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Does Klarna affect my credit score?

Knowing what does and doesn't affect your credit score can be a tricky business. Perhaps trickier still is knowing what is good and what is bad for your credit score. As always though, we're here to guide you through and shed some light on all things credit score related. Buy now pay later offers are present on most online shopping websites, one of the most famous ones is Klarna. While their offers sound amazing, they might not be the best for your credit rating. So, let's find out: will Klarna affect your credit score?

What even is Klarna?

If you're ready for a brief history lesson, sit back, make yourself comfortable, and we'll begin.

Formed back in 2005, Klarna is a company based in Stockholm, Sweden. Created with the aim of making shopping online an easier experience, it offers customers an alternative payment method when purchasing from retailers that it has partnered with.

The payment method offered by Klarna is known as Buy Now Pay Later (BNPL). It offers customers flexibility when it comes to paying for their purchases.

What does BNPL mean?

BNPL means exactly what it says: you can buy something now and pay for it at a later date.

BNPL is nothing new. Long before the arrival of the internet (hard to believe, I know, but in the pre-internet age, we could still do things like shopping), catalogue companies would often offer the choice to defer your payment or to pay in instalments. BNPL also covers traditional store cards where you are able to purchase an item on the card and pay back over a period of months.

What has changed is the explosion in popularity of using BNPL. With companies like Klarna, Clearpay, and Laybuy targeting the younger generations with the ease at which they can buy online. These companies usually offer a couple of options. The first is to buy your chosen item, and then take up to 30 days to pay in full. If you do this, then no interest is charged. Klarna makes their money by charging the retailers for using them as a payment processor. The second option is to pay in equal instalments, sometimes referred to as 'slices' over 6-36 months.

How does all of this affect my credit score?

Klarna can affect your credit score in 2 stages: first when you make an application and later when you are actually paying them back.

First, let's see how this can affect you in the application stage. If you decide to use Klarna as only a buy-now-pay-later service (so you will pay back in 30 days or in 3 instalments), they will only perform a soft credit search, rather than a hard search. This way the search won't appear on your credit file and other lenders won't see this either. However, if you choose the option to pay over 6-36 months, called "Financing", Klarna will carry out a hard credit check. This will appear on your credit file and can potentially affect your score.

As for the payments themselves, from the 1st of June 2022, all buy-now-pay-later and financing payments with Klarna have been reported to the major credit agencies. This means that they can affect your credit score too. But that's not necessarily a bad thing; assuming that you manage your account correctly, and keep up to date with your payments, Klarna can have a positive impact on your credit score. Ensuring that you have budgeted correctly and can afford any repayments is key.

Credit reference agencies have also started to analyse other short-term BNPL transactions, including them on your credit report but not necessarily in your credit scores yet as they update their scoring system to deal with these new kinds of payments. Which means that missing BNPL repayments may not affect your credit score yet, but they will still show up on your credit report for lenders to review. Lenders could already be using these missed payments to assess your creditworthiness, so be sure to make your BNPL payments on time.

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