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Changes to Klarna’s buy now pay later scheme may start to affect consumer’s credit ratings

Changes to Klarna's buy now pay later scheme may start to affect consumer's credit ratings

From June, the finance service Klarna will start sending reports to major credit agencies of customers using their services. This is a big deal for the buy-now-pay-later sector and comes ahead of a potential crackdown by authorities on this sector.

Klarna has announced that it will be reporting purchases via its platform to Experian, TransUnion and other credit services. This has the potential to impact up to 50 million UK adults who hold credit scores with these companies.

Put simply – using Klarna now affects your credit score as a consumer, becoming a far more significant decision in the purchasing process.

Why has this happened?

One of the theories behind why Klarna has implemented this change is the expected crackdown coming soon. The buy-now-pay-later sector has grown significantly, particularly with the rise of online shopping during the pandemic and there are fears by both regulators and the government that it is simply promoting unsafe spending.

If we think about the way Klarna works, it allows you to pay in three instalments without interest or fees that are hidden until payments are late. Clearly, this may persuade those with limited funds that they can afford to buy something when, perhaps, normally they wouldn’t.

Research by Citizens Advice found that approximately one in every 10  who have used buy-now-pay-later has ended up having their debt referred to a debt collector. Such a seemingly small amount can clearly snowball into a significant debt problem.

More information on the changes by Klarna

The consumer behaviour that will be reported to credit agencies includes those who have paid what they owe on time, made payments late and those who have unpaid purchases linked to their name. Klarna claims this process will help improve the visibility of those who use buy-now-pay-later services within the industry.

Klarna has claimed that the majority of their customer base in the UK, approximately 16 million adults will be able to show they use credit in a responsible way but this should definitely cause concern for some.

This change hasn’t come as a major surprise to many, given previous changes late last year when Klarna introduced the option to pay now. They also implemented stricter checks on affordability and clearer terms and conditions.

What will happen next?

From Klarna’s perspective, they are sending out the message that regulation is a good thing as it drives forward consistency. Particularly in an industry that has long been linked to underhanded, poorly run lenders who drive people into debt.

We need to wait and see what impact the crackdown by the government and regulators has overall, but it is unlikely to stop the millions choosing to use buy-now-pay-later schemes. Particularly at a time when incomes are being squeezed, yet the desire to have a new wardrobe continues to be strong.

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