Does Using Klarna Affect Your Credit Score?

Klarna is a popular Buy Now, Pay Later (BNPL) service that allows shoppers to split purchases into interest-free installments paid over time. With Klarna’s rising popularity, many consumers wonder: does using Klarna affect your credit score?

The answer is nuanced. Klarna currently does not directly impact credit scores, but changes coming in 2023 will incorporate user’s payment history into credit bureau scoring models. Additionally, even without scoring impact, Klarna can still indirectly damage credit in other ways.

This article provides a comprehensive overview of:

• How Klarna works
• Klarna’s upcoming credit bureau reporting changes
• How missed or late payments can hurt your score
• Tips for responsible Klarna usage

Understanding the implications allows consumers to make informed choices when considering Klarna or similar BNPL financing options.

How Klarna’s Payment Plans Work

Klarna offers several popular payment plans:

• Pay in 4: Pay for purchases in 4 interest-free installments
• Pay in 30 days: Try products, then pay after 30 days
• Financing: Fixed monthly payments with interest

The financing plan requires a hard credit check and is the only plan currently reported to credit bureaus. The check and account appearance could lower scores slightly.

However, no plans currently report payment history – the biggest scoring factor. So responsible usage doesn’t build credit.

Read more about what is a Good Credit Score?

Upcoming Changes in 2023 and Beyond

In June 2022, Klarna began reporting all U.S. customer payment history to Experian and TransUnion. However, the bureaus aren’t scoring accounts until 12-18 months of data accrues.

So by mid-2023, we should expect Klarna payment information to directly impact credit scores. Missed payments will lower scores while on-time payments will increase them.

Indirect Impacts: How Klarna Can Still Damage Credit

Even without scoring impact, Klarna can still negatively or neutrally affect credit health:

• Credit checks: Hard checks from financing plans create credit inquiries lowering scores slightly. Too many checks appear “risky.”
• Missed payments: Defaulting on financing plans due to missed installments causes severe score damage.
• Credit denials: If lenders deny applicants after viewing Klarna histories in credit reports, subsequent score drops occur.

While upcoming changes allow responsible usage to build credit, irresponsible usage brings all the traditional credit risks.

Do You Need a Good Credit Score for Klarna?

You do not need good credit to use Klarna’s core “Pay in 4” service, which allows splitting purchases into 4 interest-free installments. Klarna only conducts a soft credit inquiry for this option, which does not impact your score.

However, Klarna’s other financing options like “Pay in 30” or longer-term monthly financing do involve hard credit checks. Thus you will need a fair or good credit score to qualify. Those with very poor scores below 580 may not get approved.

Exact cutoff thresholds vary based on the lender partnerships facilitating Klarna accounts. But generally credit scores above 650 have the best approval odds. Those between 580-650 may still qualify but likely at less favorable rates or terms.

The Consequences of Missed Payments

Missing payments on any Klarna financing plan can severely damage your credit. When accounts become delinquent for 60-90 days, Klarna reports these as defaults to credit bureaus.

Defaults devastate credit scores, with impacts like:

• 100+ point drops possible
• 7 year presence on credit reports
• Difficulty securing loans or credit cards

Additionally, Klarna may send unpaid balances to debt collectors who can pursue legal judgements. This worsens credit damage through additional derogatory marks.

Avoid missed payments by carefully budgeting and monitoring installment due dates through the Klarna app. Seek alternative payment arrangements if needed.

Klarna’s Reporting to Credit Reference Agencies

As of June 2022, Klarna submits customer payment data to two major UK credit reference agencies – Experian and TransUnion.

Information shared includes:

• Account opening and closing dates
• Credit limits
• Account status
• Payment history

However, the agencies aren’t scoring Klarna payment data until sufficient historical information accrues over 12-18 months.

So by mid-2023, customers can expect on-time payments to benefit scores and missed payments to lower them – like with any other credit account.

Alternatives to Klarna for Building Credit

Those focused mainly on building long-term credit have several options other than Klarna including:

• Secured credit cards that report to credit bureaus
• Credit builder loans like Self that emulate installment payments
• Using regular credit cards minimally and responsibly
• Taking out and repaying small personal loans

These alternatives actively boost scores through consistent, positive payment histories and credit mix diversity.

Do Mortgage Lenders Consider Klarna in Affordability Checks?

Most mortgage lenders in the UK do not directly consider Klarna installment plans in affordability assessments currently. This will likely change once payment data becomes score-impacting mid-2023.

Until then, lenders mainly review:

• Income levels
• Existing debts
• Credit scores
• Down payment amounts

Indirectly, heavy Klarna usage now could negatively impact mortgage chances later by lowering credit scores if payments are missed once reporting begins. But formally, underwriting guidelines remain focused on traditional credit profiles.

Where Can I Check My Credit Score?

UK consumers can check credit scores for free through services like:

• ClearScore
• Experian (30-day free trial)
• MoneySavingExpert Credit Club
• TotallyMoney

These sites provide credit reports from Equifax and TransUnion detailing your score alongside factors like payment histories, balances, and inquiries.

Checking reports monthly lets consumers monitor changes from new accounts, missed payments, or access by lenders.

Does Extending Due Date on Klarna Affect Credit Score

Extending an installment’s due date through Klarna likely does not directly impact credit scores right now since payment data isn’t scored yet.

But after full reporting begins mid-2023, shifting due dates could show up as a late payment if the extension expires before settling the installment. This would damage scores like any other late account.

To prevent this, consumers should avoid repeatedly extending due dates and closely track new due dates set after extensions. Setting reminders helps avoid eventually missing adjusted deadlines.

Tips for Using Klarna Responsibly

When used properly, Klarna can provide flexible financing without long-term traps. But beware risks like overspending. Wise usage involves:

• Reviewing all terms and rates before purchases
• Budgeting effectively for installment payments
• Monitoring credit reports for new accounts
• Paying all installments fully and on-time
• Limiting unnecessary purchases even if interest-free

Missed payments remain especially hazardous – so only use installments you can confidently repay.

Conclusion

Klarna allows “buy now, pay later” flexibility but understanding the credit implications is vital. Upcoming 2023 reporting changes mean both positive and negative payment history can directly raise or lower scores. In the meantime, indirect score drops still occur through checks, denials, or defaults. Using Klarna responsibly minimizes risks and builds strong credit for other lending needs.