Latest news with #creditScores
Yahoo
06-07-2025
- Business
- Yahoo
Buy now, pay later loans will now affect US credit scores – what does that mean for consumers?
A new change to buy now, pay later loans means borrowers' credit scores may see a change, which has worried some users of the loans. 'I have a feeling that I'm just not going to have as much access to spending power and zero or really low APR rates,' said Nicole Nitta, a 31-year-old Las Vegas resident, who uses BNPL and shared that she already does not have great credit. Fico, the credit scoring company used by most US lenders, announced on 23 June that they would include BNPL loans, which play 'an increasingly important role in consumers' financial lives', to help lenders more 'accurately evaluate credit readiness'. Related: 'How did I get approved for $30,000?': is buy now, pay later headed for a fall? For users of companies like Affirm, Afterpay and Klarna, the new calculation could benefit them because it allows them to build their credit – if, of course, they pay back the loans on time, experts say. Nitta first used BNPL for essentials in 2021, like non-perishable food items. She was out of work and 'basically living off of savings', she said. Now, working as an office manager for a private therapy practice and studying marriage and family therapy, Nitta is more stable financially but has significant student loan debt. She has since used BNPL for Christmas gifts and dishware when she moved into a new apartment, but said she always makes her payments on time. Ted Rossman, a senior industry analyst at the financial site Bankrate, says: 'if you're using buy now, pay later responsibly,' like Nitta, 'I would argue [the change] should help you as a steppingstone to improve your credit, and maybe it helps you get your first credit card or car loan. 'The main downside is if it dings you because you're paying late or racking up too much debt. I would say that's a fair consequence, because that is what happens on credit cards and other products,' he added. Companies like Affirm, Afterpay and Klarna were founded more than a decade ago, but their usage expanded significantly during the Covid-19 pandemic. These companies provided $180m in loans totaling more than $24bn in 2021, an almost tenfold increase from 2019, according to the Consumer Financial Protection Bureau. Fumiko Hayashi, a vice-president at the Federal Reserve Bank of Kansas City who conducts economic research on payments, noted that the change was due to a shift from purchasing in stores to buying online – in addition to an economic downturn during the pandemic. A typical BNPL loan allows consumers to divide a $50 to $1,000 purchase into four interest-free instalments. If a borrower does not make the required payments, then the lender charges them a late fee. Lenders also charge transaction fees to merchants. BNPL is most popular among people ages 33 and under, who represented 70% of borrowers of such loans in 2022, according to the financial protection bureau. Hayashi noted that a downside for the younger users is 'if they keep using BNPL only and they don't use a credit card at all, they cannot build credit history'. With Fico's change, using BNPL responsibly could be beneficial for some younger users with no previous credit history – but less so for those not as responsible. For most users, Fico and Affirm say, including BNPL data in credit reports produced higher scores or no score changes – a finding in a year-long report released in February that looked at 500,000 consumers. Still, there are people who could be hurt by Fico using BNPL data. People with sub-prime or deep sub-prime credit scores obtained more than 60% of new BNPL loans from 2021 to 2022, according to the financial protection bureau. And 24% of BNPL borrowers were late making a payment in 2024, a 6% increase from the prior year, according to the Federal Reserve. Among people who make $25,000 or less, the rate increased from 31% to 40%. Notably, BNPL access 'significantly reduces the sensitivity of spending relative to income', according to a Harvard Business School report. 'This effect is concentrated among individuals likely to be liquidity constrained, specifically, lower-income users and users without credit cards,' the report notes. Becca, a 26-year-old tech worker in New York who declined to use her last name, said she used BNPL for things like pricier beauty products – including a Chanel perfume. She said she might 'spend like 80 bucks this month on it and make two separate $40 payments, and then next month, I pay off the rest'. While the payment option has helped her, she is concerned about companies like DoorDash offering BNPL for minor purchases like a pizza delivery. 'It's just encouraging poor spending behavior from young people,' Becca said. 'All these items build up because you're using it again and again and again. You don't feel like you're spending a lot of money.' It may be some time before the economy feels the impact of the new credit score calculation, Rossman said. While Fico stated that it would make the new scores available in fall 2025, most lenders continue to use a credit score model from 2009, (despite Fico since releasing new versions). 'Change comes relatively slowly in the credit scoring world, so even if this becomes available in the fall, that doesn't mean everybody is going to be using it right away,' said Rossman. 'It's kind of like your phone. For instance, Apple has the iPhone 16, but a lot of people are still using the 15 or the 14 or even older models. Credit scoring works the same way.' Sign in to access your portfolio
The Guardian
05-07-2025
- Business
- The Guardian
Buy now, pay later loans will now affect US credit scores – what does that mean for consumers?
