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?
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.
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.
Whether or not Klarna affects your credit score depends on which option you use. Where Klarna offers the chance to pay in full after 30 days, they perform a soft credit search, rather than a hard search. In this instance, lenders can not see that the search has taken place and any missed payments are not reported to credit reference agencies.
Taking the option to pay over 6-36 months sees Klarna carrying out a hard credit check and you entering into a regulated credit agreement. This means that any late, or missed payments would be reported, as would details of you managing and maintaining your payments.
So yes, Klarna can affect your credit score, but that's not necessarily a bad thing; assuming that you manage your account correctly, keeping up to date with your payments, Klarna and other BNPL providers can have a positive impact on your credit score. Ensuring that you have budgeted correctly and can afford any repayments is key.