Phantom debt is having a 'seismic impact' on consumer credit
A new Federal Reserve report shows a spike in credit card delinquencies among young adults, with an estimated $1.12 trillion owed collectively, of which 8.6% fell into delinquency last year. However, the real hidden issue is approximately $46 billion of phantom debt originated by Buy Now, Pay Later (BNPL) lenders. This ticking time bomb is putting significant pressure on consumers and contributing to credit card delinquency rates.
Our latest research shows that younger generations either don’t realize they are originating new loans when using BNPL, or they aren't always concerned about how these new loans impact their financial health. BNPL providers that originate “unreported” loans automatically collect installments from the shoppers’ debit cards or bank accounts. This can leave the consumer with insufficient funds to pay off their credit card statements, forcing a revolving balance or delinquencies.
Rightly so, the CFPB has today announced a significant update aimed at fortifying consumer rights within the rapidly growing BNPL market. The CFPB issued an interpretive rule solidifying the status of BNPL lenders as essentially the same as credit card providers, which brings a suite of necessary protections to consumers using these services. This ruling is set to reshape how BNPL operations are managed, compelling them to uphold standards similar to those in the traditional credit card industry.
As a card-linked installment platform, Splitit provides a responsible, interest-free installment option for shoppers without the need to originate new loans and without a detrimental impact on their credit history.
As the BNPL industry continues to evolve, the emergence of credit card-linked installment plans provides a safer, more sustainable option for managing large expenses without accruing additional debt or jeopardizing financial health.
Listen to more insights here where Nandan Sheth , CEO of Splitit, speaks to Yahoo Finance.
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