Buy now, pay later loans, it’s hard to master your credit

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Payment history often not reported

BNPL companies generally do not report to credit reporting companies when consumers use these loans. It is therefore difficult for a lender to know how many loans a consumer has outstanding.

“It makes a big difference in terms of how much you should lend,” said Kenneth Lin, CEO of fintech company Credit Karma. “Often a credit system actually ignores how much you owe in the Buy Now, Pay Later scenario.”

Consumers with multiple BNPL loans with multiple payment dates can end up in a debt spiral. “That’s when people get into big trouble,” Lin said.

Difficult to establish a credit history

“When it comes to your credit, it’s all down and not up,” said Matt Schulz, senior credit analyst at LendingTree.

Since BNPL companies don’t usually report a positive payment history, “it’s really risky because you’re not able to build your credit and show the banks that you’re creditworthy,” he said. he adds. “On the other hand, if you make a mistake, that mistake will often be logged and that can negatively impact your credit.”

About 35% of consumers said they were considering at least using a buy now, pay later loan last month, according to Lending Tree. Another survey found that 42% of BNPL users said they had paid late on one of these loans.

The impact of late payments varies

Krisanapong Detraphiphat | time | Getty Images

Experts say BNPL lenders can handle late payments differently.

For some, you end up being hit with fees. For others, they simply exclude you from service for the future and they won’t lend you again, Schulz said. Some companies will report defaults to rating companies, while others will not.

Meanwhile, the Consumer Financial Protection Bureau has opened an investigation into how BNPL lenders use consumer data and report on this information. “The problem is that when they use buy now, pay later for more and more expenses, including groceries and other in-store purchases, they can rack up a lot of debt,” the CFPB director said. , Rohit Chopra, in an interview with CNBC.

“The key thing is to make sure we don’t create a system that…sends people into a spiral of debt that they ultimately can’t repay.”

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