Buy now, pay later (BNPL) company Klarna will start reporting UK customer debts to credit agencies for the first time next month, in a move that could affect shoppers’ credit ratings from 2023.
Klarna will report UK consumer purchases paid on time, late payments and unpaid purchases for Pay in 30 and Pay in 3 orders made on or after 1 June, 2022 to both Experian and TransUnion. This, believes the company, will give the financial industry greater visibility on UK shoppers’ use of Klarna’s BNPL products, help to improve affordability assessments, and means Klarna consumers who make payments on time can build a positive credit history, showing lenders they use credit responsibly.
Whilst reporting on the use of BNPL products will be reflected in UK consumer credit files from June 2022, they will not initially impact UK consumer credit scores as this requires further updates to the scoring mechanisms used by the CRAs; however it is an important step towards this goal which both Experian and TransUnion are fully committed to progressing during 2022. Klarna will continue to ensure that consumer needs are central to everything decided throughout this process.
This development should support wider efforts to drive better visibility of consumer borrowing and affordability assessments to help ensure consumers are not building up unsustainable debt with multiple providers.
“We are pleased to help protect our UK customers and continue to cement our leadership in responsible lending, now the credit reference agencies are in a position to accept our data,” says Alex Marsh, Head of Klarna UK. “This was a key area of concern highlighted in the FCA’s Woolard Review and we very much took to heart the advice from Chris Woolard at the time to, ‘not wait for regulations before making changes.’”
Klarna and other BNPL providers have previously come under fire for offering unsecured credit to shoppers without properly explaining the terms and conditions or implications of using the service. This prompted a review – The Woolard Review – of how the industry works and, as a result, Klarna has already announced a range of changes in the UK designed to proactively address areas of concern the review highlighted.
These include updated text at the checkout to make it absolutely clear that BNPL options are credit products, with consequences for missed payments. It has also partnered with the consumer group, Fairer Finance, to make sure that BNPL terms & conditions are clear, simple and easy to understand.
Klarna says it has also Improved real-time credit decisions and affordability checks by providing consumers with the option to share their bank details using Klarna’s world-leading open banking network. It has also introduced an internal complaints adjudicator which acts as an interim step until the jurisdiction of the Financial Ombudsman Services is extended to include BNPL products.
Commenting on the move by Klarna, David Beard, Editor-in-Chief of Lendingexpert.co.uk, says: “This is good news for customers who are responsible users of Klarna because it means they’ll be able to build their credit rating using the service, but bad news if you’ve ever used Klarna and haven’t paid what you owe them on time.”
He continues: “If you’ve ever been late paying what you owe Klarna, from June, your credit score may be negatively impacted, meaning you might find it more difficult to be approved for financial products in the future, including for things like mobile phone contracts, credit cards, loans and mortgages.”
Beard concludes: “It’s important you regularly check your credit rating. You can do this for free via numerous services and apps. Using Klarna can be a great way to build your credit rating if you haven’t applied for credit products before, but you must always pay what you owe on time; otherwise, using Klarna could harm your credit rating for years to come.”