Dear Dr. Per Cap:

Earlier this year you wrote about the credit bureaus now including payments made on Pay-in-4 loans on credit reports.  However, I’ve paid back four Affirm loans this year for online purchases and my credit score hasn’t budged a point.  What gives?

Signed,

Wise Borrower

Dear Wise Borrower

Thank you for sharing.  Let’s remember that Pay-in-4 or point-of-sale loans allow shoppers to make small purchases with payments.  Hugely popular in stores and online checkouts the loans are similar to old school layaway except you get the product right away instead of waiting until you’ve made all the payments.

 I indeed wrote about how the credit bureaus now allow point-of-sale loans, often referred to as buy now, pay later loans, to be included on credit reports.  In fact all three major credit bureaus – Equifax, Experian, and TransUnion have adopted this policy.

However, many of the big name point-of-sale lenders like Klarna, Afterpay, and Affirm have yet to follow through and actually report these consumer loans to the credit bureaus.  Why is that?

Their concern is over the way point-of-sale loans are structured which could hurt a borrower’s credit score more than help it.  We have to remember that the credit scoring system is based on an old way of doing business when most loans were long term commitments – like car loans and home mortgages.  As a result the scoring models are designed to reward long term loans.

However, point-of-sale loans are a completely different animal.  People often open and close multiple point-of-sale loans in a short period of time.  And even if paid back on time, the current FICO credit scoring models can ding a person’s score because they might interpret point-of-sale plans as churning loans as opposed to responsible borrowing. 

So what’s happening is the point-of-sale loan companies are running a little scared right now while leaning on the credit bureaus and FICO to come up with a better way to report and measure point-of-sale loans so they don’t hurt customers’ FICO scores; which of course could mean less business from fewer customers using point-of-sale loans.

Hopefully the credit bureaus, FICO, and the point-of-sale companies will figure out a healthy compromise in the not so distant future that works for consumers.  Until then don’t look to point-of-sale loans as a way to boost your FICO score.

Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email askdrpercap@firstnations.org.