Here's what it means that buy now, pay later loans are on your credit report now

If you’re one of the millions of Americans who used a buy now, pay later loan for a purchase, your payments will now be recorded on your credit report.

In February, Equifax became the first major credit bureau to record buy now, pay later — also known as BNPL — loans on consumer credit files. TransUnion quickly followed suit, and introduced a new tool that allows users to add their BNPL payments to their credit history. Experian, meanwhile, confirmed plans to track BNPL payments as soon as this spring.

Recording on-time payments could potentially help consumers build or rebuild credit, but, on the flip side, missing payments could hurt a person’s credit score.

“We are encouraging more qualified BNPL providers to report consistently, giving Equifax customers and scoring partners the ability to view and decide how to incorporate the information into their decisioning to potentially open up new mainstream financial services opportunities to more consumers,” chief product officer for U.S. Information Solutions at Equifax, Mark Luber, told Yahoo Money.

More than 100 million Americans used buy now, pay later loans – also known as point-of-sale financing –  within the last year, according to TransUnion.
More than 100 million Americans used buy now, pay later loans – also known as point-of-sale financing – within the last year, according to TransUnion. (Photo: Getty Creative)

More than 100 million Americans used BNPL – also known as point-of-sale financing – within the last year, according to TransUnion. These easy-to-access payment deferment plans are often short-term and interest-free.

They are often an attractive option because they are offered at checkout and are relatively easy to qualify for. According to Luber, BNPL services usually “bypass the credit check completely” or conduct a “soft pull on credit files” — which doesn’t hurt an individual’s credit score — to determine eligibility.

Once approved, customers usually make a small upfront payment to get their item and then pay the remaining amount in installments – making them a popular choice for young consumers with little to no credit history.

In July 2020, an estimated 37.71% of consumers aged 18 to 24 used BNPL services, but that number jumped to 61.16% by March 2021, according to an Ascent study. The survey, which consisted of 2,000 people, said consumers ages 25-54 also increased use of BNPL loans by 20% during the same period.

According to Equifax, the growing popularity of BNPL loans could have a positive impact on young adults starting to build credit histories, particularly those with thin credit files.

“A growing number of consumers are applying for Buy Now, Pay Later (BNPL) loans and installment plans, which don’t typically require prior credit history to use. This means consumers that either don’t have credit or are rebuilding their credit can leverage BNPL plans to help demonstrate responsible payment behavior for future financial services,” said Luber. “However, this payment behavior needs to be reported to credit bureaus in order for it to be utilized by lenders and other organizations to help in decisioning.”

Handsome mexican hipster man sending email with laptop
(Photo: Getty Creative)

BNPL programs can demonstrate reliable behavior

Lenders use your credit report to determine your creditworthiness, or gauge how reliable you are as a borrower based on your financial past.

“If you don’t have enough information on your credit report, it can be hard to qualify for a car, new loan, mortgage or other essential needs,” Rod Griffin, senior director of public education for Experian, told Yahoo Money.

But Equifax research shows tracking on-time payments on BNPL may increase credit scores. The study revealed after the inclusion of on-time BNPL payments on credit reports, consumers with thin credit files consisting of two or less accounts or had “young” credit files – where all history was less than 24 months old – saw a FICO score increase of 21 points. For those rebuilding credit, on-time payments saw an average FICO score increase of 13 points.

“Consumers can build their credit profiles by showing responsible and on-time payment history over time, and BNPL is another way that consumers can do this,” said Luber. “By reporting BNPL payment history, it adds another valuable tradeline to credit reports, which is particularly important for younger consumers, many of whom are new to credit.”

Equifax became the first major credit bureau to record buy now, pay later — also known as BNPL — loans on consumer credit files.
Equifax became the first major credit bureau to record buy now, pay later — also known as BNPL — loans on consumer credit files. (Photo: Getty Creative)

Late payments can hurt your credit score

But just like on-time payments can boost your credit, late payments on BNPL loans can result in late fees and have a negative impact on your credit score – much like a missed payment on a credit card.

According to Ascent’s survey, almost one third of BNPL users polled in March 2021 said they were likely to miss a payment within the next 12 months. According to the Consumer Financial Protection Bureau (CFPB), lack of regulatory oversight on nonbank BNPL providers often leaves consumers with fewer protections compared to other financing options such as credit cards.

"Buy now, pay later is the new version of the old layaway plan,” said CFPB Director Rohit Chopra said in a statement. “But with modern, faster twists where the consumer gets the product immediately but gets the debt immediately, too.”

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Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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