Klarna, also known as Klarna Bank AB, is a Swedish bank that offers financial services to customers worldwide, and one of their main services is helping online shoppers purchase products through a finance plan which lets them pay for the items later on.
And while Klarna boasts of having 80,000,000 customers worldwide, it was reported in January 2020 that more than two million people have unfortunately had their credit score impacted as a result of using such BNPL schemes, meaning that they won’t be able to get the best finance deals until their credit score improves.
Here, we explain how using Klarna’s finance options could affect your credit score and provide tips on how to avoid damaging it.
Klarna's finance options
Online shoppers who purchase items from retailers (such as H&M, ASOS, Topshop, etc.) are offered a few different payment options when they reach the checkout.
In addition to the standard one-off debit card or credit card payment, shoppers also have the choice of selecting a payment plan with the likes of Klarna (and possibly other BNPL companies) which allows them to get the items now, but pay for them later.
Here are Klarna’s payment options:
- Interest-free instalments: You can spread the total cost of your purchase over three separate payments (interest-free) and pay Klarna a third of the total cost every 30 days until it’s paid off.
- Pay in 30 days: You don’t have to pay for your purchase until 30 days later (or 14 days if you’d prefer that option and the retailer offers it) and no interest is added on top (unless you fail to pay off the full amount).
- Consumer financing: If you choose to pay via Klarna financing, you can select your preferred payment plan, whether you want to spread out the payments over 3 months, 6 months or 12 months. There shouldn’t be any interest added as long as it’s paid off as agreed in your plan, but just make sure you double-check the interest rate and terms before agreeing to anything.
The above options are available to help buyers make purchases even if they can’t afford to pay for them right now, giving them the flexibility to receive new items straight away, try them out and pay for them at a later date.
Does buy now pay later affect your credit score?
There are various Buy Now Pay Later schemes available online and as they are essentially lending you the money to make a purchase right now and you are going to pay them back at a later date, it is a type of credit agreement, so BNPL could affect your credit score if you do not manage your payment plan correctly.
The key to protecting your credit score with a BNPL plan is to make sure that you make every repayment on time and in full.
While this is the general golden rule, you should also be aware of how your specific finance plan works as well as the terms and conditions of the agreement, as this can differ between BNPL companies and plans. Make sure you know when each payment is due and be aware of any interest if payments are missed or are late.
How can Klarna’s payment options affect your credit score?
While Klarna’s website states ‘No interest. No fees’, it pays to know how each payment plan could affect your credit rating before you go diving in.
1. Interest-free instalments
This allows spenders to make a purchase and spread the cost out over three interest-free monthly payments. The first instalment will be taken upon purchase and Klarna will automatically take the following payments from you every 30 days until the full amount has been paid - they will remind you of each payment before it is due.
With this option, there is no interest and there are no fees added on top, but just remember that if your payment defaults or you fail to pay it, you will more than likely have to pay interest.
With this Buy Now Pay Later option, Klarna will not report your behaviour to credit reference agencies (CRAs); the companies that hold data on you in order to generate a personal credit report and score for future lenders to see your financial history and how you handle credit. What they will do is carry out a ‘soft search’ on your credit report when you first apply to check your details - this won’t affect your score, though.
This means that your credit score will not be affected with this type of plan, but just note that missing any type of repayments could still have a negative impact on your credit report, which future lenders may be able to see.
For this reason, we recommend that you only enter into a Buy Now Pay Later scheme if you know you can definitely make the repayments on time, every time.
2. Pay in 30 days
Similar to the ‘instalments’ payment method explained above, Klarna’s ‘pay in 30 days’ option is also a type of ‘pay later’ scheme, so Klarna will not report any missed or late payments to credit reference agencies, but they will do a ‘soft search’ on your credit report initially.
Both Klarna and ClearPay have stated that so far, no customers have yet had their credit scores impacted after using their ‘pay later’ or ‘pay 30 days later’ options - even if they haven’t made the repayments on time.
It’s Klarna’s financing option that consumers need to be more careful with.
3. Klarna finance
Differing from the above two options, Klarna’s ‘consumer financing’ payment option is one that could have a negative impact on your credit score if not used sensibly.
When consumers apply for this option, Klarna will carry out a ‘hard search’ on your credit file to see how reliable you are when it comes to paying back borrowed money. This could result in your credit score dropping temporarily and any future lenders will be able to see your application for Klarna financing and whether or not you were rejected or accepted.
Remember - any rejections on your credit report can affect your chances of borrowing in the future, so if you’re planning on getting a mortgage, taking out a loan or getting a car on finance soon, for example, you will only want to apply for finance if you know you’re going to be accepted.
Klarna also reports your payments to credit reference agencies with this plan, so if you miss a payment or fail to pay it in full, this will have a negative impact on your rating and will bring your score down.
Read more: Klarna Review
An alternative to Buy Now Pay Later
Another common way of spreading out payments on purchases is by using a credit card - preferably a 0% interest purchase card which will allow you to repay the cost over a longer set time (usually 18 months or more) without any interest added on top (as long as you pay it off within in the interest-free period).
This type of borrowing gives you the freedom to shop anywhere you like and it will also help build your credit score if you make every single monthly payment on time and in full.
Credit cards also come with credit card protection under Section 75 of the Consumer Credit Act, so if your items don’t turn up, they arrive damaged or the company has fallen through, you will be covered for your purchase between the value of £100 and £30,000.
When comparing credit card deals, make sure you get one that suits you and your financial situation and be sure to use it sensibly.
Learn more: How to Apply for a Credit Card
How to avoid damaging your credit score
A poor credit score can take a while to build back up and it means that you won’t be accepted for finance deals - or you will be accepted, but you’ll have to pay much higher interest rates and the agreement will probably come with stricter terms.
This is why it is so important to make sure you avoid damaging your score. Here are some useful tips to follow:
- Don’t apply for lots of credit in one go - If you get rejected for credit, it is advised that you wait up to six months before making a credit application again.
- Pay all of your bills on time and fully.
- Find out if the company will perform a hard or soft search on your report before applying for any credit deal. If they carry out a hard search, make sure you are 100% sure that you want to apply for the deal and that you’ll be accepted, because if you are rejected, this will only hurt your score further.
- Check your credit score regularly - This way, you’ll have a good idea of your eligibility when applying for credit and you can identify any errors on your report that may be holding you back.
Check your score today to see how eligible you are for credit and read our related guides below for further help and advice.