Buy-Now-Pay-Later Solution Klarna Doesn't Build Credit, Can Hurt It

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Jul. 19 2021, Published 12:50 p.m. ET

BNPL (buy-now-pay-later) platform Klarna is on the up and up and competes with industry leaders like Affirm and Afterpay. For many shoppers, the BNPL industry is a novelty, which means that it brings up questions about charges, credit, and more.

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Klarna's relationship with credit scores is complicated. While it doesn't build credit, it can harm a person's score.

When signing up for Klarna, expect a soft credit check

If you sign up for Klarna in the U.S. and choose to either pay in four interest-free installments or pay in 30 days, you'll receive a soft credit check. This means that the credit check won't be visible to other lenders.

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However, if you sign up using the financing options that Klarna offers, you'll experience a ding in your credit score that's visible to other lenders. These financing options run through a Klarna credit account and are issued by member FDIC-insured WebBank. The credit check comes in the form of a hard pull, which stays on your score for two years. You'll be asked to complete a full application form, but you only have to do so once for all purchases. Upon submission, you'll know if you've been accepted within a few minutes.

Klarna doesn't report payments to credit bureaus.

Unless you're using Klarna's financing solutions, Klarna doesn’t report on-time payments to the three major credit bureaus in the U.S. (Equifax, Experian, and TransUnion).

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Newbies with no credit history won't get help with their score from Klarna.

Klarna is popular in part because it's available to people with no credit history. However, making on-time payments through Klarna won't help you build a credit score. You'll have to get another credit card or loan (like an auto loan) in order to build your credit history.

Since Klarna functions with a linked debit or credit card, you can choose to link a credit card to help you build credit if you prefer. As long as the lender associated with your credit card reports on-time payments, you can use it to build credit.

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Missed payments on Klarna can have a negative impact on your credit score.

While on-time payments through Klarna won't help you build credit, missed payments can actually hurt your score. Klarna might not report missed payments 100 percent of the time, but it's definitely a risk that shoppers take on when ordering through this BNPL solution.

Are there other POS loans that can help you build credit?

Point-of-sale financing (BNPL tools) usually aren't consistent in reporting on-time payments to credit bureaus. If anything, they're more likely to hurt your credit score if you miss a payment based on your financing agreement.

It's important to be aware of this reality as BNPL becomes more popular. The industry is growing rapidly and providing a new way for people to get into debt for non-essential purchases. For Klarna and other platforms, setting up automatic payments is a surefire way to avoid hurting your credit. Just be sure that you have enough funds in your checking account or that can pay off your credit card bill on time, depending on what you're using to pay off Klarna payments.

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