Why ‘Buy Now, Pay Later’ Data Isn’t in Your Credit Report
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Here's your money briefing for Friday, October 21st. I'm J.R. Whelan for The Wall Street Journal. We've talked a lot on the show about buy now, pay later companies like Klarna and Affirm that let people pay for things like shoes, pants, or dresses over four equal payments. And we've told you how there's been a push to get those payments added to people's credit reports to help them build up a good borrowing history. But the companies looked into whether adding the data to people's reports helped.
And what was found was that some 57% of consumers who would have these accounts on their credit reports would experience a, quote, material, end quote, credit score decrease that could persist for over a year despite paying the account on time.
So why would responsible use of buy now, pay later programs actually hurt your credit score? And what's being done to make sure the data reflects a customer's real credit worthiness? Our banking reporter, Anna Maria Andriotis, has been looking into this. She'll join us with some answers after the break.
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Take a look at your credit report. You'll see entries for things like your mortgage, maybe your car loan, and credit cards that you use along with payments you've made or missed. But something you're not likely to see are purchases made through so-called buy-now-pay-later programs like Klarna and Affirm.
What is the episode about and why does buy now, pay later data matter to credit reports?
So why is this data not there, despite efforts to have it included? And how could the absence of this data affect your credit profile? Buy Now, Pay Later companies are part of WSJ reporter Anna Maria Andriotis' beat, and she joins us to discuss. Anna Maria, thanks very much for being with us.
Great to be speaking with you.
So, Anna Maria, refresh us for a moment. How popular have these Buy Now, Pay Later programs become, and how do these payment plans differ from other types of debt that people rack up?
Last year, some $24 billion of Buy Now, Pay Later plans, specifically something called the Pay In 4 plan, a very popular type of Buy Now, Pay Later plan, originated that was more than 12 times the amount from 2019 so the way that these payment plans work typically is that a consumer when they buy an item be it a dress be it makeup shoes whatever it might be often paying for plans or for smaller ticket purchases they will rather than getting charged the full amount of the purchase price when they buy the item and take it home They're instead charged one fourth of the price on either their credit card or their debit card. And then every two weeks, their card is charged or debited an additional 25% of that purchase price.
So that when four payments are made in total over the course of every two weeks, the product is paid in full.
Okay, now you've been with us before talking about how consumers who use these kinds of payments should be expecting these transactions to appear on their credit reports. What's gotten in the way of that happening?
The buy now, pay later companies are concerned that the accounts, if they're added to people's credit reports, could unintentionally lower their credit scores, even if they pay on time and in full.
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