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How BNPL will affect Gen Z’s credit scores

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BNPL plans have gained popularity and could help younger consumers build credit.

Key points

  • Buy now, pay later plans saw 62% growth among younger consumers from July 2020 to March 2021.
  • Those payment plans could help Gen Zers build credit more easily.

The concept of paying for purchases over time is not new. Consumers routinely charge credit cards and transfer their balances, paying them off when they can.

The problem with carrying credit card balances, however, is accumulating interest on that debt. That’s why a newer alternative is gaining ground.

Buy now, pay later plans, or BNPL plans, have enjoyed explosive growth in recent years. And younger consumers are rushing to take advantage of them.

A recent Ascent research report found that between July 2020 and March 2021, BNPL plan usage grew 62% among consumers ages 18-24. The best thing about these plans is that they allow consumers to pay for purchases in installments, usually over 12 years. week period. Those who stick to their payment plans incur no interest or fees, making BNPL plans a more cost-effective alternative to credit cards.

But it’s not just that BNPL plans save consumers money. In some cases, they can help consumers build credit.

An easy way to get a credit score boost

Younger consumers often struggle to establish a credit history because they haven’t had much time in the workforce and haven’t had many loans or credit cards in their name. But a lack of credit history could lead to a lower credit score, making it harder for younger consumers to access affordable loan options.

Hopefully, BNPL’s plans will help change that. As BNPL data is increasingly incorporated into credit ratings, those who make their payments on time under these agreements could benefit greatly.

As Silvio Tavares, President and CEO of VantageScore, puts it, “Buy Now, Pay Later is helping many consumers access short-term credit to shop at a time when prices are rising rapidly. BNPL can enable consumers to who have traditionally had no credit records build better credit scores. We believe that adding this data to credit scores can help drive broader financial inclusion and we are working quickly to incorporate this into the VantageScore models.”

Ethan Dornhelm, vice president of FICO scores and predictive analytics, agrees. “As BNPL loans become a more common form of credit used by consumers,” he says, “these loans could also become a significant factor in consumer credit reports and, by extension, FICO® Scores. based on those credit reports.”

Dornhelm believes that younger consumers with limited credit histories could especially benefit from having BNPL data included in credit reports. “Those with very low scores or poor credit files are more likely to benefit from the addition of positive information from BNPL. If the consumer does not have any existing credit accounts reported on their credit file, then the BNPL loan could allow them to start build a credit history and ultimately receive a FICO® Score,” he explains.

Beware of BNPL plans

Of course, BNPL plans have the potential to hurt consumers’ credit scores as well as help them. Those who don’t keep up with their payments under these arrangements could see their credit scores negatively affected, in the same way that late credit card payments would have a similar effect.

But consumers who stay current on their BNPL payments could see their credit scores rise over time because of that positive behavior. And that’s just another good reason to shop with BNPL plans, albeit carefully.

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