buy-now pay-later schemes klarna

Buy-Now Pay-Later Schemes: The Positives & Negatives of Klarna

Buy-Now Pay-Later schemes have taken the world by storm with companies such as Klarna releasing their first credit card in the UK in 2022. Although, can it be suggested that many people may not understand the affect such payment schemes can have on their credit scores? Consequently, the increase of websites accepting such payment schemes, this could have a detrimental affect on credit scores globally.

What Are Buy-Now Pay-Later Schemes?

Recent research has found that nearly a third of young adults in the UK are using the arguably controversial Buy Now, Pay Later schemes for their shopping. Likewise, it was revealed that an estimate of 15 billion people in the UK actively use this particular form of credit. Indeed, the latest developments with the payment schemes though have begun to not only interest consumers, but regulators, also. 

Essentially, Buy-Now Pay-Later schemes are as the name describe. An opportunity to make a purchase while paying for it at a later date. Each scheme can differ in timelines with some offering a 30 day limit while others offer 12 months or more! Therefore, it is understandable that some people can misinterpret the payment agreement.

Currently, there are several websites and stores which accept payment schemes such as Klarna or Clearpay. For example, online clothing stores such as ASOS and Pretty Little Thing each accept them. Though, some people are having to resort to buy-now pay-later schemes for simply buying food. Shockingly, food delivery services such as Uber Eats and Deliveroo have started accepting credit schemes as payment for food deliveries.

Can Buy-Now Pay-Later Schemes Affect Your Credit Score?

Essentially, if you’re unable to pay by the deadlines given to you, your credit score can see some unfortunate effects. Similarly, missing payments can rapidly increase any future payments you may need to make. Some providers of credit schemes will ask for a settlement fee or a lump sum of interest may be added to the debt if you haven’t paid the balance by the deadline date. As well as this, you can also be charged late payment fees. 

Essentially, what has been mentioned above can have an incredibly negative effect on your credit score. It’s important to remember when using such schemes that you are literally borrowing the price of the item for the length of the delay period. The lack of the word ‘loan’ when describing these schemes can understandably belittle the seriousness of the use of them. 

Unfortunately, this means that many people don’t look to the future when using schemes such as Klarna. Most importantly to remember is that the marks could stay on your credit record for six years which in turn, lowers your credit score. Thus, when you apply for a loan, credit card or mortgage in the future how you used buy-now pay-later could affect whether your application is approved.

Subsequently, even if you’re able to pay the required payments on time, if you borrow from many credit providers, this can still affect your financial future. For example, if a mortgage company commit a hard search of your records, they will see that you rely on credit often. As a result, those companies might refuse your application. On the other hand, though, using payment schemes can actually improve your credit score! However, it is important to note that this is the case if they’re used correctly and not in constant use.

Does this mean I shouldn't Use Klarna or Clearpay?

To sum up, there’s no need to avoid buy-now pay-later payment schemes all together. However, what is important is understanding the seriousness of situation when lending from such schemes. So, if you use Klarna to buy a new outfit for a night out through ASOS, don’t fret too much! But, if you have bought a new outfit on credit every weekend this month, maybe take a little break. In other words, evaluating your financial situation, and not over-relying on payment schemes will be the trick to looking after your credit score.

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