Credit bureau Equifax has announced that it will begin including buy now, pay later (BNPL) payment information in its credit reports, a move that it says will expand credit for consumers.
The company said it acted after its research of anonymized consumer data from a BNPL provider showed that people who pay their BNPL loans on time could potentially increase their FICO Score – helping consumers to both build and rebuild credit.
"Equifax will be the first credit reporting agency to formalize a standard process for reporting BNPL tradelines for inclusion on traditional consumer credit reports," said Mark Luber, a top executive at Equifax. "We are committed to helping people live their financial best, and recognize the role that BNPL services can play in helping people build stronger financial profiles."
BNPL, also known as point-of-sale financing, is an increasingly popular way for consumers to access alternative financing options for online or in-store purchases. They typically involve short-term, interest-free installment payments offered at checkout.
Including these transactions on Equifax credit reports could have a downside if consumers who use BNPL financing don’t make payments on time. And there’s evidence that happens a lot.
A recent study by Credit Karma found that 44% of respondents had used BNPL services to make a purchase. Of those who have used BNPL services, 34% have fallen behind on one or more payments.
Younger consumers may be more likely to miss payments. According to the study, more than half of Gen Z and millennial respondents who have used BNPL services say they have missed at least one payment, compared to 22% of Gen X respondents and just 10% of baby boomers.
‘New version of old layaway plan’
With the increased use of BNPL services, regulators are concerned that consumers are taking on unmanageable debt. The Consumer Financial Protection Bureau (CFPB) has launched an investigation into how these programs affect consumers’ finances. In particular, the consumer watchdog wants to learn how payment providers use customer data.
“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately, too,” said CFPB Director Rohit Chopra.
The CFPB stated that it has asked Affirm, Afterpay, Klarna, PayPal, and Zip to provide information so that the agency can report to the public about industry practices and risks. Typically, a BNPL service allows a customer to defer payment in full for a purchased item. The consumer usually pays 25% upfront and then pays 75% over two two-week intervals.
CFPB regulators say the ease of installment buying may encourage consumers to spend more money than they would otherwise.