Paying for it later: How Klarna’s new credit reporting could affect you
Buy Now Pay Later (BNPL) has turned the world of online shopping on its head, allowing shoppers to get the goods they want now, and think about payment at a later date.
Since it was founded in 2005, Klarna has been seen as a ‘safer’ way to borrow - users only received a soft credit check when purchasing through the platform, which doesn’t affect your credit score and isn’t visible to other lenders (see the difference between soft and hard credit checks).
The ability to purchase products with no upfront commitment has raised concerns around people landing themselves into debt from impulse buys. And with product launches such as the ‘Klarna card’ allowing customers to make BNPL purchases at almost any retailer, the issue is getting more pressing. Platforms such as Klarna and Clearpay are also predominantly aimed at young adults - people who might be planning to get on the property ladder in the coming years, paving the way for potential difficulties when it comes to mortgage time.
What are the new changes?
After two years of talks with two of the UK’s biggest credit agencies, Klarna will start reporting transactions made through the platform from 1st June 2022.
Any purchases and missed or late payments will all go on your credit file (but won’t actually show up until end of 2023). When you apply for things like a credit card, loan, or mortgage, the lender will be able to see that you’ve used the platform and how good you’ve been with repaying the money.
Could it be a good thing?
There’s definitely an upside to Klarna’s new reporting. If you’re good with repayments, it could see your score shoot up. Like credit cards, if you pay off your amount in full at the end of the month, or pay off your debts early, your credit score will improve. Klarna will pass on information such as if the purchase was made on time - which will help you build a positive profile. Creditors will see you as ‘responsible’ when it comes to using credit, and could unlock more competitive rates for you when you next apply to borrow.
It could allow some people to improve their credit profile without having to take out high cost credit cards to demonstrate responsibility.
But the changes won’t improve your score straight away. There’s further updates that need to be made to the credit scoring mechanisms before Klarna will be taken seriously on credit profiles, but it’s important to start on the right track in light of these new changes.
How will it affect your mortgage application?
Mortgage lenders will look at your credit score when you apply for a mortgage and use your credit history to see if you’d be able to make repayments. The last thing banks want to do is repossess your house, so they make evaluated decisions and work out if you’ll struggle to pay back your mortgage.
Having missed or late Klarna payments on your credit file won’t stop your application in its tracks, but you’ll probably need to go a more specialist route.
If you have a low credit score, you’ll find it harder to get a mortgage from a high street bank due to their one-size-fits-all approach to assessments. But as many Haysto customers know, it’s certainly not impossible to get a mortgage with an adverse credit history. Our Mortgage Experts work with specialist lenders who deal exclusively with applicants who have damaged credit scores. They look at applications on a case-by-case basis, and look for reasons to help, rather than refuse it.
Read more about getting a mortgage with bad credit.
Other BNPL schemes to be aware of
Klarna is one of many BNPL platforms, with the likes of Laybuy and Clearpay also providing similar services. While these platforms are heavily designed for young adults, from their user-friendly apps to their colour schemes and branding, BNPL is used by people of all ages and financial circumstances.
Online retailer Very offers Very Pay which has a representative 39.9% APR variable, so while giving their customers the choice to pay now or later, it can come with a hefty interest on every late payment. Very also takes out a credit check, but states it won’t harm your credit score, similar to the checks Klarna takes out.
High street retailer Next, which also manages Laura Ashley, Victoria Secret and Gap, provides Next Pay which is their solution to a Shop Now, Pay Later scheme. They have a 23.9% representative APR variable and also complete a credit check on applicants.
So while Klarna is the most recent example of a credit platform to contribute towards your credit profile, it’s super important to keep on top of what credit accounts you have - from credit cards and to loans, to BNPL purchases. Making sure payments are paid on time, and relying less on these services will really help.
As with all types of credit, using Klarna could be beneficial for increasing your credit profile. But it can also be really easy to damage your score if you don’t keep up repayments. It’s important to be mindful of not buying more than you can afford, as everything needs to be paid on time and in full to avoid risking marks on your credit report.
At Haysto, we know better than anyone that bad credit can happen for many of reasons. We see customers who are picking themselves up after illness, redundancy, bereavement, or even just a rough couple of months. A score on a screen doesn’t affect who they are as a person, and doesn’t mean they should be punished for years to come.
Bad credit isn’t the end of the road. Credit scores do improve over time, and when it comes to mortgages, we’ll be here to find you the right deal, whatever your circumstances.
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