Payments on Buy Now, Pay Later (BNPL) loans will be added to credit reports over the coming year. This is good news for some good consumers, but others should be careful.
Loans, which typically allow customers to pay for their purchases in four equal installments rather than all at once, have exploded in popularity in recent years and are expected to continue to grow. Equifax, one of the three major US credit bureaus, announced earlier this month that it will begin recording these installment plans on the reports in early 2022.
Currently, some BNPL companies report certain loan information to certain credit bureaus. Affirm, for example, reports some loans to Experian. But Equifax will be adding BNPL information for the first time.
The bureau says this will give lenders “a more complete picture of people’s financial commitments, such as how much they owe on those plans,” and notes that including on-time BNPL loan payments on a credit report could potentially increase consumer credit ratings.
But in the same way, missing those payments would also potentially lower a consumer’s credit rating, just like missing a credit card payment now.
BNPL loans, also known as point-of-sale loans because they are usually offered over the counter, are relatively easy to obtain and generally do not require hard credit. This makes them especially popular among younger consumers, who do not have a credit history or who are wary of the credit industry.
This is one of the reasons Equifax says that including on-time payments in credit reports could help young consumers, who have easier access to BNPL loans than other types of credit, to build. their credit history.
But there are a few issues that credit bureaus and BNPL companies like Affirm and Afterpay will need to resolve. These types of loans are usually short – paid off within weeks – and consumers can open and close multiple BNPL loans at the same time. This could be a potential problem, since the average age of accounts and the time since opening a new account is part of calculating a credit score.
Additionally, there is often a time lag between when people open an account and when it shows up on their credit report, so consumers can pay something off before it shows up.
That said, if paid on time, BNPL payments added to credit reports could boost scores for those with slim credit histories.
If you take out a BNPL loan, make sure you can repay it.
“Just because you are eligible for BNPL or any other credit product doesn’t mean you should use it,” says the Consumer Financial Protection Bureau.
Register now: Get more information about your money and career with our weekly newsletter