Title: Your 'Buy Now, Pay Later' Experiences

Brigid Bergin: It's the Brian Lehrer Show on WNYC. I'm Brigid Bergin filling in for Brian today. Now we'll take now we'll talk about a major shift in how credit scores are calculated, one that could affect millions of Americans. FICO, the company behind the credit score used by 90% of US lenders, recently announced it will begin factoring in Buy Now Pay later loan history when calculating your score.

These loans, which let shoppers split payments into smaller installments, have become a popular alternative to credit scores, especially among younger adults-- excuse me, credit cards. These loans are currently not reflected in your credit score, leaving lenders with no visibility into how much debt borrowers have accumulated through payment plans. But starting this fall, that changes. Two of FICO's most widely used scoring models will begin incorporating this repayment data. That means a Buy Now Pay later loan could help build or hurt your credit score.

Joining us now is Imani Moise, personal economics reporter at the Wall Street Journal. Imani, welcome to WNYC. Hey, Imani, are you there/

Amani Moise: I'm here.

Brigid Bergin: Sorry about that. Imani, firstly for our listeners who might not be familiar, how do Buy Now Pay later loans work?

Amani Moise: They are different from, I guess, traditional credit because they're really only offered at the point of sale, and they're mostly offered online, even though there are some companies launching things like Buy Now Pay later cards, which you could actually use a brick and mortar. But typically, you're shopping online, you load up your cart and when you go to check out, there is a paid option and that will be provided by a company like Affirm, Klarna, sometimes PayPal, and it allows users to split up the payments over about six weeks.

Brigid Bergin: You mentioned a lot of these purchases are being done online. Are they used for specific kinds of purchases more than any others?

Amani Moise: This data might be a bit stale, but for the most part, Buy Now Pay later plans are most popular for discretionary purchases. That's categories like apparel, electronics, but more and more you're starting them being used and accepted for essentials like groceries or even gas.

Brigid Bergin: I think you noted that it's done at the point of sale. Is that the main difference between these types of loans and credit cards?

Amani Moise: Not quite. With credit cards, it's revolving credit instead of an installment credit, which means that you can kind of carry that debt indefinitely. With the Buy Now Pay later plans, there is a set payment schedule and you're expected to pay a quarter of the of the total transaction cost every two weeks. You don't really have as much say over how much you pay. Typically with a credit card, you can make a minimum payment or you could pay a balance in full. Buy Now Pay later is much more structured and much more short term.

Brigid Bergin: Is one better used than the other?

Amani Moise: It depends. It depends. Buy Now Pay Later, if you truly need that time to pay off your purchase, Buy Now Pay later could be the better option because oftentimes those come for zero interest. A lot of these companies don't even charge late fees. If you don't make your payment on time, they'll just kind of restrict your access to that service instead of charging a fee.

With a credit card, especially if you're going to hang on to that debt for more than 30 days, they typically charge higher interest rates, so that's something to be careful of, for sure.

Brigid Bergin: Given the rise in popularity of these Buy Now Pay later loans, what do we know about the demographics of shoppers who are using these types of loans?

Amani Moise: It definitely skews younger, just people who are more likely to be shopping online in the first place. But you're kind of seeing quick adoption across the demographic spectrum. For example, when I was talking to one of the executives at one of these credit scoring agencies, they were talking about an older family member who loves using Buy Now Pay later at Best Pro shops for all of his outdoor retirement activities, things like that.

Yes, definitely, because it is kind of a digital native product, it's going to skew younger, but it's quickly gaining popularity across the board.

Brigid Bergin: Interesting. Listeners, have you used the Buy Now Pay later option when shopping? Are you currently paying off one of these types of loans? How do you think it will affect your credit score? Ask anything you'd like to know about Buy Now Pay later from our guest. The numbers 212-433- WNYC. That's 212-433-9692. You can also text your questions to that number.

Imani, your article notes that these Buy Now Pay later loans have really grown rapidly. What's the scale of their use across the US right now?

Amani Moise: I don't have the numbers quite in front of me. It's probably in my article, but I know it's growing, I'm trying to find the number right now, but it's growing very quickly. I think it more than doubled from the end of the pandemic to probably about 2022. As of last year, the transaction growth reached $94 billion, in terms of goods crossing through Buy Now Pay later services.

Brigid Bergin: I will tell you from your article, one of my producers wrote the value of the Buy Now Pay later transactions in the US is expected to reach $108 billion this year, up from 94 billion in 2024, according to market market research firm eMarketer. We have a listener who texted, "I'm Stuart in Weehawken. I bought kitty litter online from Petco and there was an option to use Klarna. I did not use it."

