Can Klarna or Clearpay Hurt Your Credit Score? – Who? New


More than two million buyers have damaged their credit scores by using “buy now, pay later” programs, new research shows. But does that mean you should avoid them?

Buy Now, Pay Later (BNPL) programs allow buyers to delay payment for a purchase and are becoming a more common option when paying online. Klarna, Laybuy, and Clearpay are just a few of the companies offering shoppers the option of spreading payments when shopping from major retailers such as Asos and Marks & Spencer.

However, “BNPL” also encompasses other older payment methods, such as bank cards and catalog credit.

So what is the truth about this form of shopping, and should you use it? Here, which one? reveals which BNPL programs impact your credit score, how to check if you’ve been affected, and how to pay wisely that won’t cost you more.

How many people use BNPL?

One in five buyers has used a BNPL program in the past year, according to a Compare the Market survey of 2,096 people.

Of these, one in five say it had a negative impact on their credit score.

The study found that young people between the ages of 25 and 34 are particularly dependent on BNPL; one-third having used the program in the past year and four in 10 saying their score has been affected.

How can BNPL impact your credit score?

Worryingly, research found that two-fifths were unaware that BNPL programs could impact their credit score.

Using a credit card, bank card, or programs like Laybuy, Clearpay, or Klarna can damage your credit score if you miss a payment and don’t pay back what you’ve borrowed.

Missed payments or non-repayment of what you owe (called a default) can be noted on your credit report and the mark can stay there for six years.

This information will be visible to lenders and could mean that you may have difficulty getting approved for future credit, such as a loan or mortgage.

Will Using BNPL Programs Affect Your Credit Rating?

It is unlikely that you have damaged your credit score if you have followed the terms and conditions of your BNPL program.

But if you’ve missed repayments or failed to repay what you owe, the company you signed a deal with may have reported it to a credit reference agency (CRA) who might have noted it on your credit report. credit.

We asked Experian, one of the UK’s largest credit reference agencies, if people should avoid BNPL programs.

He pointed out that if used correctly, these schemes don’t hurt your credit rating and in some cases could even boost it.

A spokesperson for Experian said: “It is always important that people carefully check what they are signing up for.

“For example, if you take out credit and miss your repayment deadlines, you could end up with negative information on your credit report that will negatively impact your credit score.

“However, if retail credit is used wisely and paid off on time, it can really help people strengthen their credit histories and improve their scores. “

The dangers of BNPL debt

The study highlighted some of the dangers that BNPL programs present to buyers who are unfamiliar with credit or who choose to stagger repayments.

Two-fifths of shoppers admitted they spend more when using BNPL than they usually would, and more than half felt its use had contributed to increased levels of personal debt.

Another concern was that websites did not properly explain the risks of choosing to pay later.

One in five respondents said they had not been clearly shown the terms and conditions of the offer, and more than half said they would not have purchased the item if they had known BNPL was the default payment option.

However, research also found that many buyers prefer to use BNPL over other forms of credit. More than a third (35%) would choose to use BNPL compared to 15% who would opt for a credit card.

Worryingly, one in 10 buyers said they chose to use BNPL because they had already reached their existing credit card limit.

What do BNPL providers say?

Buy Now, Pay Later is a broad category that encompasses newer programs like Klarna, as well as more popular forms of borrowing, such as store cards and catalog credit.

However, in recent years, the rise of companies like Klarna, Clearpay and Laybuy, which are emerging as a payment option at online checkouts and in stores for fashion retailers, has raised concerns about the attraction of young people to go into debt.

Compare the Market research does not specifically name these companies, but they fall under categorization, so we asked companies to respond to the findings.

What did Klarna say?

“To date, a customer’s credit rating has not been affected by using Klarna’s Pay Later products, even if they haven’t paid on time. “We have another product called ‘Financing’ (formerly known as Slice it). It is Klarna’s only regulated credit product, with payment plans typically lasting 6 to 36 months.

“As with all traditional finance providers that offer products of this nature, with the consent of the customer, a credit check is performed. In this case, there will be a record of the search in the customer’s credit file with the CRA.

“The buyer must proactively complete, be approved and sign a regulated credit agreement, in which he is informed of the implications of non-payment before the request. If a customer doesn’t pay on time, credit reference agencies are notified, which can impact their credit rating.

“Less than 0.5% of Klarna UK customers have had their credit score affected due to missing payments. “

What did Clearpay say?

Clearpay told us that while it can report on people’s credit files, it hasn’t in its four years of operation.

What did Laybuy say?

“We perform extensive independent credit and affordability checks with our partner, Experian, for all new Laybuy accounts. It is absolutely clear to new customers who register to use our service that this verification will take place.

“We built in an independent credit and affordability assessment from day one because it is the most responsible way to ensure the well-being of our customers and to set appropriate credit limits. Because of this and our policy of never charging interest on any purchase, we have an extremely low default rate.

“When a buyer is in default, Laybuy works with them to resolve that default. If they do not respond to our communications and our efforts to work with them within a 45 day grace period, their credit rating will be affected.

“This is no different from any credit provider. Laybuy informs customers of this consequence in our communications with them. ‘

New rules for BNPL schemas

Last year, the Financial Conduct Authority (FCA) began cracking down on one of the most controversial elements of BNPL’s schemes – with interest being charged on the entire amount borrowed even though a borrower has repaid part of it. .

For example, if you had originally borrowed £ 1,000 and you still have £ 200 to pay, at an interest rate of 40% you would be required to pay £ 400 instead of £ 80.

The new rules, which came into effect on November 12, 2019, mean that companies cannot charge back-dated interest, only the parts that remain overdue.

How to use Klarna, Laybuy and Clearpay safely

If used responsibly, BNPL programs can be of great benefit. Here are some tips for using BNPL programs like Klarna, Laybuy, and Clearpay safely:

  • Set a spending limit: with so many different programs, it’s easy to lose track of all the mini loans you take out. Make sure you set a spending limit so that spending doesn’t get out of hand.
  • Use reminders: taking out multiple loans from different providers can make it difficult to know what to pay when. Use reminders to know when you need to make refunds.
  • Return unwanted items quickly: if you’re ordering multiple sizes or just a range of clothes to try on before deciding what to keep, make your returns promptly to ensure your balance is updated before payment is due.
  • Don’t be silent: if you are having trouble meeting refunds, contact the company. They may be able to freeze late fees or come up with another arrangement.

Find out more: 44 tips for dealing with debt

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