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Missed Klarna payments to impact credit scores

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Written by: Emma Lunn
04/05/2022
Late payments with buy now pay later (BNPL) lender Klarna will impact borrowers’ credit scores from next year.

Klarna will start reporting payment information to credit reference agencies Experian and TransUnion from 1 June 2022.

Klarna will 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 to both Experian and TransUnion.

Purchases made before 1 June will not be reported; neither will payments relating to purchases made before 1 June.

Payments made through Klarna Financing in the UK are already reported to credit reference agencies and there won’t be any change to this. Klarna Financing is a point-of-sale financing option to spread the cost of larger purchases over six to 36 months.

Both Experian and TransUnion need time to update their credit scoring mechanisms to reflect the changes, so any positive or negative payment information will only start affecting Klarna users’ credit scores towards the end of 2023.

The move comes as BNPL firms face pressure from MPs and campaigners to treat customers fairly. Critics warn that this type of short-term lending encourages people to buy items they can’t afford.

Klarna bills itself as a “fairer alternative to traditional credit” and claims the deal with Experian and TransUnion will help its customers build a positive credit history. It says the move will protect UK consumers from building up multiple lines of credit with different providers.

Alex Marsh, head of Klarna UK, said: “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. 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.”

Klarna has repeatedly claimed to be better than credit cards, but its arguments have been debunked by financial experts.

Klarna said the agreement with the credit reference agencies means its customers who make payments on time can build a positive credit history, showing lenders they use credit responsibly. However, on the flip side, over-indebted customers and those who miss payments will see their credit score decline as a result of the credit scoring agreement.

Laura Howard, finance expert at Forbes Advisor, said: “While Klarna and other BNPL payments will not actually impact your credit score until at least next year, your behaviour around the payments will essentially be tracked from June in preparation for that time.

“If you are a reliable payer and are taking on debt you can comfortably afford, this could have a positive impact on your credit score – but, of course, the reverse is also true.

“Even if you are a reliable payer, however, it’s difficult to argue with the principle that if you need to take out credit for non-essential purchases, you might be best off without them – especially in light of the soaring cost of living. While it’s true that a robust credit score can be a gateway to ‘life-changing’ borrowing, such as a mortgage, using BNPL schemes to improve your score has to be considered a potentially risky strategy.”

The BNPL market more than trebled in size during 2020 and is expected to become subject to Financial Conduct Authority (FCA) regulation during the next year or two.

Klarna was forced to make changes to protect consumers following publication of The Woolard Review last year. The changes include updated text at the checkout to make it clear that BNPL options are credit products, with consequences for missed payments. It has also taken steps to ensure that BNPL terms and conditions are clear, simple and easy to understand.

Jasmine Birtles, CEO of MoneyMagpie, said: “It had to happen. The idea that Klarna could support multiple customers defaulting on their bills and not having any comeback never made sense. BNPL options have been seen as something out of the Wild West with the possibility to borrow and borrow, it seemed, with no real comeback if you defaulted. That was obviously not going to work.

“The change is being touted as a way to build up or improve your credit score without having to use expensive credit cards, but really I suspect the FCA has been leaning heavily on the industry (and Klarna is the leading BNPL company) to get in line and behave more like other lenders. It’s noticeable that they also have to update text at checkouts to make it clear that BNPL options are credit products and that there are consequences for not paying them off.”

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