Following a year-long study with Affirm, Fico is planning to add buy now, pay later data to its credit scores.
BNPL loans have become increasingly popular at the checkout in recent years, prompting fears about rising consumer debt, but data on how the nascent instrument's impact on credit scores has so far been scant.
“Given the growing popularity of BNPL loans, understanding how to effectively capture the benefit that BNPL data can have on Fico Scores is crucial to all stakeholders in the credit ecosystem,” says Ethan Dornhelm, VP, scores and predictive analytics, Fico.
The new study compares the Fico Scores of more than 500,000 consumers who opened at least one new Affirm BNPL loan against a benchmark population of people without an Affirm loan. Fico simulated the inclusion of these loans into credit reports, and then examined the potential impact to resulting credit scores.
The simulated inclusion of BNPL data into consumers’ credit files shows Fico Score impacts that were generally consistent with the opening of a new account - within less than +/- 10 points for over 85% of the consumers in the study.
There are higher scores or no score changes for the majority of consumers in the study who had recently obtained five or more Affirm BNPL loans. The impacts on Fico Score predictiveness ranges from modest improvement to no adverse impact, across a range of different use cases.
Says Dornhelm: “Our findings show that the inclusion of BNPL data via our innovative treatment can drive score increases for some consumers, while improving model risk performance for lenders.”
In the wake of the study, Fico says it is now developing a way to introduce its proprietary treatment of BNPL data to the credit-scoring marketplace.
Julie May, VP and GM of scores at Fico, says: “We are eager to arm lenders with a tool that allows them to incorporate BNPL data into their credit evaluation process, demonstrating Fico’s commitment to innovation, transparency and inclusivity in lending.”