FICO, the dominant credit scoring firm, is primed to turn lending decisions on their heads. They’ll do this by including Buy Now, Pay Later (BNPL) data within their credit scores. This autumn, we are pleased to introduce two new scoring models that take BNPL into account: FICO Score 10 BNPL and FICO Score 10 T BNPL. These innovative models will be the first from a major credit-scoring firm to take into account consumers’ BNPL data. BNPL services are going from zero to millions of users very quickly. Consumers are using these services to purchase anything from clothes, travel and groceries.
As we noted in our initial post, FICO scores play a monumental role in the American lending landscape. In reality, 90% of all lending decisions utilize these scores. The most commonly used versions in mortgage lending are FICO Score versions 2, 4, and 5. Of interest, FICO Score 8—which was released in 2009—is still widely used by lenders. FICO’s latest scores aim to provide a more comprehensive view of an individual’s creditworthiness by factoring in repayment behaviors on BNPL loans.
Understanding Buy Now Pay Later Services
Consumer spending BNPL loans have quickly revolutionized consumer spending and changed how Americans shop. These no-interest loans give families the flexibility to buy larger household items and repay them over a longer period. While many enjoy the flexibility that BNPL offers, nearly half of users reported encountering issues according to a recent Bankrate survey. Overspending became the pervading issue that these consumers experienced.
Ted Rossman, chief credit analyst at Bankrate, noted that a significant portion of BNPL users are younger individuals who may lack extensive credit histories. This growing demographic shift emphasizes the importance of adopting more inclusive credit scoring approaches that better capture and reflect the financial behaviors of these Americans.
“A lot of BNPL users are often young people who don’t have long credit histories.” – Ted Rossman
FICO’s Innovative Approach to Credit Scoring
FICO has developed a revolutionary new method to credit scoring. This approach compiles data across buy now pay later (BNPL) services to account for the growing and evolving consumer financing space. This strategy seeks to arm lenders with more granular understanding of consumers’ likelihood to repay. By incorporating BNPL into credit scores, FICO hopes to enhance lenders’ ability to assess risk and make informed lending decisions.
Julie May, vice president and general manager of B2B Scores at FICO, sounded very positive about this news.
“Our clients tell us that FICO’s initiative to include BNPL data in credit scoring is a progressive step that acknowledges the evolving landscape of consumer financing.” – Julie May
FICO Score 10 BNPL and FICO Score 10 T BNPL are brand new. This is a huge step forward for technology in the area of credit scoring. Rossman warned that these new models won’t be picked up by all lenders right off the bat.
“My suspicion is that this may be a slower rollout than one might think at first glance.” – Rossman
Implications for Consumers and Lenders
The broader consequences are significant for both consumers and lenders, as integrating BNPL data into credit scores may cut deep. Through this program, entrepreneurs who have found it difficult to establish or maintain a credit history are elevated. Today, they can demonstrate their creditworthiness.
While the original use of BNPL services can be a useful tool, frequent usage can add complexity. Rossman with TINA.org pointed out some dangers that come with juggling several different accounts.
“Things like frequent opening and closing of accounts, that would be disastrous for your credit score.” – Ted Rossman
Lenders will likely need to pivot the most as they start to test how these new scores affect their underwriting and decision-making processes. Not all lenders use the same scoring model. This signals that the road to including BNPL data will be a difficult one to navigate.