pay later: buy now, pay later, loans may soon play a bigger role in credit scores

Online “Buy now, pay later” loans are gaining the attention of regulators and the credit industry as consumers look to them more and more, and they may soon play a bigger role in credit scores .

Loans from fintech companies including Affirm, Afterpay, and Klarna offer an updated version of layaway plans, once a common option for buyers to pay for big-ticket items in installments. The new offers, widely available online or through mobile apps, are typically used for smaller purchases, such as shoes, clothing, and concert tickets, and allow the buyer to get the items immediately.

Buyers usually apply at checkout and can be approved quickly, with a quick credit check. They then pay for the purchase in four installments or less over several weeks. Borrowers typically don’t pay interest, as they would with traditional credit cards, but some lenders may charge fees for late payments.

Deferred repayment loans are attractive because they give people the option of paying over time, but without any interest. They’re most popular with millennials and millennials – people around 40 and under – according to a recent report from Fitch Ratings. They also appeal to people who may have lower credit scores or a limited credit history, making it more difficult to qualify for traditional loans and credit cards at affordable rates.

As of now, many of these small, short-term loans are not consistently reported to the credit bureaus, so borrowers are not building a formal credit history using them.

But as loans become more common, that is changing. Major credit bureaus are working to include more late payment loans on consumer credit reports. Equifax, for example, said two weeks ago that it had created formal standards for reporting loans and that it plans to start adding them to its consumer credit reports in late February.

Experian said it already includes data on late payment credit, including short-term loans, in its credit reports and is working to add more. TransUnion is “on track” to include this data, said Liz Pagel, senior vice president and head of consumer loans at the credit reporting firm.

All of this means that buyers’ history of deferred payments can increasingly influence their credit rating – those three-digit numbers that sum up your credit report and determine whether you qualify for a traditional loan or credit card. credit and what interest rate you will charge. To pay.

Equifax says that’s a good thing, because lender’s on-time payment reports can help buyers build a credit history. “We have focused on being able to report, so that consumers benefit,” said Mark Luber, product manager for US information solutions at Equifax.

Equifax says a study of anonymous late payment data found that a majority of buyers were helped by having an account with on-time payments on their credit report, with an average increase in FICO credit scores of 13 points. People with poor credit histories, who may not qualify for traditional loans, achieved an average FICO score increase of 21 points when on-time payments were added to their records. (The average baseline FICO score is 716; generally scores of 670 or higher are considered good).

It could help consumers who pay their loans on time by helping them build a positive credit profile, said Lauren Saunders, associate director of the National Consumer Law Center. But, like traditional loans and credit cards, paying late could tarnish their reports.

“The jury is still out on it,” Saunders said.

As it stands, missing a down payment or not paying at all can already hurt a buyer’s credit. If a consumer doesn’t pay, some businesses may cut off access to new loans or send the account to a collection agency, which may show up on credit reports.

Financial site CreditKarma said that an online survey conducted on its behalf in August found that nearly half of American adults had used some kind of payment service later. About a third of them said they missed one or more payments. Of those who missed at least one payment, nearly three-quarters said they believed their credit scores had gone down as a result.

Most people said they used the plans to pay for purchases of $ 500 or less, with about a third of finance purchases of $ 100 or less, according to the survey.

Equifax said it would encourage late payment companies to report consumer payment history. Late payment companies contacted said they generally supported the practice.

Reporting late payment loans to credit bureaus helps protect consumers and “allows all responsible insurers to more accurately assess risk and prevent consumers from being overburdened,” Affirm said in a report. -mail.

Francis Creighton, president and CEO of the Consumer Data Industry Association, a trade group for the credit reporting industry, said it was important for late payment loans to be reflected on credit reports so that lenders can get a true picture of a loan seeker’s overall credit profile. . But because the loans are structured differently from traditional loans, he said, credit bureaus first had to solve “technical” issues to add them. “We have to make sure we get it right,” he said.

At the same time, the Federal Office for Financial Consumer Protection has stepped up the examination of late payment companies. In mid-December, the office opened an investigation, asking five companies to provide details of their business practices by March 1. wanted to better understand the potential benefits and risks to consumers. The agency said it was also concerned about how companies use the data they collect from customers.

The agency noted that if consumers use the loans for multiple purchases, they may find it difficult to keep up with payments. “Due to the ease of obtaining these loans,” the agency said, “consumers may end up spending more than expected.”

Installment payments are usually automatically deducted from debit cards, so buyers may be charged an overdraft fee if they don’t have enough money in their account to cover the payments. If buyers pay down payments with a credit card, they can accumulate additional debt and interest charges on their card if they don’t pay their down payment in full.

In addition, the consumer agency said, late payment loans have fewer protections than traditional credit cards, such as the right to dispute charges if a product is defective.

Members of Congress, as well as consumer groups, called for increased monitoring of businesses, noting that because installment loans do not use traditional credit checks, it is not clear whether borrowers have the right ability to repay multiple loans.

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