Klarna will start to report the use of its buy now pay later (BNPL) products to UK credit reference agencies from today.
The BNPL provider will now report purchases paid on time, late payments and unpaid purchases to Experian and TransUnion.
This applies to users of both its ‘pay in 30’ and ‘pay in three’ services.
New reporting: Klarna will start reporting UK customer debts to credit agencies on June 1
The data shared will be the same sort of information that is listed for any other credit customers may take out.
It will include when the account was opened, the monthly repayments, any credit limit, the current balance and how customers are managing the payments.
Klarna said the move would protect customers and provide the industry with greater visibility of BNPL use, helping to improve affordability assessments.
It also said it would help its 16 million UK customers build a positive credit profile, without needing to rely on credit cards.
But it could have a negative impact on some Klarna customers, as the changes will enable lenders to factor in a person’s BNPL use into their decisions going forward.
Those who fall too far behind with their agreed BNPL payments, will have that fact recorded on their credit report for at least six years.
What is BNPL?
Buy now pay later (BNPL) schemes are third-party services such as Klarna, Afterpay and ClearPay, which appear at online checkouts and give the buyer the option to split their payment into installments.
The services are often offered interest-free, as long as the buyer pays the money back within an agreed time limit.
While BNPL products can help people manage their personal cashflow better and avoid paying interest on their borrowing, it can also cause people to build up debts if managed badly.
This could lower their credit score and could affect any future application they make for a loan, credit card or mortgage.
On the other hand, those who always pay back on time will have that reflected in their credit file, which other lenders will usually view positively.
Liz Edwards, editor-in-chief of the comparison website Finder said: ‘Lenders will have a more comprehensive view of how much debt people have before deciding to lend, because it will mean they can do more accurate affordability assessments.
‘It’s good news if you always pay on time, because prospective lenders look at your history of making repayments when you apply for a credit card or loan, to help them decide whether you’re a good bet.
‘If you miss payments, though, they’ll see those on your record and that’s likely to have a negative impact on any decision to offer you a credit card, a loan or a mortgage, or to offer you good rates.’
While use of Klarna will be visible on a customers’ credit report from today, Klarna says that Experian and TransUnion will need to update their scoring systems before its customers’ credit scores will be affected.
A credit score is a number calculated by credit reference agencies summing up the information in someone’s credit report, which details their past borrowing.
Lenders such as banks use the information in a credit report to assess whether someone is financially secure enough to borrow money, and if they will be able to pay it back.
Whilst Klarna’s BNPL purchases will be reflected on credit files with immediate effect, it will not initially hit people’s credit scores.
Debts and repayments are expected to only start impacting customer credit scores after 18 months, meaning the change will not impact these until around the end of 2023.
This time will allow the credit agencies to fully analyse the new information.
However, whilst someone’s Experian or Transunion credit score may not be impacted for a year or 18 months, the way they manage BNPL repayments will be visible to lenders.
‘Repeatedly missing repayments could lead to an account being closed and labelled as a default on your credit history,’ says Edwards. ‘A default can also lead to debt collectors and even a court judgement.
‘A default stays on your file for six years and can make it hard to get a mortgage or other types of credit.’
Using BNPL responsibly could boost your credit worthiness in the eyes of a mortgage lender.
David Hollingworth, associate director at L&C Mortgages said: ‘More transparency around BNPL should help give lenders a clearer picture of how borrowers are using the arrangements.
‘Each lender will score their applications, and so it’s not necessarily the score the credit referencing agencies themselves will give you if you sign up.
‘Those are clearly a useful indicator, but mortgage lenders will score the application themselves and having more credit history may help.’
Uncovered: A bad buy now, pay later habit could hamper your mortgage chances – but greater visibility of purchases could also work in people’s favour if they pay back on time
When it comes to affordability, BNPL payments on a credit report are unlikely to have too much of an impact unless they are mismanaged.
This is because BNPL purchases are typically short-term repayments of relatively small sums of money. The average customer debt, according to Klarna, is ?75.
Hollingworth says: ‘Buy now pay later purchases are generally short-term arrangements. They often have very little or no impact on mortgage affordability for borrowers, as they will often be repaid before the mortgage even completes.
‘It could potentially be viewed differently if there’s such a significant and regular amount of use that the lender feels it needs to be factored in as an ongoing commitment.’
Ultimately, having sporadic BNPL lending which is paid back on time on a credit file will probably have little bearing on whether someone is accepted or rejected for a mortgage or loan.
