About five weeks ago, we reported on plans for Buy Now, Pay Later (BNPL) lenders to report their customers' borrowing practices to credit bureaus. While this would be bad news for irresponsible borrowers, it could help drive up the credit scores of others, perhaps helping them get approved for a mortgage with a lower interest rate than otherwise.
A snag has arisen since our first report.
Klarna Nixes Credit Score Reporting
Both Klarna and Afterpay say they won't furnish credit bureaus with their customers' transaction information unless they receive assurances about how it will be used. They're concerned that consumers' use of BNPL could itself be seen by some lenders as a negative, regardless of how perfectly the repayments were managed.
Many lenders don't like BNPL because it eats into their business models. Banks make fewer personal loans, and credit cards carry lower balances if consumers are using Buy Now, Pay Later to fund their purchases. And that's money off their bottom lines.
"BNPL use is expected to account for about $100 billion in transactions this year, but financial firms can’t agree on whether using the loans makes borrowers risky," reported The Wall Street Journal on Aug. 5. "Banks say use of the loans might hurt people’s chances of getting approved for a mortgage or credit card. Fair Isaac says its new FICO scoring model might lift the credit scores of people who use BNPL responsibly. Klarna says sharing its customer data widely leaves it open to interpretation."
So, some lenders might see the use of BNPL as a sign of financial irresponsibility, regardless of whether every payment is made on time. And that could see them declining applications for mainstream loans, including mortgages.
Do BNPL Borrowers Look Shaky To Other Lenders?
The Copper State Credit Union stresses the uncertainty and unpredictability of how individual lenders might regard BNPL when making lending decisions. But it also highlights some structural issues within the existing credit scoring model:
"Ordinarily, lots of short-term loans would be a bad thing, especially for younger borrowers," said Copper State in a blog. That's because these loans show that consumers have many accounts with short credit history instead of one account with long history, as with a credit card.
The average age of accounts in a credit report makes up 15% of the score, says FICO, the company behind the most widely used credit-scoring technologies. A BNPL loan may only last a few months, potentially reducing account age.
And if consumers don't use credit cards or other types credit for purchases, it could hurt their credit mix. FICO says a consumer's mix of different types of credit represents 10% of the credit score.
If some lenders are leary of lending to BNPL users, that could hurt lenders like Klarna. So, it's no wonder why BNPL lenders are hesitant to hand over customer data to credit bureaus.