A new change to buy now, pay later loans means borrowers' credit scores may see a change, which has worried some users of the loans. 'I have a feeling that I'm just not going to have as much access to spending power and zero or really low APR rates,' said Nicole Nitta, a 31-year-old Las Vegas resident, who uses BNPL and shared that she already does not have great credit. Fico, the credit scoring company used by most US lenders, announced on 23 June that they would include BNPL loans, which play 'an increasingly important role in consumers' financial lives', to help lenders more 'accurately evaluate credit readiness'. For users of companies like Affirm, Afterpay and Klarna, the new calculation could benefit them because it allows them to build their credit – if, of course, they pay back the loans on time, experts say. Nitta first used BNPL for essentials in 2021, like non-perishable food items. She was out of work and 'basically living off of savings', she said. Now, working as an office manager for a private therapy practice and studying marriage and family therapy, Nitta is more stable financially but has significant student loan debt. She has since used BNPL for Christmas gifts and dishware when she moved into a new apartment, but said she always makes her payments on time. Ted Rossman, a senior industry analyst at the financial site Bankrate, says: 'if you're using buy now, pay later responsibly,' like Nitta, 'I would argue [the change] should help you as a steppingstone to improve your credit, and maybe it helps you get your first credit card or car loan. 'The main downside is if it dings you because you're paying late or racking up too much debt. I would say that's a fair consequence, because that is what happens on credit cards and other products,' he added. Companies like Affirm, Afterpay and Klarna were founded more than a decade ago, but their usage expanded significantly during the Covid-19 pandemic. These companies provided $180m in loans totaling more than $24bn in 2021, an almost tenfold increase from 2019, according to the Consumer Financial Protection Bureau. Fumiko Hayashi, a vice-president at the Federal Reserve Bank of Kansas City who conducts economic research on payments, noted that the change was due to a shift from purchasing in stores to buying online – in addition to an economic downturn during the pandemic. A typical BNPL loan allows consumers to divide a $50 to $1,000 purchase into four interest-free instalments. If a borrower does not make the required payments, then the lender charges them a late fee. Lenders also charge transaction fees to merchants. BNPL is most popular among people ages 33 and under, who represented 70% of borrowers of such loans in 2022, according to the financial protection bureau. Hayashi noted that a downside for the younger users is 'if they keep using BNPL only and they don't use a credit card at all, they cannot build credit history'. With Fico's change, using BNPL responsibly could be beneficial for some younger users with no previous credit history – but less so for those not as responsible. For most users, Fico and Affirm say, including BNPL data in credit reports produced higher scores or no score changes – a finding in a year-long report released in February that looked at 500,000 consumers. Still, there are people who could be hurt by Fico using BNPL data. People with sub-prime or deep sub-prime credit scores obtained more than 60% of new BNPL loans from 2021 to 2022, according to the financial protection bureau. And 24% of BNPL borrowers were late making a payment in 2024, a 6% increase from the prior year, according to the Federal Reserve. Among people who make $25,000 or less, the rate increased from 31% to 40%. Notably, BNPL access 'significantly reduces the sensitivity of spending relative to income', according to a Harvard Business School report. 'This effect is concentrated among individuals likely to be liquidity constrained, specifically, lower-income users and users without credit cards,' the report notes. Becca, a 26-year-old tech worker in New York who declined to use her last name, said she used BNPL for things like pricier beauty products – including a Chanel perfume. She said she might 'spend like 80 bucks this month on it and make two separate $40 payments, and then next month, I pay off the rest'. While the payment option has helped her, she is concerned about companies like DoorDash offering BNPL for minor purchases like a pizza delivery. 'It's just encouraging poor spending behavior from young people,' Becca said. 'All these items build up because you're using it again and again and again. You don't feel like you're spending a lot of money.' It may be some time before the economy feels the impact of the new credit score calculation, Rossman said. While Fico stated that it would make the new scores available in fall 2025, most lenders continue to use a credit score model from 2009, (despite Fico since releasing new versions). 'Change comes relatively slowly in the credit scoring world, so even if this becomes available in the fall, that doesn't mean everybody is going to be using it right away,' said Rossman. 'It's kind of like your phone. For instance, Apple has the iPhone 16, but a lot of people are still using the 15 or the 14 or even older models. Credit scoring works the same way.'
The Guardian
05-07-2025
- Business
- The Guardian
Buy now, pay later loans will now affect US credit scores – what does that mean for consumers?
