January 8, 2020

Questions for Klarna as study warns "pay later" schemes damaging millions of shoppers' credit scores

"Buy now pay later" options are becoming more popular credit options. But new research suggests shoppers are still unaware of the dangers, predicting over 2m UK users have seen credit scores plummet

Isabel Woodford

3 min read

New research has warned that "shop now, pay later" schemes are affecting shoppers' credit scores, casting fresh concerns about the credit model popular among millennials.

The survey, conducted in the UK by, reveals that 22% of those surveyed say they've had their credit scores negatively impacted from "Buy Now, Pay Later" (BNPL) schemes, which allows shoppers to delay or spread the cost of a purchase at thousands of retailers.

The study calculates that over 2m UK shoppers could have seen their credit scores drop, with a third of UK 25 to 34-year-olds having used BNPL schemes over the past year.


Some of Europe's largest BNPL players include Klarna — the continent's highest-valued private fintech at $5.5bn —Clearpay and Payl8er. At the last count, Swedish fintech Klarna boasted 70m users, concentrated in the Nordics and Germany, although the UK is quickly becoming one of its largest markets, with over 5m British customers.

"Buy Now, Pay Later" providers have faced public criticism in recent months for failing to warn its young users about the dangers of opening credit. Indeed, 41% of those surveyed by said they were unaware that ‘buy now, pay later’ schemes could affect their credit score.

One issue is that when companies conduct a hard credit check, users' credit score automatically drops if they are denied. Credit ratings are also damaged when customers default on their payments, although Klarna claims this only happens in a small percentage of cases. Klarna also largely uses soft credit checks, which in theory limit the impact on their users' ratings.

The company told Sifted that less than 0.5% of Klarna UK customers have had their credit score impacted as a consequence of missing payments, saying other "pay later" providers may be to blame for the survey's "surprise" results.

Still, some argue that the service is also encouraging millennials to up their spending on sites like ASOS, Boohoo, Nasty Gal and PrettyLittleThing. "Klarna is, in my mind, a real Trojan horse for millennials’ finances. It’s coming at a time when fast-shopping has just gone to a new level," writes Iona Bain, founder of the Young Money Blog.

Klarna sells itself to online retailers with the promise of a 20% increase in the frequency of purchases.

Last year, Klarna was also embroiled in a public spat with Swedish politician Per Bolund, who said customers should not be fooled into “payment paths that cost more", promising to give companies like Klarna a “hard time”.

Klarna hit back, arguing that lending credit to retail customers was nothing new. The company's basic 'pay later' option does not cost customers more in itself, assuming they pay back on time.

BNPL companies are spreading internationally but will depend heavily on continued regulatory openness from host governments. Indeed, earlier this year, Klarna’s chief executive was called to a government council over cyber-security and ‘know your customer’ (KYC) concerns.

Klana is a fully licensed bank and makes most of its money from partnerships with over 170,000 retail partners.


This piece has been updated to include Klarna's response.