FICO To Roll Out New Scores to Reflect Your "Buy Now, Pay Later" Habits, Impacting Millions of Americans' Credit

"Buy now, pay later"users may hurt their credit if they don't pay back those loans on time. Credit score overseer Fair Isaac (NASDAQ:FICO) announced new scoring models last month that will evaluate BNPL usage when determining credit worthiness. The program, scheduled to roll out this fall may help some folks gain access to better loan terms but failing to pay on time is going to hurt.

The processing services let retailers provide installment loans at the point of sale so buyers can spread out payments. The loans may have no interest or service fees, potentially encouraging customers to overspend. Not surprisingly, a Bankrate survey released in May showed that about “half of buy now, pay later users have experienced issues like overspending and missing payments.”

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FICO will include BNPL data on upgraded Score 10 and Score 10 T credit models. It wants the new data to provide lenders with "greater visibility into consumers' repayment behaviors, enabling a more comprehensive view of their credit readiness." FICO Vice President and General Manager of B2B Scores Julie May emphasized the impact on young buyers, noting it will "more accurately evaluate credit readiness, especially for consumers whose first credit experience is through BNPL products."

Using FICO's Score 10 to roll out the initiative has raised some eyebrows because it won't be included in Score 8, currently the most widely used credit scoring product. In fact, FICO modeling is now up to Score 16 but, like the iPhone, older versions remain broadly popular due to long credit cycles and the need for lenders to invest, train and incorporate newer processes.

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Credit agencies have gathered BNPL loan activity for several years now. But this is a largely unregulated industry and not all payment processors report these transactions. So, a substantial chunk of U.S. lending activity may be missing from current data. FICO's new models will try to fill these gaps but there could be unintended consequences because, according to the survey, nearly one-third of Americans have used the service.

Bankrate Senior Industry Analyst Ted Rossman told CNN that young folks with limited credit histories are frequent users, and those most vulnerable to credit downgrades. Given survey results, new models may amplify negative credit scores of those overspending and missing payments. Of course, it's hoped this credit activity will boost scores if debts are paid on time and in full.

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FICO promises to aggregate multiple BNPL loans, but dangers abound if old school installment loan scoring seeps into the new models. Its common knowledge that borrowing up to your credit card limit is bad for your score because it signals financial stress. Now consider a young buyer who takes multiple BNPL loans at the same time. With traditional scoring, it looks like the customer is maxing out multiple short-term credit lines, raising all sorts of red flags.

Rossman believes that customers who pay their debts promptly should be fine under the new rules, but hedges his bets despite FICO assurances. "Things like frequent opening and closing of accounts would be disastrous for your credit score," he told CNN. "With Buy Now, Pay Later, you're doing that every few weeks or even every few days."

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