Does Klarna affect your credit score?
In short, yes.
In addition to reporting missed payments when you get financing, as of June 1 2022, Klarna started to share data on UK consumer balances, missed and late payments to Experian and TransUnion, which could impact your credit rating.
This, however, does not automatically mean that your credit score will go down.
To learn more about how Klarna will affect your credit rating and what it means for those interested in taking out a personal or home loan, read on below.
Used by 147 million shoppers across 45 countries, 16 million of which are located in the UK, Klarna is one of the leading Buy Now, Pay Later services.
Users can shop directly from the websites of the company’s partners or with the app at any of the participating retailers and use one of Klarna’s deferred payment options. Alternatively, they could use the Klarna card, introduced to UK customers in January 2022, to shop in-store as well as online.
Klarna partners with a huge range of UK brands, including ASOS, boohoo, Mamas & Papas, Decathlon, Nike, H&M, River Island, HMV and 400,000+ more. It also lets consumers shop at other retailers by using the One-time card—a virtual single-use card that works just like a credit card.
You might be interested in: How many people shop online in the UK?
Klarna services are interest- and fee-free.
Klarna offers three types of payment options:
This lets you make a purchase and pay the full amount 30 days later. You can cancel the order in full or return part of it and only pay for the items you decide to keep.
This option enables users to spread the cost of their purchase in three interest-free instalments, the first of which you pay when you make the purchase. The other two instalments are scheduled 30 and 60 days after the first payment.
Using both Klarna Pay in 30 and Klarna Pay in 3 involve a credit check which does not go on your credit file.
This is a regulated financial service that allows you to split payments from 6 to 36 months. Klarna finance involves a full credit check which will go on your credit file and comes with interest (the APR is between 0 and 18.99%).
Klarna collects payments automatically from your connected card or bank account.
If you are late with a payment, it will be added to your next scheduled repayment, but continuing to miss payments will result in the company freezing your account and engaging a debt collection agency to recover the outstanding balance.
UK Klarna users with late and missed payments will not have to pay interest or penalties, but this information will be recorded on their credit file.
Yes, Klarna performs a credit check in the UK that may or may not impact your credit score, depending on which payment option you choose.
When you use BNPL services like ‘Pay in 30’ or ‘Pay in 3’, Klarna does a soft credit check that does not affect your credit score, even if you are not approved.
If you apply for the Financing option, Klarna will run a full credit check, which will be recorded on your credit file. If you are rejected, which is likely if your credit score is not that great or fail to make repayments, your credit rating will be adversely affected.
Klarna uses TransUnion and Experian to run credit checks.
Worth noting: According to Klarna, less than 0.1% of their UK customers have seen their credit rating go down because of missed payments.
As of 1 June 2022, Klarna started reporting data on purchases paid on time, late payments and unpaid purchases for the company’s BNPL services to UK Credit Reference Agencies Experian and TransUnion.
This means that buys made using Klarna’s Pay in 30, Pay in 3, and the Klarna Card (in-store and online) will be visible to other lenders via your credit file.
Previously, there was no relation between Klarna and your credit score unless you missed a repayment with the Financing option. However, spurred by proposed regulation into BNPL services, as well as the desire to help consumers improve their affordability, Klarna has decided to share data about transactions and debts.
The new rules will only apply to purchases made after June 1 2022. Any activity before that will not show up on your credit report.
Even with purchases and payments made after June 1, credit scores will not be immediately impacted as it will take time for CRAs to update their scoring system. Nevertheless, both Experian and TransUnion expect this to change by the end of the year.
That said, even if your credit score is not affected, Klarna payments (or lack thereof) will be visible to loan providers through your credit file, which is what many lenders use to assess your creditworthiness.
Related reading: Do other BNPL services in the UK affect your credit?
Not all credit reporting is bad.
If you make payments on time, Klarna can be used as a credit-building tool by those with poor credit or adverse credit history. This way, you are showing potential lenders you are capable of managing your money and making regular payments. It will ultimately improve your overall affordability and make it easier to get approved for a loan.
It is also a good option for immigrants and people with no credit history, who can use Klarna’s service to build credit from the ground up.
On the other hand, failure to repay on time or at all, will likely negatively impact your credit rating.
And although loan providers tend to look at more than just your credit score, and some even accept borrowers with poor credit ratings, the interest rates you will get are far less favourable than the ones offered to applicants with good or great credit history.
In February 2021, the UK government announced that the FCA, the UK’s financial regulator, will start to crack down on Buy Now Pay Later services.
The popularity of BNPL companies skyrocketed during the pandemic, raising concerns that these non-regulated and readily-available credit lines were encouraging consumers (Gen Z and millennials especially) to spend more than they could afford.
These regulations are currently taking shape and should be enforced next year.
According to the Swedish fintech company, though, the announcements of proposed regulation only partly affected their decision, as they have been preparing for the move for almost two years.
What ultimately made the company introduce these changes was Klarna’s decision to provide more transparency to lenders and help their 16 million UK customers build their credit score without resorting to high-interest credit cards and loans. Klarna also hopes this will encourage other companies on the market to do the same.
You could use a credit card and apply the same principle as Klarna—go for smaller amounts and make payments on time. Those with poor credit ratings, low income or no job can also take out credit cards and improve their credit score. Plus, with credit cards, you are protected under Section 75 (if you encounter an issue when buying something between £100 and £30,000, your credit card company must help you), and you have the right to complain to the Financial Ombudsman. None of these options are available with BNPL schemes.
Other ways to improve your credit rating include registering to vote, making sure that all the data in your credit file are accurate and never borrowing more than you can afford to repay.
Reports on BNPL services usage are not likely to have a huge impact on your mortgage application unless you manage to get into serious debt. BNPL payments are usually short-term (paid back in one to three months) and involve low sums of money—typically around £75, so not enough to raise red flags for a prospective lender.
The data shared will, however, give lenders a better and more accurate picture of a potential borrower’s financial discipline and circumstances. Mortgage providers look beyond a person’s credit score and are more focused on their credit history, income as well as the size of the deposit, which is why it is possible for people with bad credit and a low-income job to get approved for a home loan.
Making timely and responsible payments will demonstrate to mortgage lenders that you have a good track record with loans, whereas those falling behind with payments will not be stuck with a mortgage they cannot afford to pay back.
Klarna’s recent changes set a huge precedent in the BNPL sector, an industry that remains largely unregulated. While some think that the new practice of reporting data on customers’ usage will discourage consumers from using Buy Now Pay Later services, others believe that it will provide an incentive to maintain healthy financial habits.
If you are planning on using Klarna, make sure you borrow minimal amounts and always pay your instalments on time, or even better, pay in full as soon as you are able to. This way, you can ensure that your credit score goes up instead of down.
If you make payments on time or repay the amount in full early, using Klarna could strengthen your credit. On the other hand, missed payments can have a detrimental effect on your credit score.
Yes, if you place a payment holiday for either the BNPL or Financing payment options, your credit score will suffer. Klarna allows you to pause an order for 30 days (60 with the Financing option), but it will report the arrangement to CRAs, which will in turn hurt your credit rating.
Yes, falling behind with payments will cause your credit rating to drop, which can cause problems when applying for a personal loan, credit card or mortgage.
My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.