TransUnion announced on 9 February that it can now take data from Buy Now Pay Later (BNPL) lenders. Some BNPL debts will start to appear on consumer credit reports such as Credit Karma from summer 2022.
UPDATE: In early May it was announced that Klarna will update TransUnion and Experian records from the start of June 2022.
But the loans won’t be included in credit scores for 18 months (see below for why!)
I expect other BNPLs will follow Klarna’s lead. And Equifax will also start to include this data.
Incorporating this data into credit reports will support consumers that are using this type of point-of-sale finance, whilst also ensuring lenders have a comprehensive picture of a borrower’s financial position.
But this year TransUnion will not be using the BNPL information when it calculates your credit score.
Equifax seems to be planning the same approach. It has said it:
fully intends to include BNPL data in credit reports. It said its data will be ‘incorporated in a measured and proportionate way that doesn’t unduly skew consumers’ scores or disrupt methodologies we use.’
That quote from Equifax suggests difficulties but doesn’t explain what they are.
So let’s look at the problems. Why aren’t BNPLs being included in your credit score from the start? And does this matter to you?
Why report BNPL data on credit reports?
Most BNPL providers don’t report all borrowing to the Credit Reference Agencies (CRAs) at the moment. The FCA’s Woolard Review last years warned this is creating problems for lenders.
Without the BNPL information, other lenders can’t see the full picture of a customer’s borrowing. If you apply for a loan or ask for your credit card limit to be increased, the lender wants to know how much you need to pay off your current BNPL purchases, and how often you use BNPL.
There are reports that people are being rejected for mortgages when the mortgage lender sees BNPL payments on the applicant’s bank statements.
But most lenders don’t ask to check people’s bank statements – they want to be able to get the information about your BNPL purchases from credit records. This is why BNPL reporting is being introduced.
BNPL can’t be reported like other debts
It isn’t simple to report BNPLs like other loans and credit cards.
Every BNPL purchase is a separate amount of credit, effectively a loan for each purchase. There is no limit like a credit card where the BNPL lender will let you spend up to £x and not report the individual purchases. So even if you only buy one thing a month, that is going to be a lot of BNPL items mounting up on your credit report.
When a loan or credit card is taken out, it harms your credit score for the first few months. Then the good marks you get from repaying the credit on-time start to outweigh the harm and soon improve your credit score.
But BNPL’s are repaid too quickly for this to work. A Klarna pay in 3 is completed just two months after the purchase. As is a Clearpay purchase, repaid with four fortnightly payments.
Using the current CRA credit score calculations would lead to the nonsensical result that a BNPL taken and repaid on time would always harm your credit score.
The CRAs have to come up with a new way to handle BNPLs.
This is the reason behind Equifax’s reference to “[not wanting to] skew consumers’ scores or disrupt methodologies we use”. It isn’t just a problem for Equifax – it applies to TransUnion and Experian as well.
Is excluding BNPLs from your score good then?
This is the reason BNPLs are only going to be reported on from the summer, not included in calculating your credit score.
It is expected to be 18 months before BNPL transaction affect your credit score.
So does that mean the BNPL reporting doesn’t matter at the moment? No. You can’t ignore this, if you use BNPL you need to know about this.
Lenders do not use the score that you can see
If you haven’t heard this before, it may sound very odd, but it’s true.
A lender uses the data from credit reports to make their own assessment of whether to give you a loan, a 0% balance transfer etc. This may involve calculating a score but it isn’t the one you see.
Until now it has been normal to say that lenders use roughly the same approach as the CRA customer credit score calculations. Lenders care about missed payments, defaults, credit utilisation, new credit etc.
So if your credit score improves you may find it easier to get cheap credit and if your score drops you are likely to find it harder. Your credit score is a useful guide to what a lender may think.
But from the summer, that may not be the case. Because lenders may take into account the BNPL information that will be on your credit record but that is ignored in your credit score.
Lenders will be able to see missed BNPL payments
At the moment, BNPL lenders don’t have to report missed payments to the credit reference agencies. For example Klarna says:
Klarna does not report missed payments to the CRA in relation to these products… To date, a customer’s credit score has not been impacted by using Klarna’s ‘Pay later’ products even if they have failed to pay on time.
But from June, BNPL repayment information will start to appear on credit reports. I expect other BNPLs will follow Klarna’s lead. And Equifax will also start to include this data.
Other lenders may well take this into account when deciding to lend to you. Your credit score may not change but it will still be harder to get credit.
Lenders will be able to see how much you use BNPL
Other lenders will now easily be able to see how much you use BNPL. They may be interested in:
- how much on average you spend a month. That may affect how affordable the new credit you have applied for is.
- if you have suddenly started to use BNPLs a lot more in the last couple of months. This may be a sign you are in financial difficulty.
If you have a big credit application coming up – a mortgage or car finance say – it may be sensible to reduce or eliminate any BNPL spending for 3-6 months beforehand.
Will old BNPLs be reported?
Several people have asked me this. I would be very surprised if old data is included. I expect it will just apply to new BNPLs.