BNPL users have less access to credit, but they outpace non-BNPL users in the use of credit products

Interest rates may have peaked, but their impact is likely to echo in consumers’ financial health for some time to come. Interest and fees from balances on credit cards increased by 20% in 2022, reaching $113.1 billion, according to the Financial Health Network. On average, credit cards now charge an all time high 20.69% APR, which is 5% more than last year. 

It is likely that an end of year survey of 2023 will reflect a similar hike in interest and fees from revolving balances. FHN also estimates that increases in APRs account for at least $5 billion of the $113.1 billion.

When faced with credit card debt, a common practice among consumers is to turn to BNPL. 14% of households used BNPL in 2022, of which Black and Latinx households had a higher share, outpacing White households by at least 8%. Loan stacking continues to be a practice for at least one third of the consumers that have used BNPL. 

Prevalence of BNPL is more common in consumers that have lower access to credit. A recent report by the CFPB found that BNPL borrowers had an average score in the “near prime” range. However, the report also shows that incurring BNPL debt does not generally cause a drop in consumers’ credit scores. 

Despite having lower access to credit, BNPL users are more active users of other credit products like credit and retail cards than non-BNPL users. 

BNPL users generally have access to a credit card, but in the face of rising fees and debt adding up, consumers are trying every avenue to get short term liquidity. 

For this consumer segment, savings are more limited than for those who don't use BNPL.

On average, BNPL users have $11,981 less in retirement savings than non-BNPL users, and similarly, their access to credit card liquidity is also lower than those who do not use BNPL. 

Taken together, it is likely that as inflation and price hikes persist, more financially vulnerable people will turn to BNPL as well as incur loans in other credit products. This trend will invariably have a greater impact on non-white households, which make a bigger percentage of the financially vulnerable. 

Although experts recommend moving balances from a high-rate credit card to one that has lower rates, this isn't a feasible solution for those who have bad credit histories, since this balance transfer strategy relies heavily on paying down debt in the initial months after a balance transfer. 

The fact that balances reached $943.5 billion in January of this year, but more than half of the consumers continued to carry balances from month to month, this strategy is limited to those who need it the least: Only 10% of financially vulnerable cardholders reported never carrying a balance to FHN. 

Murky Waters: BNPL’s effect on credit scores

Since moving balances between accounts is not an option for many, and credit limits are lower for financially vulnerable households, BNPL will continue to be an option. But the confusing thing about BNPL is that unlike normal lending through a credit card, the impact of BNPL loans is unclear and not standardized across credit scoring models. For example, Affirm reports BNPL activity to Experian, but it doesn't report loans with 0% APR and four biweekly payments or those with a three-month payment term with 0% APR. 

For other types of loans, the entire history is reported to Experian, which means that these kinds of loans have an impact on a consumer’s credit score. Moreover, credit scores can suffer negative impacts even if consumers pay down their debt on time. This is because factors like the average age of a consumer’s accounts, the time since the first account was opened, and  the time since the last account all factor into the credit score. 

“Every purchase you make with a POS loan is considered a separate account on your credit report that gets closed once you pay off the balance. Since these loans are short-term (generally six weeks), they can bring down the average age of your credit history considerably — especially if you’re a regular borrower,” said Leslie Tayne, founder and managing director at Tayne Law Group. 

For credit scorers like FICO, which includes how long a particular credit line is open in its scoring, recurring BNPL loans -- even if they're paid off on time -- can pull down a consumer's final credit score. And if 33% of BNPL users engage in loan stacking, according to the FHN, there's got to be a broader deterioration of credit scores in the wake of increasing BNPL usage.

It also shows the importance of financial literacy specifically around newer concepts in credit like BNPL, where on time payments don't always result in good credit standing. This isn't necessarily clear to most BNPL users.