The integration of Buy Now, Pay Later (BNPL) loans into credit scoring is set to impact the credit scores of millions of Americans. FICO, a leading credit scoring company, announced a new model that incorporates these short-term loans into consumer scores. Previously, BNPL loans were not typically included in credit scores, although some companies like Affirm have started reporting certain loans to credit bureaus like Experian.
The new FICO scores, available in the fall, aim to provide lenders with better insights into consumer repayment behaviors. However, not all BNPL providers share their data with credit bureaus, and adoption by lenders may take time.
BNPL loans differ from traditional credit as they often involve no or soft credit checks and are paid in installments over a short period. These loans are marketed as interest-free, making them an attractive alternative to credit cards. However, concerns about “loan stacking,” where consumers accumulate multiple loans, have been raised. This practice can lead to “phantom debt,” obscuring a consumer’s financial health.
FICO’s new model is designed to broaden credit access, especially for younger consumers or those with limited credit histories. Studies indicate that consumers with multiple BNPL loans may see their credit scores improve or remain stable, potentially increasing access to other credit forms like mortgages or car loans.
However, there are concerns about the potential negative impact on credit-restrained individuals. As Nadine Chabrier from the Center for Responsible Lending points out, the long-term effects of integrating BNPL loans into credit scores are uncertain. Many BNPL users already face financial challenges, including existing debt and lower credit scores.
Adam Rust from the Consumer Federation of America suggests that while the changes might not drastically alter existing credit profiles, the increased transparency could lead to more accurate assessments of consumer debt, helping to prevent individuals from overextending financially.
Overall, while integrating BNPL loans into credit scoring could offer benefits by improving visibility and credit access for some, it also poses risks that need careful consideration, particularly for vulnerable consumer groups.