Buy now, pay later (BNPL) providers like Affirm, Afterpay and Klarna give shoppers the option to break up large purchases into interest-free installments at checkout. Until recently, BNPL wasn't included in credit reporting, which meant that these borrowers didn't benefit from making on-time payments.
That changed earlier this year when Equifax became the first credit bureau to include BNPL payment information when calculating credit scores. And on Feb. 24, TransUnion followed suit by introducing a new feature that allows users to add their BNPL plans to their credit history.
"The inclusion of point-of-sale loans including BNPL into credit reports and other risk management tools can help tens of millions of consumers gain access to more credit opportunities and potentially secure better loan terms," TransUnion Senior Vice President Liz Pagel said.
TransUnion users must opt in to add BNPL tradelines to their credit profile. As a default, credit report delivery to existing scoring models will remain unaffected.
Keep reading to learn more about how BNPL will impact credit reporting, as well as what you can do to improve your credit score. You can enroll in free Experian credit monitoring services on Credible.
BNPL in credit reporting will ‘maximize financial inclusion’
Up to 100 million Americans have used a BNPL service at least once in the past year, TransUnion reported. And millennials and Gen Z consumers are utilizing this financing option at high rates — a third of BNPL applicants are between the ages of 18 and 30.
Including BNPL payment history in credit reporting could benefit these young consumers with thin credit files by giving them a way to start building and improving their credit.
"Maximizing the financial inclusion impact requires broad usage of this valuable data in more credit decisions."
However, consumers may not begin reaping the benefits until BNPL loan data is widely used by financial institutions and lenders. Credit reporting companies need time to build BNPL payment data in their future underwriting, TransUnion reported.
For example, VantageScore is "working rapidly" to incorporate BNPL installment loans into its scoring models, according to the company's president and CEO, Silvio Tavares. Additionally, FICO is still determining "the best approach for inclusion of BNPL data," Sally Taylor, vice president at FICO Score, said.
Long term, TransUnion said it expects that adding BNPL consumer data will help some borrowers improve their credit score. In the short term, though, consumers may need to look for alternative ways to boost their creditworthiness. You can begin building your credit score by enrolling in credit monitoring on Credible.
Short-term ways to improve your credit score
There are several long-term ways to boost your credit score, such as improving your on-time payment history and building your average age of credit over time. If you're looking for short-term solutions to improve your credit score, consider these strategies:
- Check your credit report for errors. You can request a free credit report through all three major credit bureaus on www.AnnualCreditReport.com. If your credit report contains errors, like erroneous missed payments or missing accounts, file a dispute through the credit bureau.
- Open a secured card. Also known as credit-builder cards, secured credit cards let you borrow money from a line of credit that's secured by a cash down payment. This can help you establish an on-time payment history and diversify your credit mix. You can compare secured credit cards on Credible.
- Pay down credit card debt. Your credit utilization ratio is the amount of debt you owe compared to your available credit. Paying down your credit card balances will lower your credit utilization, which will have a quick positive impact on your credit score.
You could consider using a fixed-rate personal loan to pay your credit card balances to zero. Personal loan rates are currently at historic lows, according to the Federal Reserve, but the interest rate you qualify for depends on your creditworthiness.
You can compare personal loan rates on Credible for free without impacting your credit score and decide if this credit-building strategy is right for you.
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