Buy Now, Pay Later (BNPL) services have revolutionized consumer purchasing habits, offering a modern twist on traditional installment plans. However, this convenience comes with its challenges, primarily the emergence of phantom debt. Phantom debt accumulates through BNPL services but often goes unnoticed in conventional financial reporting, as it is typically not reflected in credit bureau records.

This lack of visibility raises concerns about financial risks for consumers, particularly those who frequently use multiple BNPL loans without undergoing comprehensive credit checks. As the popularity of BNPL services continues to soar, especially among younger demographics and individuals with lower credit scores, understanding the implications of this hidden debt is becoming increasingly critical.

Key Takeaways

• Unseen Debt Accumulation: BNPL “phantom debt” is debt incurred through BNPL services that aren’t immediately visible in standard financial reports. Not typically reported to credit bureaus, this debt poses financial risks for consumers, mainly when they take on multiple BNPL loans without thorough credit checks.
• Impact on Financial Stability: The rapid expansion of the BNPL market, especially among younger consumers and those with lower credit scores, could significantly affect financial stability. As BNPL gains popularity, this hidden debt could reach substantial levels, complicating consumer credit management and regulation.
• Transparency Challenges: There is a transparency gap between BNPL providers and credit bureaus, with most BNPL transactions not reflected in credit reports. While credit bureaus are working to incorporate BNPL data, BNPL companies are hesitant, fearing negative impacts on customers’ credit scores.
• Consumer Financial Struggles: Many BNPL users face financial difficulties, and a significant percentage regret using these services. Younger consumers, with high delinquency rates and lower credit scores, are particularly vulnerable, highlighting the risks of overspending and potential long-term financial consequences.

Understanding “Phantom Debt” in the Context of BNPL and the Hidden Risks Behind It

BNPL (Buy Now, Pay Later) “phantom debt” refers to debt accumulating through BNPL services but isn’t immediately visible in traditional financial reporting. This happens because BNPL transactions often aren’t reported to credit bureaus, making it difficult to track and measure the total debt consumers owe. This unreported debt can strain users financially, especially if they take on multiple BNPL loans, leading to loan stacking and potential delinquencies.

Economists and analysts have used the term “phantom debt” to highlight the challenges of tracking BNPL debt within the broader economy. Since BNPL transactions are typically not included in traditional credit reporting, they can contribute to a hidden layer of debt that doesn’t factor into standard assessments of consumer creditworthiness. This can lead to consumers unknowingly accumulating more debt than they can manage, as BNPL services are often easy to access without the rigorous credit checks associated with credit cards.

This lack of data sharing between credit agencies and BNPL lenders worldwide is why Tim Quinlan, a senior economist at Wells Fargo, has termed it “phantom debt.”

Additionally, the rapid growth of the BNPL market has amplified concerns about this hidden debt. As BNPL becomes more popular, especially among younger consumers and those with lower credit scores, the potential for “phantom debt” to impact financial stability increases. Some estimates suggest that this type of debt could reach significant levels in the coming years, further complicating efforts to effectively manage and regulate consumer credit.

Major companies offering “pay in four” products, including Klarna Bank AB, Affirm Holdings Inc., and Afterpay, do not report these loans to credit agencies.

These companies have declined demands for increased transparency despite the market expanding annually. In 2024, the US BNPL market was valued at $36.4 billion, and it is projected to reach $145.7 billion by 2033, growing at a compound annual growth rate of 21.3%. This lack of full disclosure obscures an accurate understanding of the financial health of American households, information vital to entities ranging from global central banks to regional U.S. banks and international corporations.

Generation Z and parents with young children are the most rapid adopters of BNPL services. Recent data shows that around 43% of Generation Z and more than one in three parents have used BNPL. These groups are also more prone to difficulties with repaying loans.

Often likened to a contemporary version of layaway, BNPL allows consumers to divide the cost of significant purchases into smaller payments. A separate study revealed that nearly 60% of financially vulnerable households used BNPL services over five times a year, in contrast to 23% of economically stable consumers. About 30% of financially vulnerable consumers used BNPL ten or more times annually, compared to 10% in better financial situations.

