Buy Now Pay Later (BNPL) deferred payment options are becoming increasingly popular with 56% of consumers using them, up from 38% in July 2020, an increase of nearly 50% in less than a year, according to a Motley Fool investigation. Now many credit bureaus are looking to include them in credit reports.
See: 7 Buy Now Pay Later apps and their participating retailers
Learn: PayPal Pay in 4 Review – What to Know About This “Buy Now, Pay Later” Option
BNPL is a type of deferred payment option that typically allows the consumer to split a purchase into multiple installments, usually four or less, often with a 25% down payment due at checkout, according to the Consumer Financial Protection Bureau (CFPB).
Although these are not yet flagged in credit reports, 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 expressed concern about debt accumulation, regulatory arbitrage and data collection in a consumer credit market that is already rapidly changing with technology, as GOBaningRates has 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 also gets the debt immediately,” said the CFPB manager. , Rohit Chopra, 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 on industry practices and risks.”
Credit bureaus that now want to include BNPL in credit reports include Equifax, Experian and TransUnion, which told GOBankingRates in February that including BNPL in reports would likely benefit populations who most need new tools to build and improve their credit.
Ted Rossman, senior industry analyst, CreditCards.com, told GOBankingRates that adding BNPL to credit reports and scores makes perfect sense because 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 integrate this new method of payment into the traditional structure of credit reports.
“There are challenges with frequent opening and closing of accounts and how credit usage is handled. BNPL loans are not apples to apples with other financial products,” Rossman said, “If not done correctly, adding BNPL could hurt consumers if it appears they are opening a lot of accounts in a short time and using up a lot of their available credit. That’s why Experian and TransUnion are currently keeping BNPL records separate from traditional credit metrics, and while Equifax does integrate that data, it recognizes that the process may be slow to evolve.
Rossman explained that in general, it’s a good idea to include this information because it gives a more complete 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 operational challenges that mean this data won’t be widely used for some time yet,” he added.
In January, Experian also announced plans to bring more transparency to the BNPL industry, saying that in the spring of 2022, Experian will launch The Buy Now Pay Later Bureau, a first-of-its-kind specialist bureau, which will provide visibility so that lenders can help strengthen financial inclusion and better assess risk while avoiding a negative impact on 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 the most commonly used scoring models today are designed to predict risk based on payment behaviors of traditional credit products, not BNPL accounts. according to the press release. “Justified concerns about the negative impact on consumer credit ratings have prevented many BNPL providers from disclosing information. This, in turn, has prevented traditional lenders from getting a full view of consumers’ financial obligations, Experian said in the statement.
For now, Experian plans to separate BNPL information from basic credit bureau information due to how BNPL loans would be reported using traditional methods. In other words, since credit cards are considered a revolving line of credit, different transactions on your credit card will appear on a business line, which displays information about a specific credit account.
Learn: Affirm, Afterpay and Klarna: do they really save more than using a credit card?
Discover: Attitudes towards BNPL differ across generations, but usage is similar
CNBC explains that multiple transactions made with different BNPL loans appear as different trade lines on your credit report. For some lenders, having many different trade lines could indicate potentially risky behavior.
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