New Short-Term Loan Product Will Impact Credit Scores
American Banker reports that the major credit bureaus are adding designations for Buy Now, Pay Later (BNPL) products such as AfterPay and Klarna.
Beginning in the next few weeks, Equifax will add a business industry code for BNPL to classify data such as payment history, a move that will make BNPL loans visible on credit reports. Equifax says this will provide clients and scoring partners the ability to decide how to include BNPL payments into their own decision making for new financial services. At the same time, TransUnion is working on its own BNPL credit reporting service.
The American Banker piece notes:
Experian’s website says BNPL payments can impact a consumer’s credit score, and Affirm reports some BNPL loan data to Experian.
The move to add data on BNPL products to consumer credit files comes as the Consumer Financial Protection Bureau (CFPB) has opened an inquiry into the relatively new short-term loan products.
“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. “We have ordered Affirm, Afterpay, Klarna, PayPal, and Zip to submit information so that we can report to the public about industry practices and risks.”
Consumer advocates have raised concerns about the BNPL products and their long-term impact on consumer credit and debt.
Lauren Saunders of the National Consumer Law Center (NCLC) says of these products:
“Buy-now-pay-later products, if affordable and truly free to the consumer, may help consumers manage larger purchases without the long-term debt and high costs of credit cards. But some BNPL products may have deceptive and abusive profit models built on the expectation of late fees from struggling consumers.
Move Comes as Credit Bureaus Face New Scrutiny
Even as the credit bureaus move to provide reporting of these new financial products, the bureaus themselves are facing renewed scrutiny due to their resistance to effectively resolve consumer complaints.
In response to a recent report on credit bureau practices issued by the CFPB, Chi Chi Wu, a staff attorney at NCLC said:
“The CFPB is to be commended for issuing this report and shining a spotlight on the serious problems of the Big Three credit bureaus in responding to credit reporting disputes. We appreciate the leadership of Commissioner Chopra and the efforts of the CFPB staffers who worked on the report. We endorse the CFPB’s conclusion that ‘The [credit bureaus’] responses to these complaints raise serious questions about whether they are unable — or unwilling — to comply with the law.’ And quite troubling is CFPB’s highlighting that the credit bureaus reported relief in response to less than 2% of covered complaints.”
It’s not clear at this time how reporting of BNPL will impact consumer credit reports.
Trina Paul, writing for CNBC, notes the ways these products may negatively impact a consumer’s credit score.
“If reported, a missed payment can be noted on your credit report for up to seven years and will negatively impact your credit score,” says Rod Griffin, the senior director consumer education and advocacy at Experian.