People who use the buy now pay later scheme Klarna to make purchases online may find that their credit scores are affected from 2023.
The company has said that it will start reporting UK customer debts to credit agencies for the first time next month, and this will impact customers’ financial scores.
Klarna is the first firm of its kind to do this, and it’s thought the move could persuade similar companies to do the same.
So, what is Klarna, exactly what changes is the company making and how will this affect shoppers?
Here’s what you need to know.
What is Klarna?
Klarna is a Swedish firm which is the leading buy now pay later provider in the UK, and has 16 million customers.
It allows customers to delay payments for purchases online instead of having to make an initial payment upfront.
Shoppers can have their items straight away, as usual, but they have the choice of spreading out the cost of their purchases over three months or delaying payment for even longer.
The retailer won’t ask for money until a later date, which means this way of shopping allows people to make purchases online and then decide if they want to keep them or not before paying for them.
This also means that if people decide not to keep a purchase they don’t then have to wait for their money to be refunded, and they can also make a purchase ahead of their pay day if needed while they wait for their funds to be available in their bank account.
What changes have Klarna made?
Klarna has said that it will start reporting UK customer debts to credit agencies for the first time in June 2022.
The credit agencies will be informed of all customer transactions on items such as clothes, food and furniture.
The decision is thought to have been made at the end of two years of talks with credit reference companies Experian and TransUnion.
It comes as buy now, pay later firms, including Klarna, have faced criticism from some experts and campaigners, who say that they should prevent customers from taking on more debt than they can afford.
All free buy now pay later lenders are looked at by the Financial Conduct Authority (FCA), but they are not yet regulated.
The government does, however, wish to regulate the sector to prevent younger shoppers from amassing unaffordable debt repayments.
Klarna has said that it "wholeheartedly supports" doing affordability checks before lending to shoppers.
How will the changes affect shoppers?
The changes could affect shoppers’ credit ratings from 2023.
Klarna will start sharing customer data with the two agencies from 1 June, meaning credit card companies will be able to see transactions and debts when conducting formal checks on potential borrowers.
Debts and repayments will only start affecting customer credit scores, however, after 18 months, so the change will not have any impact on shoppers until the end of 2023.
What has Klarna said about the changes?
Klarna has said the move is positive as it will allow responsible borrowers to build good credit scores without taking out high-interest credit cards.
Alex Marsh, the head of Klarna UK, said: “It is alarming that UK consumers are still being forced to take out high-cost credit cards to demonstrate they can use credit responsibly and build their credit profile.
“That will start to change on 1 June this year as the vast majority of the 16 million UK consumers who make Klarna buy now pay later payments in full and on time will be able to demonstrate their responsible use of credit to other lenders.”