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TransUnion, one of the three major consumer credit bureaus in the United States, began including data from Buy Now, Pay Later (BNPL) companies in consumer credit reports in February 2022.
The news came shortly after Equifax, a competing credit bureau, announced a similar initiative. The inclusion of BNPL data is important because it has the potential to improve the credit scores of people discovering credit or rebuilding credit, but it could potentially encourage overspending and opening too many accounts.
Why Buy Now Pay Later accounts are so popular
BNPL plans, sometimes known as point-of-sale financing, have exploded in popularity in recent years as companies like Affirm, Klarna and Afterpay have formed partnerships with retailers, making enrollment at the one of the payment plans as simple as a few mouse clicks.
Buyers, especially younger consumers, have been drawn to installment plans for both their clear terms and relatively easy approvals. Notably, many BNPL plans do not require excellent credit or even a rigorous credit check to qualify, which can add to their appeal.
Some BNPL plans are interest-free to the consumer, and most loan provider fees are sponsored by the retailer as an incentive to make a purchase. A November 2021 YouGov/Forbes Advisor survey found that among respondents who had used a BNPL plan, 38% said the interest-free payments were what appealed to them.
However, a 2021 survey, Buy Now, Pay Later Statistics and User Habits by C+R Research, a market research firm, found that 59% of respondents said they had bought a useless item that they couldn’t. afford otherwise.
It was precisely these concerns that prompted the Consumer Financial Protection Bureau (CFPB) to issue orders in December 2021 to several BNPL companies, asking them to collect data on the benefits and harms that could result from underwriting. one of these loans.
The complexity of adding BNPL plans to credit reports
A big part of the reason it took so long to add BNPL plans to credit reports is that the data doesn’t fit neatly into the current system, which is set up to analyze revolving credit, like debit cards. credit, and long-term installment loans. , such as a mortgage or car loan.
“A consumer with normal purchasing behaviors could subscribe to several [BNPL] loans per year,” says Liz Pagel, Senior Vice President and Head of Consumer Lending at TransUnion. “Current credit models view this kind of origination behavior as inherently risky, when that’s really how these loans are meant to be used.”
The integration of BNPL accounts into a consumer’s credit file creates an opportunity for credit reporting models to adapt to these new payment plans.
Pagel says that while TransUnion will incorporate BNPL accounts into a consumer’s credit file, the data will be tagged and filtered so that potential lenders and credit reporting companies like FICO do not receive account information. BNPL until their respective systems are finished adapting to these new payment plans.
Benefits of BNPL accounts to build your credit
Equifax research, based on a study of anonymous consumer data from a BNPL provider, showed that including a BNPL plan’s on-time payment history can benefit consumers with a credit history. short. This can demonstrate responsible payment behavior and help boost their overall credit score.
“The main benefit is that consumers, especially those new to credit, can benefit from paying their debts to these lenders that they wouldn’t have gotten credit from before,” says Tom Aliff, leader of credit management consulting. risks at Equifax.
However, the key is on-time payment history. If you miss or fail to make a payment and the supplier reports this history to the credit bureau, it will likely negatively impact your credit scores. The Forbes Advisor/YouGov survey found that 27% of respondents said they had missed at least one BNPL payment, and 11% of those who had missed more than one.
“We believe this is the greatest financial inclusion opportunity we’ve seen in generations,” says Pagel. “There are lots of credit offers out there and this one is quite simple. If you use it responsibly, you should be able to build some credit.
Will Experian add BNPL to credit reports?
With Equifax and TransUnion announcing plans to include BNPL’s information, that leaves Experian as the only one that has yet to officially announce similar plans from the “big three” bureaus.
An Experian spokesperson said the company has been working with top BNPL providers since 2016 and will continue to work with partners in the financial services industry to include more BNPL information in credit reports.
“In short, there will be more to come from Experian on buy now, pay later very soon,” according to the spokesperson.