You have undoubtedly encountered many consumer finance alternatives when purchasing online at the point of sale. Nowadays, consumers are increasingly choosing the Buy Now Pay Later (BNPL) consumer financing option. Every buyer appreciates the convenience of spreading out payments over a specific period and returning the debt using a predetermined payment schedule. especially when prompt payment is rewarded with no fees.
Due to increased internet buying over the past year as a result of the epidemic, BNPL loans have become increasingly popular. According to research by C+R Research, in the US, three out of every five users (60%) use BNPL, and nearly half of consumers currently make purchases using BNPL.
The dangers and drawbacks of using these kinds of loans should also be known to consumers. Many BNPL loans, particularly short-term loans, are not recorded to credit bureaus, in contrast to credit cards. Because of this, younger borrowers who choose BNPL loans typically won’t see a negative impact on their credit ratings from a history of on-time BNPL payments.
Equifax, Experian, and TransUnion, the three largest U.S. credit bureaus, are attempting to change this by putting information on individuals’ BNPL lendings on credit reports.
The Consumer Financial Protection Bureau announced in December that it was opening an investigation into the five major BNPL providers and requesting that they submit information so that the Bureau might keep consumers informed about current industry procedures and potential risks. The announcement of these changes comes just a few months later.
Credit reporting agencies include BNPL loans on credit reports.
BNPL loans can lower borrowers’ FICO credit scores, even if they are making on-time payments, which may appear to be a welcome shift for credit bureaus to consider when determining an individual’s score. Because BNPL loans are frequently short-term installment loans, this is the cause.
One element that goes into determining your FICO score is the duration of your credit history; it makes up 15% of your score. The closing of a credit line that results from paying a short-term BNPL can lower your overall credit age and have an impact on your total FICO score.
By excluding all BNPL loans from consideration when determining a person’s core credit score, TransUnion is making an effort to remedy this problem.
Instead, information on BNPL loans will be included in a different section of the credit report. Because of this, a consumer’s BNPL loan record will still be reflected on the credit report even if it won’t be utilized to determine their credit score.
While TransUnion intends to factor in BNPL loans in the future when determining consumer credit scores, it might take some time for the credit reporting agencies and distribution models to adapt. She proposes that coming ahead, credit bureaus should exclude any details regarding a person’s BNPL loans that could unjustly lower someone’s credit score because BNPL loans can lower average credit age.
Since the majority of credit reporting occurs monthly, BNPL loans can end up being repaid soon after they are recorded on your credit history. So that consumers may experience the benefits of making on-time, full payments sooner, TransUnion plans to provide information on BNPL payments more regularly.
The Buy, Now Pay Later bureau, which will compile data on a person’s total number of outstanding BNPL loans, and also their overall BNPL loans and payment history, was launched by Experian in January. Experian, like TransUnion, will not, at least initially, factor information regarding BNPL loans into the computation of core credit ratings.
According to a press release from Experian, specific information linked to each BNPL transaction will be held separately from Experian’s core credit bureau data to protect customer credit scores from rapid negative impact.
Due to the way BNPL loans will be recorded using conventional techniques, Experian intends to keep BNPL data distinct from basic credit bureau information. In other words, because credit cards are viewed as revolving lines of credit, various purchases made using your credit card will show up on a single trade line that contains details on a particular credit account.
Contrarily, several transactions made with various BNPL loans show up as several merchant accounts on your credit report. Having numerous tradelines may signal potentially dangerous behavior to some lenders.
To prevent the account information from such loans from hurting credit scores, Experian created a distinct bureau for BNPL. Experian also intends to submit information to this specialized bureau in real-time rather than wait 30 days before doing so.
Equifax started enabling BNPL providers to disclose “pay-in-4” loans on February 28. Based on how the BNPL operator chooses to list them, customers who use online or in-store BNPL credits will have them recorded either as continuous or installment accounts.
Your BNPL provider may decide to include the BNPL loans inside the calculation of your credit score with Equifax, as opposed to TransUnion and Experian.
The new industry code will categorize BNPL tradelines, including payment history, and give Equifax clients and scoring groups the ability to view and choose how to use the information in their decision-making, potentially opening up new opportunities for mainstream financial services to more consumers.
Equifax reports on BNPL loans every two weeks. The credit bureau recently looked at people who had a minimum of one BNPL loan listed as a credit line on their record to research the effects BNPL loans have on consumers’ credit reports. The usual pay-in-4 BNPL loan has a length of four months, but the average was four months. The study also discovered that people with BNPL loans who made on-time payments had an average 13-point boost in their FICO scores.
Financial Platform to Trust
What does this mean for customers and merchants, then? Simply put, customers will need to exercise greater caution when applying for BNPL financing services. In other words, before making any purchases, you must select the right merchant and BNPL supplier platform. Previously, late payments just led to higher costs; today, they can result in a poor credit score. This is dangerous, especially for the Gen-Z and Millennial borrowers who make up the majority of BNPL loans because they have not yet worked to improve their credit scores and run the risk of having ruined credit histories when they eventually need credit cards or banking services.
Among the top BNPL providers, ChargeAfter’s multi-lender platform operates according to clear procedures. Since the client and BNPL loan information is constantly accessible, it will be easier for credit brokers to interact with the platform. The clients of ChargeAfter, on the other hand, were all able to obtain loans based on their credit scores and repayment capacity because they had presented the relevance of lending processes considerably earlier before it would have an impact on credit scores. Therefore, it is safe to apply for BNPL at ChargeAfter because the financing platform has previously been operating with these standards.
ChargeAfter is a leading multi-lender platform for Buy Now pay later (BNPL) Consumer Financing. It connects businesses with the most reliable lenders, enabling them to offer customers the greatest financing solutions. With the best system of Waterfall Financing, ChargeAfter guarantees BNPL lending to every shopper, by matching the most relevant lender to every client. Using the unique consumer financing technology, ChargeAfter provides all parties, merchants, lenders, and consumers, with the best shopping experience. Phoenix, MUFG, VISA, Bradesco, BBVA, Synchrony, PICO Partners, CITI, Propel Venture Partners, Plug and Play, and other companies worldwide are among the investors of ChargeAfter.