Buy Now, Pay Later loans will factor in to Americans’ credit scores

FICO is set to launch new FICO Score 10 and 10 T models later this year that will incorporate Buy Now, Pay Later (BNPL) data, addressing a significant blind spot for lenders regarding consumer repayment behavior on these increasingly popular, largely unregulated installment loans. This move, driven by demand from major U.S. lenders, will provide crucial insight into previously unmonitored 'phantom debt' and could either build or damage consumers' credit, particularly for younger demographics. While this represents a step towards a more comprehensive view of credit activity, the integration may be slow given the varied adoption of FICO models across the industry and FICO's novel, aggregated scoring approach designed for BNPL's distinct usage patterns.

Analysis

FICO's plan to launch new credit score models, FICO Score 10 BNPL and 10 T BNPL, represents a significant development in acknowledging and quantifying the risk associated with the rapid growth of Buy Now, Pay Later (BNPL) financing. This move is a direct response to demand from major lenders seeking visibility into what has been termed "phantom debt," which has become a considerable blind spot in assessing consumer creditworthiness. By developing a novel methodology that aggregates BNPL loan data, FICO aims to avoid unfairly penalizing consumers for the high-frequency, short-term nature of these loans, a key difference from traditional credit. This integration could serve as a credit-building tool for responsible users, particularly younger demographics with limited credit histories, but will also expose over-leveraged consumers. However, the immediate market impact may be muted due to the notoriously slow adoption cycle for new scoring models by lenders, many of whom still utilize FICO Score 8 from 2009. The effectiveness of the new scores also hinges on the willingness of a fragmented and largely unregulated BNPL industry to consistently report data to credit bureaus, a process where firms like Affirm are currently outliers.

Key Decisions for Investors

• Investors should view this development as a long-term positive for data-forward BNPL providers like Affirm (AFRM), as FICO's integration legitimizes the business model and is likely to drive market share towards firms that already report transparently.
• For FICO, the launch reinforces its market dominance and ability to innovate in response to client demand, though the slow lender adoption of new scores suggests revenue impact will be gradual rather than immediate.
• Portfolio managers with exposure to consumer credit should monitor the adoption rate of these new models, as the formalization of BNPL debt could lead to a repricing of risk for certain consumer segments and potentially impact the performance of consumer-linked securities.