Buying Now and Paying Later? Be Prepared To See Your Credit Rating Take a Hit

Using Buy Now, Pay Later services to finance a burrito or other purchases from food delivery companies like DoorDash could soon have negative impacts on borrowers’ credit scores if they do not make their payments for those burritos in a timely manner. FICO announced it will start incorporating BNPL data into its credit scores later this year. It said the inclusion of that information will “represent a significant advancement in credit scoring, accounting for the growing importance of BNPL loans in the U.S. credit ecosystem.”“These scores provide lenders with greater visibility into consumers’ repayment behaviors, enabling a more comprehensive view of their credit readiness, which ultimately improves the lending experience,” FICO said. Currently, BNPL lenders typically do not report payments to credit reporting companies, giving consumers less pressure to pay their loans on time. Only if the loans get sent to collection agencies does failure to pay them show up on a borrower’s credit report. For credit reporting companies, the question of how to score BNPL payments has been somewhat of a puzzle, as consumers usually repay the loans over six weeks instead of months or years. However, the growing popularity of the loans has raised questions about whether the current system is giving lenders an accurate picture of borrowers’ debt situations, as consumers typically take on multiple BNPL loans at the same time. FICO said that when it was testing out its model for its new scores in conjunction with a BNPL lender, Affirm, it found that consumers with five or more Affirm loans saw their scores stay the same or increase.Yet, as BNPL lending has grown in popularity and the types of purchases it can be used for have expanded, financial analysts have issued warnings about it. A certified financial planner at Bone Fide Wealth, Douglas Boneparth, said in a post on LinkedIn that the loans “encourage overspending, destroy credit, saddle you in debt, and target consumers who are most susceptible to borrowing when they shouldn’t.”A recent survey from LendingTree found that 41 percent of BNPL users have been late on their payments in the last year, up from 34 percent a year ago, with young consumers and even high-income borrowers among those most likely to be late. Twenty-three percent of borrowers said they had three or more active loans.The survey also found that 25 percent of BNPL borrowers used the loans to buy groceries, up from 14 percent a year ago. Meanwhile, 16 percent of borrowers said they used BNPL loans for food delivery or takeout.In March, DoorDash announced a partnership with a BNPL lender, Klarna, with the goal of offering American customers “even more convenience with flexible payments.” In May, Klarna reported that its losses doubled in Q1, as $136 million in debt went unpaid.

Buying Now and Paying Later? Be Prepared To See Your Credit Rating Take a Hit

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