One popular type of “buy now, pay later” plan comes with credit reports.
Early next year, Equifax Inc.
starts recording installment payments, allowing shoppers to make four bi-weekly payments instead of covering the full cost at checkout. The move is intended to give lenders a more complete picture of people’s financial obligations, including the amount of their debt for those plans.
These “pay-in-4” plans have grown in popularity in recent years. Often used on small items like clothing and makeup, they’re usually billed directly to the buyer’s debit or credit card. For example, a $ 200 shopping spree requires $ 50 upfront and three more $ 50 billed every two weeks.
Buy now, pay later is booming in the US High-end and discount stores are offering the plans at the online checkout. Some dealers also offer them in stores. But the plans often do not appear on credit reports, creating a blind spot for lenders who use the information in the reports to assess an applicant’s repayment ability.
“Responsible lending benefits from having a complete picture of an individual’s financial obligations,” said Mark Begor, chief executive of Equifax.
Billions of dollars in commitments are not reported. Buy now, pay later afterpay company GmbH.
For example, in the twelve months ended June 30, North America realized $ 9.8 billion in Pay-in-4 plans, more than double the previous year. Klarna Bank AB’s transactions in the US totaled $ 3.2 billion in the first half of the year, up from $ 722 million in the same period in 2020. Most are pay-in-4 plans.
Payment plans are small – the average Afterpay transaction is $ 150 – but they can add up if shoppers use them frequently.
Credit bureaus were faced with technical challenges by adding short-term installment plans to credit reports. Most credit reports are not set up to show bi-weekly payments. And there is often a delay between the opening of accounts by consumers and the submission of that information by lenders for inclusion in consumer credit reports. The delay can outlast a quick repayment period.
Some Buy Now, Pay Later Installment loans for large items are recorded on credit reports in the same section as personal loans. Much fewer of these smaller, short-term plans, which in most cases don’t require a credit check, are reflected in credit reports.
TransUnion said it was not including these plans in its credit reports but was working with companies that buy now, pay later to enable reporting for next year. A small number of buy now, pay later companies submit information about these plans to Experian PLC, which then feeds that information into credit reports. Experian is working with companies that buy now, pay later to include more of this information in their reports.
Afterpay and Klarna, two of the biggest players in the industry, don’t report their deposit plans to US credit bureaus. Confirm holdings Inc.
said it reports the full history of some of its loans, including on-time payments and defaults. The company is not reporting its Pay-in-4 product. All three said they had spoken to the companies about possibly reporting these plans.
One stumbling block: the frequent opening and closing of accounts can affect creditworthiness. Businesses that buy now, pay later, want to make sure that customers who pay their bills on time are not penalized for using their short-term payment plans frequently.
Equifax will be adding Deposit Dates 4 to credit reports from the end of February. Both positive and negative information, on-time payments and defaults, will be included in the reports and incorporated into consumer credit ratings, Equifax said.
Buy Now, Pay Later are especially popular with people with limited credit history who do not qualify for credit cards or other traditional loans. These consumers, Equifax said, should get a boost from including the plans in credit reports if they pay their bills on time.
Individuals with thin credit files or a credit history of no more than two years saw an average FICO credit score increase of 21 points, compared to an average of 13 points for the typical borrower, according to an Equifax study.
The credit report contains the time at which the payment plan was opened, the planned payment to which the consumer has agreed, and the payment actually made.
Write to AnnaMaria Andriotis at [email protected]
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