Buy-now-pay-later (BNPL) is an increasingly attractive option for customers to pay for purchases. These providers offer instant approval and zero-interest installment payments, making them an attractive option for buyers who may have liquidity or credit issues. Plus, until recently, BNPL providers did not report to credit bureaus.
This spring, however, the big three reporting agencies announced plans to incorporate BNPL loans into their reporting. These point-of-sale financing options will play a larger role in a user’s credit history going forward, and businesses need to know what to expect.
How BNPL affects credit
Until recently, BNPL did not interact much with a customer’s credit score. Providers didn’t require a hard credit check during their approval process, which meant applying for BNPL did not hurt your credit score. Thus, borrowers with less than excellent credit didn’t have to worry as much about how credit affected their approval, and whether applying for BNPL financing would drag down their score.
Most BNPL providers did not report to credit bureaus until recently. This made it easier for people with credit issues to keep this form of financing separate from their existing credit history. Now we can expect BNPL to have a larger role in a customers’ credit score and history as providers begin reporting to agencies, albeit with some changes.
Current credit reporting and BNPL
Previous to the credit bureaus’ incorporation on BNPL, the payment option did not affect credit much. Most reporting only happened in the most severe cases of missed payments, if at all. This also meant that on-time payments didn’t show up on your credit report, losing an opportunity for you to improve your score. There were downsides and upsides, but essentially the world of BNPL financing worked separately from typical lenders.
Upcoming changes to reporting
In December 2021, the Consumer Financial Protection Bureau urged credit bureaus to standardize how they incorporate BNPL loans into their reporting. In the months following, the major credit reporting agencies have all announced plans to incorporate BNPL loan information into their credit reports and scores. Now each of the three incorporate BNPL into their reporting, and these methods vary between agencies as well.
This is a marked difference between how BNPL first interacted with credit, which is to say it had little if any interaction with your credit history. Now, credit agencies incorporate this information into a person’s core file, albeit with its own classification to help bureaus track this information. The industry still has yet to fully recalibrate its reporting and the role BNPL plays in it. Nor have the three agencies agreed on a measurement standard. This means that your BNPL usage might change your credit information across all three bureaus in different ways.
It’s a good idea to monitor your credit score. You can also sign up for a credit monitoring service. While free credit monitoring services will typically only track your credit report with one of the bureaus, you can opt for a paid service that reviews all three bureau’s credit reports. Some paid services also offer security benefits like fraud alerts, social security number tracking and identity theft insurance.
What merchants and consumers should take away
Both merchants and consumers have a lot to consider now that BNPL providers are working more closely with credit bureaus. It may not become more difficult for people to get approval for BNPL loans if providers keep to their existing business strategies. The ramifications of missing payments, defaulting on your BNPL loan, or opening too many BNPL payment lines could become more severe, however.
Merchants may see customers become more reluctant to pursue BNPL as often if they’re concerned about credit issues. The standards providers use for approval decisions may not change, but it’s also possible that they may want to pull hard credit checks as the credit rating landscape changes. The ways in which bureaus report BNPL credit history is still in transition: TransUnion plans to add these loans to a person’s credit report, but will not use them to calculate credit scores. Experian plans to let BNPL companies to report repayments as revolving or installment accounts depending on their preference.
Changes to BNPL: what to expect
The speed and convenience of BNPL are attractive to many customers who want to pay for big-ticket items over time. The credit implications of BNPL were perhaps more straightforward in the past: lenders took a soft credit pull and did not report payments to bureaus. This is beginning to change, however, and bureaus are learning how to adapt. Ultimately this may impact consumers more than your business, since BNPL will become a bigger part of a more comprehensive credit history.