Buy Now Pay Later (BNPL) deferred payment options are becoming increasingly popular with 56% of consumers using them, up from 38 % in July of 2020 — an increase of almost 50% in less than one year, according to a Motley Fool survey. Now, several credit bureaus are seeking to include these in credit reports.
BNPL is a type of deferred payment option that generally allows the consumer to split a purchase into smaller installments, typically four or less, often with a down payment of 25% due at checkout, according to the Consumer Financial Protection Bureau (CFPB.)
While these are not reported on credit reports yet, they are still loans. And in December 2021, the CFPB issued a series of orders to five companies — Affirm, Afterpay, Klarna, PayPal, and Zip — offering this option. The CFPB said it was concerned about accumulating debt, regulatory arbitrage and data harvesting in a consumer credit market already quickly changing with technology, as GOBankingRates previously reported.
“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too,” CFPB Director Rohit Chopra, said in a statement at the time. “We have ordered Affirm, Afterpay, Klarna, PayPal and Zip to submit information so that we can report to the public about industry practices and risks.”
Credit bureaus who now want to include BNPL on credit reports include Equifax, Experian and TransUnion, who in February told GOBankingRates that BNPL’s inclusion in reports is likely to benefit the populations most in need of new tools to build and improve their credit.
Ted Rossman, senior industry analyst, CreditCards.com, told GOBankingRates that it makes a lot of sense to add BNPL to credit reports and scores, as BNPL is debt just like a credit card.
He added that while it seems fair to include it in credit reports and scores, the main issue is how to fit this new payment method into the traditional credit reporting structure.
“There are challenges with respect to frequently opening and closing accounts and how credit utilization is treated. BNPL loans aren’t apples-to-apples with other financial products,” Rossman said. “If not done properly, adding BNPL could hurt consumers if it looks like they’re opening a lot of accounts in short order and using up a lot of their available credit. This is why Experian and TransUnion are keeping BNPL records separate from traditional credit metrics for now, and while Equifax is integrating this data, it acknowledges that it could be a slow process to scale.”
Rossman explained that in general, it’s a good idea to include this information because it gives a fuller picture of a consumer’s finances. “In theory, they should be rewarded for paying BNPL plans on time – just like other loans – and penalized if they fall behind. But there are some operational challenges that mean that this data won’t be widely used for a while yet,” he added.
In January, Experian also announced its plan to bring more transparency to the BNPL industry, saying that in the spring of 2022, Experian will debut The Buy Now Pay Later Bureau, a first-of-its-kind specialty bureau, which will provide visibility so lenders can help further financial inclusion and better assess risk while preventing negative impact to consumer credit scores, according to a press release.
While Experian has worked with some of the largest BNPL providers since 2016, the majority of BNPL accounts are not reported to credit bureaus because today’s most commonly used score models are designed to predict risk based on payment behaviors of mainstream credit products, not BNPL accounts, according to the release. “Justifiable concerns about the negative impact to consumer credit scores has prevented many BNPL providers from reporting information. In turn, this has inhibited traditional lenders from gaining a complete view of consumers’ financial obligations, Experian said in the release.
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 tradeline, which shows information about a specific credit account.
CNBC explains that 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.