Why saving time can be as valuable as saving money blog

Buy-Now, Pay Later (BNPL) Data Is Coming to Your Members’ Credit Scores

Reading Time: 3 minutes
By Thomas Anichini, CFA®, CFP®, Chief Investment Strategist

Recently1 FICO announced it will introduce BNPL data to credit scores this Fall. This announcement raises concerns about cashflow risk for members, especially for younger and lower-credit score members who might already be living paycheck to paycheck.

Increasing Savings Rate: Positive Impact on Retirement Wealth

While less visible than the Big 3 credit bureaus – Equifax, Experian, and Transunion, which collect and store consumer finance data on all of us, FICO is arguably more important. FICO is a predictive analytics and data science company2. Among other services, FICO provides credit scoring algorithms used by the Big 3 and by lenders of all sizes.

What is BNPL?

“Buy Now, Pay Later (BNPL) is a type of installment loan that typically allows you to purchase something immediately with little or no initial payment and pay off the balance over four or fewer payments.”3 While BNPL lenders do not charge consumers interest, they do charge fees for late and missed payments. Transaction sizes range from a few dollars to thousands, such as to pay for a vacation or luxury exercise equipment.

You have seen BNPL options available at online and physical checkout, offered by brands such as Affirm, Klarna, Afterpay, Zip, and Sezzle. According to CapitalOne Shopping, these five lenders account for over 95% of the market share.4

Unlike with credit cards, the financing costs for BNPL are born by the seller, not the purchaser. In effect, BNPL allows sellers to reach consumers who might otherwise not make the purchase.

Until now, BNPL data have remained in silos. While card issuers can view a consumer’s other cards and balances, most lenders never see the consumer’s BNPL transactions with competing platforms.

Who Uses BNPL?

Federal Reserve calculations based on 2023 data5 show BNPL users tend to be young, have low credit scores, and high credit card utilization, as depicted in Tables 1 and 2.

Table 1. Percentage who use BNPL by Age and Credit Score

Source: FEDS Notes, December 20, 2024 Table 3

Table 2. Percentage who use BNPL by Credit Limit and Credit Card Utilization

Source: FEDS Notes, December 20, 2024 Table 4

What impact will FICO’s inclusion of BNPL data have on your members’ credit scores?

Plan members who use BNPL and pay on-time might see some of their credit scores improve. Those who do not pay on-time might see some of their scores decline.

FICO supports a variety of score versions.6 The press release mentioned above specifies FICO will evolve its Score 10 and Score 10 T to include BNPL data. If FICO’s earlier versions, especially Score 8 and Score 9, remain widely used, scores calculated by those models should not be affected. It seems reasonable that versions using BNPL data will be used by lenders marketing to Millennials and to higher risk borrowers, possibly to first-time home buyers.

Who benefits and who loses from this decision?

Including BNPL data in credit scores should benefit convenience borrowers who repay on time – higher scores should result in marginally lower interest rates. BNPL data will probably lower scores of consumers who are delinquent, raising interest rates lenders charge them.

Takeaways

Until now, BNPL data has flown under the radar in widely used credit scores

Consumers who repay BNPL loans on-time may benefit; those who are delinquent may find their credit scores hurt

Make sure to boost your plan members’ financial literacy – about credit scores, their effect on borrowing rates, and the importance of repaying loans on-time

See All From 3Nickels