Buy now, pay later loans will soon hit credit scores — and experts think Gen Z could be at risk
BNPL loans don't behave like traditional credit: they break a purchase down into four interest-free payments over six weeks, making them harder to factor into credit scores.
But there's an increased emphasis on monitoring the BNPL space, and FICO's move to incorporate BNPL loan data into its scores follows Affirm's move in April to start reporting new loans to Experian and TransUnion.
Concerns about the impact of BNPL have risen alongside its rise in popularity. Research from EMARKETER predicts total US BNPL transactions to reach $108 billion in 2025, up from $94 billion in 2024.
According to a Lendingtree report, 41% of BNPL users reported paying late, up from 34% a year ago. Users are increasingly leaning on BNPL to pay for essentials, with 25% of users buying groceries and 33% seeing BNPL as a "bridge" to their next paycheck.
Gen Z and millennials have been the biggest adopters of this payment plan method. Lendingtree found that Gen Z was more likely to have multiple BNPL loans at the same time.
The lack of impact on credit scores up to this point have been an attractive factor, according to a study by the Federal Reserve Bank of Kansas City.
"BNPL is convenient because you don't need to pay credit interest, but that can also nudge young people to spend more and overextend," Fumiko Hayashi, vice president of economic research at the Kansas City Fed, told Business Insider.
Aditi Routh, economist at the Kansas City Fed, attributes Gen Z's high usage to their tech savviness and openness to adopting new payment technologies.
Gen Z in particular has exhibited weaker credit card spending growth compared to older generations, according to David Tinsley, senior economist at the Bank of America Institute.
This could be a sign that rising living costs are putting pressure on younger consumers, and Gen Z could be relying on BNPL to help them avoid racking up credit card debt and hurting their credit scores.
With credit scores no longer shielded from BNPL activity, Gen Z could be affected more than other cohorts.
"The benefit is that the good repayment behavior may improve your credit score, but BNPL is unsecured credit. Multiple lines of unsecured credit use usually leads to a negative credit score," Hayashi said.
While BNPL can theoretically be used in a low-risk way to manage cash flow, Hayashi and Routh found that BNPL users were significantly more likely to face financial constraints than non-users. BNPL users who paid late exhibited even higher levels of financial constraint.
Given the fact that BNPL users tend to be younger and more financially vulnerable, increased regulation in the payments space could reveal consumer weaknesses and hit credit scores.
Hayashi and Routh said they plan to continue monitor Gen Z spending habits to gather more information on the extent of the risk.
"As a researcher, we don't know much about Gen Z behavior," Routh said. "We know boomers and Gen X behavior relatively well, but there's a lack of knowledge about young people."
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