Credit report

Klarna’s buying habits will affect the credit report

Woman shopping online

Buy-it-now, pay-later company Klarna will start telling credit agencies who is paying on time and who is falling behind.

The company said the move could help or hinder its customers’ ability to get credit for loans such as mortgages.

From June, banks and credit card companies will be able to see people’s habits in Klarna during credit checks.

Citizens Advice said buying it now and paying later ‘can be like quicksand – easy to get to but hard to get rid of’ amid fears it could encourage people to get into debt.

Klarna, the UK’s largest buy-it-now and pay-later company, enables customers to buy from retailers such as Boohoo, H&M and Asos.

It will start sharing customer payment histories with credit reference agencies from June 1.

The Swedish company already shares information with credit reference agencies when customers use Klarna Financing for longer-term loans.

But starting next month, it will also share customer data for its Pay in 3 (installments) and Pay in 30 (days) products.

Debt risk

Matthew Upton, director of policy at Citizens Advice, said buy it now and pay later “attracts shoppers with split payments at checkout”.

“Too often consumers don’t understand what they’re signing up for and we’ve found people who have used it accidentally,” he said.

Last year, the charity Citizens Advice said that one in 10 buyers who use “buy now, pay later” credit end up being sued by debt collectors.

At this time, Klarna customers in arrears could be sued by debt collection agencies, but the company said this does not affect the ease of obtaining credit. However, this will change from June 1.

Analysis box by Kevin Peachey, personal finance correspondent

Analysis box by Kevin Peachey, personal finance correspondent

For shoppers, buy now-pay later seems to be everywhere. It was used by 17 million people in the UK, including 30% of people in their twenties, but it was never the most visible credit product.

Consumer groups say BNPL can create a slippery slope to unmanageable debt that is largely hidden from all but those who find themselves in a financial mess.

This decision by Klarna is therefore significant, even if the company has been forced to do so with stricter regulations on the horizon. Expect other providers to follow suit.

It will test BNPL’s suppliers’ claim that their customers are almost always able to meet the “pay later” part of the agreement.

What may be even more interesting to observe is the response of other lenders.

Will they view candidates’ use of BNPL products as a sign of financial stress and be more reluctant to grant them loans and mortgages?

Or will they decide that the use and prompt repayment of BNPL is a positive signal of a responsible borrower?

Companies that buy now and pay later have come under pressure from watchdogs over contract terms and the information they provide to credit agencies.

Klarna said it has been working with agencies for two years so they can adapt the reporting systems put in place for credit card companies.

Borrowing levels

Klarna’s announcement came as official figures revealed UK consumers borrowed £800million more in March on credit cards.

This marked a rise of more than 10% on the previous year, according to data from the Bank of England.

However, the increase in credit card borrowing, alongside an increase in the use of other loans as well, is bringing borrowing back to levels seen before the pandemic.

Repayments massively outpaced new borrowing during the Covid lockdowns when cardholders had far fewer opportunities to go out and spend money.