FICO to Factor “Buy Now, Pay Later” Loans Into Credit Scores

Consumers who use “buy now, pay later” loans may have their payment data incorporated into one of the key metrics used to determine creditworthiness.

“Buy Now, Pay Later” (BNPL) options have increased dramatically in recent years as consumers seek more financial flexibility in paying off their installment debt. Responding to this increased popularity as a financing mechanism, FICO has recently announced the launch of FICO® Score 10 BNPL and FICO® Score 10 T BNPL.

These are the first credit score tools from a leading credit scoring provider to incorporate BNPL data. They will be implemented starting in the Fall of 2025.

Typically, BNPL loans are used by younger purchasers, such as active-duty servicemembers and their families, as a way to navigate increased costs for goods and services across the board.

Here’s what you need to know and how it may affect you if you use BNPL financing.

A Quick Explanation of FICO Scores

FICO utilizes data analytics and data science to provide a predictive measure of risk for consumer lending worldwide. It offers credit scoring products to businesses, helping them quantify the risk of extending credit to consumers.

The most notable of these is the well-known FICO Score, which is used by 90% of top US lenders and has become the standard measure of credit risk. A high FICO score indicates that a consumer is more likely to repay a loan in a timely manner until the debt is fully paid off.

FICO scores are determined by analyzing information from credit reports, with payment history, amounts owed, length of credit history, new credit, and credit mix used as determining factors. Based on these indicators, consumers are issued a score between 300 and 850. 

When it rolls out, BNPL data will be integrated into these metrics and could have an impact on one of the most important pieces of financial data associated with you.

The Growing Impact of BNPL Loans

BNPL plans typically allow consumers to split payments for purchases into four or fewer installments, often with a down payment required at checkout. This form of payment is popular for purchases such as food deliveries, concert tickets, televisions, furniture, clothing, and more. In this way, BNPL loans are more similar to layaway plans than traditional credit cards.

The loans are usually marketed as zero-interest, and most require no credit check or a soft credit check. Typically, when using BNPL loans, consumers pay for a given purchase over six weeks, although terms and timeframes may vary. 

According to the Consumer Financial Protection Bureau, the six largest BNPL providers are Affirm, Afterpay, Klarna, PayPal, Sezzle, and Zip originated almost 280 million loans for $33.8 billion in merchandise in 2022, equal to about 1% of credit card spending that year.

These numbers continue to rise as consumers seek more flexibility to help deal with rising costs for all types of goods. That has been in response to a period in which consumer debt has risen to a record $ 18.2 trillion, plus a more aggressive push to collect on federal student loans.

After a year-long study with leading lenders, FICO developed an innovative approach that includes aggregating separate BNPL loans together when calculating certain creditworthiness variables. This approach has proven effective in capturing predictive signals by incorporating BNPL data.

Adding in BNPL data will have an impact on FICO scores by providing lenders with greater visibility into consumers’ repayment behaviors. These insights will provide a more comprehensive view of credit readiness, ultimately enhancing the lending experience.

It is a more accurate measure that protects and prevents consumers from taking out loans they may struggle to repay, while also protecting businesses that must contend with consumers who default on loan repayments.

How It May Impact Servicemembers

According to the Federal Reserve, lower-income households —defined as those earning less than $50,000 per year —are the largest users of BNPL programs.

That means lower-ranking and lower-paid servicemembers find BNPL loans attractive as a financing option, especially those who are young, have growing families, and are trying to stretch their family resources with military pay.

This is consistent with the general public, where many BNPL loan users are younger consumers and those with limited or short credit histories. 

As part of its research, FICO included BNPL metrics 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. 

That’s good news for servicemembers who pay back their BNPL loans in a timely way because the new credit scoring model could help them improve their credit scores. In turn, that could increase access to mortgages, car loans, and apartment rentals. 

This represents a shift from current practices, as BNPL loans don’t typically contribute directly to improved scores, although missed payments can negatively impact a score. 

However, there is a downside to note. Unfortunately, while BNPL loans provide credit to financially vulnerable consumers, such as servicemembers, some appear to be overextending themselves. Recent reports by Bankrate and LendingTree cite an increase in BNPL users stating they have fallen behind on payments.

This is consistent with previous research that has shown consumers spend more when BNPL is offered at checkout, and that BNPL use leads to an increase in overdraft fees and credit card interest payments, and other types of fees.

Approximately 40% of BNPL plan users reported making late payments in the past year, up from just over 30% the previous year. According to a May report from Bankrate, about a quarter of BNPL users chose them because they were easier to get than traditional credit cards.

That’s a red flag that will now become more important to servicemembers now as FICO scores may reflect BNPL purchases and credit impacts that are shared with lenders.

While this definitely changes the credit game in some ways, it’s important to put things in perspective.

Although the new FICO scores will be available beginning in the fall, they are not a complete mandate for how FICO scores are reported. Although FICO is providing lenders with the option to increase visibility into consumers’ repayment behavior, not all BNPL companies share their data with credit bureaus, and not all lenders will opt in to using the new FICO tools, meaning widespread adoption may take some time.

The bottom line on BNPL loans is that if you use them responsibly after this new FICO overlay is added, it should help your credit score. But if you pay late or rack up too much debt, there’s a good chance it will hurt your credit score, just like the irresponsible use of credit cards or other types of consumer loans.

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