Buy now, pay later, or BNPL, is a payment method that has soared in popularity in recent years. It’s normally used for relatively small purchases, so it may seem hard to believe that BNPL could ever help you buy a home.
But now it could help people take a step toward larger financial goals — like qualifying for a mortgage — thanks to a new version of the FICO credit score that incorporates BNPL activity.
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Millions of Americans Are ‘Credit Invisible’
For Americans with a credit history, the ability to get a credit card, car loan or mortgage is easy to take for granted. However, a 2022 study by management consultant Oliver Wyman and Experian found that 28 million Americans had no credit history. These people are referred to as being “credit invisible.”
Another 21 million had what’s known as a “thin credit file.” That means that their credit history does not contain enough information to generate a credit score. That’s 49 million Americans who face significant challenges qualifying for conventional credit.
How the New FICO Score May Help More People Build Credit
In June, FICO announced that it would be launching a version of its credit scores that includes data from BNPL accounts. This would be added to data from more conventional credit accounts like loans and credit cards in computing a credit score. This could help some credit invisible people build their credit history.
BNPL activity has soared in popularity in recent years. These transactions typically involve small amounts for retail purchases, and approval rates are high, even for people with bad or no credit. But because they are not reported to credit bureaus, they don’t contribute to your credit history.
That’s what the new FICO Score 10 BNPL and Score 10 T BNPL are intended to address. These versions will incorporate BNPL activity alongside traditional credit accounts, helping users build credit history with these small, easy-to-access loans.
This provides “a vital on-ramp for consumers establishing credit history,” says Chris Stanley, banking-industry practice lead for Moody’s Analytics.
Mike Taiano, a vice president and senior analyst at Moody’s Ratings, adds that “consumers with BNPL loans that consistently pay on time will get the benefit reflected in their FICO scores and see their access to credit expand.”
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Limitations of the New FICO Score
While FICO says the new scores will be a more reliable gauge of creditworthiness, don’t expect them to become the instant standard. Lenders have a wide selection of credit-scoring models to choose from, and there are concerns over how well BNPL activity fits in with other forms of credit like car loans or mortgages.
Chi Chi Wu, director of consumer reporting and data advocacy for the National Consumer Law Center, says BNPL transactions, which often require payment on a two-week frequency, don’t necessarily reflect someone’s ability to make sustained monthly payments on a longer-term loan.
“Also, you’re opening and closing a series of small accounts over a relatively short period of time, instead of maintaining the same account over a longer time,” says Wu. “The issue becomes how do you handle this data when it’s not jibing with other payment history data.”
Can Arkali, senior director in analytics and score development at FICO, says the company has taken steps to account for the different nature of BNPL loans.
“FICO developed an innovative approach that includes aggregating separate BNPL loans together when calculating certain in-model variables,” Arkali says.
Still, widespread adoption will require BNPL providers to report data to credit bureaus, those credit bureaus to include it in consumer files and lenders to update their models — and all of those stakeholders operate on their own timelines, Arkali says.
On Aug. 5, The Wall Street Journal reported that two major BNPL platforms, Afterpay and Klarna, were holding off on sharing customer data with the credit bureaus over concerns about how fairly the information would be interpreted.
Risks of Having BNPL Activity Included in Your Credit Score
The new FICO scores are part of a broader shift toward using nontraditional data, such as rent and utility payments. This approach is also reflected in the new Vantage 4.0 score, recently approved for use in mortgages sold to Fannie Mae and Freddie Mac.
While these data sources can help more consumers build credit files, they can also carry risks.
“The reporting of BNPL loans to the credit bureaus that will then begin to be reflected in FICO scores has both positive and negative consequences for lenders and borrowers,” Taiano says.
For example, “consumers that take out multiple BNPL loans with different providers and/or have been delinquent or default on these loans would likely see their FICO scores decline. These borrowers would likely then have reduced access to credit going forward,” he says.
And there are also concerns about the fairness and accuracy of what gets reported, says Wu.
“We don’t want to focus just on access to credit. The bigger problem is about making sure the credit reporting system is accurate and fair to consumers,” says Wu. “We are leery of efforts to bring alternative data into the system because sometimes these efforts end up hurting vulnerable consumers.”
Even when fully implemented, the BNPL-inclusive FICO scores won’t automatically solve the challenges faced by those previously shut out of credit. As always, a strong credit profile depends on maintaining low balances and making payments on time.
As Arkali says, the new versions of the FICO score “provide lenders with greater visibility into consumers’ repayment behaviors, enabling a more comprehensive view of their credit readiness and better-informed credit decisions.”
Whether that greater visibility helps or hurts your chance of getting credit depends on how you’ve managed your BNPL accounts.
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Can These New Scores Be a Bridge Toward Homeownership?
The new FICO scores offer an additional pathway to build credit, especially for those with limited history. However, they are not an instant solution. It will take time for BNPL data to be widely reported and even longer for mortgage lenders to adopt the new scoring model.
Fortunately, using BNPL isn’t the only way to start establishing a credit record. “You can apply for a secured credit card,” Wu says. “If you bank with a big bank, you may be able to get a credit card based on your history with your bank account. You can also be named an authorized user on a card.”
However you try to build a credit history, it’s important to make responsible choices. Borrow money only when you have a solid plan for repaying it.
If used thoughtfully, BNPL activity — alongside other credit types — can help you move up the financial ladder. Successful BNPL use could lead to a credit card, which may help you qualify for a car loan or personal loan. And paying those off can demonstrate to lenders that you’re ready for a mortgage.
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Could BNPL Help You Buy a Home? The Answer May Surprise You originally appeared on usnews.com
