Extending access to credit is a worthwhile goal. Too many people can not get a mortgage or emergency loan at a reasonable interest rate because they can not show a solid credit history. They may pay more for insurance or make large security deposits to receive utilities or rent an apartment.
Recently, the three major credit bureaus announced plans to integrate “buy now, pay later” programs, an extremely popular type of point-of-sale financing that has so far remained largely outside the traditional credit ecosystem.
But one should not expect that his purchases now, pay later, will immediately open the door for better credit. If you want reliable access to the largest number of lenders, building credit by traditional means is still the best route.
Buy now, pay later loans are growing in popularity
If you’ve bought something online recently, you probably came across a buy now, pay later option that offered to split your purchase into a few installment payments. Retailers work with lenders such as Affirm, Afterpay and Klarna to offer payment plans, which usually do not require strict credit control and may not charge interest. With the popular four-payment option, for example, you repay your balance in four equal, interest-free installments due every other week. Instead of charging interest, lenders receive a percentage of your cost from the retailer, similar to the interbank fees charged by credit cards.
Buy Now, Pay Later Services have multiplied as the pandemic has shifted to many online markets, but plans are now available for travel and healthcare and as an option in some retail stores. Nearly 100 million people used the buy now, pay later option last year, says Liz Pagel, senior vice president of consumer lending for the TransUnion credit bureau.
Like any easy loan, these plans can entice people to overspend. Buy Now, Pay Later Loans are also largely unregulated and lack consumer protection that covers credit card and debit card purchases. In addition, the Office of Consumer Financial Protection investigates how lenders use payment and purchasing data they collect from customers.
Credit bureaus are still working on the details
Credit bureaus want access to this payment data, hoping to provide more traditional information to lenders on how these borrowers might handle other types of credit.
The offices are not altruistic, of course. They are private companies that want to make a profit. However, in this way, bureaucrats could help extend access to credit by identifying borrowers who could most likely handle credit between the millions of “invisible” people with no credit history and those with few information. files to generate credit scores. TransUnion’s Pagel called the market data now, pay later the biggest chance of financial integration in a generation.
How the offices will move about this is another ongoing project. Two of them, TransUnion and Experian, say that for the time being, the information will not be included in the regular credit reports, but lenders will be able to request it. The third bureau, Equifax, says it will integrate the data into people’s credit reports.
However, the leading credit rating agency, FICO, is still studying the market data now, paying later to see how well it predicts how people could handle other loans. There is still no agreement between the agencies on whether loans should be treated as recyclable debt, such as credit cards, or as installment loans, which usually last much longer.
“It’s such an important question, because the way it is reported makes a clear difference in the way it will affect the score,” said Ethan Dornhelm, FICO Vice President of Scoring and Predictive Analysis.
How To Build Better Credit Now
If you’re currently trying to build or rebuild credit, you probably do not want to wait for these details to be settled.
Consider asking someone on credit to add you as an authorized user to their credit card. Other options include a credit line or a secured credit card from a lender listed in all three offices.
Credit unions, offered by credit unions or online, put the money you borrow into a savings account or deposit certificate that you can claim after making all the monthly payments. A secure credit card usually gives you a credit line equal to the deposit you make at the issuing bank. Of course, these are not immediate fixes for bad credit at all, but they are proven ways to extend your access to credit now.
Liz Weston is a columnist for NerdWallet, a certified financial planner and author of “Your Credit Score”. Email: lwestonnerdwallet.com. Twitter: lizweston. NerdWallet staff writer Bev O’Shea contributed to this report.