Buy Now, Pay Later Loans are Now Part of FICO Credit Scores – What It Means for You
Exploring the impact of BNPL loans on credit scores and consumer financial health.
How you handle your Buy Now, Pay Later (BNPL) loans will soon influence your credit score. Recently, FICO announced it will release new scoring models this year that incorporate data from BNPL loans. This marks a significant shift in the credit scoring landscape, especially as these installment-based payment plans have become a go-to financing option for millions of consumers, particularly younger ones. But what does this development mean for your financial health, and how does it impact the broader credit scoring ecosystem?
This blog will explore the unprecedented inclusion of BNPL data in FICO scores, highlighting the opportunities, risks, and challenges this poses for borrowers and lenders alike.
FICO’s New Approach to Credit Scoring
Traditionally, FICO credit scores have been built around long-established factors such as payment history, credit utilization, account longevity, and types of credit used. Until now, BNPL loans have largely been invisible in this equation. These loans, which allow users to split purchases into smaller, interest-free installments, were not reported to credit bureaus like Experian or TransUnion by most BNPL providers.
According to Ethan Dornhelm, Vice President of FICO Scores and Predictive Analytics, this blind spot in credit data has left lenders with an incomplete picture of consumer credit behavior. “A number of the largest lenders in the US told us, loud and clear, there is a need for a credit scoring model that includes the BNPL data,” Dornhelm said in a recent CNN interview.
FICO’s response? The upcoming release of the FICO Score 10 and FICO Score 10 T models, which will aggregate and assess consumers’ BNPL data and incorporate it into credit scores. This innovation promises to offer a more nuanced understanding of borrowers’ habits, but it also adds a layer of complexity to an already intricate system.
A Mixed Bag for Young and First-Time Credit Users
BNPL loans have enjoyed immense popularity, particularly among younger consumers and those without extensive credit histories. For these groups, the inclusion of BNPL activity could act as a credit-building tool. "A lot of BNPL users are often young people who don’t have long credit histories," said Ted Rossman, Chief Credit Analyst at Bankrate. "That’s the more optimistic use case—BNPL could bring more people into the credit system. And if they use Buy Now, Pay Later responsibly, it should help them."
For example, a 25-year-old with no traditional credit cards might use BNPL to buy concert tickets or even groceries. If they make on-time payments, this positive behavior could now reflect in their FICO score, potentially boosting their creditworthiness.
However, where there’s opportunity, there’s also risk. BNPL is incredibly easy to use—perhaps too easy. A May survey by Bankrate found that nearly half of BNPL users reported problems ranging from overspending to juggling multiple payment obligations. Since BNPL loans are often used for discretionary purchases, it’s not uncommon for consumers to take on more loans than they can repay. Such behavior could harm credit scores, particularly if missed payments or overextended debts are reported.
The Unique Challenges of Scoring BNPL Loans
Unlike traditional credit lines or personal loans, BNPL loans carry unique characteristics that could complicate their role in credit scoring:
1. Frequent Account Openings
BNPL loans are short-term by design. Consumers might open and close multiple accounts within days or weeks. Traditional scoring systems interpret frequent openings and closures as risky behavior, which could penalize users unfairly. To address this, FICO has developed a "novel" methodology that aggregates BNPL loans to avoid over-penalizing users, as Dornhelm explained.
2. Maximized Credit Utilization
Users typically max out their BNPL credit lines and then pay them off. While this doesn't align with traditional credit card utilization behaviors, FICO’s updated models aim to assess these patterns without automatically categorizing them as negative.
3. Data Reporting Gaps
Not all BNPL providers report loan activity to credit bureaus, and those that do use inconsistent methods. For instance, Affirm is among the few companies that currently share data with Experian and TransUnion. Consistent and comprehensive data sharing will be critical to the success of FICO’s new models.
4. Impact of “Phantom Debt”
The rise of BNPL has also exacerbated concerns about phantom debt—the type of debt that goes unnoticed due to lack of reporting or oversight. This phenomenon may make it hard for both lenders and consumers to manage total financial obligations effectively, creating potential pitfalls.
Challenges for the Credit Industry
Despite the promise of more comprehensive credit scores, this shift is unlikely to happen overnight. The credit scoring industry, much like any sophisticated system, adapts slowly. While FICO’s inclusion of BNPL data marks a forward-thinking move, not every lender will adopt the new scoring models immediately.
According to Rossman, lenders may be hesitant to invest in new systems or train employees on updated protocols. Many mortgage lenders, for example, still rely on older FICO scoring models like versions 2, 4, or 5. Simply put, it will take time for the new BNPL-ready scores to become widely used.
Additionally, the entire system depends on data furnished by lenders—yet not all BNPL providers are on board. This creates further inconsistency in how these loans will be evaluated.
The Bigger Picture for Consumer Financial Health
The integration of BNPL loans into FICO scores signals progress in understanding today’s evolving financial behaviors. Yet, much of the outcome depends on how consumers, lenders, and regulators respond to this change.
For consumers, this means exercising caution. While BNPL offers a more flexible way to manage purchases, failing to adhere to repayment schedules could now hurt your credit score. Using BNPL responsibly—by monitoring spending, sticking to a budget, and keeping loan obligations manageable—will be critical.
For the credit industry, the move invites a much-needed conversation about transparency and fairness in credit reporting. Regulators may eventually have a role to play here, ensuring BNPL providers consistently report data to level the playing field.
Closing Thoughts
The inclusion of BNPL data in FICO scores is a step into uncharted territory for both consumers and lenders. On the one hand, it offers an opportunity for underserved populations, such as young or first-time credit users, to build financial credibility. On the other hand, it introduces risks tied to overleveraged spending and the complexities of capturing non-traditional borrowing behaviors.
Looking ahead, consumers who use BNPL services must weigh the convenience of these loans against their potential long-term impact on credit scores. Doing so is essential for maintaining financial health in a rapidly evolving credit environment. Meanwhile, the credit industry will grapple with making these new models and methodologies accessible, fair, and effective in reflecting consumer realities.
Ultimately, FICO's move to incorporate BNPL data marks a pivotal shift. Whether it becomes a boon or a burden will depend on how all stakeholders—consumers, lenders, and regulators—navigate this new frontier.