Earlier this month, Buy Now Pay Later (BNPL) giant Klarna announced it will start reporting its customer data to credit agencies, advising to them who pays on time and who falls behind on their debt.
Potential lenders will be able to see transactions and debts when checking consumers’ credit scores, with the move having the potential to both help and hinder its customers’ ability to successfully apply for things like loans and mortgages.
The move is a result of two years of talks with credit reference agencies Experian and TransUnion. Klarna will begin to report UK consumer purchases paid on time, late payments and unpaid purchases for Pay in 30 and Pay in 3 orders made on or after 1 June, 2022. This will likely have an effect on scores from 2023.
“It is alarming that UK consumers are still being forced to take out high-cost credit cards to demonstrate they can use credit responsibly and build their credit profile,” said Alex Marsh, Head of Klarna UK, “That will start to change on 1 June this year as the vast majority of the 16 million UK consumers who make Klarna BNPL payments in full and on time will be able to demonstrate their responsible use of credit to other lenders.”
A positive move
Many in the industry see this as a positive step forward for the BNPL scene and have praised Klarna for the initiative.
One of the main criticisms of BNPL in comparison to credit cards has been the previous lack of reporting from payments companies. One of the best ways to build up a credit score is using and repaying small balances of credit, and now that Klarna is sharing its data with bureaus, it should help customers build credit in the long run – if using the service correctly and making payments on time.
On the other hand, it can also have negative effects on credit scores for consumers who don’t manage their payments correctly and get into debt. Having poor credit and debt can impact eligibility for products such as mortgages, car insurance, and bank loans, so consumers will have to use BNPL products responsibly to avoid this. Klarna have advised that all of its UK consumers will be made fully aware of the change in policy before it takes effect.
The industry view
Johnny Steele, Head of Banking, SAS UK & Ireland:“Using good quality, up-to-date data allows for better analytical insights and therefore better decision-making for banks and financial institutions.
“Klarna sharing the data of its 16 million customers in the UK will provide an even richer source of data for credit reference agencies to help banks and financial institutions to improve their risk profiling and governance. Without quality data, even the most powerful analytical tools won’t deliver reliable results.
“This is becoming more important than ever. In March alone UK consumers borrowed an extra £1.3billion in credit and of that £0.8billion was new lending on credit cards.
“Credit risk modelling is starting to look more like the evolving techniques for retail credit scoring, and now with BNPL data being incorporated into the dataset, these two worlds are getting closer than ever.
“The path forward for credit portfolio managers is one of continuous improvement in reducing risk and optimising the allocation of capital. This is one more step in this process of continuous improvement.”
The director of behavioural analytics at Neuro-ID,James Craddick, added: “As the BNPL space continues to mature and gain popularity, starting to report to the Credit Bureaus is another step that will further legitimise the product offering alongside other forms of credit.
“A primary component of the legitimacy comes not only from reporting on the repayment for that line of credit but more importantly the non-payment in the form of negative information on the credit report. This reporting will increase pressure on the consumer, as non-payment will now adversely affect their credit score and subsequent ability to access other financial products. Even with BNPL establishing popularity as a form of credit, representing 91 per cent of all consumer loans issued in 2020 in California alone, there is still high risk and uncertainty around the ability for consumers to pay back on BNPL products, especially with the minimal consequences.
“However, there are also many upsides for those looking to establish their creditworthiness through this more accessible credit product, particularly among the Gen Z crowd. Leveraging BNPL as a stepping stone can provide a cost-efficient way for consumers to build their credit scores and avoid high APRs and steeper penalties that come with traditional credit products and other forms of alternative lending.”
Sooner or later
“Klarna‘s announcement is nothing out of the blue,” said Kunal Sawhney, CEO, Kalkine Group.
“First, all the creditors, including commercial banks, must be feeling the heat of delinquencies, which were a direct fallout of the pandemic-induced slowdown and job losses. Credit scores help these creditors take a call on the loan application, and this matters more when the economy is not in its best shape. The US economy contracted in the first quarter, and the UK economy is also not in its best form. Slowdowns may hamper these economies’ ability to produce jobs and let wages rise. BNPL players might be filling the gap where the borrower wants to make an impulsive purchase.
“The point is that BNPL is a short-term credit, which usually does not come with interest levied on the borrowed amount. But why would a borrower want to avail of these short-term, short-ticket loans? One reason might be because they want to spend now and pay later when the bank account is credited with the wage. BNPL is on the rise, and various surveys suggest that an overwhelming number of consumers are availing of the services. Delinquencies would be a part of the system sooner or later. This might be why watchdogs in the UK and the US are favouring BNPL data’s inclusion in credit scores. This is a good thing — for all stakeholders, including the borrower, the lender, and the overall economy.
LawrencePower, Global Head of Payments at Endava believes that “the Buy Now Pay Later(BNPL) industry continues to see great growth as more and more people turn tothis flexible payment method.”
