Does Klarna affect your credit score?

Klarna is a popular payment processing service used by a growing number of online store checkouts. When you choose to pay with Klarna, you buy now and then pay at a later date. Because of this setup, Klarna is technically a form of credit, so you might be wondering if using Klarna affects your credit score. 

The relationship between Buy Now, Pay Later (BNPL) companies and your credit score can seem complicated – especially since June 2022, when Klarna started sharing BNPL purchases made in the UK with the credit reference agencies Experian and TransUnion.

And because there are several different ways to use Klarna, whether it can impact (or even damage) your credit score doesn’t have a simple yes or no answer. Here, we dig a little deeper into the link between Klarna and your credit score.

What is Klarna? 

Klarna is a Swedish company that claims to make online shopping easier. It’s mostly (but not entirely) aimed at young people and is a common option in many online clothing stores.

Essentially, Klarna is an alternative form of payment to credit and debit card payments, digital wallets, and services like PayPal. Although the merchant pays a percentage of the transaction cost to Klarna for using the service, customers don’t have to pay a service fee. 

When UK Klarna users checkout, they have several payment options.

• Pay now, where the bank account details connected to your Klarna account are used to transfer the money to the merchant, and the money leaves your account as soon as your bank processes the payment. 

• Pay in 30 days, where Klarna sends you an invoice reminding you of how much you have to pay and setting a deadline for the payment. You’ll get an email notification when the invoice is ready, and you can also log in to your Klarna account and click through to view your outstanding invoices. 

• Pay in 3 instalments, where you make the first payment when you buy your item, and then Klarna automatically takes the next two payments from your account after 30 and 60 days. 

• Klarna financing, where you can pay off your purchase over 6–36 months. Unlike the other payment plans, Klarna’s financing option charges interest on top of the amount you paid for your item. 

You can also use the Klarna app to generate a one-time card. In this case, you would use those card details if the online store wasn’t set up to take Klarna payments. 

Although your credit score won’t automatically be affected if you use Klarna, the payment method you choose can have an impact. As with any form of credit or financing, how you manage Klarna repayments can affect your credit score, too. 

Let’s look at the possibilities – and ways to avoid any negative impact – in more detail. 

Why can Klarna affect your credit score? 

Your credit score is a number generated from a credit report, which is the information about a consumer’s financial history that’s held by the UK’s three credit reference agencies: Experian, Equifax, and TransUnion. 

Since June 2022, Klarna has been reporting user transactions and repayments to Experian and TransUnion. Previously, it only reported the data if a customer chose their financing option or missed a payment.

This means that it is now possible for lenders to see that someone uses Klarna when they check their credit report (for example, when they do a hard credit check as part of someone’s application for a new loan or bank account – more on this later). So, Klarna does play a role in how your credit score is calculated, and it can therefore impact lending decisions. 

This isn’t necessarily a cause for concern. If you borrow what you can afford with Klarna and make the repayments on time, their Buy Now, Pay Later option will appear on your credit record without lowering your credit score. In some scenarios, it might even have a slight positive impact since making small, timely payments can build a positive repayment record that shows you managed the credit responsibly. 

That said, it also means you have a few things to consider before choosing this option at the online checkout. 

1. Missed Klarna payments will lower your credit score

While using Klarna won’t necessarily have a negative effect on credit score, missing Klarna repayments will. Klarna will report late or missed payments to the credit reference agency, and these will stay on your credit file for six years. 

What’s more, if Klarna customers miss too many consecutive payments (often around six months of payments, although it can be less), they can start proceedings to mark a default on your credit report. A default is a serious negative payment marker that can limit your options if you need to apply for a new loan, mortgage, bank account, or contract. 

This is why it’s vital that you only use a BNPL provider when you know you’ll be able to pay off the debt within the agreed repayment schedule.

2. Klarna financing involves a hard credit search

Klarna financing works differently from the other two BNPL options the service offers. If you choose financing, Klarna will perform a hard credit check before they agree to finance your purchase. 

This type of credit check shows bank accounts, mortgage lenders, and other credit providers detailed information about your last six years of financial history. They use this information to decide how risky it would be to lend you money. 

Because hard checks show that you applied for new credit, which can be an indication of how you’re handling your finances, they’re recorded on your credit file. Having a large number of hard checks in a short time can lower your overall credit score. 

Remember, the pay now and interest-free BNPL Klarna options involve a soft credit search (sometimes called a soft credit check).

3. Klarna repayments can be considered a monthly outgoing  

If you apply for a loan or a mortgage, your potential lender will take all your monthly outgoings into account when they calculate how much they can lend to you and the interest rate they can offer. If you have an outstanding Klarna balance to settle, they can count this as a monthly outgoing, and it can affect the deals you’re eligible for. 

But although misusing Klarna can impact your credit score in some circumstances, there are ways to use the service which can reduce the chances of this happening. 

Ways to use Klarna without damaging your credit score 

Your Klarna orders and payments will now show up on your credit file with Experian and TransUnion, but it’s possible to use the service without risking it negatively impacting your credit score. It’s important to… 

• Only purchase what you can afford to pay off. For example, spreading the cost over three months can make it easier to manage a large essential purchase like a replacement household appliance. But if you know it will be a struggle to make the repayment at the end of 30 days, 60 days, or longer, it can be better to postpone the purchase or choose a more affordable option than to risk the negative impact a missed payment can have on your credit score. 

• Make your Klarna payments on time, whether that’s settling your Pay in 30 days invoice as soon as you’re notified by email, or making all your Klarna financing repayments on time. Otherwise, the payment will be recorded as late or missed on your credit file. 

• Keep track of upcoming payments if you choose the Pay in 3 instalments option. Klarna’s terms and conditions state that the money for the second and third payments will be taken from your account automatically. If there’s not enough money in your account when that happens, it could be recorded as missed, or you could go into your overdraft, both of which could be reported negatively on your payment history. 

Remember, the information on your credit file is visible to lenders and credit card companies for six years, so a missed Klarna payment can continue to affect your credit score for a long time. 

In summary: How Klarna affects your credit score

Although paying through Klarna won’t automatically have a negative impact on your credit score, it’s important to recognise that the company does share information about the way you use Klarna with two of the UK’s main credit reference agencies, so the dates of your purchases and your repayments could appear on your credit record. 

If you choose to pay with Klarna, it’s also important to use that credit responsibly to avoid late payments that can affect your credit score and your options for borrowing in the future. Making your Klarna payments on time and borrowing only what you can afford to pay back can help protect (and even improve) your credit score.

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