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.
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.
Klarna is partnered with WebBank which extends a credit line to clients which is great if you are looking for a customized financing plan. 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.
A more serious concern, however, would be the credit check made by WebBank. 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.
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 fail to pay or heed the warnings, you will be reported to a debt collection agency. At that point, your non-payment of your orders will be included in computing your next credit score.
In essence, Klarna will not really affect your credit score negatively so as long as you live up to your end of the deal.
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 is make you overspend.Because you are not paying for your orders immediately, 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. Thus, you no longer have to look for available funds just to pay for something. In practice, this means you can purchase whatever you want now 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. This obviously 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
For its part, Klarna does recognise the fact that it is rather easy to fall into credit-ruining debt. As such, they did extend their Financing plan to reach a maximum of 36 months. At the very least, should give a credit holder enough time to settle on their outstanding payments.
However, Klarna has made the application process a bit more tedious. This is so that would-be users do not become dependent on the system.
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 unpaid transactions will be reported to the credit scoring agencies.
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 limits set in place on how often you can place orders. If you cannot pay your outstanding debts first, Klarna won’t allow you to make new orders.
On the part of credit holders, regulation is essential. 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 learn before you start ordering. 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. This is 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. This 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. 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. This should at least lessen the chances of bad transactions ruining your credit score.
If you do make a rather expensive purchase, pay for 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. Also, thse credit cards come with a 3-27 months repayment period
Just do remember that a missing payment remains on your credit report for a span of 6 years. this 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.
Klarna allows for repayments to be done within two weeks or a full month. 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. THis way, 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.
Either way, it is best that you fully understand the consequences of missing a payment through Klarna. 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. At best, this should hel you mitigate the risks of not paying in time.
What if you want to return a product 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. It might not even be an option on some retailers. Either way, 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 . At least, this should help you settle transactions before they 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. The goal is to help you get what you need quickly and pay for it at a much more advantageous time.
The only problem it brings to your credit score is if you become reckless with Klarna. The service basically follows the same rules as with any online market. If you don’t pay up, you will be reported. And any negative information will hurt your credit score.
Thus, being mindful with your usage of Klarna is still the best method. By setting a limit and sticking to it, you can enjoy the service without putting your credit score at risk.