BNPL loans could provide consumers with a new, easy way to build credit

Buy now, pay later loans could provide consumers with a new, easy way to build credit

Written by Liz Pagel, SVP, TransUnion
17th September 2024

The prospect of building credit can be daunting. Many consumers have little credit experience or lack basic credit knowledge, and the myriad of new, entry-level products can cause confusion, leaving consumers out of the credit ecosystem for longer periods. For those with damaged credit, it can be challenging to get approved for new credit products to build up a positive payment history and get back on track.

Once the BNPL data is folded into traditional credit scores it will be the first significant change in credit reporting in decades

Imagine a young adult wanting to buy a new pair of sneakers. She can afford to pay for them outright, but what if she purchased them using short-term financing – specifically, a buy now, pay later (BNPL) loan with no interest – and started building payment history toward her credit score instead? She could still get the shoes without paying an extra cent – while gaining valuable credit experience on her path toward financial success.

A different take on BNPL

I probably don’t need to tell you BNPL has been a game-changer in the credit world. It’s the first truly new product we’ve seen in generations, and with more than 100 million consumers having used it, according to the TransUnion Consumer Pulse Survey Q2 2024, and 89% of recently surveyed BNPL users expressing they’re satisfied with it, its simplicity and popularity are well established. Many BNPL customers are repeat users, and delinquency rates remain relatively low. There are millions of largely positive tradelines out there now – and that’s only expected to grow.

I bring this up because many say BNPL loans can lead to too much debt or encourage poor credit behavior, and for some consumers, this could be the case. But, I’d argue for many people trying to build credit (particularly the young), leveraging BNPL loans can be a responsible way of going about it.

These borrowers are selecting fast, highly regimented payment plans – which can demonstrate intent for a quick payoff. They’re also choosing products with a 0% interest rate over credit cards or installment loans with higher rates that don’t need to be paid off right away. A BNPL loan can also be a good alternative for consumers who need to make big purchases but are working to keep their credit card utilisation under 30%, which is another key to building credit.

Are all BNPL borrowers going to demonstrate excellent credit responsibility? Of course not. But it’s worth noting many opting for BNPL as a cheaper, faster way to borrow money are being thoughtful and savvy in their financial decision-making, and might be exactly the kind of responsible consumers lenders seek out.

Why should lenders care about BNPL?

While BNPL data has yet to be folded into traditional credit scores, that shift will come – and will be the first significant change in credit reporting most of you reading this will have seen throughout your careers.

The BNPL data pool at the credit reporting agencies might remain limited for now, but before long, there’s going to be a massive amount of new and valuable data available. Lenders may use this data to underwrite more consumers, possibly leading to significant financial inclusion gains – while consumers will be able to build their credit histories more quickly.