Consumers are accumulating “phantom debt” through “buy now, pay later” (BNPL) loans, which don’t appear on credit reports.

These loans allow interest-free installment payments but are not considered traditional debt.

Despite not affecting FICO scores, BNPL loans are contributing to rising delinquency rates, signaling consumer financial strain.

Credit-card delinquency rates have increased significantly, showing the broader impact of BNPL.

BNPL market growth is substantial, with a projected rise to $700 billion by 2028, but many consumers are falling behind on payments, indicating potential limits on future consumer spending.

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Consumers are piling up on what’s called “phantom debt” – and that never shows up on their credit report.

Phantom debt is a fancy term for “buy now, pay later” (“BNPL”) loans.

These loans allow consumers to pay for a lot of online purchases in interest-free installments. So instead of paying $100 upfront for a pair of shoes online, you can divide your purchase into multiple equal payments over a few months.

BNPL technically isn’t debt… but it’s a way for consumers to delay paying for goods.

And customers don’t have to get approved in the same way they do for an auto loan, so “debt” generated by BNPL purchases never shows up on your FICO score.

These loans are stacking even more obligations on people’s plates, and folks are starting to fall behind on their payments.

While credit scores may not include BNPL, these loans can’t hide from every metric…

Delinquency rates include all loans that are past due…

That makes them a much better indicator of consumer health.

They take into account mortgage balances, which increased by $190 billion in the last quarter, and total household debt, which rose by $184 billion.

Delinquency rates also include BNPL. And they’ve been on the rise as more and more folks have relied on these types of loans…

According to data from the New York Federal Reserve, 90+ day credit-card delinquency rates rose from 8% to nearly 11% in the last year.

90+ day delinquencies are the most serious type. Once again, this signals that folks are holding off on paying their bills as long as possible, whether or not the credit agencies see it.

And the fact that credit-card delinquency rates, along with auto and “other” loan severe delinquency rates, are also rising is just not a great look for the consumer.

It’s clear that BNPL is contributing, as its market has been growing every year since 2020.

BNPL purchases totaled $33 billion in 2019… climbed to $300 billion in 2023… and are now expected to reach $700 billion by 2028.

Recent Bloomberg News surveys also show that 43% of people are behind on their BNPL payments… and 28% of folks were late on other debts because of BNPL.

So while the average FICO score may tell the story of a healthy consumer, keep in mind that those credit metrics don’t take into account phantom debt.

Consumers’ obligations are piling up. Credit-card delinquency rates are at the highest level in more than a decade. And that’s likely to limit consumer spending going forward.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research