Expert take: Does buy now, pay later help or hurt your finances?
Priya Malani, CEO of Stash Wealth, and Paula Pant, host of the Afford Anything podcast talk buy now, pay later.
FICO announced it will begin factoring in Buy Now, Pay Later loans into people’s credit scores starting in the fall of 2025.
Credit scores affect Americans’ ability to get a loan, buy a car or home, rent an apartment, and more. FICO, the data analytics company whose credit models are used in the majority of lending decisions, said scores accounting for BNPL loans will give lenders a more comprehensive view of consumers’ repayment behaviors.
In a joint study simulating the inclusion of BNPL data with Affirm, FICO found score impacts were generally consistent with the opening of a new account, meaning scores improved or decreased by about 10 points for the majority of consumers.
FICO offers several scoring models. NerdWallet spokesperson Sara Rathner said lenders adopting new scoring takes time and most consumers likely won’t notice the change this fall.
“Different scoring models are designed for different focuses,” Rathner said. “It could be years before these are largely adopted in decision making and they might not be adopted by lenders for all types of borrowing. “
Still, FICO said the introduction of this new kind of scoring represents a significant shift, as lenders catch up with consumers’ growing reliance on BNPL loans.
FICO responds to BNPL’s growing popularity
Younger generations appear to be digital BNPL loans’ most common adopters.
Apps like Klarna, Affirm, and Afterpay have made securing the loans easy. In many cases, it can be done on a mobile device, often without a hard credit check, and consumers can take on many loans at once.
Use of these loans among Gen Z and Millennials seems to have accelerated over the last year, with about 10% of each cohort taking advantage of them, a new Bank of America report found.
This comes following a three-year period of slowing use after digital BNPL platforms saw a rise in popularity.
“For some people it’s because it’s convenient, but there are some who are reaching for it because they’ve perhaps been a bit financially stressed,” said David Tinsley, senior economist at the Bank of America Institute.
Who the change helps and hurts
For those responsibly using BNPL loans to delay payments for big purchases like a home appliance, computer, or wedding dress, the FICO change could actually improve their credit score.
Rathner said credit institutions had already found ways to factor in missed or late payments into people’s scores, but this change could give people more recognition for their habits of paying off loans on time.
“We’re certainly seeing this acknowledgement that there are lots of different ways consumers are financially responsible,” she said. “So it is absolutely beneficial to consumers to factor that type of behavior into decision making when evaluating them for a loan.”
Tinsley said while some gravitate toward BNPL loans as a way to spread out payments knowing they’ll have the cash to make them, some low-income consumers with higher rates of delinquency also use them.
Of course, for consumers taking on several BNPL loans at once and not paying them off, FICO’s new scoring model could be another way for lenders to clearly identify that behavior.
What to keep in mind if using BNPL loans
Rathner advises consumers to read the fine print before agreeing to a BNPL loan and ensure they know how much they will need to pay at what time.
“Keep that in mind with all of your other financial obligations, especially if you’re using Buy Now, Pay Later frequently and you have multiple plans going on all at once,” she said.
Tinsley said consumers should remember that BNPL loans usually put them on a stricter repayment schedule than credit cards. So, while they may have an initial zero-interest grace period, they will usually also have less flexibility.
If people can’t make the payments on time, they can be hit with late fees and interst rates equal to or greater than those they would have faced if they made the purchase with a credit card.
“Buy now pay later can be an incredible tool,” Rathner said, if you “enter in knowing you have the money to pay it off.”
How will BNPL affect my credit score?
If consumers are concerned about how BNPL loans are affecting their credit score, Rathner encourages them to check their score online.
Checking your own score won’t make it drop. Make sure it’s accurate, Rathner says. If you see an account listed you don’t remember opening, that could be a sign of fraud or an error. Report it to the credit bureau and the financial institution.
If you apply for a loan and are denied or unhappy with the terms offered, don’t be afraid to speak up.
“Speak to the lender about the factors that went into their decision and they can help you understand whether or not there are actions you can take that would improve your odds later,” she said.
If consumers believe a lender’s decision was unfair and based on inaccurate information, they can file a complaint with the Consumer Financial Protection Bureau.
Reach Rachel Barber at rbarber@usatoday.com and follow her on X @rachelbarber_
