TransUnion - one of the three main credit reference agencies in the UK - has announced that consumers' Buy Now Pay Later (BNPL) credit agreements will form part of their credit files from the summer. This reflects a step towards protecting consumers against building unaffordable debt whilst creating inclusivity for those who demonstrate good debt management through BNPL to build a better credit profile.
BNPL has been under a great deal of scrutiny since it became widely available as a way of spreading the cost of goods and services interest free. There have been concerns over how consumers are protected, leading to a review of the sector and moves to make the sector regulated.
How do BNPL agreements affect your credit score now?
Currently, there is no standardised way that information from BNPL companies is shared with the credit agencies. For the major players - Klarna, Laybuy and Clearpay - lending agreements for most of their services don't appear on credit reports with TransUnion, Experian or Equifax. It is only when a customer has repeatedly failed to repay the loan and it is passed on to a debt recovery agency that it is then included.
This means that there is no valid way for mortgage lenders, credit card companies and other credit providers to include BNPL within their affordability assessments, which could lead to customers building up unmanageable debts. Equally, consumers who are using BNPL responsibly and making payments on time aren't benefitting from the potential boost this could give their credit ratings if it was included on their credit files.
For more detailed information on how the BNPL sector currently works, read "Everything you need to know about Buy Now, Pay Later".
How BNPL will affect your TransUnion credit file from the summer
TransUnion's announcement reveals that consumers can expect to see their BNPL credit agreements appear on their credit files later in the year, but a few things are unclear at this stage. Which BNPL providers will be sharing information with TransUnion is yet to be revealed. How, what is mostly short-term debt, will impact your credit score is also yet to be clarified. It is also unclear whether BNPL will be included in Experian and Equifax credit reports.
What is next for BNPL regulation?
The Treasury launched a consultation on the regulation of BNPL schemes in October 2021, which was concluded in January 2022. This has led to legislation beginning to be drawn which will bring BNPL under the regulation of the Financial Conduct Authority. The details of this legislation are likely to be brought before Parliament in the coming months.
The move to the BNPL sector being regulated should lead to greater controls over how they operate, including how they report their lending practices to the credit reference agencies, in order to give consumers greater protection.
Why is your credit score important?
Your credit reports with TransUnion, Experian and Equifax are used by potential creditors to decide on your creditworthiness. They affect whether you are approved for a loan, mortgage or credit card, how much you are allowed to borrow and the interest rate you will pay. Even before BNPL is included, it is worth checking your reports with all three agencies to see if they are accurate and if there is anything you can do to improve your credit score.
You can find out how to check your credit score for free in our article "The best way to check your credit score for free". It outlines how you can use ClearScore* (Equifax), MSM Credit Monitor* (TransUnion) and MSE Credit Club (Experian), among other services, to keep on top of your credit reports.
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