Written by Lexx Thornton
How well—or how poorly—Americans manage their Buy Now, Pay Later loans may soon be reflected in their credit scores.
FICO plans to launch a suite of credit scores later this year that incorporate BNPL data, providing lenders a window into what’s been a big blind spot: consumers’ repayment behavior on these increasingly popular installment loans.
BNPL loans can serve as an alternative to credit cards and are used by consumers who are seeking more flexible payment options, who want to overcome a tight financial spot, or who are looking to smooth out some bigger transactions to better meet their budgets.
For some consumers, the inclusion of BNPL data in the company’s FICO Score 10 and FICOScore 10 T models could help serve as a credit-builder—or even a credit buster.
“A lot of BNPL users are often young people who don’t have long credit histories,” Ted Rossman, chief credit analyst at Bank rate, said in an interview. “That’s the more optimistic use case, that these people could be brought into the credit system. And if they use Buy Now, PayLater responsibly, it should help them.”
BNPL loans have become more widely available and adoption rates have increased as people of all ages—especially younger adults—have grown more comfortable incorporating them into their shopping habits.
“Things like frequent opening and closing of accounts, that would be disastrous for your credit score,” he said. “With Buy Now, Pay Later, you’re doing that every few weeks or even every few days. And then credit utilization, too: Maxing out a credit card is bad, but Buy Now, Pay Later is basically you maxing out a short-term credit line and then paying it down.”
In Monday’s announcement, FICO indicated it developed a “novel” approach to credit scoring that includes aggregating BNPL data when calculating the variables used in the models.
FICO developed the BNPL approach after conducting a year-long joint study with Affirm on how pay-over-time loans could impact consumers’ credit scores.
“Simply forcing the BNPL data into our existing FICO scores, which weren’t calibrated to this new type of credit product, was not the answer,” Dornhelm said.
For example, Dornhelm noted, the joint study found that a unique behavior around BNPL loans is the potential for a large number of the loans to be opened within a short period of time.
“(That’s) Something you obviously don’t see when you’re looking at a mortgage loan or a student loan or the like,” he said. “We developed this approach that aggregates a number of BNPL loans together when calculating some of the variables in the model to avoid the model over-penalizing consumers for having opened a reasonable number of Buy Now, Pay Later accounts.”