Founded in Sweden in 2005, Klarna is a global payments provider that works with retailers to offer customers different payment options.
Klarna offers three payment products in the UK, including two Buy Now, Pay Later (BNPL) options. But Klarna isn’t just a BNPL provider. They offer longer-term finance options for higher ticket items too.
To use Klarna, you shop as usual at popular retailers like ASOS that offer Klarna and choose to pay with Klarna at checkout.
Klarna makes its money by charging the retailer a percentage fee for the purchase. This is usually about 5.4% for small retailers plus 20p for each sale. Large retailers pay less.
Some of Klarna’s financial products can affect your credit score. As such, it is crucial to understand how Klarna's products work and how they use your credit information before you opt to pay later.
Klarna services with soft-credit checks
In the UK, Klarna offers two interest-free BNPL payment options. These products are Pay in 3 and Pay in 30 days. Klarna carries out a soft-credit check to make sure customers can afford repayments. A soft-credit check is not visible to other lenders and does not impact credit scores.
There are no interest or late fees for missed payments. Plus, you can always choose to pay off your balance early or extend the due date for free if you need some extra time.
If you do not pay after communication from Klarna, they may contact a debt collection agency to help with contact. But they will not send bailiffs and will not pass on the costs to you.
While late payments will have no impact on your credit score in 2022, Klarna has reached an agreement with TransUnion and Experian to report payment information to them from June 1, 2022.
These changes may start impacting customers’ credit scores from 2023 onwards.
The news comes after a review commissioned by the Financial Conduct Authority (FCA) revealed that the lack of reporting makes it harder for lenders to make decisions about granting credit.
And a planned change in legislation could mean all BNPL providers have to report missed payments to credit reference agencies soon.
Pay in 3 (Instalments)
Pay in 3, also known as Instalments, allows you to pay in three instalments, which means you can spread the cost of your purchase into three equal interest-free and fee-free payments, which are taken every 30 days. You make the first payment when you purchase your item.
Pay in 30 days
Pay in 30 days customers have up to 30 days to pay for their goods after they are shipped. There are no interest or late fees with this option. If you're dissatisfied, you can return the items without any money leaving your bank account.
When does Klarna affect your credit score?
Klarna has a financing option that allows you to spread the cost of your purchase over six to 36 months with an interest rate of up to 18.9%. This option is designed to help you pay off more expensive items over a
more extended period.
Klarna will carry out a hard credit check and look at your credit history to check that you are eligible for this product. This may impact your credit rating and may appear in your credit report. In addition, other lenders will be able to see this hard credit check as it is reported to credit reference agencies like Experian.
If you miss a payment, Klarna will inform the credit reference agencies, and this will be reflected on your credit file. So, if you're considering using Klarna, be sure to keep up with your payments. Missing a payment could damage your credit score.
Also, while Klarna will never sell on your debt, they could hire a debt collection agency to chase you for the money. However, Klarna will cover the cost of the debt collection agency, so the total you owe will not increase.
Despite this, Klarna claims that less than 0.1% of customers’ credit scores have been affected by making late payments.
BNPL vs interest-free finance products
Because some of these finance options are still interest-free, some customers may confuse them with the BNPL options offered by Klarna. But the financing option is different in that it involves a hard credit check, and you repay the balance over a more extended period.
Customers will always be told a hard credit check will be carried out and asked to consent for this to happen. This is why it's essential to read the fine print and avoid unpleasant surprises.
What does the new Klarna agreement mean for my credit score?
Up until May 2022, Klarna did not report late or missed payments via their BNPL products to credit reference agencies. This meant people could miss payments without an impact on their credit score. But this has changed.
Regulators and credit bureaus were unhappy that they did not have a clear picture of people's ability to handle money and called for changes in legislation. However, after talks with Experian and others, Klarna will report payment information to credit reference agencies.
Klarna will start reporting this information from June 2022. However, this information will only reflect in credit scores from 2023.
But it’s not all bad news
While this change means missing payments will harm your credit score, there are also some benefits.
Customers who pay on time and in full could improve their credit scores. Klarna could become another valuable method of improving your credit score without worrying about late fees. It could compete with high-fee or high-interest credit cards that people previously had to take out to prove they could handle credit responsibly.
What is Clearpay?
Customers who are worried that the new changes in reporting will harm their credit score may turn to competitors not bound by this agreement.
Options like Clearpay (also known as Afterpay) could become popular.
Clearpay offers interest-free payments spread over six weeks and is available in many popular retailers.
Does Klarna affect your credit score?
Some of Klarna's financing products can affect your credit score and use hard credit checks to ensure eligibility. Therefore, it is crucial to understand how these products work and exactly how Klarna uses your credit information before you opt to pay later.
New agreements with credit reference agencies also mean that payment information will be passed to TransUnion and Experian even if you use the Buy Now, Pay Later option. This could negatively or positively affect your credit score, depending on how you manage debt.