Buy Now, Pay Later installment loans have grown in popularity among Americans, offering a convenient way to purchase items ranging from clothes and flights to groceries and concert tickets. Up until recently, these financing options were not reported to credit agencies, lenders, or government data analysts. However, the management of Buy Now, Pay Later loans may soon impact Americans’ credit scores, as FICO plans to introduce new credit scores this year that incorporate data from these installment loans. This move will give lenders insight into consumers’ repayment behaviors, filling a significant blind spot in assessing creditworthiness.
Buy Now, Pay Later loans are seen as an alternative to credit cards, providing consumers with more flexible payment options to navigate tight financial situations or make larger purchases more manageable within their budgets. While incorporating BNPL data into credit scores could be beneficial for some individuals, helping them establish or improve their credit history, there are concerns about potential overspending and the rise of “phantom debt” associated with these loans.
The industry of Buy Now, Pay Later remains largely unregulated, with providers not obligated to report data to credit agencies or other financial institutions. Despite these challenges, the upcoming launch of FICO’s FICO Score 10 BNPL and FICO Score 10 T BNPL aims to provide a more comprehensive assessment of consumers’ credit activity by factoring in Buy Now, Pay Later transactions. This move has been welcomed by lenders seeking a more holistic view of borrowers’ financial behaviors. While this development represents progress in credit scoring, the implementation of these new scores may take time to fully materialize.
Credit tracking, scoring, and reporting is a complex industry with multiple layers. The most widely used credit scoring model by lenders is the FICO Score, with FICO Score 8 being the most prevalent version since its launch in 2009. However, newer versions like FICO Score 10 and FICO Score 10 T have also been introduced. Despite advancements in scoring models, not all lenders adopt the latest versions immediately due to the lengthy sales cycle and reluctance to invest in new technology and training.
In mortgage lending, FICO Score versions 2, 4, and 5 are commonly used. FICO has developed a proprietary method that considers factors such as payment history and balances provided by lenders to credit bureaus. The emergence of Buy Now, Pay Later (BNPL) loans has added complexity to credit scoring, as these loans behave differently from traditional credit products. Frequent opening and closing of BNPL accounts and high credit utilization can impact credit scores differently compared to traditional credit cards.
FICO recently announced an innovative approach to credit scoring that incorporates BNPL data into its models. This new approach was developed following a year-long study with Affirm to understand how BNPL loans affect consumers’ credit scores. The study revealed unique behaviors associated with BNPL loans, such as opening multiple accounts within a short period. To address these complexities, FICO’s new approach aggregates BNPL data to prevent consumers from being penalized excessively for opening a reasonable number of BNPL accounts.
In conclusion, the credit industry is continuously evolving to adapt to new credit products like BNPL loans, requiring collaborative efforts between lenders, credit bureaus, and scoring agencies to ensure accurate and fair credit assessment for consumers.
