Equifax's BNPL credit scoring a potential win-win

Consumer interest in buy now pay later programs has exploded in recent years, and now credit reporting agencies are taking notice. Equifax, one of the three main credit bureaus in the United States, heralded what it said is the industry's first policy for including these short-term financing alternatives in calculations of consumers' credit scores. The new policy is expected to kick in during the first quarter of this year.

This is potentially good news for consumers and BNPL companies alike. Equifax reported that a study of anonymized consumer data from BNPL providers suggests consumers who make on-time BNPL payments can increase their FICO scores by between 13 and 21 points.

"Most BNPL providers either bypass the credit check completely or do a soft pull on credit files, which can be attractive to consumers," said Mark Luber, chief product officers for U.S. information solutions at Equifax. "We are encouraging BNPL providers to report to Equifax as a powerful source of data. Those [consumers] who use BNPL services that report can demonstrate reliable behavior and boost their credit profile."

The move by Equifax comes as the Consumer Financial Protection Bureau raises concerns about the rapid growth of these alternative financing options and how they may be adding to consumers' debt loads.

In December 2021, the federal consumer watchdog agency ordered five large BNPL companies to answer tough questions about their business practices. The agency also wants Affirm, Afterpay, Klarna, PayPal and Zip to collect and share with it information that can help it to assess the risks and benefits of BNPL products.

21st century layaway plans, with a twist

BNPL programs are akin to old-fashioned layaway plans—only instead of the merchant holding on to (laying away) a item purchased by installments, the customer makes an upfront payment and gets to take immediate possession of the purchase with a commitment to pay it off over time. Typically this entails equal installments over one to six months. In most cases the financing is interest free, provided all payments are made on time.

"Whereas the old-style layaway installment loans were typically used for the occasional big purchase, people can quickly become regular users of BNPL for everyday discretionary buying, especially if they download the easy-to-use apps or install the web browser plugins," the CFPB said in a statement about its inquiry.

BNPL was first popularized by online sellers but has not been limited to the ecommerce channel as brick-and-mortar merchants, like BestBuy and Target, joined the fray. More than 45 million Americans have used BNPL plans, according to several estimates. Many are using several at the same time.

A survey of 1,500 consumers recently conducted for the insurance technology company Breeze found 41 percent have had multiple BNPL accounts open at the same time. Separately, a study by the recurring payments platform GoCardless found 46 percent of BNPL users find it difficult to keep track of how many BNPL plans they have open.

"Most BNPL companies right now are not really looking intently at credit usage or history during the application process and it's possibly leading to BNPL distributing too much unwarranted credit," said Mike Brown, director of communications at Breeze.

Among BNPL users surveyed for Breeze:

• 62 percent expect to use the financing option more in 2022;
• 57 percent said BNPL has caused them to spend above their means;
• 36 percent have missed or made late payments on a BNPL plan.

"One correlation stuck out from our study: if a consumer had multiple BNPL accounts open at once, they were more prone to overspending, missed or late payments, and poor credit history," Brown said.

Siamac Rezaiezadeh, director of product marketing at GoCardless, said the move by Equifax could lead to heightened awareness among consumers of how their spending can hurt their credit scores. "However, I think this awareness can only be a good thing," he added, "particularly if it encourages shoppers to shop responsibly, but also to keep a better handle on what they are spending across different BNPL providers."

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