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 comparethemarket.com, 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.

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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 comparethemarket.com 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.

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MIKE BOREY
MIKE BOREY

I’ve only used Klarna a couple times but never did anything to my credit score.

CreditGuru
CreditGuru

Depends which score your referring to. Most certainly will affect your ability to take a personal loan or mortgage.

Amilia S
Amilia S

I can’t see how using Klarna can negatively impact your credit score unless you miss, or are late on a payment!

CreditGuru
CreditGuru

When a lender checks your credit, its clear you that couldn’t afford to pay in full. You used Klarna to spread the cost and this indicates poor affordability which reduces your credit score.

Donna Invisible
Donna Invisible

So using a regular credit card to spread cost is the same thing. You don’t pay in full when you use a credit card. You make,have payments

Alexander Åström
Alexander Åström

I used Klarna to pay for an article. I changed my mind though before the article was sent. To get my money back from Klarna, required 5 weeks, as not only did they need a statement in paper form from the company that sold the article, saying that it wasn’t sent, but they have an email queue policy that forbids the reading of emails, before a certain amount of days has gone by, from their receiving!

Alexandru Dorobantu
Alexandru Dorobantu

EPIC

Steve Chambers
Steve Chambers

According to Experian my credit score plummeted a 143 points for using these, and just as I was getting my score up. I did not see anything telling me this would happen when I signed up.

D X A
D X A

Did you default?

Ken Wickleton
Ken Wickleton

Did you pay on time???

Donna Invisible
Donna Invisible

You missed a payment because if you done everything right,paid on time it wouldn’t have affected your credit score. If you did do everything right and your credit score went down 143 points for making payments on time then I would be contacting someone about it instead of just complaining on a article. You are obviously not telling the whole story or there was a big mistake somewhere that if it were me I would have someone’s head.

Donna Invisible
Donna Invisible

People that borrow money,loans,credit cards which ever know they have a monthly payment due every month. It amazes me that I see so many people complain that oh I was just 1 day late or oh I forgot because I wasn’t sent 20 reminder emails, text messages, letters saying I needed to pay my monthly payment for the money I borrowed. If you are not responsible enough to know without getting 20 reminders to pay your monthly bills then you are not responsible enough to be borrowing money period. You know that payment is due at the same time every… Read more »

HOMEiA
HOMEiA

Thanks for sharing, this is a fantastic article. Looking forward to reading more.
When Buying a Home, Make Your Credit Score Work For You

D X A
D X A

Hold on… are you saying it only negatively affects when you default or when they do a hard check which they aren’t doing? This isn’t very clear.

CreditGuru
CreditGuru

Using Klarna or any other form of short term credit will reduce your credit score. Data analysis on credit scores clearly shows that these customers are far more likely to default on credit agreements, than those who don’t use short term credit.