To me, that's interesting because it seems to show that these types of Buy Now Pay Later loans could be showing up in places, kitty litter is pretty necessary, not quite discretionary if you own a cat, but it's maybe unexpected places. Are you seeing that these options are showing up kind of ubiquitously across online retailers?

Amani Moise: Absolutely. At first, it was your mainstream, but maybe higher end brands. There was one example where Buy Now Play Later was really popular for luxury purchases for like a Gucci belt. But then you also started to see them on fast fashion sites like Shein, and if the top is only $12 to begin with, do you really need to pay in four?

I think part of the reason that these things have become so popular is because 1, it is 0 interest and it reduces the pain of paying. If you are doing one of these big shopping hauls that are popular on social media, it stings less when it's $50 coming out of your account every two weeks as opposed to $200 coming out all at once.

Brigid Bergin: Sure. Let's go to Alison in Newburgh, New York. Alison, you're on WNYC.

Alison: Hi, thank you so much for taking my call. I just wanted to say many years ago, maybe about 10, I had just started out as an attorney and almost all of my appliances in my house started to break at once and I had no money. I was able to utilize Best Buys 18 month, 0% interest if you paid it off religiously. I slowly bought a refrigerator, a stove, a dishwasher, a washing machine, and it just saved me. I wouldn't have been able to do it any other way.

I continue to use those kind of credit cards and I love them. I pay them off on time. I haven't had to pay interest, but I do feel it could negatively impact my credit.

Brigid Bergin: Imani, I want to take Alison's example and get into this question of what is the argument for including this data in credit scores given that she paid off her purchases. Is she someone who could benefit from this change, and is there any chance that someone who's got good credit, but doesn't use a Buy Now Pay Later loan could see their credit be hurt by that?

Amani Moise: That's a great question. I think in the case of a store credit card, which is what the furniture and the appliance thing sounds like, that would be treated very much like a regular credit card for credit scoring purposes. The reason why it's important the case for including these numbers in your credit scores is that it really benefits the lenders more than anything. Buy Now Pay Later is the fastest kind of consumer credit. Again, that number we cited earlier, 108 billion by the end of this year, compared to something that people hadn't even heard of maybe five years ago. It's growing really, really quickly.

If you're a lender, whether you're a mortgage lender, auto lender, just regular credit card, you want to know how much debt your customers are in before you potentially lend more to them. It's really been an industry push to make the scores more valuable because if FICO did not adapt to include this information, then those scores would be rendered obsolete as Buy Now Pay Later continues to grow. If you are a user of it and you pay your bills on time, and a lot of the ways that these services are structured is very easy, it's usually auto pay, pulling directly from your account every two weeks, that's going to benefit you, because it's going to allow people who maybe don't have as much access to credit. Buy Now Pay Later, it's typically used by people who don't have traditional credit. It's going to make them more visible, potentially boost their score.

Where it will hurt is if you do miss a payment, because the algorithm, the way it works, it assigns different levels of risk to different behaviors. Being delinquent on Buy Now Pay Later is potentially really, really risky because those services, the designers of the algorithms know that those tend to be an automatic withdrawal. If you're missing a payment from an automatic withdrawal, it's a sign that that's potentially a borrower in distress.

Brigid Bergin: Imani, just to be clear, when will this change go into effect?

Amani Moise: TBD. The new scores will officially be rolled out later this fall. I don't have an exact date, but it's still up to the credit bureaus. FICO is a credit scoring agency. The credit bureaus are like Experian, Equifax, Transunion, and it's up to those companies to decide when to turn on the switch and make it available to lenders or consumers.

Brigid Bergin: That's interesting. A listener texted, "I've used the pay later services many times. I really like the structure, but I've noticed that if you don't have the best credit, some services won't let you use it, like Klarna and Affirm. Those are two of the companies that are the Buy Now Pay Later companies." Is that something that you've seen too Just about 30 seconds?

Amani Moise: Yes, absolutely. Sometimes that really has nothing to do with you as a borrower and more with the companies, because of the way that they fund themselves through capital market. They have to contract or expand their credit box really quickly to fit what investors want. If they can't find appetite for investors to buy their loans, so that they could fund the loans, they're not going to do as much, which makes you more likely to get rejected.

Brigid Bergin: We will have to leave it there for today. Amani Moise is Personal Economics Reporter at the Wall Street Journal. Thank you so much for joining us.

Amani Moise: Thank you for having me.

Brigid Bergin: I'm Brigid Bergin, and this is the Brian Lehrer Show on WNYC. Thanks for listening, everybody, and stay tuned for All Of It.

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