The credit scoring company FICO recently announced it will add something new to some of its credit scores: data from buy now, pay later loans.
Those are the loans that allow shoppers, usually online, to break up a purchase into installments — a way to pay that's become very popular.
Let's take a look at what this could mean for your credit score.
A shift toward splitting up payments
The offer to buy now, pay later has become ubiquitous when shopping online. At checkout, it's now common to see the option to pay in installments with a service like Affirm or Klarna. One typical format allows shoppers to break the cost into four flat payments, with no interest if they pay on time. Or they can split it into more installments, with interest. Shoppers can also use the companies' apps to pay in physical stores.
Lots of Americans are choosing these options. In 2024, 15% of American adults had used this type of payment in the previous 12 months, the Federal Reserve found.
A FICO score is used by lenders to assess your creditworthiness and decide whether to offer you a loan or a credit card, and at what rate. And right now, your FICO score doesn't include data about any buy now, pay later loans. But starting in the fall, two of FICO's scoring products — out of the 15 or so it offers — will incorporate that data.
Buy now, pay later "is becoming a really big part of how people are managing their finances, and so FICO wanted to be able to manage and reflect that shift," says Julie May, vice president and general manager of business-to-business scores at FICO.
So who's using buy now, pay later? Its biggest adopters are low- and middle-income folks, Black and Hispanic people, women, millennials and members of Gen Z, according to the Federal Reserve. Those who use these payments say they're convenient and allow them to spread out the cost of purchases or avoid credit cards and interest payments. And for some, it's the only way they can afford to make their purchase.
But typically these loans are pretty small, averaging $142 in 2022.
A blind spot for lenders
FICO says lenders have been wanting this kind of data to give them a fuller picture of people's finances. Without it, there has been something of a blind spot, says Adam Rust, director of financial services at the Consumer Federation of America.
"In the past, when buy now, pay later loans have not been reported to credit bureaus, that has meant that credit card lenders couldn't see the presence of that debt when they were making a decision on how much credit to offer. And that set up a possibility where a lender might offer more credit than a person can reasonably afford to repay," Rust says.
"We want people to get the credit that they need — but we don't want lenders to be flooding the market with credit beyond what's safe and reasonable for consumers," he adds.
Some of this data sharing has already begun: The payment company Affirm began sharing consumers' loan data with credit bureau Experian in April.
The effect on individuals' credit scores will depend on whether they make their payments on time: Paying on time should help your credit. Missing payments could ding it.
FICO did a yearlong study with data from Affirm and said that incorporating these scores had a pretty small effect — within 10 points up or down — for more than 85% of the consumers in their study. The company did not disclose the effect on the other 15%.
For those using buy now, pay later loans as their first foray into credit, the change will be helpful, as it will allow the company to generate a FICO score for them, says May. "I think for all consumers who are using these products, who are responsibly making payments on time, it will also be positive," she adds.
But Rust cautions that this change may not make a huge difference. A recent study from the Consumer Financial Protection Bureau found that people often use buy now, pay later only sporadically.
"If a person is hoping that using a single buy now, pay later loan will have a dramatic effect on their credit, it's likely that won't be the case," says Rust. "It's still only going to be as impactful as the overall use of it."
And, of course, there's the risk of hurting your score. Almost a quarter of people using these loans made a late payment last year, according to the Federal Reserve.
"As with credit cards, as with your home loan or your auto loan, making on-time payments, being responsible about credit utilizations that's been granted to you, understanding the amount of credit that you're asking for — these are the things that make up the FICO score calculation," says May. "And that will continue with the introduction of buy now, pay later loans" into that score.
Buy now, pay later doesn't have the same protections as credit cards
Rust also warns that even though people are using these loans a lot like they use credit cards, they don't offer the same protections, especially when it comes to disputes.
For instance, consumers have had issues when they cancel an order but can't get refunded by the seller — but they're still on the hook for payments to these third-party companies.
"Those kinds of problems are addressed with the regulations surrounding credit cards," says Rust. "In some ways, credit cards have stronger protections than almost any other form of credit."
The Consumer Financial Protection Bureau issued a rule last year that essentially treated buy now, pay later lenders the same as credit card providers, giving consumers more protections, including a right to dispute charges.
But in May, under the Trump administration, the CFPB said it was pulling back from enforcing that rule and would consider rescinding it.
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