BNPL may not be the best thing that happened to lending, but credit bureau reporting for BNPL consumer loans may be the best thing that happened to Buy Now, Pay Later lending.
The NYTimes covered this emerging trend in this article.
For now, many of these smaller, short-term loans are not reported in a consistent way to credit bureaus, so borrowers do not build a formal credit history by using them.
But as the loans become more mainstream, that is changing. The major credit bureaus are working to include more pay-later loans in consumer credit reports. Equifax, for instance, said two weeks ago that it had created formal standards for reporting the loans and expected to begin adding them to its consumer credit files in late February.
At the three main credit reporting agencies in the United States, each is working towards implementing credit reports on BNPL loans.
Experian said it already includes data on pay-later credit, including short-term loans, in its credit reports and is working to add more.
TransUnion is “well on our way” to including such data, said Liz Pagel, senior vice president and consumer lending business leader at the credit reporting company.
Equifax says that is a good thing because lender reporting of on-time payments can help shoppers build credit histories. “We have been emphasizing the opportunity to report, in order for consumers to benefit,” said Mark Luber, chief product officer for United States information solutions at Equifax.
One of the benefits will be to help consumers improve (or become scorable on) their cherished FICO Scores.
Equifax says a study of anonymous pay-later data found that a majority of shoppers were helped by having an account with on-time payments in their credit file, with an average FICO credit score increase of 13 points. People with scant credit histories, who may not qualify for traditional loans, had an average FICO score increase of twenty-one points when on-time pay-later payments were added to their files. (The average basic FICO score is 716; generally, scores of 670 or above are considered good).
But, of course, for that to help, BNPL borrowers must pay attention to payment dates!
And BNPL lenders are not against reporting, if they follow Affirm’s lead.
Reporting pay-later loans to credit bureaus helps protect consumers and “enables all responsible underwriters to more accurately assess risk and help prevent consumers from being overextended,” Affirm said in an email.
But if you follow FICO’s advice, it boils down to managing credit at the household level.
A spokesman for FICO, Greg Jawski, said that regardless of the type of credit, the advice for building a strong credit score is the same: Keep “your debt levels low and pay your debt on time.”
FICO’s advice is what consumer credit management is all about, anyway.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group