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Equifax, one of the three major US consumer credit bureaus, said it will start including data from Buy Now, Pay Later (BNPL) companies in its registration forms starting in February 2022.
This is important because including data has the potential to boost credit scores for people new to credit – but it can also encourage overspending and opening of many accounts.
Why buy now and pay later accounts are very popular
Buy now, pay later, sometimes known as point-of-sale financing, has mushroomed over the past few years, as companies like Affirm, Klarna, and Afterpay have formed partnerships with retailers, making signing up for one of the payment plans as easy as a few mouse clicks.
Consumers have been drawn to installment plans for their clear terms and relatively easy approvals. Notably, many BNPL plans do not require excellent credit or even a tough credit check to qualify.
For someone who is just getting started with credit, or may not have a lot of credit history, a BNPL plan can sometimes be more cost-effective than they would pay on a credit card aimed at those with less than excellent credit.
This is because some BNPL plans are interest-free to the consumer, and most of the loan provider’s fees are taken care of by the retailer as an incentive to make a purchase. A YouGov/Forbes Advisor survey from November 2021 found that among respondents who used the BNPL scheme, 38% said it was interest-free payments that attracted them.
A Spring 2021 Buy Now, Pay Later stats and user habits survey by C+R Research, a market research firm, found that 59% of respondents said they purchased a non-essential item they could not afford.
It is precisely these concerns that prompted the Consumer Financial Protection Bureau (CFPB) to issue orders last week to several BNPL companies, asking them to collect data about both the good and the bad that might come from subscribing to one of these loans.
Why Equifax Adds BNPL Plans to Credit Reports
Equifax says its research, based on a study of anonymized consumer data from a BNPL provider, has shown that including the on-time payment history of a BNPL plan can be beneficial for those without a long-term credit history. It can demonstrate responsible payment behavior, as well as help boost your overall credit score.
“We are very focused on how we can help expand access to credit for individuals,” an Equifax spokesperson said on a call with Forbes Advisor.
Opening multiple lines of credit within a short period of time usually has a negative effect on credit, so anyone with multiple BNPL accounts can see a detrimental effect on their credit score. But for those who pay their debts on time, reporting those payments is more likely to produce positive results.
“The main idea is that consumers, especially those who are new to credit, can take advantage of repaying their debt obligations to those lenders that they would not have previously had,” Tom Aliff, head of risk advisory at Equifax, said on a call with Forbes. Adviser.
However, the key is the on-time payment record. If you miss or default on a payment and the provider reports that date to the credit bureau, this can potentially have negative repercussions on your credit score. The Forbes Advisor/YouGov survey found that 27% of respondents said they had lost at least one BNPL payment, with 11% of those losing more than one payment.
Experian, TransUnion to follow suit
Equifax will be the first of the “big three” offices to include BNPL information, but TransUnion and Experian have indicated they will launch similar initiatives later next year.
“TransUnion believes that this data should be reported, and that it is important for our reports to reflect the consumer’s overall indebtedness. Furthermore, we believe reporting such information will provide a more complete picture of the borrower and enhance financial inclusion,” said Liz Bagel, Senior Vice President and Business Leader. TransUnion Consumer Lending, in a statement.
An Experian spokesperson said the company has been working with the largest BNPL providers since 2016 and will continue to work with partners across the financial services industry to include more BNPL information in credit reports.
“In short, there will be more Experian when you buy now, and pay later very soon,” according to the spokesperson.