By Alicia Wallace, CNN

(CNN) — How well — or how poorly — Americans are managing their Buy Now, Pay Later loans soon could be reflected in their credit scores.

FICO plans to launch a suite of credit scores later this year that incorporate BNPL data, providing lenders a window into what’s been a big blind spot: consumers’ repayment behavior on these increasingly popular installment loans.

BNPL loans can serve as an alternative to credit cards and are used by consumers who are seeking more flexible payment options, who want to overcome a tight financial spot, or who are looking to smooth out some bigger transactions to better meet their budgets.

For some consumers, the inclusion of BNPL data in the company’s FICO Score 10 and FICO Score 10 T models could help serve as a credit-builder — or even a credit buster.

“A lot of BNPL users are often young people who don’t have long credit histories,” Ted Rossman, chief credit analyst at Bankrate, told CNN in an interview. “That’s the more optimistic use case, that these people could be brought into the credit system. And if they use Buy Now, Pay Later responsibly, it should help them.”

BNPL loans have become more widely available and adoption rates have increased as people of all ages — especially younger adults — have grown more comfortable incorporating them into their shopping habits.

Insight into ‘phantom debt’

However, BNPL comes with such ease that people can quickly spend well beyond their means — especially if they have multiple installment loans running at the same time. A Bankrate survey conducted in May found that nearly half of all BNPL users experienced at least one problem, and overspending topped the list.

Consumer advocates and economists alike also have expressed concern about how consumers have used BNPL loans, including a recent uptick in installment financing used for everyday purchases such as groceries.

Another question mark with BNPL has been its role in the mushrooming of “phantom debt.”

By and large, the popular installment loan activity is a gigantic black box. The industry remains largely unregulated, and BNPL providers aren’t required to report to credit agencies, lenders or other data-keepers.

And regulations likely aren’t coming any time soon: The Consumer Financial Protection Bureau, under the Trump administration, dropped planned enforcement of a Biden administration rule that would have treated BNPL providers like credit card companies.

FICO says its FICO Score 10 BNPL and FICO Score 10 T BNPL — set to launch this fall — would be the first credit scores from a leading scoring company to account for Buy Now, Pay Later activity.

“A number of the largest lenders in the US told us, loud and clear, there is a need for a credit scoring model that includes the BNPL data,” Ethan Dornhelm, vice president of FICO Scores and Predictive Analytics, told CNN in an interview.

Bankrate’s Rossman said Monday’s “eye-catching” announcement is a step in the right direction for having a fuller and more accurate representation of consumers’ credit activity; however, he noted that the pace of that progress might not be that swift.

“My suspicion is that this may be a slower rollout than one might think at first glance,” he said.

That’s because credit tracking, scoring and reporting is a complex business.

A multi-layered credit industry

For example, FICO scores are the most widely used by lenders (the company touts that its scores are used in 90% of lending decisions); however, not all lenders use the same scoring model.

FICO Score 10 and FICO Score 10 T are among the newest releases, but the most widely used model is FICO Score 8, which was launched in 2009.

“It’s kind of like an iPhone, just because they’re up to (version) 16 now, some people are still using old ones,” Rossman said. “Not everybody’s using the latest and greatest, just because it’s available. Credit scoring has a long sales cycle, lenders are sometimes hesitant to invest in the technology and train all their staff and implement new processes.”

The most widely used versions in mortgage lending are FICO Score versions 2, 4 and 5, according to FICO.

FICO developed a secret sauce for how factors such as payment history, balances and the like feed into its scoring system; however, those ingredients come from what the lenders report to the credit bureaus.

And when it comes to BNPL loans, some of those have only just started hitting credit reports. A select few BNPL lenders, notably industry giant Affirm, have begun reporting activity to agencies such as Experian and TransUnion.

“It’s like you’ve got multiple levels to this,” Rossman said. “The lenders are the ones furnishing the information, and then they send it to the credit bureaus, and then FICO applies its methodology, and it’s kind of hard to get everybody to agree.”

Also, BNPL doesn’t behave like traditional credit, and that could complicate how these loans are scored, Rossman said.

“Things like frequent opening and closing of accounts, that would be disastrous for your credit score,” he said. “With Buy Now, Pay Later, you’re doing that every few weeks or even every few days. And then credit utilization, too: Maxing out a credit card is bad, but Buy Now, Pay Later is basically you maxing out a short-term credit line and then paying it down.”

In Monday’s announcement, FICO indicated it developed a “novel” approach to credit scoring that includes aggregating BNPL data when calculating the variables used in the models.

FICO developed the BNPL approach after conducting a year-long joint study with Affirm on how the pay-over-time loans could impact consumers’ credit scores.

“Simply forcing the BNPL data into our existing FICO scores, which weren’t calibrated to this new type of credit product, was not the answer,” Dornhelm said.

For example, Dornhelm noted, the joint study found that a unique behavior around BNPL loans is the potential for a large number of the loans to be opened within a short period of time.

“(That’s) Something you obviously don’t see when you’re looking at a mortgage loan or a student loan or the like,” he said. “We developed this approach that aggregates a number of BNPL loans together when calculating some of the variables in the model to avoid the model over-penalizing consumers for having opened a reasonable number of Buy Now, Pay Later accounts.”

This story has been updated with additional reporting.

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