In recent years, Klarna has gained popularity as a convenient and flexible payment option for online shoppers. With its “buy now, pay later” model, Klarna allows users to make purchases without immediate payment, giving them the flexibility to pay in instalments.
While Klarna offers numerous benefits, many users are left wondering about its impact on their credit score. In this comprehensive guide, we will delve into the details of how Klarna affects your credit score, debunk common myths, and provide valuable insights to help you make informed decisions.
Understanding Credit Scores
Before delving into Klarna’s impact on credit scores, it’s crucial to understand what a credit score entails. A credit score is a numerical representation of an individual’s creditworthiness, indicating their likelihood of repaying borrowed funds. Lenders and financial institutions rely on credit scores to assess the risk associated with lending money.
In the UK, credit scores are typically calculated by credit reference agencies such as Experian, Equifax, and TransUnion. These agencies analyse various factors, including payment history, credit utilisation, credit length, types of credit, and recent credit utilisation, to calculate your credit score.
How Klarna Works
Klarna, a Swedish fintech company, offers a unique payment solution that allows consumers to make purchases and split the cost into interest-free installments.
Here’s how Klarna works:
- Select Klarna at Checkout: When making a purchase online, you can choose Klarna as your payment option during checkout. Klarna partners with numerous retailers, making it accessible across a wide range of online stores.
- Split Payments into Installments: Klarna offers different payment options, including spreading the cost of your purchase into four equal interest-free installments, paying within 30 days, or financing larger purchases over a more extended period.
- Credit Check: When you choose Klarna as a payment option, they may conduct a soft credit check, which does not impact your credit score. This check helps Klarna assess your eligibility for their services and customise payment plans based on your financial situation.
- Repayment: Klarna provides clear repayment schedules, and it’s essential to make payments on time to avoid late fees or potential negative impacts on your credit score.
Klarna and Credit Scores
Soft Credit Checks
When you use Klarna’s services, they may perform a soft credit check, which does not leave any negative marks on your credit report. Soft credit checks are not visible to other lenders and have no impact on your credit score. Therefore, simply using Klarna for purchases and undergoing a soft credit check will not affect your creditworthiness.
Late or Missed Payments
While Klarna itself does not directly report your payment activity to credit reference agencies, late or missed payments can still have an indirect impact on your credit score. If you fail to make payments on time, Klarna may pass your debt to a collection agency, which could then report the debt to credit reference agencies. Such negative marks on your credit report can lower your credit score and make it harder to secure future credit.
It’s crucial to remember that maintaining a good repayment record is essential when using Klarna or any other credit facility. By ensuring timely payments, you can avoid potential damage to your credit score.
Credit Utilisation and Affordability
While Klarna does not directly report your payment activity to credit reference agencies, it’s important to note that utilising Klarna’s “buy now, pay later” service can impact your credit utilisation ratio. Credit utilisation is the amount of credit you use compared to the total credit available to you across all borrowing such as credit cards, personal loans and short term lending like Klarna.
When you make a purchase using Klarna, the total amount of your purchase is considered as credit utilised. If you have a high credit utilisation ratio, it can negatively impact your credit score. Therefore, it’s essential to consider your affordability and credit utilisation before making a Klarna purchase. Keeping your credit utilisation ratio below 30% is generally recommended to maintain a healthy credit score.
Klarna Financing Options
In addition to their “buy now, pay later” option, Klarna also offers financing options for larger purchases. These financing options involve a credit agreement with Klarna, which may require a hard credit check. A hard credit check can leave a footprint on your credit report visible to other lenders and can have a temporary negative impact on your credit score.
If you choose to finance a purchase through Klarna, it’s essential to understand the terms and conditions of the credit agreement, including interest rates, repayment periods, and any potential fees. By being knowledgeable about these details, you can make informed decisions and manage your credit responsibly.
Improving Your Credit Score
While Klarna itself does not directly contribute to improving your credit score, responsible use of their services can indirectly benefit your creditworthiness. Here are some tips to improve your credit score:
- Make Timely Payments: Ensure prompt repayment of your Klarna installments or bills to maintain a positive payment history and avoid late fees or potential damage to your credit score.
- Monitor Your Credit Utilisation: Keep an eye on your credit utilisation ratio and aim to keep it below 30% by managing your Klarna purchases and other credit facilities responsibly.
- Avoid Excessive Credit Applications: Applying for multiple credit facilities within a short period can negatively impact your credit score. Use credit facilities, including Klarna, judiciously and only when necessary.
- Regularly Check Your Credit Report: Stay vigilant by reviewing your credit report from credit reference agencies to ensure accuracy and identify any potential errors or fraudulent activities.
By following these guidelines and maintaining good financial habits, you can build a positive credit history and improve your creditworthiness over time.
Common Myths about Klarna and Credit Scores
Myth: Using Klarna will automatically damage your credit score.
Reality: Simply using Klarna for purchases and undergoing a soft credit check will not harm your credit score. However, late or missed payments can indirectly impact your creditworthiness.
Myth: Klarna reports all payment activity to credit reference agencies.
Reality: Klarna does not directly report your payment activity to credit reference agencies. However, if you fail to make payments and your debt is passed to a collection agency, it may be reported, leading to potential negative marks on your credit report.
Myth: Klarna always requires a hard credit check.
Reality: Klarna may perform a soft credit check, which does not leave any negative marks on your credit report. However, for financing options or larger purchases, a hard credit check may be required, which can have a temporary negative impact on your credit score.
Klarna offers a convenient and flexible payment solution, allowing consumers to make purchases without immediate payment. While Klarna itself does not directly impact your credit score, responsible use of their services is essential to maintain a healthy credit profile. By making timely payments, managing your credit utilisation, and being aware of the terms and conditions of any credit agreements, you can enjoy the benefits of Klarna while safeguarding your creditworthiness. Remember, knowledge is power, and understanding how Klarna affects your credit score empowers you to make informed financial decisions.
