Does Using Klarna Improve My Credit Score?

Understanding what affects and what does not affect your credit score might seem difficult. What’s even more difficult is determining what is beneficial and detrimental to your credit score. That’s why we’re so passionate about helping our community understand all things credit score. 

Most online buying websites provide Buy Now, Pay Later options, with Klarna being among the most well-known. While their deals appear to be revolutionary, they may not be the greatest for your credit score. So, can Klarna affect your credit score? And can using Klarna improve your credit score? Let’s find out. 🔎

What is Buy Now Pay Later (BNPL)?

Klarna was founded in 2005 in Stockholm. It was created with the goal of making online buying easier for customers by providing an alternate payment option when purchasing from businesses with whom it is associated. This is known as Buy Now Pay Later (BNPL). 

BNPL is exactly what it says on the packet. You buy something and then pay for it later. These kinds of options with companies such as Klarna, Clearpay or Very, have become increasingly popular in the past few years, maybe because of the rising costs of living. They provide temporary relief from the burden of monthly purchases by allowing you to spread costs over a set period of time. 

BNPL providers generally offer a number of choices. The first option is to purchase your desired product and then pay the full amount within 30 days of the purchase. If you do this, no interest will be charged. Klarna earns money by charging shops for the use of their BNPL option, so that's why they don't charge you for that option. Your second choice will be to pay in equal instalments over a period of 3 to 36 months.

Can Klarna Affect Your Credit Score?

Klarna provides three primary products in the United Kingdom:

  • The pay in 30 days option
  • The pay in instalments option
  • And the financing option

Should you want to use Klarna just as a BNPL provider (paying back your credit in 30 days or three different instalments), they will only run a soft credit search as opposed to a hard credit search. That means that  the search will not show on your credit report, and future lenders will not be able to view it. However, if you opt for the financing option whereby you pay over 6-36 months, Klarna will perform a hard credit check. This will show up on your credit report and may have an impact on your credit score.

Does Klarna Report to Credit Agencies? 

When it concerns repayments, Klarna's policy has recently changed. All BNPL and financing transactions will be reported to the three main credit bureaus beginning 1st June 2022. This implies they might also have an impact on your credit score. However, this isn't always a negative thing; if you handle your account responsibly and pay on time, Klarna can have a favourable influence on your credit score. It is critical to ensure that you have properly budgeted and can handle any repayments comfortably. 

Will Klarna Improve My Credit Score? 

Many BNPL lenders do not perform hard credit checks. Instead, they conduct soft credit checks in order to establish your identity and obtain some information about your credit history. Whilst this may help you acquire credit if you have repaid loans in the past, it also means that your credit score may suffer. 

That's because BNPL providers rarely communicate on-time payments to credit reporting bureaux, though they will tell TransUnion and Experian if you miss a repayment.  In other words, merely making BNPL timely payments will not necessarily improve your credit score.

Are BNPL Services Not Good Then? 

Klarna advertises itself as the safest way of shopping online, but you should be aware that Klarna (and other Buy Now, Pay Later schemes) do not provide the same level of security as a credit card transaction. Because Klarna is classified as a 'third-party payment processor,' your Klarna account is connected to your preferred card, which is not protected by Section number 75 of the Consumer Credit Act.

There's nothing inherently wrong with using a BNPL service. It's rather simple to get accepted, and there's usually no credit check, so it's handy if you want to avoid credit inquiries. Making regular BNPL payments can also educate you about managing money and making payments on time, which are skills you'll need if you want to keep your credit score high.

Having said that, missing BNPL payments normally have a negative impact on your credit score, making it more difficult to obtain credit elsewhere. It's also simple to fall into debt since it's easy to lose sight of how much you're spending. So, before you purchase anything with BNPL, think about if it would be wiser to save up for the products you desire instead.

So, if you can manage to pay for a purchase in full, it's best to do so using a debit or credit card so you're still covered if you don't receive the purchases you've just paid for.

Need more credit score help? Carmoola’s got you covered! We have a regularly updated blog overflowing with the best kept industry secrets and tips when it comes to credit scores. We’ll show you how to navigate through the complicated journey of building your credit score, as well as maintaining it whilst getting credit. It seems overwhelming but really, it’s just a question of having the right information at hand 😊