Buy now, pay later (BNPL) services can make point-of-sale purchases more affordable by stretching out payments into multiple installments. But unlike with other financing options, these payments typically don't get reported to the credit bureaus, despite the bureaus allowing it.
According to a report by the Wall Street Journal, BNPL companies are saying it's because they're worried reporting will unintentionally lower users' credit scores, even with on-time payments.
- 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.
- Despite being allowed to report user payments to the three national credit bureaus, many BNPL services are still not doing so. The bureaus have even designed solutions where payments can be reported without impacting consumer credit scores.
- BNPL companies are seeking solutions to ensure that their products can help users build credit.
BNPL Services Don't Fit in the Current Credit Scoring System
Earlier this year, Experian, Equifax, and TransUnion began allowing BNPL companies to report user payments, but months later, major players have yet to do so.
The reason is a test cited by the Wall Street Journal, where a credit reporting agency reviewed more than 130 million BNPL loans and other short-term payment plans and found that 57% of the consumers could experience a material decrease in their credit scores that could remain for more than a year, despite making their payments on time.
This is due to the fact that while BNPL loans are technically installment loans, they don't function the same way as traditional installment loans. Payments are typically made on a biweekly basis instead of monthly, and many BNPL loans are paid in full within six weeks instead of 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 users' accounts would drop significantly, potentially causing long-term credit score damage.
Some consumer advocates have argued that BNPL loans should be treated as revolving lines of credit, but doing so would mean that users are essentially maxing out their credit limit every time they choose a BNPL loan as their payment method. A high credit utilization rate typically correlates with a lower credit score. Additionally, BNPL companies don't want to be subject to credit card regulations.
In other words, the current credit scoring models aren't built to treat BNPL loans as separate credit products.
Credit Bureaus and BNPL Companies Are at a Standstill
The three national credit bureaus have proposed solutions to the problem of credit scoring, but while their answers help prevent consumer scores from going down, they're not helping boost credit scores either.
For example, Experian set up a separate BNPL bureau, where it would maintain BNPL loan data separate from consumers' other credit data. Equifax said it would list BNPL data in reports for lenders who request to see them, and TransUnion is offering the ability to have BNPL loan information show up in credit reports without affecting consumer credit scores.
But BNPL companies have balked at those solutions, saying that they want a uniform 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 lines of credit.
Until then, credit bureaus and BNPL companies remain at a standstill.