Buy Now, Pay Later (BNPL) services can make point-of-sale purchases more accessible by expanding payments into multiple installments. But unlike other financing options, these payments are typically not reported to the credit bureaus, although the credit bureaus allow it to be.
According to a Wall Street Journal report, BNPL companies say they fear the reports will inadvertently lower users’ credit scores, even with on-time payments.
BNPL services do not match the current credit rating system
Earlier this year, Experian, Equifax, and TransUnion started allowing BNPL companies to report user payments, but months later, the big players still haven’t.
The reason is cited by the Wall Street Journal Test that it is a credit reporting agency analyzed more than 130 million BNPL loans and other short-term payment plans and found that 57% of consumers could experience a significant drop in their credit score which can last for more than a year despite making your payments on time.
This is because, although BNPL loans are technically installment loans, they do not work like traditional installment loans. Payments are usually fortnightly rather than monthly, and many BNPL loans pay off in full within six weeks rather than 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 user accounts would drop significantly, which could result in long-term damage to credibility.
Some consumer advocates have argued that BNPL loans should be considered as revolving lines of credit, but this would mean that users would essentially exhaust their credit limit every time they choose a BNPL loan as a payment method. A high credit utilization rate typically correlates with a lower credit score. Furthermore, BNPL companies do not want to be subject to credit card regulations.
In other words, current credit scoring models are not designed to treat BNPL loans as separate loan products.
BNPL companies and credit agencies are paralyzed
The three national credit bureaus have proposed solutions to the creditworthiness problem, but while their responses will help prevent consumer creditworthiness from falling, they will not help improve your creditworthiness either.
Experian, for example, has established a separate BNPL department to keep BNPL loan data separate from other consumer credit data. Equifax said it would list BNPL data on reports for lenders who want to see it, and TransUnion offers the ability to show BNPL loan information on credit reports without harming consumers’ credit scores.
But the BNPL businesses have resisted these solutions, saying they want a unified approach that helps current payers improve their credit scores. Such a proposal would likely require new credit scoring models that treat BNPL loans separately from traditional installment loans and revolving credit lines.
Until then, credit bureaus and BNPL companies remain stagnant.