For a lot of credit holders, there is nothing scarier than a “Buy Now, Pay Later” scheme. After all, research has shown that more than 2 million shoppers have damaged their credit lines over using BNPL methods.
And that number is expected to rise in 2020 alone as online and other contact-free transactions are being made due to the still ongoing pandemic. In the UK, BNPL schemes can come in the form of Laybuy, Clearpay but it could also include other older payment methods like store cards and catalogue credit schemes.
The focus of this discussion, however, would be Klarna which has become one of the more popular BNPL schemes in the UK right now. And that does beg the question: should you avoid it? Or, to be more specific with regards to your credit score, does using Klarna have an effect of sorts to your credit score?
This post would shed light on what the system is and how you might be able to use it without jeopardising your credit score.
A Stockholm-based service, Klarna operates on a “try before you buy” model with minimal fuss, or so as they say. In order to use Klarna, what you will need is an email address and a shipping address. There is no need to set up an account or provide any confidential information to start using Klarna. In just a few simple steps, you can then start purchasing on any Klarna-supported retailer.
You will also have to put in your preferred method of payment which is hardly confidential information for most people. As of now, this includes regular installments, the full amount within a set period of time ranging from 2 weeks to an entire month, or a customised financing plan.
Right from the get-go, you could see where the appeal for Klarna comes from. For the side of the retailer, this means a faster turnout for their inventory as people would hesitate less on adding items to their digital carts or going through a rather lengthy checkout process where they have to provide private information or fill out multiple forms.
And Klarna does shoulder all the risk of encouraging shoppers to buy now and pay later. In essence, Klarna pays the retailer for every product they shipped while informing the buyer of when they are going to pay for what they ordered. To put it in even simpler terms: a buyer orders, Klarna pays for the order, the buyer pays Klarna at the appointed time.
And for buyers that opt for a customised financing plan, Klarna is partnered with WebBank which extends a credit line to clients. It basically functions like any other credit and this is where a lot of a credit holders have some concerns with.
Let’s get this out of the way: using Klarna or any other BNPL scheme will not hurt your credit score; at least not directly.
Since Klarna will be the one shouldering all the risks, the company runs a soft credit check on your financial information for every purchase that you make. Soft Credit Checks, on their own, do not drop your credit score nor does it even appear on your next credit report like any other check does.
But a more serious concern would be the credit check made by WebBank depending on the payment option you have chosen. If you chose to extend your credit line, WebBank will automatically make a hard credit check on your financial information. And unlike soft checks, hard checks can put a serious dent on your credit score especially if they are done repeatedly within a single credit reporting period.
And here is the far worse scenario: what if you are not able to pay for any of the stuff you ordered? In this instance, you get three warning letters. If you still don’t pay after the third warning, you will be reported to a debt collection agency and your non-payment of your orders will be included in computing your next credit score.
Of course, that non-payment will stick on your credit score for quite a while which means that you might have problems getting approved for new credit lines in the future so as long as that note remains in your report. In essence, Klarna will not really affect your credit score negatively so as long as you live up to your end of the deal.
Mechanics-wise, it is established that Klarna is a fairly safe system to use as far as your credit score is concerned. If you just follow the rules and do pay for what you ordered, you should be fine with the service.
But what Klarna and other BNPL systems do pose a risk at is in introducing users to a culture of overspending. Since you don’t have to immediately fork out cash for the things that you want to order NOW (especially if said things are on sale), the guilt of having to buy stuff normally found in conventional transactions is no longer there. In essence, you get the Euphoria out of having what you were longing for with none of that nagging feeling of making an allegedly poor investment choice.
Also, it removes the waiting time in between purchases as you no longer have to look for available funds just to pay for something. In practice, this means that Klarna users can purchase whatever they want and for whatever price and deal with the financial consequences later.
Therein lies the problem as a BNPL scheme can easily tempt a person to overspend. In the right conditions, this means that you would be dealing with debt later on and even miss out payments, both of which can negatively impact your credit score. At its worse, the BNPL culture has encouraged an increase in deferred payments, poor budgeting, and higher levels of debt especially in younger credit holders.
