In December 2021, Equifax — one of the “big three” credit bureaus — announced it was creating a new reporting code for “buy now, pay later” (BNPL) loans, also known as “point of sale” loans. In January 2022, Experian introduced its upcoming “Buy Now, Pay Later Bureau,” which is set to debut in the spring. TransUnion followed suit in February with its “Point of Sale Suite of Solutions,” saying the move would “maximize financial inclusion” for the nearly 100 million consumers using this increasingly popular service.
Why the change?
BNPL loans are sometimes explained as today’s youngest generations’ answer to old-fashioned layaway plans, except that the consumer has access to their purchase immediately. Most of these short-term, typically interest-free loans are completed at checkout, whether online or in-person. Most BNPL lenders run only soft credit checks — or no credit check at all — before extending credit to the borrower.
In its release, TransUnion explained that one in three BNPL applicants are between the ages of 18 and 30, compared to 17% for the overall credit-active population. Additionally, 9% are “thin file,” or have three or fewer trades reported, and 43% fall into the subprime credit risk category. As these loans are underwritten as individual unsecured installment loans and treated transactionally, like a credit card swipe, it would theoretically be easy for a consumer to open several BNPL loans a year. Most existing credit models view this activity as risky behavior, TransUnion said.
While this move to include BNPL loans in credit reports will have advantages for both lenders and borrowers, it’s likely driven by the recent increased scrutiny by the Consumer Federal Protection Bureau (CFPB). Just days before Equifax’s initial announcement, Bloomberg reported that the CFPB was taking a closer look at BNPL lenders, including PayPal, Affirm, Klarna, and AfterPay. A statement from the Bureau said it was concerned about borrowers’ accumulating unreported debt as well as with lenders’ potential “regulatory arbitrage” and misuse of consumer personal data.
How it will work
To implement the reporting of BNPL data, Equifax has created a new business industry code for providers, and Experian and TransUnion are expected to do the same. These trades will be reported through the traditional credit reporting process, “with specific Metro 2 reporting guidance that ensures FCRA compliance,” TransUnion explained.
Experian’s statement adds that its program will allow BNPL providers to “furnish data on all types of point-of-sale products – enabling a comprehensive view of consumer payments, including the number of outstanding BNPL loans, total BNPL loan amounts and BNPL payment status.”
According to Bloomberg, the bureaus are urging BNPL providers to begin reporting their customer’s loans as soon as possible so lenders can begin to use the information when making credit decisions.
“We are encouraging BNPL providers to report into Equifax as a powerful source of data,” says Equifax chief product officer Mark Luber. “Those who use BNPL services that report can demonstrate reliable behavior and boost their credit profile.”
Will inclusion really boost credit scores?
At first, TransUnion credit data users will be able to opt-in to receive these tradelines; otherwise, default credit reporting will not change. Experian will store reported BNPL data separately from its core credit data.
Equifax did not elaborate on this aspect of its plan, but it did say that the company’s research shows inclusion of BLPL loans may increase credit scores. Of course, that’s only if lenders opt to factor it into their credit decisions.
Equifax found that, overall, BNPL consumers also had, on average, 5.5 months of payment history reported and an average utilization of 17.9%, including those who paid off their BNPL tradelines. The majority of consumers in its study enjoyed an average FICO score increase of 13 points. Equifax suggested BNPL loans (if reported and considered) could be a “powerful way for new-to-credit consumers to build their credit profiles” and could help consumers to rebuild their credit.
For more information on any and every aspect of credit reporting, call Datalinx at 425-780-4530 today!
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