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your Buy now pay later debt

The way in which buy now pay later debt affects your credit score has changed since the providers first became popular. At first, there was no effect on your credit score, and consumers could use BNPL as frequently as they wanted and if they made late payments or missed them altogether, this wouldn’t appear on a credit report. Some BNPL providers now carry out a “hard” credit check each time you choose to spread payments over a prolonged period, so they can ensure your eligibility for making the monthly repayments. 

Many of the larger buy now pay later debt providers such as Klarna and Clearpay now also log things such as missed or late payments onto your credit report, which can in time damage your credit score. Even if your buy now pay later purchases don’t appear on your credit report, any hard credit checks or late/missed payments will appear there. As well as this, having more than one buy now pay later debt agreement at one time could mean that you’re unable to apply for and receive other types of credit, such as credit cards, personal loans and goods to hire.

Yes, Klarna debt is a form of buy now pay later debt. Klarna was created to allow shoppers and consumers to pay and shop more flexibly, with their research showing that ¾ of people in the UK felt that spreading the cost of purchases allowed them to better manage their finances. Compared to other methods of debt, Klarna debt offers shoppers an interest-free way to manage and pay for their purchases. 

With each transaction a user makes using Klarna debt, they will conduct what is known as a “soft” credit check, which doesn’t appear on the consumer’s credit report. Their pay in 3 and pay in 30 days options do not impact credit scores, so long as the consumer makes repayments on time. 

With their financing options for larger items, such as furniture and electrical items, where consumers may feel better about the purchase by splitting into smaller and more manageable chunks over a longer period of time (typically between 6-36 months), then a “hard” credit check will be carried out by the buy now pay later provider to ensure the eligibility of the consumer and their affordability to make the repayments. 

Klarna is a regulated provider and acts as a fully licensed bank, currently operating in 19 countries with over 90m consumers using the buy now pay later service.

Although buy now pay later debt allows consumers to make purchases without spending much, if any, money initially, it is important to remember that it is still a form of debt and lending. As consumers aren’t parting with their money when checking out, this can then lead to them overspending and ending up with repayments that are more than they can afford.

Another risk with buy now pay later debt is that, because consumers aren’t paying at checkout, they end up spending more on their purchase. Retailers are reporting that, since the increase in popularity of buy now pay later providers and these being made available to shoppers at checkout, conversion rates and average order values have increased. This means that consumers are spending more than they originally set out to, which then leads to increased repayment fees that they may not be able to afford. 

One of the other risks with buy now pay later debt is that, if consumers don’t keep up with repayments or forget to make payments, then this can affect their credit score.

Lenders, whether buy now pay later providers or credit card providers, will complete credit checks in order to help them assess the risks involved of offering the individual credit. They will look at how likely the amount is to be repaid which is based off of your past financial history, as well as personal circumstances such as living arrangements and employment status. 

Depending on what you are applying for, providers will either carry out a hard or soft credit check. A hard credit check is carried out when an individual submits an application for credit or to use lending services, including buy now pay later for payments split over a long period of time. This involves a full review of your credit report and history and may impact your credit score. Examples of a hard credit check include a mortgage application or when applying for a mobile phone contract. 

Submitting too many applications which involve a hard credit check in a short space of time can impact your credit score and will remain on your credit report for up to two years, which can then affect your ability to lend and borrow.

A soft credit check is typically used when applying for insurance or credit quotes, obtaining a mortgage agreement in principle or when checking your credit card eligibility. Some buy now pay later debt providers will also carry out soft credit checks to ensure that you have eligibility to submit your order at checkout. Although soft credit checks involve a review of your current credit report, it won’t have an impact on your credit score.

When using buy now pay later debt, it is important to keep up with your repayments, as missed or late payments can have consequences on your financial future. One thing to remember with buy now pay later debt is that it should be considered as a non-priority, especially if you need to pay for essential costs, such as rent or mortgage payments, utilities and food. 

If you miss a buy now pay later repayment, you may incur late fees for each day that you delay the payment. If the payment ends up becoming long overdue, or is for a significant amount, then it may get passed onto bailiffs or credit reference agencies and may make a permanent mark on your credit report. If you are finding it difficult to manage your repayments, it’s also worth speaking with the buy now pay later provider to see what advice and help they can provide. 

If you need time to find a debt solution that helps you better manage your debts, including buy now pay later debt, then one option to consider is applying for breathing space. This helps you to gain better control of your finances by giving you extra time to repay debts and gain extra protection from lenders. It can involve freezing interest, fees and charges upon your debt payments and pausing any enforcement actions or contact from creditors.