This is what happens when Buy Now, Pay Later loans are folded into FICO scores

Buy Now, Pay Later (BNPL) loans have become increasingly popular in recent years—originations grew tenfold between 2019 and 2021, for instance. Last year, roughly 20% of American consumers used one to make a purchase.

Despite their increasing usage, BNPL loans are still not used to calculate credit scores—which may have effects for lenders, and could be costing some consumers with good credit habits some valuable points. FICO—the creator of the FICO Score which is used by 90% of U.S.-based lending institutions to make lending decisions—recently published an analysis in tandem with the BNPL company Affirm to get a sense of what the results would be if those loans were used to calculate FICO scores. The results? Mostly good for both consumers and lenders.

The analysis looked at data from a 12-month period and compared the FICO scores of more than 500,000 people who used Affirm to open a BNPL loan against those who had not. FICO then simulated the inclusion of the BNPL data into its model and found that most people saw an increase or no change in their credit scores. 

“Affirm gave us data that would be the same data they would furnish to a credit bureau,” says Julie May, vice president and general manager of B2B scores at FICO. “With the simulated study, we would see positive benefits for approximately two-thirds of consumers, particularly for those with utilization of five or more BNPL loans,” she says. 

In all, incorporating BNPL loan data into credit scoring models would “benefit consumers, and the lenders who use the FICO score to make lending decisions,” she says.

In all, the analysis found that using the BNPL data to generate a FICO score was “generally consistent with the opening of a new account,” with a slight (plus or minus 10 points) change in their score for 85% of the individuals analyzed. For those who have better credit habits—such as making on-time payments, and keeping their overall credit utilization low—the BNPL data helps increase scores to a degree.

With the simulation complete, May says that FICO will be looking to roll out a new FICO scoring model in the future that will incorporate BNPL data, effectively the first model to do so.

“We know what the actual solution would be; we’re in final discussions with stakeholders in terms of how that would roll out,” she says. There’s no hard date yet, but May adds that when it does ultimately happen, FICO is excited to “introduce the proprietary technique to the marketplace.”

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