Catalyst for Credit Shift
- Affirm stepping up by dishing out credit bureau reports for pay-over-time loans, including Pay-in-4.
- BNPL's insignificant impact on credit scores today, but could spiral significant change in future.
- Young users, often Gen Z & millennials, stand a chance to build or ruin their credit, thanks to Affirm.
"Impact on Credit Scores: Understanding the Implications of 'Buy Now, Pay Later' Installment Plans"
Buy now, pay later (BNPL) has unleashed chaos in the credit domain with tempting zero-or-low-interest payment options for hefty purchases. Check out these stupendous figures - our research indicates that 39 percent of Americans (nearly 2 in 5) have dabbled in BNPL [1]. Particularly among the younger generations.
Traditionally unmonitored, those BNPL payments - whether on time or delinquent - bode well or poorly for your credit until now. Late or missed payments on credit cards and loans have long played a part in building (or breaking) your credit, but this hasn't been the case for BNPL.
Affirm, a significant BNPL lender, recently threw a curveball - it's about to start reporting all pay-over-time shenanigans to two heavyweight credit bureaus, Experian and TransUnion. No sweat if you've had an Affirm loan, for months it's been on the reports. But Pay-in-4, their popular four-part interest-free payment plan, is gearing up to join the club, including the original and outstanding balance, payment history and loan terms [2].
"More transparency in BNPL activity benefits consumers and promotes responsible borrowing," cheers Libor Michalek, Affirm's Prez [2].
Get to Know Affirm
One of the biggies in the BNPL market, Affirm doles out payment plans with varying interest rates - from zero to 36 percent. Given its lenient credit terms, it garners popularity among those with subpar credit or tight budgets. In fact, Affirm grabs second place with 12 percent of Americans under their belt, tying with Afterpay. PayPal Pay-in-4/Pay Later and Klarna claim 16 percent and 11 percent of Americans, respectively [1].
Introducing Pay-in-4, Affirm's version of BNPL, you can smash purchases between $50 and a whopping $1,000 into four installments, doled out over time, sans interest or fees, and, surprisingly, untouched by credit hits [1]. Folks, this is all about to change with Affirm, Experian, and TransUnion.
"Pay in 4, pass now, agony later, it's all fun and games until it hits your credit score," warns Libor Michalek, Affirm's Prez [2].
Whatcha Know About Credit Bureaus?
Experian and TransUnion are two of the godfathers of credit reporting, collecting data on payment history, outstanding balances, inquiries, and account statuses that shape your credit report. They share data with fellow scorers FICO and VantageScore, turning your number, a neat three-digit indicator of your creditworthiness, from 300 to 850 [3].
Check out April 1, 2025, baby! Affirm's data began gracing Experian reports, and TransUnion will follow suit starting May 1, 2025, once you establish a free membership with Experian [3].
"BNPL's veil of secrecy is being lifted, and it's about time," grins Scott Brown, Group Prez, Financial Services of Experian North America [2].
BNPL and Your Credit Score
Historically, BNPL has wielded less influence on credit scores, but it's all about to change [2]. Common BNPL strategies usually invite a soft credit inquiry for approval - different from hard credit checks, which pop up when you apply for credit cards, loans, or auto loans. Those hurt your score temporarily.
While longer-term loans are usually reported to the bureaus, short-term BNPL payment plans typically don't make the cut. The CFPB mentions exceptions when unpaid BNPL plans land in the hands of debt collectors, eventually showing up on credit reports and denting your score. But with Affirm stepping up to the plate, that could change [2].
"Affirm steps forward, putting BNPL newbies on notice," suggests Steve Chaouki, TransUnion's US Markets & Consumer Interactive Prez [2].
BNPL, A Chance to Build (or Tarnish) Your Credit
For cash-strapped folks (without credit histories) choosing BNPL because traditional borrowing doors shut, this is a shot to better their Experian and TransUnion credit reports. Four consecutive on-time BNPL repayments translate to a positive payment history gracing your credit report, even though traditional models snub such data [2].
And here's the kicker - a FICO study earlier in the year shows that incorporating BNPL data into credit files could potentially boost some borrowers' FICO scores [2]. Good credit makes it easier to snag future lines of credit, housing, and fairer loan terms.
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Footnotes:[1] Based on our website's 2024 Buy Now, Pay Later Survey[2] Press release by Affirm - https://affirm.com/about/news/affirm-announces-first-integrated-credit-bureau-partnership/.[3] Press release by Experian - https://www.prnewswire.com/news-releases/affirm-expands-committed-to-financial-transparency-through-partnership-with-experian-301582486.html[4] Press release by TransUnion - https://www.prnewswire.com/news-releases/transunion-announces-new-partnership-with-affirm-which-will-report-bnpl-data-to-credit-bureaus-301524136.html[5] CFPB Press Release (2024) - https://www.consumerfinance.gov/about-us/newsroom/cfpb-signals-support-for-buy-now-pay-later-inclusion-in-credit-scoring/
- With Affirm's recent decision to report BNPL payments to Experian and TransUnion, millennials and Gen Z users who utilize services like Pay-in-4 may now have an opportunity to build or ruin their creditworthiness in the realm of personal-finance.
- Following Affirm’s lead, BNPL could have a significant impact on credit scores in the future, as BNPL providers like Afterpay also look to report payment information to credit bureaus.
- Prospective users of Buy Now, Pay Later (BNPL) services, such as those offered by Affirm, Afterpay, PayPal Pay-in-4/Pay Later, and Klarna, should be aware that their creditworthiness may now be affected by their payment history and loan terms with these services.
