How Does Klarna Affect Your Credit Score?

Updated: June 14, 2024 Author:

Quick answer Yes; using Klarna has the potential to affect credit scores. Klarna now shares customer information with credit bureaus, which is used by lenders and can affect future lending. 

    Buy now, pay later (BNPL) systems have become increasingly popular, allowing customers to spread the cost of a purchase to fit their financial needs. However, they are not without risk. In this post, we’ll explore the negative and positive effects Klarna can have on your credit score.

    What is Klarna?

    Klarna is a global buy now, pay later service, allowing customers to spread the cost of purchases from online and physical stores. This means that you are able to take home a product without having to pay the amount beforehand.

    Klarna offers a range of payment methods, including:

    • Buy now, pay later: Spread the cost over 30 days. If paid within that time period, no interest will be charged.
    • Pay in three instalments: The cost of your purchase is divided into three equal payments (due every 30 days) with no interest.
    • Financing: Spread the cost of your purchase over a 6-36 month period. The interest and repayment terms are determined on an individual basis.

    Why Is My Credit Score Important?

    Your credit score is an indication of how likely you are to repay any money that you owe. Credit companies and lenders check your credit score when assessing whether or not to let you borrow from them and how much you can borrow. Therefore, keeping a steady credit score is crucial for future lending.

    What Does Klarna Report to Credit Bureaus?

    This is where it gets a little complicated. Before 1 June 2022, Klarna didn’t share any information about its customers with credit bureaus unless you missed repayments or used the finance option. However, since 1 June 2022, Klarna has reported user payments to two of the biggest UK credit bureaus – Experian and TransUnion. This is down to the Buy Now, Pay later industry facing scrutiny from consumer advocates.

    After Klarna began reporting user payments, they explained that it can take on average 12-18 months for this information to start being incorporated into credit scores. This means that Klarna payments didn’t start impacting credit scores until June 2023 the earliest.

    Similar to banks and credit card issuers, Klarna reports information about consumer purchases, including:

    • The cost of monthly payments
    • The account balance
    • Late payments
    • Unpaid purchases

    Credit card companies and lenders typically use this information to assess your creditworthiness. This means that while Klarna may not have a direct impact on your credit score, this information can still have an affect on your future lending.

    Why is Klarna Only Now Reporting This Information?

    Buy now, pay later companies like Klarna hope to ease regulators by self-regulating in an effort to prevent stricter regulatory oversight. In February 2021, the UK Government announced that UK’s financial regulator will begin regulating BNPL businesses, which is currently taking shape. This is as a result of lawmakers calling for regulation amid fears that households could be racking up high amounts debt.

    Does Klarna Help Build Credit?

    If you make repayments on time, using Klarna can have a positive effect on your credit score. Because your BNPL payment information is now visible on your credit report, lenders are able to see this information if you apply for credit with them. While this information doesn’t directly affect your credit score, it can have an impact on whether a bank or lender decides to offer you credit. Thus, making timely repayments can work in your favour, increasing your chances of future lending and, in turn, improving your credit score.

    How Can Klarna Affect Credit Scores?

    Depending on how responsibly you manage your borrowing and repayments, the effect of using Klarna can be either positive or negative on your credit score – just like using a credit card.

    For example, if you only borrow a small amount and make a timely repayment, this could have a positive effect. This shows lenders that you have a steady track record of repaying the money you owe.

    However, if you fail to make repayments on time, this information will be reported to credit bureaus and could have a negative effect. Similarly, if you are using Klarna’s financing option and take a payment holiday (extend your due date), this can also have a negative effect on your credit score and impact any future lending.

    Because Klarna has only recently started reporting your debt and repayment information to credit bureaus, the full effect on your credit score is currently unknown. Klarna stated that it intends to work with credit agencies and bureaus “to ensure that any future impact on credit scores is fair and proportionate”.

    Does Klarna Financing Affect Your Credit Score?

    Klarna’s financing options pose more risk to your credit score. This option is for longer term borrowing, and the time period you have to repay and interest rates is determined by personal and financial circumstances. To calculate this, Klarna carries out a full credit check. This type of check is reported on your credit report and thus can potentially harm your credit score.

    Does Klarna Run Credit Checks?

    Klarna runs a soft check on your credit score for short lending options like “Pay in 30 Days”. This type of check doesn’t affect your credit score since it isn’t reported to credit bureaus.

    However, if you apply for Klarna financing or take a payment holiday, then Klarna runs full credit checks, which will be shared on your credit report. This may affect your credit score.

    Final Thoughts on Klarna and Its Effect on Credit Scores

    Currently, even making timely repayments to Klarna wont have a direct impact on your credit score. However, the information sent to credit bureaus can have an impact on your credit report and influence lending decisions.