WASHINGTON–Some banks and credit unions are actively encouraging their customers and members not to binge on buy now, pay later (BNPL) financing so as not to hurt their chances for qualifying for mortgages and credit cards, according to a new report.
Reminding that some of the popular point-of-sale loans from companies such as Affirm and Klarna will be factored into credit scores later this year, as the CU Daily reported here, the Wall Street Journal noted there is a risk paying for a couch or a pair of pants in installments might improve—or hurt a consumer’s credit score, depending on whether they make the payments.
CU ‘Warns’ Members
“Lenders are more wary,” the Journal report stated. “One credit union calls up customers who use BNPL and warns against it. A community bank scrutinizes loan applications more closely when it notices them in its underwriting. JPMorgan and Capitol One have barred customers from using credit cards to pay down the installment loans.”
The Journal did not identify the credit union it said was making those calls.
“Bankers and underwriting consultants say frequent use of BNPL—even with on-time payments—is often treated as risky because it is hard to tell whether a customer is using the loans responsibly,” the Journal said. “It factors into decisions about how big of a credit line to extend, what interest rate to charge or whether to even approve the borrower.”
The report added that traditional lenders also stand to lose revenue and market share for their own loan products as BNPL grows in popularity.
Trade Group Pushes Back
The Financial Technology Association, however, a trade group representing several companies that provide BNPL products, told the Journal concerns about BNPL borrowers being riskier aren’t supported by industry data, and that BNPL plans are individually underwritten loans with a default rate of less than 2%, lower than traditional credit cards.
