Buy now, pay later (BNPL) services can make purchases more affordable at the point of sale by splitting payments into multiple installments. But unlike other funding options, these payments are typically not reported to the credit bureaus, although the credit bureaus allow them to be.
According to a Wall Street Journal report, BNPL companies say this is because they fear reporting will unintentionally lower users’ credit scores, even with on-time payments.
The central theses
- Buy now, pay later (BNPL) services allow consumers to pay for goods and services over a longer period of time rather than all at once, often with no interest or fees.
- Although they are allowed to report user payments to the three national credit bureaus, many BNPL services still do not. The bureaus have even developed solutions where payments can be reported without affecting consumers’ creditworthiness.
- BNPL companies are looking for solutions to ensure their products can help users build credit.
BNPL services do not fit into the current credit rating system
Earlier this year Experian, Equifax and TransUnion started allowing BNPL companies to report user payments, but months later the big players have yet to do so.
The reason is a test, cited by the Wall Street Journal, in which a credit bureau reviewed more than 130 million BNPL loans and other short-term payment plans and found that 57% of consumers could experience a significant deterioration in their credit rating despite staying longer than a year, despite paying on time .
This is because BNPL loans, while technically installment loans, do not work like traditional installment loans. Payments are typically bi-weekly rather than monthly, and many BNPL loans are fully paid off in six weeks rather than several months or even years.
With an average of 3.8 BNPL loans per user per year, according to C+R Research, The average age of user accounts would drop significantly, potentially causing long-term credit damage.
Some consumer advocates have argued that BNPL loans should be treated as revolving credit lines, but this would mean that users are essentially exhausting their credit limit every time they choose a BNPL loan as a payment method. A high credit utilization rate typically correlates with a lower credit score. Additionally, BNPL companies do not want to be subject to credit card regulations.
In other words, current credit scoring models are not designed to treat BNPL loans as separate lending products.
Credit bureaus and BNPL companies are at a standstill
The three national credit bureaus have proposed solutions to the credit rating problem, but while their responses will help keep consumer ratings from falling, they will not help improve credit scores either.
For example, Experian set up a separate BNPL office to keep BNPL credit data separate from other consumer credit data. Equifax said it would list BNPL data in reports for lenders who want to see it, and TransUnion offers the ability to have BNPL loan information appear on credit reports without hurting consumers’ credit scores.
But BNPL companies have resisted these solutions, saying they want a unified approach that will help users who pay on time improve their credit scores. This proposal would likely require new credit scoring models that treat BNPL loans separately from traditional installment loans and revolving credit lines.
Until then, credit bureaus and BNPL companies remain at a standstill.