Bnpl Loans Will Affect Credit Scores

The decision to buy that $600 collectible Labubu doll with a Buy Now, Pay Later (BNPL) loan might soon impact your creditworthiness. The company that assigns credit scores, FICO, said yesterday that starting in the fall, it’ll incorporate BNPL borrowing into its scoring formula.

The loans that allow customers to break up purchases into four installments have become increasingly popular, particularly among young shoppers—but unlike credit card borrowing, they have had no bearing on credit scores. FICO’s move comes after BNPL provider Affirm recently began reporting its loans to credit agencies Experian and TransUnion.

A mixed bag for borrowers

FICO finally taking note of BNPL borrowing could be a blessing for some shoppers and a credit score-busting curse for others:

• FICO says that it could be a boon to people who have been diligent in paying BNPL loans, especially those who have limited credit history otherwise.
• At the same time, it could harm the credit scores of borrowers with missed BNPL payments.

Phantom debt

BNPL becoming a FICO score component addresses a longtime credit score blind spot. The rise of BNPL has made some industry observers concerned that Americans are becoming over reliant on these one-click loans amid economic hardship, while lenders don’t have the full picture of borrowers’ debt and whether they are making timely payments. The total amount of BNPL loans issued is projected to rise to $108 billion this year, up from $94 billion in 2024, per Emarketer.

Meanwhile, BNPL defaults are also on the rise. Last month, BNPL lender Klarna reported that its losses from defaulted loans rose from .51% to .54% as a share of total lending.

Looking ahead…it could take years for BNPL history to become fully visible to all lenders, as it will only be incorporated into FICO’s two newest credit scoring products. Many lenders still rely on the older scoring system FICO created in 2009.—SK