What Is Phantom Debt?
Phantom debt refers to forgotten or hidden debt obligations that arise from buy now pay later purchases, often without users realizing it. These debts can impact your approval for future loans, including a car loan.
Buy now pay later lenders like Affirm, Afterpay, and Klarna allow consumers to make immediate purchases at retail or online checkout, and then pay in multiple interest-free installments over shorter terms than traditional loans.
“BNPL could lead to an increase in consumer debt, as consumers may be more likely to take on additional debt if they know they can spread out the payments,” wrote Tim Quinlan, Wells Fargo economist, in the December 2023 report BNPL: The Phantom Debt. "Because no central repository exists for monitoring it, growth of this 'phantom debt' could imply total household debt levels are actually higher than traditional measures."
This new form of phantom debt differs from older definitions, mainly focusing on phantom debt scams, where debt collectors would go after people for debts they didn't owe.
The Federal Trade Commission (FTC) defines phantom debt collection as the practice of pressuring people to pay “debts” they don’t owe, which can include phantom auto loans. This practice is illegal, and the FTC has been pursuing legal action against phantom debt scammers who have allegedly made false threats of lawsuits, wage garnishment, and damage to credit if consumers don't pay.
Why Phantom Debt Raises Concern
Financial experts worry that overuse of BNPL loans will lead to irresponsible spending, at the expense of savings, and higher debts than consumers realize.
"Until there is a definitive measure for it, there is no way to know when this phantom debt could create problems for the consumer and the broader economy," Quinlan wrote in the BNPL: The Phantom Debt report. "In the meantime, it could make life difficult for those who embrace it most enthusiastically.
"More worryingly," Quinlan added, "BNPL does this in de facto stealth mode because it largely flies beneath the radar of both regulators and policymakers."
Investors are also watching for potential distortions in credit reporting and whether consumers can keep up with other debts.
“We do not yet think BNPL poses a risk that consumers have taken on too much debt, but we are wary of increased usage in the future, considering the current lack of reporting as well as greater usage among younger consumers,” James Faucette, who leads Morgan Stanley’s U.S. fintech and payments research team, said in a statement.
BNPL and Phantom Debt
Buy now pay later services are becoming more popular, with 49% of Americans reporting that they have used at least one BNPL service, according to a April 2025 survey by LendingTree. Nearly half (49%) use these services as their preferred payment method for "so-called stretch purposes," the survey found.
BNPL users, however, are running into issues with the services. More than half (54%) note they have missed payments, and 60% of BNPL users have held multiple BNPL loans at once. What's more, 33% of BNPL users view the loans as "a bridge to their next paycheck" – up 30% from the previous year, according to LendingTree.
What Frequent BNPL Use Could Mean for Car Buyers
Phantom debt associated with frequent buy now pay later usage can make it hard for lenders to accurately assess your debt-to-income (DTI) ratio, a key factor in auto loan decisions.
Though your credit score may not currently reflect your BNPL activity, your bank statement could tell another story. Some lenders might consider too many BNPL transactions a sign of financial strain or overextension. This could impact your ability to secure an auto loan with favorable terms.
If you're regularly using BNPL options as part of your financial plan, it's crucial to evaluate your financial situation, use the services responsibly to avoid potential negative consequences, and read the terms of the agreement.
How Traditional Debt Obligations Are Tracked
Traditional debt obligations, including mortgages, auto loans, credit cards, and student loans, are reported to credit bureaus and impact your credit score. FICO and VantageScore are the two common types of credit scores.
FICO Scores are calculated using five pieces of data in your credit report: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).
FICO and VantageScore analyze consumers' credit history, good and bad, to forecast the likelihood that the consumer will pay back debts on time. They give lenders a clear view of a borrower’s debts.
A strong credit history usually means better access to loans and lower interest rates. Timely payments help you build credit, while missed ones hurt it.
Do BNPL Companies Report To Credit Bureaus?
Buy now pay later lenders typically do not report to credit bureaus as consistently as traditional lenders. However, more have begun to partner with credit bureaus as financial experts have noted this poses potential risks to consumer credit reporting.
"Incomplete reporting of BNPL loans could make it difficult for lenders to know the total dollar amount of debts and other obligations that applicants have before determining whether to approve them for new credit," notes a December 2023 bulletin by the Office of the Comptroller of the Currency (OCC).
Most major BNPL companies have simplified the application process for users, with a soft credit check done right at checkout. Soft credit checks usually do not have an impact on credit scores.
Short-term, interest-free borrowing is part of the BNPL appeal. However, some major BNPL companies will charge late fees (between $2.50-$15 on average) for missed payments. Failure to repay could result in debt collection, which can be reported to credit bureaus and appear on a credit report.
What Are BNPL Lenders Reporting?
While not all BNPL lenders in the U.S. report to credit bureaus, some providers have begun partnering with the three main credit reporting agencies in the U.S., which include Experian, TransUnion, and Equifax.
In November 2024, Klarna started sharing loan and repayment activity with TransUnion. The company’s Klarna Term Loan, including repayment activity and defaulted loans, is now visible on TransUnion credit files.
Affirm partnered with Experian and TransUnion in 2025 and reports consumers' first monthly installment payment. The company won't report again unless a payment is 30-plus days late.
Why Not Report?
Buy now pay later lenders might not report to credit bureaus because the loans typically fall outside traditional lending models, and the current infrastructure makes it challenging.
Afterpay, for example, doesn't currently report to credit bureaus in the U.S.
"We won't until we see concrete evidence that BNPL data reflecting responsible payment behavior will help, not hurt, the credit scores of our customers," according to the company.
Credit scoring companies have begun developing tools to incorporate BNPL activity in their data. In 2025, FICO launched its BNPL credit score models, which add BNPL info to the company's mainstream credit reports. FICO scores are often used by lenders to determine whether or not to approve loans.
Phantom Debt and Zombie Debt Differ
Phantom debt has long referred to fake debt that a customer is told they owe, but that doesn’t actually exist or is not legally enforceable. This differs from the current state of phantom debt, which is real debts owed by consumers but not reported on their credit reports. Real phantom debt runs the risk of turning into zombie debt if you never pay it.
Unlike traditional phantom debt scams, zombie debt isn't fake. Zombie debt can refer to a real debt that has passed the statute of limitations for collection of a previously settled debt, discharged bankruptcy debt, or identity theft debt.
Phantom debt and zombie debt can create huge headaches for consumers. Not only can these tactics cause significant financial stress, but they can also potentially hurt your credit. Attempts at collecting these types of "debts" could show up as negative entries on a credit report, so it's important to know your rights, ask for written verification regarding the debt, and regularly review your credit report for suspicious entries.
The Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from using unfair, deceptive, or abusive practices and is enforced by the FTC. If you suspect a phantom debt scam, it can be reported to the FTC or your state's attorney general. Additionally, if you're unsure about a debt's status, a consumer protection attorney can help you.
