Klarna is the UK’s largest buy now, pay later (BNPL) firm, with over 8 million households as customers. In 2022, it, along with other BNPL firms, started sharing data with credit referencing agencies. We reported on this at the time. See our article Do BNPL deals affect your credit history.
This article zeros in on Klarna, examining how its services can influence your credit score. Lets start with the preeminent question ‘does Klarna affect your score?’
Does Klarna affect your score?
Yes. Klarna, like other “buy now, pay later” services, can potentially impact your credit score. From June 2022, when you use Klarna to make a purchase, the transaction will be reported to all major UK referencing agencies and recorded on your credit report.
If you meet the agreed-upon payment terms and settle the amount within the stipulated time, it generally should not negatively affect your credit score.
What does Klarna report to credit agencies?
Klarna reports the following to credit referencing agencies:
Account Information:
- The existence of your Klarna account
- The type of Klarna service you are using (e.g., Pay Later, Instalments).
Payment Performance:
- Whether you make payments on time
- Any instances of late payments or defaults.
Klarna started reporting to credit agencies on 1 June 2022. Any account activity before this date will not appear on your credit report.
How does Klarna affect my credit score?
When you use Klarna to make a purchase, the transaction is recorded on your credit history report. If you meet the agreed payment terms and settle the amount within the stipulated time, it generally should not negatively affect your credit score.
Improving your credit rating with Klarna
Those needing to build credit, could have a positive impact using Klarna’s ‘pay in 3’ or ‘pay in 30 options’. It’s not something we’d advise as there are better dedicated credit rebuilder options out there, such as those from Cashplus. But using Klarna in this was and paying off the balance on time could help to improve your credit rating.
However, if you fail to make payments on time or default on your Klarna payments, this could have a detrimental effect on your credit score. Late payments and defaults will be reported to credit reference agencies, and be considered by lenders when assessing your creditworthiness for future financial transactions.
As with any credit arrangement, it’s essential to manage your Klarna account responsibly and ensure timely payments to avoid any adverse impact on your credit history.
Understanding the terms and conditions, as well as being diligent in meeting payment obligations, is crucial for maintaining a positive credit history in the UK.
Does extending due date on Klarna affect credit score?
While Klarna allows payment holidays on its ‘pay in 3’ and ‘pay in 30 days’ credit options, it reports these holidays to credit referencing agencies. This is likely to have an adverse affect when being assessed for credit in the future.
Experian, one of the credit agencies Klarna reports to, states:
A payment holiday will usually appear on your credit report and will likely affect your credit score. This can make it harder to take out credit in future. If in doubt, ask your lender how your payment holiday will be shown on your credit report.
As such it is not recommended to extend the due date unless you absolutely have to.
Does Klarna run a credit check?
When using Klarna’s ‘pay in 3’ or ‘pay in 30’ scheme, it carries out a soft credit search on your file. This is purely to determine you are who you say you are, and don’t have credit issues, such as defaults or CCJs.
This soft search isn’t visible to other lenders, and won’t impact your ability to gain credit in the future.
If on the other hand you opt to use Klarna financing, or apply to take a payment holiday, Klarna performs a hard credit search. This will be visible to other lenders, and can have affect on your credit history.
Which agencies does Klarna report to?
Klarna reports to TransUnion and Experian. To the best of our knowledge, it doesn’t yet report to Equifax. This is likely because it doesn’t use Equifax for gathering history on new customers.
Typically, in order for financial firms to use credit refrencing agencies for conducting their checks, they also have to report to those same agencies.
Why is Klarna reporting to credit reference agencies?
The popularity of buy now pay later services such as Klarna exploded during the pandemic, fuelled by the growth in online shopping. With an increasing number of households relying on these services, many feared that customers could be racking up huge debt, in what was largely an unregulated market.
In 2021 the Government announced that it would work with the financial regulator to bring stricter regulatory oversight to BNPL firms. As a result of this, many BNPL firms began to share customer data with credit referencing agencies in an attempt to appease regulators.
What are the alternatives to Klarna?
There are number of BNPL companies operating in the UK. Klarna may be the biggest name, Clearpay and Laybuy are also popular.
Some banks and credit cards also offer buy now pay later schemes. Of these Monzo’s Flex is particular popular. You need a Monzo account to access Flex, but it’s one of the best bank accounts around, and if you join Monzo via our link will get a free £5 when they use there Monzo debit card.
The benefit of using Monzo Flex, over a BNPL provider like Klarna, is that Monzo Flex is full regulated.