Following a year-long study with Affirm, Fico plans to integrate buy now, pay later (BNPL) data into its credit scoring system.
BNPL loans have gained traction at the checkout in recent years, raising concerns about increasing consumer debt. However, there has been limited data on how this emerging financial tool affects credit scores.
“Given the growing popularity of BNPL loans, understanding how to effectively capture the benefits that BNPL data can have on Fico Scores is crucial for all stakeholders in the credit ecosystem,” states Ethan Dornhelm, VP of scores and predictive analytics at Fico.
The new study examined the Fico Scores of over 500,000 consumers who opened at least one Affirm BNPL loan and compared them to a benchmark group without an Affirm loan. Fico simulated the inclusion of these loans in credit reports and analyzed the potential effects on credit scores.
The simulated inclusion of BNPL data indicated that credit score impacts were generally comparable to the effects of opening a new account, with changes falling within +/- 10 points for over 85% of the consumers studied. Most individuals who recently secured five or more Affirm BNPL loans either experienced an increase in their scores or no changes at all. The effect of incorporating BNPL data on Fico Score predictiveness ranged from slight improvements to no negative impacts across various scenarios.
“Our findings show that integrating BNPL data through our innovative approach can lead to score increases for some consumers while enhancing model risk performance for lenders,” adds Dornhelm.
In light of the study’s results, Fico is developing a method to introduce its unique approach to BNPL data in the credit scoring market.
Julie May, VP and GM of scores at Fico, emphasizes: “We are eager to provide lenders with a tool that allows them to integrate BNPL data into their credit evaluation process, underscoring Fico’s commitment to innovation, transparency, and inclusivity in lending.”