Since there is no central system to track it, this ‘phantom debt’ growth might suggest that total household debt levels are higher than what traditional metrics indicate. It’s difficult to assess the full extent of this debt. This kind of hidden debt looms over consumers.

While standard terms often divide a purchase into four equal interest-free payments, not all BNPL agreements follow this model. These arrangements increasingly resemble credit cards, which could lead to complications if a payment is missed. Depending on the lender, missed payments might result in late fees, deferred interest, or other penalties.

This method of installment purchasing also prompts consumers to make impulse buys that exceed their financial means.

Transparency Still a Challenge Between BNPL Providers and Credit Bureaus

The ongoing conflict between BNPL providers and major credit bureaus—Experian, TransUnion, and Equifax—has created a transparency issue that frustrates consumers and regulators. Although BNPL has become a significant consumer credit aspect, most BNPL transactions are not recorded in credit reports. This lack of data is due to BNPL companies’ hesitation in sharing their transaction details. BNPL companies argue that credit agencies are not equipped to handle their data and that disclosing it could negatively affect customers’ credit scores, essential for securing mortgages and other loans.

Meanwhile, the credit bureaus are working on solutions to include BNPL data. Experian has initiated a dedicated bureau to enable BNPL providers to report on various consumer payments. Equifax has begun to include BNPL activities in traditional credit reports, which may help consumers enhance their credit scores through timely payments. TransUnion is also developing methods to incorporate BNPL data into its credit reporting services.

Credit bureaus contend that adding BNPL data would offer a more complete view of consumers’ financial health, aiding lenders in making better-informed lending decisions. However, BNPL companies are still cautious, resulting in a deadlock that keeps most BNPL loans unreported. This issue has caught the attention of regulators like the Consumer Financial Protection Bureau, which is examining the potential risks of unreported BNPL debts.

The deadlock is slowly changing, with companies like Apple beginning to report some BNPL transactions, but comprehensive integration into the credit system remains an ongoing process.

Financial Struggles Intensify for BNPL Consumers

Consumers using BNPL services face increasing financial difficulties, with data indicating the inherent risks of these payment methods.

A large number of BNPL users are struggling to meet their payment obligations. For example, nearly 29% of US BNPL users admit to regretting their decision to use these services, as they lead to overspending and subsequent challenges in meeting payment deadlines. Younger consumers, those aged 18-29, are particularly affected, as they are more likely to miss payments, with delinquency rates sometimes rising above 8%.

Additionally, many BNPL users have lower credit scores, with the majority (95%) having scores under 700 and approximately 70% registering scores below 600.

BNPL: Not for Consumers Looking to Build Credit…Yet

The relationship between BNPL providers and credit bureaus has complex implications for consumer credit scores. Although timely payments on BNPL purchases might seem beneficial for credit building, this is only sometimes true.

Many BNPL services, including Afterpay and other pay-in-4 providers, do not report payment activities to major credit bureaus like Equifax, TransUnion, and Experian. Therefore, even regular, on-time payments do not improve credit scores. In contrast, some providers like Klarna report only missed payments, which can negatively impact a credit score.

As mentioned before, there are significant risks associated with late payments. Late payments can lead to fees and the potential involvement of collection agencies. Once a debt goes to collections, it can be reported to credit bureaus, significantly lowering your credit score and potentially affecting your ability to obtain future loans or credit on good terms.

Conclusion

While BNPL services provide a convenient option for managing expenses, they also pose significant risks, particularly in the form of untracked “phantom debt.” This hidden debt can contribute to financial strain, especially among younger consumers and those with lower credit scores.

The lack of transparency between BNPL providers and credit bureaus further complicates matters, as consumers might find themselves inadvertently accumulating more debt without it reflecting on their credit reports. As BNPL becomes more mainstream, the need for regulation and clearer reporting standards is evident. Addressing these issues is crucial to ensure BNPL remains a beneficial tool without compromising consumer financial health.