Yahoo Finance Will buy now, pay later impact your credit history?
The buy now, pay later industry has grown significantly in recent years.
Global funding for the service shot up to $10.8bn in 2021, up from $6.5bn the previous year, according to The Telegraph.
But, some financial watchdogs have been critical of this relatively new mode of payment, which is especially popular among younger shoppers.
On 14 February, the Financial Conduct Authority (FCA) announced that it had secured changes to potentially unfair and unclear terms in the contracts of buy now, pay later (BNPL) companies Clearpay, Klarna, Laybuy and Openpay.
Previously, the terms required consumers who returned goods to continue paying instalments until the BNPL firm received confirmation from the retailer that the goods had been received and/or the BNPL firm had been refunded by the retailer.
Additionally, three of the four companies in question were charging late fees (apart from Klarna).
Read more: Buy now, pay later firms to refund fees as watchdog cracks down
Still, some are concerned about the possible negative effects of this service on credit history.
How does buy now, pay later work?
Buy now, pay later schemes allow users to buy products and pay for them at a later date through instalments.
Some give you 30 days to pay, while others give you up to 12 months.
BNPL companies make their money from retailers by taking a cut of each transaction.
Read more: Here's what to know about buy now, pay later options
The difference between BNPL and traditional forms of credit is that you don't have to pay interest.
In the case of Klarna, if you miss the payment, the company will continue to send you reminders until you pay and if you are several months late, they will get in touch with a debt collector agency to chase it up.
Does buy now, pay later affect your credit history?
Clearpay and Klarna only perform soft checks on your credit report.
A soft credit check looks at certain information on your credit report to determine how successful your application will be – they have no impact on your credit score or future credit applications you make.
But, Laybuy and OpenPay do conduct a hard search of your credit history which could negatively impact your attractiveness to lenders in future as it makes it look like you're desperate for credit.
In terms of missed payments, a spokesperson for Klarna told Yahoo Finance UK that they do not impact your credit history.
However, Laybuy confirmed that if you miss a payment for them, this could affect your credit score and impact your future financial goals.
At the same time, if you make all your repayments on time, your credit score could improve.
On 10 February, the credit reporting agency TransUnion announced that it will begin including BNPL payments on its files from summer 2022 which could see millions of people having their credit score negatively impacted in the near future.
At the moment, however, the biggest problem with BNPL is that it can accumulate personal debt.
Las year, the charity Citizen's Advice claimed that one in 10 shoppers who used this service were chased by debt collectors.
Consequently, it's calling on companies to do more to warn consumers about the dangers of these payments.
Dame Clare Moriarty, chief executive of Citizens Advice, said: “The sheer number of shoppers facing debt collection is startling. We know from our frontline advisers just how much stress this can cause.
“A seamless buy now, pay later checkout process should not mean shoppers have to dig around in the small print to find out they’re taking out a credit agreement, and could be referred to debt collectors if they can’t pay. The warnings should be unmissable.
“The buy now, pay later industry has exploded and we need consumer protection to keep up with the changes in the way we live. We hope the Treasury can keep pace.”
A spokesperson for Klarna added: "Sometimes people's circumstances change after they've made a purchase and if someone is concerned about that, we always asked him to get in touch with us as soon as possible so we can resolve the issue.
"We're available 24/7 to help them."
Watch: Klarna triples valuation to $31 billion
