You see it at checkout—and before long you could see it again on your credit report.
The popularity of the “Buy Now, Pay Later” (BNPL) option has skyrocketed. A recent Motley Fool study found that 56% of consumers reported using a BNPL service at least once, up from 38% the previous year—an increase of nearly 48%.
And while it’s an easy way to spread the cost of a purchase out over several months, there’s more to it than many shoppers realize. “Many people don’t realize these are essentially loans,” said Andrew Iven, product strategy manager at BOK Financial®. “You are, in essence, agreeing that the third-party BNPL provider is covering the cost and that you will pay the provider back in installments, typically over four months.”
Until now, BNPL loans with on-time payments haven’t been reported to credit bureaus but Equifax, Experian and TransUnion are now seeking to include BNPL history on credit reports.
But just what is reported and by whom is a little complicated.
According to an Equifax press release, the BNPL provider could choose to include BNPL loans in the calculation of a credit score. TransUnion and Experian both say that at least for now , the data will be reported but shouldn’t impact a credit score—but the policy is subject to change.
Credit bureaus announced they were taking an interest in BNPL options to understand the industry trend and stay apprised of any inherent risks. Additionally, they’ve announced that BNPL options could impact a person’s credit score even if they are paying it off in time (which isn’t always the case) because BNPL loans are essentially short-term installment loans.
The length of your credit history is one factor used to calculate your FICO score — it accounts for 15% of your score. When you pay off a short-term BNPL loan, it means you’re closing a line of credit, which could reduce your average credit age and potentially affect your overall FICO score.
One of the credit bureaus, TransUnion, is attempting to address this issue by not counting all BNPL loans in the calculation of an individual’s core credit score. Rather, BNPL loans will be mentioned in a separate portion of the credit report that does not factor into the score. At least for now.
Iven said many consumers aren’t aware of how credit scores are calculated or what information could appear on their credit report.
"Your credit score and credit report are personal to you, so it's important to familiarize yourself with them," Iven suggests.
The composition of a credit score used by all three credit reporting agencies includes:
- Payment history: 35%
- Total amount owed: 30%
- Length of credit history: 15%
- Types of credit: 10%
- New credit: 10%
“Things like on-time loan payments matter,” he said. “But more than that, it’s important to understand the variables and factors that could impact your credit report. Knowing that buy now, pay later loans might appear on your credit report could make you more mindful of your choices when making a purchase.”
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