However, it will give lenders more information when assessing someone’s application.
‘There could be a benefit for borrowers in that it will demonstrate a good track record for those that are conducting their BNPL arrangements well,’ says Hollingworth.
‘Having clarity on their credit file could therefore only help to provide further evidence of their ability to manage credit. That could potentially help strengthen their score in the eye of a lender.
‘Of course it will also give lenders more clarity where BNPL users have fallen behind which could clearly have an impact on the mortgage lender’s decision to lend and so it remains important for BNPL users to ensure that they maintain their payments.’
BNPL is the UK’s fastest-growing online payment method and is expected to account for 12.1 percent – nearly ?32 billion – of UK e-commerce spending by 2025, according to the financial technology firm FIS.
As more and more people begin using these services it will likely factor increasingly into lenders’ decision making.
By reporting to credit agencies, Klarna has made it easier for financial services firms to lend responsibly to those that use it.
This means more customers may be prevented from taking on new debts when it is unsustainable for them to do so.
However, this may not go far enough to help financially vulnerable customers most in need of protection from debt, according to the anti-poverty and financial education charity, the Fair Credit Charity.
Unreported: According to the Fair Credit Charity, most financially vulnerable customers are using BNPL providers that are yet to open up to credit agencies
Other than Klarna, BNPL providers Clearpay, Zilch and Payl8r also reserve the right to report missed payments to credit reference agencies, although Clearpay has stated that it hasn’t done so widely yet.
Laybuy has been reporting to Experian, but not to Equifax or TransUnion, whilst Payl8r says it has always shared transactions and missed payments, reporting them to Equifax.
According to the charity, most financially vulnerable customers are using BNPL providers that are yet to open up to credit agencies including Clearpay, Studio, Freemans or Littlewoods.
Tom Levitt, chair of the Fair Credit Charity is urging these other BNPL providers to follow Klarna’s example.
‘Our analysis shows that the most financially vulnerable customers are using other BNPL providers – it is time that they made the same commitment, for the sake of their customers.
Problem debt: One in 10 buy now, pay later shoppers have been chased by debt collectors, according to Citizens Advice, rising to one in eight young people
‘Low-income households which use BNPL are likely to do so out of need or a lack of viable alternatives, rather than because of the choice and convenience which has attracted many consumers to this form of payment.
‘We are worried that BNPL remains too enticing to customers who are most likely to struggle to repay – the fact that one in 10 BNPL customers fall into bad debt [according to Citizens Advice] shows that this can be ruinous to families.
‘BNPL needs to make it clearer to all shoppers that they are entering into a credit arrangement – the process is currently too seamless.
‘They also need to perform more rigorous checks on all lenders, just like regulated lenders do.
‘And they must all make sure that all BNPL loans are visible on a customer’s credit files – until they do, many lenders will not be able to make fully informed, responsible decisions, and consumers will suffer.’
What happens if a buy now, pay later debt is not repaid on time?
If BNPL debts are repaid on time, many companies do not charge any interest.
But if they are paid late, there are usually fees to pay – and if the sum remains unpaid, the provider can use bailiffs to recover it.
Clearpay’s terms state: ‘We give you till 11pm on the following day to make your repayment and then you will incur a late fee for a missed payment that is not resolved. This will be an initial ?6 and a further fee of ?6 if the payment is not made within seven days. If you are facing hardship, we have hardship policy that allows us to work with you to get you back on track.’
Laybuy states: ‘If you fail to pay within 24 hours of the due date, we will charge you a default fee of ?6. If you do not rectify your default by making the missed instalment payment within the next seven days, we will charge you a further default fee of ?6. We may also arrange for a debt collection agency to collect from you the amount you owe us.’
Klarna states: ‘If you do not pay for your order on time by the due date, you shall no longer be able to access Klarna’s payment options for future purchases. For purchases where payments are frequently missed, Klarna may use debt collection agencies to recover your outstanding balance.’
According to Citizens Advice, those chased for arrears by a bailiff can expect to be hit with an initial ?75 penalty.
Failure to pay up, resulting in a debt collector knocking on your door, can trigger a further penalty of ?235 and a 7.5 per cent fee on any amount owed above ?1,500. This means a debt of ?2,500 may trigger total penalties of ?150.
People unable to clear the debt face being charged ?110 for having valuables repossessed and sold at auction.
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