A new change to buy now, pay later loans means borrowers' credit scores may see a change, which has worried some users of the loans. 'I have a feeling that I'm just not going to have as much access to spending power and zero or really low APR rates,' said Nicole Nitta, a 31-year-old Las Vegas resident, who uses BNPL and shared that she already does not have great credit. Fico, the credit scoring company used by most US lenders, announced on 23 June that they would include BNPL loans, which play 'an increasingly important role in consumers' financial lives', to help lenders more 'accurately evaluate credit readiness'. For users of companies like Affirm, Afterpay and Klarna, the new calculation could benefit them because it allows them to build their credit – if, of course, they pay back the loans on time, experts say. Nitta first used BNPL for essentials in 2021, like non-perishable food items. She was out of work and 'basically living off of savings', she said. Now, working as an office manager for a private therapy practice and studying marriage and family therapy, Nitta is more stable financially but has significant student loan debt. She has since used BNPL for Christmas gifts and dishware when she moved into a new apartment, but said she always makes her payments on time. Ted Rossman, a senior industry analyst at the financial site Bankrate, says: 'if you're using buy now, pay later responsibly,' like Nitta, 'I would argue [the change] should help you as a steppingstone to improve your credit, and maybe it helps you get your first credit card or car loan. 'The main downside is if it dings you because you're paying late or racking up too much debt. I would say that's a fair consequence, because that is what happens on credit cards and other products,' he added. Companies like Affirm, Afterpay and Klarna were founded more than a decade ago, but their usage expanded significantly during the Covid-19 pandemic. These companies provided $180m in loans totaling more than $24bn in 2021, an almost tenfold increase from 2019, according to the Consumer Financial Protection Bureau. Fumiko Hayashi, a vice-president at the Federal Reserve Bank of Kansas City who conducts economic research on payments, noted that the change was due to a shift from purchasing in stores to buying online – in addition to an economic downturn during the pandemic. A typical BNPL loan allows consumers to divide a $50 to $1,000 purchase into four interest-free instalments. If a borrower does not make the required payments, then the lender charges them a late fee. Lenders also charge transaction fees to merchants. BNPL is most popular among people ages 33 and under, who represented 70% of borrowers of such loans in 2022, according to the financial protection bureau. Hayashi noted that a downside for the younger users is 'if they keep using BNPL only and they don't use a credit card at all, they cannot build credit history'. With Fico's change, using BNPL responsibly could be beneficial for some younger users with no previous credit history – but less so for those not as responsible. For most users, Fico and Affirm say, including BNPL data in credit reports produced higher scores or no score changes – a finding in a year-long report released in February that looked at 500,000 consumers. Still, there are people who could be hurt by Fico using BNPL data. People with sub-prime or deep sub-prime credit scores obtained more than 60% of new BNPL loans from 2021 to 2022, according to the financial protection bureau. And 24% of BNPL borrowers were late making a payment in 2024, a 6% increase from the prior year, according to the Federal Reserve. Among people who make $25,000 or less, the rate increased from 31% to 40%. Notably, BNPL access 'significantly reduces the sensitivity of spending relative to income', according to a Harvard Business School report. 'This effect is concentrated among individuals likely to be liquidity constrained, specifically, lower-income users and users without credit cards,' the report notes. Becca, a 26-year-old tech worker in New York who declined to use her last name, said she used BNPL for things like pricier beauty products – including a Chanel perfume. She said she might 'spend like 80 bucks this month on it and make two separate $40 payments, and then next month, I pay off the rest'. While the payment option has helped her, she is concerned about companies like DoorDash offering BNPL for minor purchases like a pizza delivery. 'It's just encouraging poor spending behavior from young people,' Becca said. 'All these items build up because you're using it again and again and again. You don't feel like you're spending a lot of money.' It may be some time before the economy feels the impact of the new credit score calculation, Rossman said. While Fico stated that it would make the new scores available in fall 2025, most lenders continue to use a credit score model from 2009, (despite Fico since releasing new versions). 'Change comes relatively slowly in the credit scoring world, so even if this becomes available in the fall, that doesn't mean everybody is going to be using it right away,' said Rossman. 'It's kind of like your phone. For instance, Apple has the iPhone 16, but a lot of people are still using the 15 or the 14 or even older models. Credit scoring works the same way.'
The Independent
26-06-2025
- Business
- The Independent
How Buy Now, Pay Later schemes could affect your credit score soon
FICO announced a new model that will factor Buy Now, Pay Later (BNPL) loans into consumer credit scores, marking a significant shift in creditworthiness assessment. The new scores, available to lenders from autumn, aim to provide increased visibility into consumers' repayment behavior and responsibly expand credit access, especially for those with limited credit histories. A joint study with Affirm indicated that consistent on-time BNPL repayments could lead to improved credit scores, potentially enhancing access to traditional loans and rentals. Consumer advocates raised concerns about 'loan stacking' and 'phantom debt,' warning that integrating BNPL into scores could have unforeseen negative effects on 'credit vulnerable' communities. While not expected to be an immediate 'game-changer' for consumers with established credit profiles, the change could create a more accurate picture of consumer debt, potentially preventing over-extension.
