The new FICO scores will be available beginning in the fall, as an option for lenders to increase visibility into consumers’ repayment behavior, the company said. Still, not all Buy Now, Pay Later companies share their data with the credit bureaus, and not all lenders will opt in to using the new models, so widespread adoption could take time, according to Adam Rust, director of financial services at the nonprofit Consumer Federation of America.
Here’s what to know.
Typically, when using Buy Now, Pay Later loans, consumers pay for a given purchase in four installments over six weeks, in a model more similar to layaway than to a traditional credit card. The loans are marketed as zero-interest, and most require no credit check or only a soft credit check.
In a statement, FICO said that their new credit score model is accounting for the growing significance of the loans in the U.S. credit ecosystem.
“Buy Now, Pay Later loans are playing an increasingly important role in consumers’ financial lives,” said Julie May, vice president and general manager of business-to-business scores at FICO. “We’re enabling lenders to more accurately evaluate credit readiness, especially for consumers whose first credit experience is through BNPL products.”
FICO said the new model will responsibly expand access to credit. Many users of BNPL loans are younger consumers and consumers who may not have good or lengthy credit histories. In a joint study with Affirm, FICO trained its new scores on a sample of more than 500,000 BNPL borrowers and found that consumers with five or more loans typically saw their scores increase or remain stable under the new model.
For consumers who pay back their BNPL loans in a timely way, the new credit scoring model could help them improve their credit scores, increasing access to mortgages, car loans, and apartment rentals. Currently, the loans don’t typically contribute directly to improved scores, though missed payments can hurt or ding a score.
Nadine Chabrier, senior policy and litigation counsel at the Center for Responsible Lending, said her main concern is that the integration of the loans into a score could have unexpected negative effects on people who are already credit-restrained.
“There isn’t a lot of information out there about how integrating BNPL into credit scoring will work out,” Chabrier said. “FICO simulated the effect on credit scoring through a study. They saw that some users’ scores increased. But if you factor in something that, last week, didn’t affect your credit, and this week, it does, without having very much information about the modeling, it’s a little hard to tell what the consequences will be.”
“This is a credit vulnerable community,” said Chabrier.
Rust, of the Consumer Federation of America, said he doesn’t expect this to be a game-changer for consumers who already have a credit profile.
“Are we at a point where using BNPL loans will dramatically alter your credit profile? Probably not,” he said. “I think it’s important that people have reasonable expectations.”
Rust said the average BNPL loan is for $135, and that repaying such small loans, even consistently, might not result in changes to a credit score that would significantly move the needle.
“It’s not about going from 620 to 624. It’s about going from 620 to 780,” he said, referring to the kind of credit score jumps that affect one’s credit card offers, interest rates on loans, and the like.
Still, Rust said that increased transparency around the loans could create a more accurate picture of a consumer’s debts, which could improve accurate underwriting and keep consumers from over-extending themselves.
“This addresses the problem of ‘phantom debt,’ and that’s a good thing,” he said. “Because it could be something that keeps people from getting too deeply into debt they can’t afford.”
