Consumers grab on to ‘buy now, pay later’ appeal
‘Buy now, pay later’ options offer customers flexibility in paying for items and services they want, but experts warn to proceed with caution.
New credit scoring will soon include buy now pay later, a welcome change for lenders who don’t want to make risky loans but maybe not so much for the growing share of users who pay late.
Major credit scoring company FICO said it would launch a credit score model this fall that includes BNPL loans, which allow people to make purchases and typically pay over four installments in six weeks. Up until now, BNPL hasn’t been included in credit scoring. It has barely even been reported to credit agencies. Affirm said only earlier this year that it would begin reporting to Experian and TransUnion, and Klarna sends some data to TransUnion.
BNPL’s popularity has grown quickly, partly because those super-short-term loans went unnoticed by credit bureaus. With that about to change, experts say, consumers must start paying more attention to their BNPL loans.
It’s a “double-edged sword,” said Bobby Ritterbeck, president at lender Best Egg. “For disciplined users, this creates an incredible opportunity to build credit through responsible BNPL behavior. But for those with irregular payment patterns or high outstanding balances, it will have the opposite effect.”
How many people could be hurt by BNPL reporting?
A survey by LendingTree of 2,000 adults in early April showed almost half of respondents have used BNPL, and 60% said they’ve held multiple BNPL loans at one time. Nearly a quarter (23%) have held three or more.
BNPL users also tend to lean younger, surveys show.
“BNPL’s popularity has exploded in part because it’s easier to get than many other loan types,” LendingTree said. “However, that easy access also makes it dangerous. Getting more than one loan at a time makes managing them more challenging.”
An alarming 41% of users paid late at least once in the past year, up from 34% a year ago, it said.
Those missed payments may not have affected your credit score before, but they will soon, experts warn. “Thirty-five percent of your FICO score is paying your bills on time,” said Rob Burnette, investment advisor representative at Outlook Financial Center.
Why are credit scores important?
Credit scores are used to determine how much you can borrow and how much it will cost you. They help determine “interest rates for loans and mortgages, your insurance premiums, rental approvals, credit limits on credit cards, and can potentially impact employment,” said Haiyan Huang, chief credit officer at Prosper.
What should BNPL users do to preserve their credit scores?
- Don’t buy what you can’t afford. “You should have the money to pay it off on time,” Burnette said. “If not, your credit score will take a hit. However, on the flip side, if you pay it off in a timely manner, your credit score may increase.”
- Don’t open too many BNPL loans. “Just as it wouldn’t be a smart idea to open too many credit cards, the same can be said for BNPL loans,” Burnette said.
- Before using BNPL, consider your credit score. “If consumers believe that a BNPL transaction will appear on their credit report, I think it gives them a critical piece of information needed in a buying decision,” said Josh Miller, head of consumer acquisition, marketing and product development at KeyBank.
- Set up a BNPL budget. If you find yourself using BNPL loans, add it to your monthly budget. “Set an amount you’re comfortable with and don’t go over,” Burnette said.
“Now is the time to act − audit your finances, identify any open BNPL loans, and catch up on missed payments,” Ritterbeck said. “Consider setting up autopay or reminders so future payments stay on track.
“My biggest piece of advice is to treat BNPL like any other form of credit, because it will soon carry the same weight in determining your financial future.”
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
