‘Buy Now, Pay Later' Will Soon Affect Your Credit Score in the UK

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  • Starting June 1, Klarna will share data on whether Brits paid off a "buy now, pay later" loan in time to the credit bureaus TransUnion and Experian.
  • Customers' credit scores are expected to be impacted by the change in the next 12 to 18 months, Klarna said.
  • It comes as the U.K. government is looking to bring in regulation for the BNPL industry by 2023.

"Buy now, pay later" giant Klarna says it will start reporting data on customers' usage of its products to credit bureaus in the U.K., gearing up for incoming regulations aimed at reining in the sector over fears it is putting young people into debt.

Starting June 1, the Swedish fintech firm will share information on whether Brits paid off an installment loan in time or are falling behind on their payments to TransUnion and Experian, meaning such data will now start to appear on their credit reports. Klarna has around 16 million users in the country.

The move will apply to the firm's "pay in three" and "pay in 30" services, which allow customers to pay down their debt in three months or 30 days, respectively, without accruing interest. Klarna already reports data on longer-term lending agreements ranging from six to 36 months, which do incur interest.

Klarna said customers' credit scores won't immediately be impacted by the change — currently, most BNPL services do not impact a person's credit score. However, after 12 to 18 months, a person's usage of Klarna will appear for lenders when approving a loan or mortgage application. Purchases made before June 1 won't be affected, Klarna said.

The development sets a major precedent for the nascent buy now, pay later, or "BNPL," sector, which has flourished in no small part thanks to a smoother application process and lack of regulatory oversight. It could deter shoppers from using the company's services, as it will now affect their credit history.

"Credit reporting is a double-edged sword in that it can be used to punish borrowers but also to incentivise and reward healthy financial habits," Gwera Kiwana, product manager at U.K. fintech consultancy 11:FS, told CNBC.

"Klarna reporting to credit scoring agencies could be leveraged by thin file users such as immigrants and the underbanked as a tool for credit building. That would strengthen BNPL's offering versus high-cost credit cards, if it could give customers the chance to improve their credit score through good repayment behavior."

BNPL companies face a reckoning in the U.K. and other countries, as regulators look to crack down on such services amid worries they are encouraging consumers — Gen Z and millennials, in particular — to spend more than they can afford.

Last year, the British government announced it would regulate BNPL products after a review found one in 10 customers of a major bank using such services had already fallen into arrears. The rules are yet to be approved, but are expected to come into effect by 2023.

In the U.S., meanwhile, the Consumer Financial Protection Bureau is investigating Klarna, Affirm and other BNPL firms over concerns they are pushing people into debt.

Klarna said that, while U.K. regulation was relevant to its decision to report data to the big credit agencies, the company had been working on the change for two years. The firm says it hopes its competitors will follow suit.

"This will give other providers the ability to see whether someone has overextended themselves using Klarna; or, equally, as other providers come on board, we'll be able to see whether consumers have overextended themselves using those providers," a Klarna spokesperson told CNBC.

It's not yet clear whether rival firms PayPal or Clearpay — which is now owned by Square parent company Block — plan to announce similar steps.

A Clearpay spokesperson said the firm is reviewing its approach to credit checks but recognizes "appropriate and proportionate credit reporting can add value for customers."

"Our priority is to ensure that we create a solution that protects customers and provides the best possible outcome for them," the spokesperson told CNBC.

PayPal was not immediately available for comment when contacted by CNBC.

Klarna has often railed against the credit card industry for landing shoppers with burdensome interest and late payment fees.

"It is alarming that U.K. consumers are still being forced to take out high cost credit cards to demonstrate they can use credit responsibly and build their credit profile," Alex Marsh, Klarna's U.K. boss, said in a statement Wednesday.

"That will start to change on 1 June this year as the vast majority of the 16 million U.K. consumers who make Klarna BNPL payments in full and on time will be able to demonstrate their responsible use of credit to other lenders."

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