NEW YORK — Hundreds of millions of ‘Buy Now, Pay Later’ loans will soon affect credit scores for millions of Americans who use the loans to buy clothing, furniture, concert tickets, and takeout.
Scoring company FICO said Monday that it is rolling out a new model that factors the short-term loans into their consumer scores. A majority of lenders use FICO scores to determine a borrower’s credit worthiness. Previously, the loans had been excluded, though Buy Now, Pay Later company Affirm began voluntarily reporting pay-in-four loans to Experian, a separate credit bureau, in April.
The new FICO scores will be available beginning in the fall, as an option for lenders to increase visibility into consumers’ repayment behavior, the company said. Still, not all Buy Now, Pay Later companies share their data with the credit bureaus, and not all lenders will opt in to using the new models, so widespread adoption could take time, according to Adam Rust, director of financial services at the nonprofit Consumer Federation of America.
Why haven’t the loans appeared in credit scores previously?
Typically, when using Buy Now, Pay Later loans, consumers pay for a given purchase in four installments over six weeks, in a model more similar to layaway than to a traditional credit card. The loans are marketed as zero-interest, and most require no credit check or only a soft credit check.
The main three credit reporting bureaus, Experian, TransUnion, and Equifax, haven’t yet incorporated a standard way of including these new financial products in their reports, since they don’t adhere to existing models of lending and repayment. FICO, the score of the Fair Isaac Corporation, uses data from the bureaus to calculate its own credit score, and is independently choosing to pilot a new score that takes the loans into account.
