Apple recently announced that loans made through its buy now, pay later (BNPL) program will be reported to Experian, a major credit reporting company. If more lenders follow Apple’s lead, the change could help consumers who use these loans build a credit history—but it could hurt their credit scores, too.
BNPL services allow consumers to spread payments on their purchases over a few weeks or months, typically without interest if payments are made on time. Unlike layaway plans of the past, which required buyers to wait to claim a purchase until they had paid it off, BNPL provides instant gratification, which has made the loans popular with consumers. More than 40 percent of U.S. adults have used at least one BNPL service, according to a survey by Bankrate.
However, the simplicity of BNPL plans can obscure potential pitfalls. Fees for late payments can be steep, and consumer advocates worry that the easy availability of the loans encourages consumers to purchase things they can’t afford. Nearly 30 percent of consumers who have used BNPL said they have spent more than they should, according to the Bankrate survey.
Because BNPL payments usually aren’t reported to the three major credit reporting companies—Equifax, Experian and TransUnion—consumers have less incentive to curb spending and pay on time (although if you fail to pay for an extended period, the BNPL provider may turn your debt over to a debt collector, which can heavily damage your credit). At the same time, with most BNPL providers, using your loan responsibly doesn’t help you build a good credit history.
So far, most other BNPL providers, including Klarna and Afterpay, haven’t announced plans to report their loans to the credit reporting companies. Affirm says it reports some longer-term loans to Experian, but it doesn’t report its plans that offer four interest-free payments, a common BNPL structure.
In addition, most credit scoring models haven’t adapted to incorporate the way BNPL payments are made. For example, unlike credit card payments, which are typically made once a month and are reported to the credit reporting companies, many BNPL borrowers make small, biweekly payments. While Apple BNPL payments will appear on Experian credit reports, the information won’t be factored into borrowers’ credit scores, Experian says—and a credit score is a key measure that lenders use to judge a potential borrower’s creditworthiness for a credit card, mortgage or other loan. Experian says that BNPL loan information may factor into credit scores in the future “as new credit scoring models are developed.”
For now, while BNPL services provide a convenient way to spread out payments, consumers shouldn’t rely on them to develop a positive credit history. The most effective way to build credit is to apply for a credit card, pay your bills on time and keep the balance to less than 20–30 percent of the card’s limit.
