Buy now, pay later credit reporting moves forward, but a long journey lies ahead

Earlier this month, Apple became the first major provider of buy now, pay later loans to report all of its customers’ “pay-in-four” account histories to a credit bureau (Experian). While this is a notable milestone, I also see it as a sign of how far the industry still needs to go in order to make buy now, pay later (BNPL) a mainstream credit reporting component.

Apple and Experian should be commended for their leadership on this issue, but let’s face it: This is just one provider, providing data to just one of the three major credit bureaus. And while Apple is a huge, successful company overall, it’s one of the newest entrants to the BNPL market with much smaller BNPL market share than more established BNPL competitors such as Affirm, Afterpay and Klarna.

Affirm reports some of its longer-term loans to Experian, but across the industry, the vast majority of BNPL products remain unknown to credit bureaus. Especially the “pay-in-four” model which typically involves a 25 percent down payment and then additional 25 percent installments due in two, four and six weeks.

It’s important to note that while Apple Pay Later plans have started appearing on Experian credit reports for consumers’ self-edification, lenders will not be able to see these credit report notations for the foreseeable future. And it could be much longer before these plans are factored into credit scores, the crucial three-digit numbers that substantially impact whether or not applicants are approved for loans and lines of credit.

Why BNPL credit reporting is proving to be difficult

I hoped that lenders would be able to see BNPL information much sooner, although I realize that this lending model represents a square peg compared with the proverbial round hole of traditional credit reporting.

To be honest, it seems as if existing credit scoring models don’t know what to do with BNPL. This has been a pain point for years, and it’s one the Consumer Financial Protection Bureau has been looking into. The formal rulemaking process is still playing out, but in 2022, the agency noted that “consumer reporting companies should incorporate the BNPL data into core credit files as soon as possible.”

In early 2022, Equifax debuted a new “business industry code” for BNPL and encouraged providers to report consumers’ usage. But adoption has been slow across the industry, and there are several primary reasons.

First, by definition, BNPL plans are often very short-term loans (six weeks, in most cases). Credit scoring models don’t like it when consumers frequently open new accounts — it would be disastrous for your credit score if you opened a new credit card every six weeks, since this would be viewed as a sign of financial distress. In other words, why do you need so much new credit? But BNPL is designed to be a short-term funding source.

The other key issue pertains to credit utilization. On a credit card, this refers to credit you’re using compared to the credit available to you. It’s often recommended that you use no more than about 30 percent of your credit line, because maxing out a card can be an indicator of financial trouble. But how should BNPL utilization be measured? Is the customer effectively maxing out their available credit when they make the purchase and then paying it off within six weeks, if all goes according to plan?

BNPL plans don’t usually have a defined credit limit like credit cards do. Whereas a credit card issuer might give you a $5,000 credit line that you can use as you wish — charging purchases, paying them off over time and watching your available credit rise and fall along with your usage — BNPL loans are usually one-offs underwritten for a specific purchase.

How BNPL could be integrated into credit reports

One fix could be for the BNPL industry to treat its payment plans more like ongoing lines of credit, rather than a series of separate loans for individual purchases. But this would require fundamental adjustments to the way they do business.

An easier lift — and a potential short-term fix — would probably be to acknowledge that BNPL is different from credit cards. Therefore, credit scoring models could exclude BNPL from the average age of accounts and credit utilization calculations. My near-term suggestion is to incorporate BNPL into credit reports and credit scores, but to focus more on whether or not the consumer paid on time. It wouldn’t be a particularly comprehensive solution, but payment history is the most important factor in one’s credit score, so it would at least check that box.

Why BNPL credit reporting matters to lenders and consumers

I know this is a process, and it’s going to take more time for BNPL to become more embedded into the credit scoring system. But right now, it still feels as if there are too many blind spots for lenders — and it’s not great for some consumers, either.

Many shoppers are drawn to BNPL because these plans are generally easier to obtain than credit cards and other loans, meaning that people with lower incomes and lower credit scores are more likely to be approved. But using BNPL plans responsibly doesn’t usually help build credit, so this can be a self-fulfilling prophecy.

In other words, BNPL plans can hurt your credit if you fall so far behind that you’re sent to collections. But since most routine payments aren’t reported, using this financing responsibly usually won’t help you to improve your credit score over time, either. That’s unfortunate, because responsible BNPL usage could become a stepping stone to a better credit score — but only if this account history is reported.

Some other financial products, such as rent payments, utilities and streaming subscriptions, operate similarly. They’re mostly outside the traditional credit scoring system, but there are some ways to bring them into the light (for example, by signing up for services such as Experian Boost, eCredable Lift and RentTrack).

Can better credit reporting boost BNPL customer satisfaction?

Apple Pay Later received a middle-of-the-pack rating in J.D. Power’s 2024 U.S. Buy Now Pay Later Satisfaction Study. Interestingly, the BNPL offerings from established credit card leaders American Express, Chase and Citi took the top three spots, while pure-play BNPL providers Sezzle, Afterpay and Affirm placed at the bottom of the ranking.

“The credit card brands’ customers tend to be financially healthier than the other providers’ customers and financially healthier customers tend to be more satisfied with BNPL providers. They are more likely to find BNPL terms reasonable than other consumers are. They are likely less concerned about missing a payment and therefore using BNPL to budget/spread out repayment.”

— Miles TulloManaging Director of banking and payment, J.D. Power

I wonder if Apple’s leadership on BNPL credit reporting will help it move up the ranks?

I asked Tullo, who replied, “Credit reporting is likely to affect satisfaction differently depending on the provider. Apple, for example, shouldn’t see a change in satisfaction or growth with Apple Pay Later now that they are reporting. Their customers are more likely to have higher credit scores. Providers that are not reporting today and are attracting a greater percentage of customers with low credit scores may be more likely to experience lower satisfaction scores if they begin reporting. That being said, reporting will only help further legitimize BNPL and improve the health of the industry long-term, which should benefit all providers.”

The bottom line

Buy now, pay later has become a mainstream payment method over the past few years. In fact, online usage of this method hit a record-high $16.6 billion during the 2023 holiday season, which was up 14 percent from 2022, according to Adobe. The BNPL industry has hit critical mass and it’s time — past time, really — for this popular lending product to be included in Americans’ credit reports.

Have a question about credit cards? E-mail me at ted.rossman@bankrate.com and I’d be happy to help.