Buy Now, Pay Later (BNPL) services can make point-of-sale purchases more affordable by spreading payments over multiple installments. But unlike other financing options, these payments are generally not reported to the credit bureaus, although the bureaus allow it.
According to a Wall Street Journal report, BNPL companies say it’s because they fear the reports could unintentionally lower users’ credit scores, even with on-time payments.
Key points to remember
- Buy Now, Pay Later (BNPL) services allow consumers to pay for goods and services over time rather than all at once, often without interest or fees.
- Although they are authorized to report user payments to the three national credit bureaus, many BNPL services still do not. The bureaus have even devised solutions to report payments without affecting consumer credit scores.
- BNPL companies are looking for solutions to ensure that their products can help users build credit.
BNPL services do not fit into the current credit scoring system
Earlier this year, Experian, Equifax and TransUnion began allowing BNPL companies to report user payments, but months later the major players have yet to do so.
The reason for this is a test cited by the Wall Street Journal, where a credit bureau reviewed more than 130 million BNPL loans and other short-term payment plans and found that 57% of consumers could suffer a significant drop in their credit rating which could remain for more than a year, despite having made their payments on time.
This is because while BNPL loans are technically installment loans, they do not work the same way as traditional installment loans. Payments are typically made every two weeks instead of monthly, and many BNPL loans are repaid in full in six weeks instead of 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 users’ accounts would drop significantly, which could cause long-term damage to credit rating.
Some consumer advocates have argued that BNPL loans should be treated like revolving lines of credit, but that would mean users are essentially maxing out their credit limit each time they choose a BNPL loan as their method of payment. A high credit utilization rate is generally correlated with a lower credit score. In addition, 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 credit products.
Credit bureaus and BNPL companies are at a standstill
The three national credit bureaus have offered solutions to the credit score problem, but while their answers help keep consumer scores from dropping, they don’t help improve credit scores either.
For example, Experian set up a separate BNPL office, where it would keep BNPL loan data separate from other consumer credit data. Equifax said it will list BNPL data in reports for lenders who request to see it, and TransUnion offers the ability to have BNPL loan information appear in credit reports without affecting consumer credit scores.
But BNPL firms balked at these solutions, saying they wanted a one-size-fits-all approach that would help users who pay on time improve their credit scores. This proposal would likely require new credit reporting models that treat BNPL loans separately from traditional installment loans and revolving lines of credit.
Until then, credit bureaus and BNPL companies remain at a standstill.