Klarna, the buy now pay later company, will start reporting its UK customer debts to credit agencies for the first time next month, in a move that will affect shoppers’ credit ratings. Buy Now Pay Later (or BNPL as it is more commonly known) firms are popular with UK consumers who buy into the simple concept of buy now pay later; instead of customers paying a retailer for goods or services in full when checking out, the BNPL provider pays the retailer. Customers then repay the BNPL provider over a few weeks or months, meaning the cost of shopping is spread over a period of time. This doesn’t mean that the products are any cheaper; customers have simply got more time to pay it off, which can help ease with cash flow issues.
Since 2021, buy now pay later has been one of the most popular forms of borrowing in the UK. One of the main attractions is that it can be completely free to use. It’s both interest-free and fee-free, so it shouldn’t cost a penny to use. Some providers do charge late repayment fees but if you never miss a payment, using BNPL shouldn’t cost anything. BNPL providers don’t charge the consumer, they make money by taking a cut from anything they help a retailer to sell. One of their main sales pitches to retailers is that BNPL can significantly increase sales numbers.
Klarna is the biggest BNPL company in the UK with 16 million customers, and the move to report customer debts to credit agencies comes as BNPL firms face pressure from MPs and campaigners who say they should prevent customers from taking on more debt than they can afford.
Klarna will start to share customer data with the two biggest UK credit agencies (Experian and TransUnion) from 1 June 2022, meaning credit companies will be able to see BNPL transactions and debts in full when conducting formal credit checks on potential borrowers. However, debts and repayments will only start affecting customers’ actual credit scores after 18 months, meaning the change will not have any definitive impact until the end of 2023.
The move is good news for those who use Klarna’s payment plans responsibly. Payments made on time will help establish a positive credit history, which could boost borrowing chances when applying for mortgages and other traditional forms of credit. The change, however, also means a that if you miss a payment or pay late, you could be less likely to be accepted for credit in future.
BNPL products are not yet fully regulated in the UK, but Klarna’s agreement will put pressure on rival BNPL companies to follow suit. These agreements could result in some customers not using Klarna and turning to rival BNPL providers to hide mounting debts from credit card companies and credit reference agencies.
How will the move affect me?
Klarna will report customers’ buy now, pay later borrowing data from 1 June – Klarna will pass on data about its customers’ repayments to the UK Credit Agencies from the beginning of June, but any payment history you have with Klarna before this date won’t be reported. From June 1st 2022 Klarna will report:
- Purchases made on time – which will positively affect your credit file and improve your chances of getting approved for a loan, mortgage, or credit card in the future
- Late payments for purchases – which could be detrimental to your credit file, making it less likely that you’ll be accepted for other forms of borrowing
- Unpaid purchases – like any other missed credit repayment, unpaid purchases can damage your credit file and raise a red flag to any other potential lenders
Klarna’s new agreement with the credit reference agencies means customers who make payments on time can build up a positive credit history, showing lenders they can indeed use credit responsibly. The flip side however is the effect on over-indebted customers and those who miss payments. These customers will see their credit score decline because of the credit scoring agreement.