How BNPL Will Impact Generation Z Credit Scores

BNPL plans have grown in popularity and could help younger consumers build credit.

The concept of paying for purchases over time isn't a new one. Consumers routinely charge expenses on credit cards and carry their balances forward, paying them off when they're able to.

The problem with carrying credit card balances, though, is racking up interest on that debt. That's why a newer alternative is gaining traction.

"Buy now, pay later" plans, or BNPL plans, have enjoyed explosive growth in recent years. And younger consumers are rushing to take advantage of them.

A recent Ascent research report found that between July 2020 and March 2021, BNPL plan usage grew 62% among consumers aged 18 to 24. The great thing about these plans is that they allow consumers to pay for purchases in installments, usually over a 12-week period. Those who stick to their payment plans don't incur interest or fees, making BNPL plans a more cost-effective alternative to credit cards.

But it's not just that BNPL plans allow consumers to save money. In some cases, they might help consumers build credit.

An easy way to snag a credit score boost

Younger consumers often struggle to establish a credit history because they haven't had much time in the workforce and haven't had too many loans or credit cards in their name. But a lack of credit history could lead to a lower credit score, making it harder for younger consumers to access affordable borrowing options.

Hopefully, BNPL plans will help change that. As BNPL data is increasingly incorporated into credit scores, those who make their payments on time under these arrangements could benefit tremendously.

As Silvio Tavares, President and CEO of VantageScore, puts it, "Buy Now Pay Later is helping many consumers access short term credit for shopping at a time when prices are rising rapidly. BNPL can enable consumers that have not traditionally had credit records to build better credit scores. We think adding this data to credit scores may help drive broader financial inclusion and we are working rapidly to incorporate this into VantageScore models."

Ethan Dornhelm, Vice President of Scores and Predictive Analytics at FICO, agrees. "As BNPL loans become a more commonplace form of credit used by consumers," he says, "these loans could also become an important factor in consumer credit reports, and by extension, in the FICO® Scores based on those credit reports."

Dornhelm thinks younger consumers with a limited credit history might especially benefit from BNPL plan data getting incorporated into credit reports. "Those with very low scores or thin credit files are more likely to benefit from the addition of positive BNPL information. If the consumer doesn't have any existing credit accounts reported in their credit file at all, then the BNPL loan could enable them to begin building a credit history and ultimately receive a FICO® Score," he explains.

Be careful with BNPL plans

Of course, BNPL plans have the potential to hurt consumers' credit scores as well as help them. Those who don't keep up with their payments under these arrangements could see their credit scores negatively impacted, the same way late credit card payments would have a similar effect.

But consumers who keep up with their BNPL payments could see their credit scores rise in time due to that positive behavior. And that's just another good reason to make purchases with BNPL plans, albeit carefully.