Yahoo
26-06-2025
- Business
- Yahoo
Buy Now, Pay Later loans will soon affect some credit scores
NEW YORK (AP) — Hundreds of millions of 'Buy Now, Pay Later' loans will soon affect credit scores for millions of Americans who use the loans to buy clothing, furniture, concert tickets, and takeout. Scoring company FICO said Monday that it is rolling out a new model that factors the short-term loans into their consumer scores. A majority of lenders use FICO scores to determine a borrower's credit worthiness. Previously, the loans had been excluded, though Buy Now, Pay Later company Affirm began voluntarily reporting pay-in-four loans to Experian, a separate credit bureau, in April. The new FICO scores will be available beginning in the fall, as an option for lenders to increase visibility into consumers' repayment behavior, the company said. Still, not all Buy Now, Pay Later companies share their data with the credit bureaus, and not all lenders will opt in to using the new models, so widespread adoption could take time, according to Adam Rust, director of financial services at the nonprofit Consumer Federation of America. Here's what to know. Why haven't the loans appeared in credit scores previously? Typically, when using Buy Now, Pay Later loans, consumers pay for a given purchase in four installments over six weeks, in a model more similar to layaway than to a traditional credit card. The loans are marketed as zero-interest, and most require no credit check or only a soft credit check. The main three credit reporting bureaus, Experian, TransUnion, and Equifax, haven't yet incorporated a standard way of including these new financial products in their reports, since they don't adhere to existing models of lending and repayment. FICO, the score of the Fair Isaac Corporation, uses data from the bureaus to calculate its own credit score, and is independently choosing to pilot a new score that takes the loans into account. Why is this important? BNPL providers promote the plans as safer alternatives to credit cards, while consumer advocates warn about 'loan stacking,' in which consumers take on many loans at once across several companies. So far, there's been little visibility into this practice in the industry, and the opacity has led to warnings of 'phantom debt" that could mask the health of the consumer. In a statement, FICO said that their new credit score model is accounting for the growing significance of the loans in the U.S. credit ecosystem. 'Buy Now, Pay Later loans are playing an increasingly important role in consumers' financial lives,' said Julie May, vice president and general manager of business-to-business scores at FICO. 'We're enabling lenders to more accurately evaluate credit readiness, especially for consumers whose first credit experience is through BNPL products." What does FICO hope to achieve? FICO said the new model will responsibly expand access to credit. Many users of BNPL loans are younger consumers and consumers who may not have good or lengthy credit histories. In a joint study with Affirm, FICO trained its new scores 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. For consumers who pay back their BNPL loans in a timely way, the new credit scoring model could help them improve their credit scores, increasing access to mortgages, car loans, and apartment rentals. Currently, the loans don't typically contribute directly to improved scores, though missed payments can hurt or ding a score. Since March, credit scores have declined steeply for millions, as student loan payments resume and many student borrowers find themselves unable to make regular payments on their federal student loans. What are the risks and concerns? Nadine Chabrier, senior policy and litigation counsel at the Center for Responsible Lending, said her main concern is that the integration of the loans into a score could have unexpected negative effects on people who are already credit-restrained. 'There isn't a lot of information out there about how integrating BNPL into credit scoring will work out,' Chabrier said. 'FICO simulated the effect on credit scoring through a study. They saw that some users' scores increased. But if you factor in something that, last week, didn't affect your credit, and this week, it does, without having very much information about the modeling, it's a little hard to tell what the consequences will be.' Chabrier cited research that's shown that many BNPL users have revolving credit card balances, lower credit scores, delinquencies, and existing debt. Women of color are also more likely to use the loans, she said. 'This is a credit vulnerable community,' said Chabrier. Will consumers see immediate effects? Rust, of the Consumer Federation of America, said he doesn't expect this to be a game-changer for consumers who already have a credit profile. 'Are we at a point where using BNPL loans will dramatically alter your credit profile? Probably not,' he said. 'I think it's important that people have reasonable expectations.' Rust said the average BNPL loan is for $135, and that repaying such small loans, even consistently, might not result in changes to a credit score that would significantly move the needle. 'It's not about going from 620 to 624. It's about going from 620 to 780,' he said, referring to the kind of credit score jumps that affect one's credit card offers, interest rates on loans, and the like. Still, Rust said that increased transparency around the loans could create a more accurate picture of a consumer's debts, which could improve accurate underwriting and keep consumers from over-extending themselves. 'This addresses the problem of 'phantom debt,' and that's a good thing,' he said. 'Because it could be something that keeps people from getting too deeply into debt they can't afford.' ___ The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism. Cora Lewis, The Associated Press
