Equifax To Add More Buy Now, Pay Later Plans to Credit Reports
A popular type of “buy now, pay later” plan is showing up in credit reports.
Early next year, Equifax Inc.
will begin recording installment plans that allow buyers to make four payments every two weeks instead of covering the full cost at checkout. The move is meant to give lenders a more complete picture of people’s financial commitments, including how much they owe on those plans.
These “pay-in-4” plans have exploded in popularity in recent years. They are often used for low cost items such as clothing and makeup and are usually billed directly to a buyer’s debit or credit card. A $ 200 shopping trip, for example, requires $ 50 up front and three more payments of $ 50 billed every two weeks.
Buy now, pay later is booming in the United States. High-end and discounted retailers offer the plans at checkout online. Some traders also offer them in stores. But the plans often don’t show up on credit reports, creating a blind spot for lenders who use the information on the reports to assess an applicant’s repayment capacity.
“Responsible lending gets a full picture of a person’s financial obligations,” said Mark Begor, CEO of Equifax.
Billions of dollars in bonds go unreported. Buy now, pay later company Afterpay Ltd.
, for example, completed $ 9.8 billion in 4-payment plans in North America in the 12 months ended June 30, more than double a year earlier. Klarna Bank AB’s transactions during the first half of the year in the United States totaled $ 3.2 billion, compared to $ 722 million during the same period in 2020. The majority are 4-payment plans.
Payment plans are small – the average Afterpay transaction is $ 150 – but they can add up if buyers use them frequently.
Credit reporting companies have faced technical challenges in adding short-term payment plans to credit reports. Most credit reports are not configured to show bi-weekly payments. And there is often a time lag between when consumers open accounts and when lenders send in that information for inclusion on people’s credit reports. The lag may last longer than a quick payback period.
Some buy now, pay later installment loans for big ticket items are recorded on credit reports in the same section as personal loans. Much less of these small, short-term plans, which in most cases don’t require credit checks, are reflected in credit reports.
TransUnion said it does not include these plans on its credit reports, but is working with buy now and pay later companies to enable reporting next year. A small number of Buy-It-Now and Pay-On-Pay businesses submit information about these plans to Experian PLC, which then includes this data in credit reports. Experian is working with buy now, pay later companies to add more of this information to its reports.
Afterpay and Klarna, two of the biggest players in the industry, do not report their 4-payment plans to US credit reporting companies. Affirm holdings Inc.
said he was reporting the full payment history for some of his loans, including on-time payments and delinquencies. The company does not report its pay-in-4 product. All three said they have discussed with the companies the possibility of reporting the plans.
A stumbling block: Frequent opening and closing of accounts can lower credit scores. Buy-it-now, pay-back businesses want to ensure that customers who pay their bills on time are not penalized for frequent use of their short-term payment plans.
Equifax will add pay-in-4 data to credit reports starting at the end of February. Positive and negative information, on-time payments and defaults, will be included in reports and reflected in consumer credit scores, Equifax said.
Buy Now, Pay Later plans are especially popular among people with limited credit histories who don’t qualify for credit cards or other traditional credits. These consumers, Equifax said, should benefit from the plans’ inclusion in credit reports if they pay their bills on time.
People with poor credit records or who have no more than two years of credit history have seen their FICO credit scores increase on average by 21 points, according to an Equifax study, compared to an average of 13 points for the typical borrower.
The credit report will include the date the payment plan was opened, the expected payment the consumer has committed to make, and the actual payment made.
Write to AnnaMaria Andriotis at [email protected]
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