BNPL purchases now impact your credit report

[UNITED STATES] Credit reporting agencies are now including “Buy Now, Pay Later” (BNPL) purchases in credit reports, offering a new level of transparency and potentially impacting consumers’ credit scores. As BNPL services like Afterpay, Klarna, and Affirm grow in popularity, this development raises important questions about how the rising trend of deferred payments could affect individual financial health and creditworthiness.

The Growing Popularity of BNPL Services

Over the past few years, the “Buy Now, Pay Later” (BNPL) trend has exploded in popularity, especially among younger consumers looking for flexible ways to pay for goods and services without taking on credit card debt. Services like Klarna, Afterpay, and Affirm allow users to split their payments into smaller, manageable installments, typically over six weeks or more, without accruing interest if payments are made on time.

According to recent reports, the number of BNPL users in the U.S. is expected to surpass 45 million by 2026, reflecting a major shift in consumer spending behavior. While BNPL options can offer consumers more flexibility and purchasing power, the lack of traditional credit checks and the ease of access have raised concerns about potential financial risks and long-term implications.

Impact on Credit Reports

Until recently, BNPL purchases didn’t typically appear on credit reports, leaving many consumers unaware of the long-term consequences of using these services. This all changed when major credit reporting agencies—Equifax, Experian, and TransUnion—announced that BNPL activity would be reflected on consumers' credit reports, starting in 2024.

Now, when consumers make purchases through BNPL services, the details of their installment agreements, including payment history and outstanding balances, will be included in credit reports. This means that missed or late payments could impact consumers' credit scores, while timely payments could have a positive effect, just as with traditional credit cards or loans.

What Does This Mean for Consumers?

The inclusion of BNPL information on credit reports can have both positive and negative effects on consumers. For those who use BNPL services responsibly and make timely payments, the added visibility on their credit report could help improve their credit score, demonstrating a reliable payment history. On the flip side, missed payments could now impact credit scores, making it even more important for consumers to manage these short-term loans carefully.

“The credit reporting system is evolving, and BNPL services are a natural extension of that,” said Erin McCarty, a personal finance expert at the Consumer Financial Protection Bureau (CFPB). “We’re seeing an increasing convergence between traditional forms of credit and the more flexible payment options consumers are using today. Consumers need to be aware of the potential impact BNPL has on their creditworthiness and overall financial health.”

How BNPL Services Are Adapting

The inclusion of BNPL data in credit reports also marks a shift for BNPL providers themselves. Many of these services have made efforts to integrate with credit bureaus, either voluntarily or in response to growing scrutiny by regulators. Companies like Klarna and Affirm have already begun reporting payment activity to the credit bureaus, while others are expected to follow suit in the near future.

This move also aligns with a broader trend of increasing regulation of BNPL services. The Federal Reserve and various consumer protection agencies have raised concerns about the risk of consumers overextending themselves financially, given the ease with which BNPL purchases can be made. As a result, these services will now be subject to more stringent oversight, both from regulators and the credit reporting industry.

The Need for Financial Literacy

Experts warn that the most significant challenge with the increased presence of BNPL services on credit reports is consumer understanding. Many people—especially younger consumers—may not fully grasp how BNPL works and the implications it has on their credit score. According to a study by the National Endowment for Financial Education, nearly 40% of consumers who use BNPL services report not fully understanding how it affects their financial standing.

“There’s a clear need for greater financial education around BNPL services and how they can impact your credit,” said Michelle Hensley, a senior financial analyst at Credit Karma. “While BNPL offers flexibility, it’s essential to be mindful of the potential consequences of missing payments. Understanding how it affects your credit report can help consumers make better decisions about using these services.”

What You Can Do to Protect Your Credit

For consumers who use BNPL services or are considering them, there are several steps to help ensure they don’t face negative consequences when it comes to their credit:

Read the fine print: Each BNPL provider has different terms, so it’s important to fully understand the payment schedule and any fees or penalties associated with late payments.

Set reminders for payments: Make sure you know when each installment is due, and set calendar reminders to avoid missing deadlines.

Track your spending: Keep an eye on how many BNPL purchases you’re making. Using too many services can lead to a higher risk of overspending and missed payments.

Check your credit report regularly: Monitor your credit report to stay on top of any changes and make sure your BNPL payments are being reported accurately.

Looking Ahead: The Future of BNPL and Credit Reports

As BNPL services continue to grow in popularity, the way they are integrated into the credit reporting system will likely evolve. Experts predict that over time, BNPL services could become more tightly regulated, and their presence on credit reports could become more standardized. The push for more consumer protection may also lead to more transparent reporting systems, allowing consumers to track their BNPL activity more easily.

In the end, the decision to use BNPL services remains a personal one, but it’s crucial for consumers to be fully informed about how these payments impact their credit history and score. As credit reports evolve to include more diverse financial behaviors, being proactive in understanding how deferred payments can affect your financial future will be key to maintaining a healthy credit profile.

The inclusion of BNPL data in credit reports is a significant development for both consumers and the broader financial ecosystem. While it offers potential benefits in terms of transparency and accountability, it also underscores the need for financial literacy and responsible borrowing. As BNPL continues to shape the landscape of consumer finance, being informed and cautious will be the best strategy for avoiding financial pitfalls.