not all of the credit bureaus plan to use BNPL loan information when calculating a consumer’s core credit score — TransUnion and Experian will keep this separate while Equifax will let BNPL providers choose how they want loans to be reported on consumer credit reports.

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