For its part, Klarna does recognise the fact that it is rather easy to fall into credit-ruining debt with BNPL schemes. As such, they did extend their Financing plan to reach a maximum of 36 months. This, at the very least, should give a credit holder enough time to settle on their outstanding payments without having such balances negatively impacting their credit score.
However, in order to not put credit holders in a fall sense of complacency, Klarna has made the application process a bit more tedious. To be approved for a Financing plan in Klarna, you’d have to proactively complete and adhere to a credit agreement. Failure to stick to what was agreed will ensure that whatever unpaid amount you have will be reported to the country’s different credit agencies which will ultimately affect your credit score.
But that alone is not enough to discourage a person from overspending. As such, Klarna has employed a number of countermeasures to prevent people from going way over their budgets with purchases. For starters, the service does not allow for unlimited transactions on a daily basis. Furthermore, there are thresholds set for every user to make sure that they pay their current purchases first before the start ordering new items.
On the part of credit holders, the strategy that must be used in BNPL is to regulate one’s usage of them. Purchasing things online might not exactly hurt your credit score but this only happens if you follow the rules.
Klarna has its own set of guidelines that you must familiarise yourself with before you even start ordering things using their service. But, in the interest of safeguarding yourself and your credit score, here are a few tips to keep in mind.
Section 75 of the Consumer Credit Act allows you to recover any money you have given out to online stores for purchases worth £100 to £30,000 in case whatever you ordered does not show up on your doorstep within a set period of time.
But not all BNPL schemes are covered under section 75 which means that you might have a problem raising this rule in disputes regarding your purchases and you might still end up with a lowered score due to the faulty transactions. But, in Klarna’s case, they do offer refunds and cancellations in case an order goes awry. This way, any dispute you have with a retailer can be internally settled and you won’t have to deal with the prospect of that purchase negatively affecting your credit score in the future.
But, if you do make a rather expensive purchase, the best option is to pay it using a 0% Credit Card. This is a far better alternative to going fully BNPL as you have the bonus of being covered under section 75 combined with a 3-27 months repayment period if you take out a new card specifically.
Just do remember that a missing payment remains on your credit report for a span of 6 years which is an awfully long time to deal with rejected credit applications. As such, you would want to know when things need to be paid for.
The Pay Later option at Klarna allows you to make payment in full either in 14 days to a full month depending on the retailer. At the very least, you would have an idea when a payment for your purchase becomes due.
Klarna does take the money from your card the moment that the payment becomes due. Just make sure to remind yourself to check there is enough money on your card a day before the due date so you won’t receive the first of those three dreaded warning letters.
Out of all the BNPL schemes in the UK right now, Klarna seems to be the most lenient. This is in context of them not charging extra for late payments. What they do, instead, is charge the payment to any of the card that you have used previously in paying for your purchases.
Either way, it is best that you fully understand the consequences of missing a payment through Klarna. As such, you must consult with an agent of theirs first before you fully subscribe to their service. You may even talk about any other options that you can avail of so as to mitigate the risks of not paying in time.
What if you want to return a product since it is not to your liking but you wouldn’t want to pay for it? Klarna suggests that you make your returns within a week or so after receiving the item you purchased.
However, here is the catch: you must make that return way before the payment is due. This way, you don’t have to be obligated to pay for anything that you do not want. This scheme might be different depending on your payment option but it is best that you know exactly what you will be charged for and make sure that such charges are only for the orders that meet your specifications.
Or, at least, you can always ask for a refund if you think that you overpaid. Agents at Klarna will check on your payment history and address any discrepancy in your transactions way before such transactions will be reported to your credit agency.
Without a doubt, Klarna on its own would not put a serious negative impact on your credit score. It simply exists to help you “re-arrange” the sequence of paying for your online transactions so you get what you need quickly and pay for it at a much more advantageous time.
But the problem with it as far as your credit score is concerned is if you become too dependent on it. Overspending in Klarna has the same consequences as in any other online store out there: if you don’t pay up, your non-payment will be reflected on your credit score and it will stay there for quite a while.
Thus, being mindful with your usage of Klarna is still the best method. Staying within a set limit and making sure that you always have the means to pay for whatever you purchased will make your experience with the service favorable to you and safe for your credit score in the long term.