Should buy now, pay later loans impact your credit score? That’s been an important question ever since Apple announced in February that it would begin reporting loans from its Apple Pay Later service to Experian.
Many observers thought that might be a game-changer for the BNPL industry. However, as the New York Times is reporting, there hasn’t been any follow-through. None of the other BNPL services have begun reporting their loans to credit bureaus.
Two years ago, Experian created a Buy Now Pay Later Bureau, where the loans would be included on consumers’ credit reports but not incorporated into the credit-scoring models. According to its site, “the information won’t be factored into existing traditional credit scores at this time but may in the future as new credit scoring models are developed.” FICO and VantageScore, the two methodologies that produce credit scores, were expected to adjust their models as they saw fit, but that has not happened yet.
Uncharted Territory
The BNPL industry is still grappling with the communication issues behind that reporting, and as Danner pointed out, this isn’t helpful for consumers.
“The marketing strategy behind BNPL vendors has always been averse to the traditional credit scoring mode,” said Ben Danner, Senior Analyst of Credit and Commercial at Javelin Strategy & Research. “They position themselves as challengers to the credit card, which allows them access to a wider audience that may not qualify for other unsecured lending products. If other vendors begin to follow Apple, the bureaus will need to develop separate BNPL scoring products to address high-volume, short-term loans.”
The credit scoring industry is mature enough to have accommodated many of the complications around credit card borrowing. If debts were incurred on multiple credit cards, the scoring bureaus have access to that data, so they can account for the entirety of the borrowing.
Lack of Communication
The BNPL industry is still grappling with the communication issues behind that reporting, and as Danner pointed out, this isn’t helpful for consumers.
“It has been a real problem because consumers are taking out loans from different BNPL vendors, which in the industry is known as ‘loan stacking,’” said Danner. “There is no centralized credit data to prevent them from doing so, and they get into trouble.
“If I have an account with Affirm, they will only let me reasonably take out a loan or two before I hit their own internal limits,” he said. “They have their own lending and risk models. However, if I have accounts with both Affirm and Klarna, I can max out my Affirm and max out my Klarna. There is no talking in between vendors.”
