People think buy-now-pay-later is helping improve their credit. They’re wrong.

Buy-now-pay-later providers typically don’t report users’ payment history to credit bureaus, according to the New York Fed report. This means that making a buy-now-pay-later payment on time won’t improve a person’s credit score in the way that paying a credit-card bill would. People who use the option in hopes of improving their credit “may be better off using a credit card,” the report said.

“At this time, many of the shorter [buy-now-pay-later] loans are not reflected on consumer credit reports, so they would not help consumers build credit,” Liz Pagel, senior vice president and leader of the consumer-lending business at TransUnion
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said in a statement.

This could change in the future. “The industry is quickly moving towards a world where these loans will be reported to the credit bureaus, giving consumers the opportunity to build credit history,” Pagel said. “Consumers should work with [buy-now-pay-later] lenders who will let them know when more new [buy-now-pay-later] loans will begin to be reported.”

Data may be reported … or it may not be

Buy-now-pay-later companies have different approaches to reporting users’ payment history.

Klarna does “not report any positive or negative loan information to credit bureaus,” a company representative said.

Afterpay, which is owned by Block
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also does not report payments to the credit bureaus. Affirm
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reports monthly installment payments to Experian
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but does not report payments for its “pay in four” plan — in which consumers pay off a purchase in four installments, making one payment every two weeks — to any of the credit bureaus.

While some shoppers are able to use buy-now-pay-later services to gain access to credit without paying interest or fees, Chien noted that many consumers may be borrowing under terms that they don’t fully understand from companies that are not regulated as rigorously as credit-card companies. 

There are no industry-wide rules for buy-now-pay-later companies to report transactions to credit bureaus. Because buy-now-pay-later data sent to credit bureaus is not consistent across all providers and is not reported to all of the credit bureaus, consumers simply can’t know what the impact on their credit of using such services will be, Chien said. 

For example, Transunion doesn’t include buy-now-pay-later activity on credit reports, while Experian does — however, an Experian spokesperson said buy-now-pay-later use does not yet affect a consumer’s credit score. “Experian will not factor [buy-now-pay-later] data into score calculations,” the spokesperson said.

By contrast, credit cards “have established rules on disclosure and transparency,” Chien said. 

‘Phantom debt’

The New York Fed researchers found that people who are financially stable are able to use buy-now-pay-later as an interest-free loan, giving them an alternative to credit cards at a time when interest rates are near record highs. A spokesperson for Experian said that could indirectly benefit a person who stops using their credit cards and finances purchases through buy-now-pay-later instead. Lower credit-card balances can help consumers maintain a lower credit-utilization rate, “which is an important factor in determining a consumer’s credit score,” she said.

Because buy-now-pay-later does not involve a hard credit check, people who have low credit scores or who have had a credit application declined within the past year can still use the option. However, consumer advocates note that easy access to this form of financing might allow people to rack up more debt than they can manage.

And because buy-now-pay-later use isn’t tracked like other forms of debt, some economists have raised concerns that it’s creating “phantom debt” that obscures consumers’ true financial health. 

Stanford Graduate School of Business researchers led by professor Ed deHaan did a study on buy-now-pay-later in 2022 that recommended that providers should be reporting data to the credit bureaus.

“They provide transparency so that different lenders can observe how much credit is being extended to consumers,” deHaan said in a recent story for the Stanford Business Insights podcast. “That prevents debt stacking, which is when people open several accounts at the same time and end up in trouble. Not reporting [buy-now-pay-later] loans also doesn’t allow consumers to build up their credit scores — they aren’t getting credit for their credit.”