He continued: “While some consumer protection advocates have raised concerns over the potential for customers to increase their debt, this move from Klarna to work with credit agencies and report on the usage of services is a step in the right direction to further refining the financing option.
“This is particularly important in light of the UK Financial Conduct Authority suggesting that a lack of reporting could mean that lenders may find it hard to assess whether customers are able to afford their products. This announcement shows that the companies behind BNPL are listening and are prepared to take the right steps to safeguard the financial wellbeing of users, helping them make the best and wisest use of the system. This cooperation is an encouraging sign of a maturing market and is a good step for the industry as a whole.”
David Beard, Editor-in-Chief ofLendingexpert.co.uk, said on the announcement: “This is good news for customers who are responsible users ofKlarnabecause it means they’ll be able to build their credit rating using the service, but bad news if you’ve ever usedKlarnaand haven’t paid what you owe them on time.
“It’s important you regularly check your credit rating. You can do this for free via numerous services and apps. Using Klarna can be a great way to build your credit rating if you haven’t applied for credit products before, but you must always pay what you owe on time.”
- Polly Jean Harrison
Polly is a journalist, content creator and general opinion holder from North Wales. She has written for a number of publications, usually hovering around the topics of fintech, tech, lifestyle and body positivity.
Though it performs a hard inquiry to approve you for a Klarna financing account, Klarna doesn't report your monthly payments, balance or credit limit to the credit bureaus. Because Klarna doesn't report on-time payment history to the credit bureaus either, it isn't a good option to help you build credit.Does Klarna financing report to credit? ›
Klarna performs a soft credit check which does not affect your credit score and will not be visible to other lenders when: Deciding to Pay in 4. Preferring to Pay in 30 days.Does Afterpay report to credit bureaus 2022? ›
No. Afterpay Buy now, Pay Later payments will not affect your credit score, as they are not reported to credit reporting agencies.Which credit agency does Klarna use? ›
Klarna will NOW report customers' buy now, pay later data
Klarna will pass on data about its customers' BNPL repayments to Experian and TransUnion, but any payment history you have with Klarna before today (1 June) won't be reported. Klarna will report: Purchases made on time.
Does BNPL affect credit? As long as you repay the amount on time, your credit score will not be impacted. If you clear the amount on time, you credit score is likely to improve. However, if you miss or delay your payments, then you credit score will fall.Do you have to report returns on Klarna? ›
Good to know: If the store has already approved your return, refunded you and this is reflected in your app you do not need to report your return to us.Does Klarna report to Equifax? ›
Klarna said in an email to Morning Brew that it has never reported anything to the three main American credit bureaus: Experian, Equifax, and TransUnion.What happens if you don't pay Klarna? ›
If we are unable to collect the payment on the scheduled date, we will try again. If that payment attempt also fails the missed payment will be added to the amount of the next scheduled payment. Please note, missed payments and unpaid debts are sent to debt collection.Does Afterpay report to credit bureaus if you don't pay? ›
If you are late with a payment, Afterpay also does not report late or missed payments to the credit bureaus. This makes Afterpay an attractive financing option for people with troubled credit or who don't have enough credit history to get approved by other lenders.Will Afterpay start reporting to credit bureaus? ›
For years, these types of loans have been mostly untracked by traditional credit reporting, but that's now changing. Credit bureau Equifax will start adding such purchases to credit reports with the purpose to give lenders a fuller vision of people's financial commitments.
Can Klarna or Afterpay Hurt Your Credit? As long as you make your payments on time, Klarna and Afterpay will not hurt your credit. Klarna does a soft credit check for its pay-in-four service, so its inquiry will not affect your credit score.Is Klarna a BNPL? ›
Klarna is a reputable provider of BNPL loans. However, BNPL loans can lead to overspending, so NerdWallet recommends using them only to help pay for an essential expense.Does Klarna report to TransUnion? ›
Klarna will report payment performance to Experian and TransUnion, and the information will appear on a U.K. consumer's credit report.Does Klarna check your bank account? ›
These are the ways by which we can verify your details:
We'll send you a verification code by email to verify your email address. We'll send you a verification code via SMS to verify your phone number. We'll ask you to log into your bank to verify your identity.
BNPL (Buy Now, Pay Later) is unsecured consumer credit and an increasingly popular fintech-enabled payment option, most commonly offered on e-commerce platforms.What loans are not reported to credit bureau? ›
Financial Information That's Not Related to Debt
Loan and credit card accounts will show up, but savings or checking account balances, investments or records of purchase transactions will not. Did you buy a car? Your purchase won't appear on your credit report, but any loan you used to finance it will.
Miss an instalment and you could face late fees
With some BNPL providers, you risk being charged late fees if you miss a repayment – something nearly half of users are unaware of. This can happen, for example, if there aren't enough funds in your account when an instalment is due.
