How does Klarna work?

Klarna has changed the way many of us shop online, making it easier to spread the cost of purchases without paying interest. But with new rules coming into place for Buy Now, Pay Later (BNPL) services in the UK, you may be wondering how it all works – and if it’ll affect your credit score.

Let’s explore the nuts and bolts of Klarna, how the changes seek to better protect shoppers, and whether it’s a good option for you.

What is Klarna?

Klarna is a BNPL service that allows you to break down the cost of your purchases into smaller, manageable payments. It’s an increasingly common sight at the checkout when shopping online. 

The three most common ways to pay with Klarna are: 

1. Pay in 30 days – Receive your item first, then pay for it within 30 days. You can schedule this payment in advance.  

2. Pay in 3 instalments – Split the cost into three equal interest-free payments, taken monthly. The first payment will be taken when you place your order.   

3. Financing – A longer-term option that works more like a traditional loan. You can pay over 6-36 months, but you’ll be charged interest. Make sure you check the terms before committing.  

Klarna is available as a digital card that can be added to your Apple or Google Wallet, so you may be tempted to use it while out and about too. You can use it to pay for things via the three methods listed above, and it allows you to shop abroad without being charged exchange fees. 

Will using Klarna affect your credit score? 

One of the big questions about BNPL services like Klarna, Clearpay, and PayPal Pay in 3, is whether they impact your credit score. Here’s the lowdown: 

• Soft searches: When you apply to pay with Klarna, they usually perform a soft search. While these show on your credit report, they don’t affect your score. 

• Missed payments: If you don’t keep up with your payments, Klarna may report this to the credit reference agencies, which can negatively impact your score.  

• Longer-term financing: If you opt for financing, Klarna will perform a hard search. This will appear on your credit report and could influence your score. Lenders can view too many hard searches in a short period as a red flag, as it may indicate that you’re taking on too much credit – being dependent on it – or being rejected by other lenders.  

But does Klarna build your credit score? Like other forms of credit, making your Klarna payments on time and only borrowing what you can afford to pay back could help build your credit score over time. Read more about how Klarna affects your numbers here.

You can keep an eye on your credit health with Checkmyfile – the most detailed credit report out there. We put your information from the three main credit reference agencies in one place, so you know where you stand. Get a 30-day free trial with Checkmyfile today, then it’s just £14.99 a month. Cancel online anytime. 

New UK Rules for Buy Now, Pay Later

BNPL has largely been unregulated in the UK – but in October 2024, the government announced plans for new measures to protect shoppers from falling into unmanageable debt. What could be changing: 

1. Affordability checks: BNPL providers like Klarna may soon have to conduct more in depth checks to ensure you can afford the repayments. 

2. Clearer terms: BNPL agreements should be clearer and easier to understand, so you know exactly what you’re signing up for. 

3. Complaint escalation: The new rules would allow customers who have issues with BNPL services to escalate complaints to the Financial Ombudsman Service. 

These changes should be great news for anyone using Klarna or other BNPL services, as they would add an extra layer of protection and transparency.  

Is Klarna a good idea? 

Klarna can be a handy tool for managing your cash flow, but it’s not a free pass to overspend. Before you click ‘Pay with Klarna,’ ask yourself: 

• Can I comfortably afford the repayments? 

• Do I understand the terms and any potential fees? 

• Could this impact my credit score, either now or in the future? 

Final thoughts 

Klarna is changing the way we shop and, for many, it’s a convenient way to manage spending. But it’s essential to understand how it works, how it could affect your credit score, and what the potential new UK rules mean for you – so familiarise yourself with the information above before you hit that pink button at checkout.