FICO: Buy Now, Pay Later Loans Unlikely to Hurt Most Credit Scores

As a financial advisor, I've seen firsthand how consumers are increasingly turning to Buy Now, Pay Later (BNPL) services like Afterpay, Klarna, and Affirm to spread out the cost of their purchases. But with the rise of these short-term financing options, many people are wondering: will using BNPL services impact my credit score? According to FICO, the answer is likely no, at least for most consumers.



In a recent study, FICO analyzed the impact of BNPL loans on credit scores using data from a major BNPL provider in the U.S. market. The findings suggest that the inclusion of BNPL data in consumer credit files generally yields a modest score change within +/- 10 points, with a slight trend toward lower FICO® Scores. However, it's essential to understand that the impact of BNPL loans on credit scores is dependent on various factors, such as the reporting approach of the BNPL lender and the consumer's overall credit profile.

BNPL reporting approach: How a BNPL lender reports these accounts to a credit bureau can materially influence the impact these loans ultimately have on the FICO Score. BNPL loans reported to the CRAs as a revolving debt are likely to have a more substantial effect (in either direction) than BNPL loans reported as installment loans, mainly because the credit utilization ratio on revolving accounts is an important factor for FICO® Scores.

Overall credit profile: Where a consumer is along their credit journey is another important consideration regarding how the inclusion of BNPL data might impact their FICO Score. Consumers with a history of missed payments in their credit report may benefit from the inclusion of BNPL loans that offer new evidence of on-time payments being made. Credit builders with thin or new-to-credit profiles might be impacted more significantly in either direction by the inclusion of new data coming from a recently opened BNPL loan.

Payment behavior on BNPL accounts: Consistent with all types of lending products reflected in the consumer credit file, the inclusion of BNPL loans that demonstrate on-time payment data and/or low utilization will be more likely to support a higher FICO Score.

In conclusion, while the impact of BNPL loans on credit scores is modest for most consumers, it's crucial to understand the factors that influence this impact. As a financial advisor, I would recommend that consumers monitor their credit reports regularly, make on-time payments, and maintain low utilization rates to build and maintain good credit. Additionally, lenders should consider the reporting approach of BNPL providers and the consumer's overall credit profile when assessing the potential impact of BNPL loans on credit scores. By doing so, we can help ensure that FICO® Scores continue to be the industry standard in accurate and reliable evaluation of borrower credit risk.