Nearly Half of Americans May Not Be Ready for This Huge Credit Report Update (Plus What You Can Do)

A recent study from LegalShield revealed that 76% of Americans are using buy now, pay later (BNPL) services and that 49% have missed a payment. The Wall Street Journal first reported back in June that FICO would be releasing a credit score model in the fall that takes BNPL loans into account.

Since FICO is responsible for calculating credit scores, the three credit bureaus (Equifax, Experian and TransUnion) can decide what’s included in a credit report. This means that BNPL programs can impact your creditworthiness, depending on how promptly you make your payments.

Learn More: Do Your Student Loans Affect Your Credit?

Consider This: 6 Safe Accounts Proven To Grow Your Money Up To 13x Faster

Unfortunately, LegalShield noted that 38% of consumers are totally unaware of the coming FICO changes. Americans could hurt their finances if they don’t take prompt action, as FICO plans to factor in these BNPL loans in the coming future.

GOBankingRates consulted with experts to determine how this credit report update could impact your finances and how you can prepare yourself for it.

How Can Using BNPL Programs Put Your Finances at Risk?

You Take on Too Much Debt

“For households already juggling high costs of living, BNPL can potentially deepen the financial strain in a way that may not be apparent initially,” said Rebecca A. Carter, LegalShield provider attorney with Friedman, Framme & Thrush, PA. “By giving consumers a false sense of affordability, due to small payments, one may take on more short-term debt than they realize.”

With these loans, you end up financing purchases that you may not afford, which adds to your current debt load. As you take on more time, you could struggle to keep up with payments.

Find Out: New Law Could Make Electricity Bills Skyrocket in These 4 States

You Could Damage Your Credit Score

“This shift provides lenders with insight into consumers’ BNPL activity, for better or for worse, “remarked  Leslie H. Tayne, Esq., a finance and debt expert and the founder of Tayne Law Group. “Essentially, it could either boost or hurt consumers’ ability to borrow in the future, depending on how responsibly they manage those payments.”

Any missed or late payments through BNPL loans could be reported, which has the potential to lower consumers’ credit scores. Austin Kilgore, an analyst with the Achieve Center for Consumer Insights, elaborated, “While every consumer’s finances are different, consumers who miss or are late with payments — BNPL or other — will generally see this reflected in credit scores.”

If you don’t make your BNPL payments on time, you could see your credit score drop, which would impact your ability to borrow money in the future. You could struggle with a home mortgage or car loan when the time comes since your credit score determines if you qualify and at what rate.

You’re Not Addressing the Real Issue

While BNPL plans may seem like a helpful tool for consumers with a limited credit history or those going through a temporary financial struggle, the LegalShield study revealed that these short-term loans have evolved from a luxury to a necessity, with 47% of customers using them for groceries and 35% for medical bills. This means that BNPL users are relying on these plans to get by instead of using them solely for major purchases or emergencies.

An analysis from the Consumer Finance Protection Bureau noted that almost two-thirds of BNPL loans went to customers with low credit scores. By having multiple small payments to manage, consumers can easily forget about one and end up in further debt.

How Can Americans Prepare for These Changes to Credit Reporting?

Review Your BNPL Purchases and Credit Report

Carter believes that Americans should be reviewing their credit reports regularly, regardless of their financial situation or use of BNPL plans.

“Everyone should be tracking BNPL purchases, payments and balance due, as you would for any credit card,” she added. “In addition to record keeping, one should set reminders for installment payments to avoid any surprises once BNPL data is fully integrated in reporting.”

You’ll want to see what’s on your credit report to ensure that you don’t have any issues as the new changes are implemented.

It’s worth noting that some BNPL services, such as Affirm and Klarna, already report their lending activities to credit reporting bureaus. In an August report from CBS News, it was revealed that other short-term loan providers like AfterPay are still not providing customer data to the credit bureaus until the new score calculations are announced.

Treat BNPL Programs as Loans

Tayne advises that consumers who are just learning that BNPL will now be considered in their FICO credit score should treat this (relatively new) payment method as what it is: A loan. Tayne warned that a BNPL loan isn’t a low-risk option just because approval is easy.

Kilgore also emphasized that no matter how a BNPL program is presented, you’re adding debt, which can be challenging to manage with your other expenses. Since BNPL payments can have different due dates, the process can be complicated, even for organized individuals. This leads us to the next point.

Stay Organized

Organization is key because it ensures you’ve set up automatic payments, preventing you from falling behind. You want to stay on top of your payments because you may have a few BNPL plans, and it’s easy to forget about one.

How Can Consumers Avoid These Services?

Awareness Is Key

“Before opting into BNPL, consumers need to read the fine print about the repayment timeline, interest risk and other penalties and terms,” warned Carter. “Consumers should also attempt to limit the use of BNPL, ideally one purchase at a time.”

The best way to protect your credit score moving forward is to limit how many purchases you make on credit, because you’re risking hurting your finances by having too many payment plans.

Create a Budget

Tayne suggests that you steer clear of impulse purchases altogether, especially with the holidays here. The best way to do this is to create a budget by carefully considering your goals.

Kilgore pointed out that you’ll likely have to make modifications to your goals or income and expenses, but you’ll have a much better chance of getting where you want to go with a roadmap as opposed to financing purchases that you’re not ready for.

More From GOBankingRates

• Here's What the Average Social Security Payment Will Be in Winter 2025

• 5 Old Navy Items Smart Seniors Should Stock Up On for Winter 

• How Middle-Class Earners Are Quietly Becoming Millionaires -- and How You Can, Too 

• 5 Tiny Money Moves That Can Add Up to Thousands by Next Year 

This article originally appeared on GOBankingRates.com: Nearly Half of Americans May Not Be Ready for This Huge Credit Report Update (Plus What You Can Do)