As soon as you've reported your return your invoice is paused. This allows time for the return to be registered by the store and your invoice to be updated accordingly. You will receive an email with updated payment information or you can always log in to the app for up-to-date payment details.How long do Klarna investigations take? ›
Once Klarna starts the investigation it can take up to 30 to 50 days to reach a decision, hence we recommend solving the issue together with the store even after you've reported your problem to us.What happens if I return something I used Klarna? ›
Once the refund is registered against your order, any remaining payments will be cancelled and the already paid amount will be refunded to the original payment method.
Sometimes simple errors or miscommunications can cause problems with an order. As a result, your customer might open a dispute with us. The easiest way to resolve the dispute is to get in touch with your customer, work things out, and solve the issue together.Does Klarna show on Experian? ›
This means purchases you make using Klarna Pay in 30, Pay in 3, in-app shopping and Klarna Card will become visible on your credit files held by Experian and TransUnion.Why Is Klarna telling me to check with TransUnion? ›
Using Klarna will not affect your credit score. However, information such as payment holidays and existing, late and unpaid balances is visible on your credit file to other lenders. Making repayments on time consistently will help build a positive history when using our payment options.How long can you go without paying Klarna? ›
If you do miss a payment, Klarna allows for a grace period by retrying within 10 days. A reminder during this retry period is also sent. In the event that a payment is still not made after a 10-day grace period, a late fee of up to $7 is applied to the next installment due date.What is the highest Klarna limit? ›
There is no predefined spending limit when using Klarna.Can I ever use Afterpay again? ›
Initially, your account will be frozen until the repayments are up to date. Afterpay charges an $8 late fee, plus up to 25% of the order value. If your account remains in arrears or is frequently overdue, you may not be able to use Afterpay again in the future.Can banks see your Afterpay? ›
Because the Afterpay account is linked to your card – and, ultimately, to your bank account – everything you spend through them will appear on your statements. Mortgage brokers and banks will see your Afterpay expenses.What happens if you use Afterpay and don't pay? ›
If you don't pay Afterpay, the company does two things. First, you'll be charged a late fee. Second, you'll be locked out from paying for new orders with Afterpay until you pay your overdue payments. It's also possible that Afterpay may not approve you for future purchases either.Can Klarna stop you getting a mortgage? ›
If you think interest-free payment plans like Klarna, Laybuy or Clearpay seem too good to be true, you could be right. While they're great for getting out of short-term financial shortfall, frequent use of payment plans and payday loans can damage credit ratings and prevent mortgage applications from being approved.
Good to know: Each purchase is a new decision so one rejection does not mean that your future purchases will always be declined. A rejection does not negatively impact your credit score.Does paying off AfterPay improve credit score? ›
Using AfterPay responsibly will not improve your credit score, but misusing it can have serious negatively effects on your credit score. Unlike Zippay, where customers must meet a certain credit approval criteria to be accepted, AfterPay does not do credit checks, and also do not report late payments to credit bureaus.Why Is Klarna making me pay more? ›
This can happen because the order amount exceeded your purchase power, however, other credit factors are also assessed. Purchase power is the estimated amount available to spend using Klarna's pay later products. Your spending limit and any outstanding balances are factored into the purchase power amount.Why Is Klarna valuation so low? ›
"The shift in Klarna's valuation is entirely due to investors suddenly voting in the opposite manner to the way they voted for the past few years," Michael Moritz, partner at venture capital firm Sequoia, said in a statement.Does Klarna take your SSN? ›
Both SSN or ITIN are accepted in order to open your B9 account.Does Klarna build your credit up? ›
Klarna is not a good idea if you:
Want to build credit: Most BNPL lenders do not report payments to the credit bureaus, and Klarna is no different. Showing a history of on-time payments to the bureaus can help you build credit, which opens the door to more affordable financing options in the future.
Like most buy-now-pay-later services, Klarna and Affirm use a soft credit check when approving your transactions. They do not report your pay-in-four loans or payment history to the credit bureaus.Why Is Klarna denying me? ›
Attempting too many purchases in a short amount of time may result in being rejected (fraud prevention) The approval decision is not based solely on credit score, but rather multiple internal data points such as past payment history.How long does Klarna block you for? ›
You won't be able to use the Klarna service. This will remain in place until you pay the amount owed. But your access could remain blocked for 12 months after this. Once Klarna lifts the block, it doesn't mean you can use the service.Does Affirm show up as an inquiry on credit report? ›
Affirm performs a soft credit inquiry when you create an account to prequalify you for future purchases. This soft inquiry does not affect your credit score and will not show on your credit report. However, when you do make a purchase, your credit score could be affected if Affirm does a hard credit inquiry.
According to the company, Affirm never conducts a hard credit check and considers other data besides your credit score when deciding whether to approve or deny you for a loan.