Buy Now, Pay Later Plans Must Follow Credit Card Rules, Says CFPB

All your buy now pay later plans might soon be treated as credit card purchases -- at least as it pertains to billing disputes -- according to a new ruling from the Consumer Financial Protection Bureau.

With its new interpretive rule, the CFPB can impose regulations on BNPL plans to help protect consumers, but it also raises the question of how the plans could affect people’s credit scores. Before this year, BNPL plans had not been reported by the three major credit bureaus. 

That all began to change in December 2021 when the CFPB announced it would begin to collect information from five major BNPL providers -- Affirm, Afterpay, Klarna, PayPal and Zip -- to assess the “risks and benefits of these fast-growing loans.”

However, according to credit expert John Ulzheimer, formerly of FICO, Equifax and Credit.com, it would take a much larger change to our credit framework for BNPL plans to truly be treated as credit cards, specifically the credit scoring models we currently use to create credit scores.

“And that’s not likely to happen because BNPL definitely is not the same as a credit card account. There’s also not a critical mass of BNPL on credit reports yet,” he said.

In March, Apple Pay Later plans became the first major BNPL provider to fully share 4-1 installment loan data and payment history directly with a credit bureau, Experian. 

The new rule will go into effect in 60 days. The CFPB is accepting public commentary through Aug. 1, 2024. If you use BNPL to help stretch the cost of a purchase, here’s what you need to know.

What are the new rules for BNPL plans?

Among the key legal protections and rights that the CFPB will require BNPL plans to provide is the right to dispute charges and demand a refund from the lender after returning a product purchased with a BNPL loan. 

These are similar to the protections provided by conventional credit cards, and come in response to consumer complaints about disputed transactions and refunds when using BNPL services, the CFPB said in its announcement.

“When consumers check out and choose Buy Now, Pay Later, they don’t know if they will get a refund if they return their product or whether the lender will help them if they didn’t get what was promised,” said CFPB Director Rohit Chopra. 

In a 2022 report, the CFPB found that more than 13% of BNPL transactions involved a return or dispute. 

With the new rule, BNPL lenders must:

• Investigate disputes that consumers initiate, pausing payments during the investigation 
• Credit refunds to consumers’ accounts when they return products or cancel services
• Provide periodic billing statements

Many of the best BNPL apps already offer some or all of these services, but the CFPB said the new rule will ensure that they are applied consistently. Affirm, among the leading BNPL providers, responded with support for the ruling.

“We are encouraged that the CFPB is promoting consistent industry standards, many of which already reflect how Affirm operates,” the company said in a statement following the ruling. 

BNPL plans have become a popular payment method over the past few years. They allow you to make a purchase and spread out the cost using a payment plan, typically four payments over a few weeks. 

Most BNPL plans do not currently require a hard credit inquiry, which can make them attractive alternatives to credit cards. However, they also lack the protections that credit card users have under federal law.

“I suspect the CFPB did what they did so BNPL users could get the protections under the Fair Credit Billing Act,” Ulzheimer said.

The Fair Credit Billing Act is a federal law that requires creditors to respond to billing complaints, fix suspected billing errors and ensure lenders are handling consumer accounts fairly. It also limits consumer fraud liability to $50.

Cardholders are also protected under the Truth in Lending Act, which protects them against unfair billing practices. It ensures that lenders must disclose all the costs of a loan, including any fees and interest charges.

This interpretive rule is the latest move by the CFPB to help protect consumers against potentially predatory lending practices. In March, the CFPB announced a rule limiting the late fees credit card issuers can charge and preventing them from increasing the fees for inflation. However, the ruling was temporarily halted.

What should you do if you use BNPL plans?

While additional protections may be welcome for giving you peace of mind when you make a purchase, you should keep in mind that there’s a reason BNPL plans continue to be compared to credit cards. Both are payment options that let you make a purchase now with the potential to pay it off later. 

And while BNPL plans can help you afford purchases by spreading out payments, it’s important to keep these tips in mind:

Plan ahead. When you’re at the checkout, the first payment may seem easy enough to cover. But will you be able to afford to pay the same amount in the following weeks? 

Manage your plans. Putting one large purchase on a BNPL plan may make sense for your budget, but what happens when you use another plan … and another one? Keep track of the payment plans by setting alerts, and carefully consider your options before using more plans than you or your budget can handle.

Build your credit in other ways. Even if BNPL services are incorporated into credit scores down the road, it could take time before they’re incorporated into your credit. Consider applying for a secured credit card or ask to become an authorized user on someone else’s credit card.