Klarna, the popular buy-now-pay-later (BNPL) service, has revolutionised how we shop. Splitting payments or delaying them seems like a financial win, but the question lingers: does Klarna affect your credit score? The answer, like many things in finance, is a nuanced “it depends.” Let’s untangle the web and explore how Klarna interacts with your creditworthiness.
Klarna Reporting Shift: A Timeline for Transparency
Before June 1, 2022, Klarna didn’t directly report your payment history to credit reference agencies (CRAs) in the UK (like Experian and TransUnion). This meant your Klarna activity wouldn’t necessarily show up on your credit report, and therefore, wouldn’t directly impact your credit score. Strangely, at that point, we were never asked ‘Does Klarna and your credit score as wasn’t a major concern then? However, things have changed.
Since June 1, 2022, Klarna has begun reporting payment information to CRAs. This includes details like your repayment history, missed payments (if any), and credit utilisation (the amount you owe compared to your credit limit with Klarna). While the information is reported, there was initially a wait-and-see period.
The Credit Score Impact: What’s the Latest?
The credit reporting agencies needed time to integrate Klarna’s data into their scoring models. This means that while your Klarna activity is now visible on your credit report, it might not have immediately affected your credit score. However, as of early 2024, CRAs have likely incorporated Klarna information into their calculations.
So, does Klarna affect your credit score now? The answer is yes, but the impact depends on your repayment habits. Here’s the breakdown:
- On-Time Payments are Key: Consistently making your Klarna payments on time builds a positive credit history. This can improve your credit score over time, demonstrating responsible credit management.
- Late Payments Hurt: Missing Klarna payments or falling behind on your instalments will be reported to CRAs and can negatively impact your credit score. Late payments are a red flag for lenders, potentially lowering your score and making it harder to qualify for future loans or credit cards.
Klarna and Credit Inquiries: A Temporary Dip?
Whenever you apply for a credit limit increase with Klarna, a “hard inquiry” might be placed on your credit report. Hard inquiries can cause a temporary dip in your credit score, but the impact is usually minimal and disappears within a few months. So, while inquiring about a Klarna credit limit increase might cause a slight dip, it shouldn’t significantly harm your score in the long run, especially if your overall credit management is positive.
Building a Positive Credit History with Klarna
Here are some tips to ensure Klarna helps, not hinders, your credit score:
- Manage Your Payments Wisely: Treat your Klarna purchases like any other credit obligation. Make your payments on time and in full to build a positive credit history.
- Avoid Maxing Out Your Limit: Just because you have a certain Klarna limit doesn’t mean you have to use it all. Keeping your credit utilisation ratio low (ideally below 30%) demonstrates responsible credit management and can positively impact your score.
- Monitor Your Credit Report: Regularly check your credit report for accuracy. If you notice any errors related to Klarna payments, dispute them immediately to avoid negative consequences.
Take a look at our article on credit scores to get the full low down.
Klarna: A Tool, not a Free Pass
Does Klarna affect your credit score? Absolutely, but it’s a double-edged sword. By using Klarna responsibly and making timely payments, you can build a positive credit history and potentially improve your score. However, neglecting your Klarna obligations can lead to late payment marks and a lower credit score. Remember, Klarna is a financial tool, and like any tool, it’s up to you to use it wisely.