Klarna is going to charge fees to customers in the UK that miss payments. From the mid March 2023, these will be:
- £5 a late fee;
- no more than two late fees will be charged on an order;
- late fees cannot total more than 25% of the value of an order.
This is a major shift for Klarna, who has so far charged late fees in other countries but not in the UK.
Clearpay and Laybuy charge £6 for a late fee. So Klarna’s will be slightly less than its largest competitors.
Why Klarna is starting to charge late fees
Alex Marsh, Klarna UK’s CEO says:
Not charging fees feels consumer-friendly, but we’re worried it drives the wrong behaviour. Our data now shows that a total absence of late fees actually leads to less favorable outcomes for customers: with less reason to pay on time, customers are more likely to miss a payment. In the Netherlands and Belgium the introduction of late fees improved Klarna’s on-time payments by 20 per cent.
Marsh continues:
We’ve concluded that having no fees is not in the best interest of our customers.
So they are doing this for the benefit of their customers. Yeah right…
If this pattern is repeated in the UK, it will have 20% fewer late payments to deal with. Which will save Klarna a lot of money chasing the payments.
Fewer late payments are good though, aren’t they?
It is good if people choose to buy less using Klarna so they can be sure they can make the repayments on time.
But it isn’t clear that this will be the result of these new late fees.
Instead some Klarna customers may stretch to make a payment on time and avoid a fee. If this leaves them too short of money, in the next few weeks they may end up using Klarna again not for something nice to have but for essentials. Klarna isn’t just used for big purchases or fast fashion. The Klarna card can be used at any shop that takes Visa payments, including supermarkets.
So that’s a double win for Klarna. Fewer late payments and more purchases.
And many Buy Now Pay Later shoppers already use some form of credit to make a BNPL payment. Citizens Advice found last year that more than 40% of BNPL customers have borrowed money to repay a BNPL, mostly by using a credit card or their overdraft. And that rises to over half the customers aged 18-34 – a group that has been badly hit by cost of living increases.
If Klarna’s new late fees mean more people do this, then that’s good for Klarna and not good at all for its customers.
Klarna’s new Customer Recovery program
Klarna says it will be using the money from the new fees to fund a new “customer recovery program” that will launch later this year.
In the program, Klarna will contact customers with long-overdue payments and offer to waive 50% of their balance. It says “eligible customers” will need to pay the remaining half before using Klarna again, this will help those customers get back on track with their money and avoid debt collection.
It isn’t clear however who Klarna will decide is eligible. All late-paying customers are going to be subsiding the ones that Klarna decides can have this break. And the ineligible ones will have higher debts being sent to debt collection because of the new late fees.
Making the quicksand even more sticky
Citizens Advice has warned:
Buy Now Pay Later borrowing can be like quicksand – easy to slip into and very difficult to get out of.
You have to be very optimistic to think adding late fees will magically improve this by causing people to borrow less. It is more likely to make things harder for people already in difficulty, causing them to get deeper into debt. The quicksand becomes even harder to escape from.
“Halifax cut my rate but now I must pay more”
Options when cards are maxed out
BNPL are now on credit reports
Bill says
Credit cards are far more better than applying for payday loans, I’ve stopped using payday loans, thus my credit score increased as a result, I pay above the minimum payments, be it I have 5 credit cards, all where a very small credit limit but I’ve been a good customer by paying each month, yes I get charged intrest on not paying off the full balance but much paying off them payday loans sharks everymonth with nothing left in your account, it’s all about having a good relationship with the credit card companies 🙂
Sara (Debt Camel) says
You will help your credit score more if you can repay the balance in full – see https://debtcamel.co.uk/credit-builder-cards/
Si says
Hi Sara, I don’t have the best credit rating but have got a Klarna card, I use it basically as a credit card and pay it off in full every month but without having to pay any interest as I would with a standard credit card. Is this likely to cause me any problems with trying to rebuild my credit rating?
Sara (Debt Camel) says
This won’t help your credit score – although Klarna records show on credit files, they are not used in the credit score calculations.
What is wrong with your credit score – problems with previous payments or a very high credit card utilisation?
james says
Credit cards can be used to your advantage.
I have twenty thousand pounds in a fixed 4.5% deposit account for a year, the money was from a credit card, and the cost was a one-off payment of 2% with 0% for 12 months.
When the one year is up I will transfer the balance to another credit card for 0% and 2% cost, thus making a profit of 2.5%.
I have done this a number of times, credit cards are great as long as they are not used to buy things we do not need.
Sara (Debt Camel) says
This is called stoozing. It works well if you have an excellent credit score and very low debts, otherwise you wont be offered large limits on the transfers – getting a 20k limit on a transfer card is unusual.
Things to look out for:
1) you have an interest free band of £1000 a year on savings income. Exceed that and you have to pay income tax on the extra. Your 20k at 4.5% is £900 a year (you can’t deduct the £400 cost f the balance transfer here) so you are very close to the limit – any other savings and you may already be over it. Paying tax on stoozing income at basic rate makes it less profitable, at a higher rate takes it down to so little it’s not worth the hassle.
2) a mortgage lender will see this as 20k owed on a credit card and it will harm the mortgage affordability calculations.
3) you need to reliably have the spare cash each month to be able to make the minimum payments to the card.
Overall stoozing is not likely to be a possible option for the large majority of people using Klarna and othe BNPLs.
james says
Yes, I agree, I just mentioned this for interest, people who need to use Klarna etc will not be able to do this.
In my case, I have 110,000 pounds total credit limit available (not used) spread over a number of cards.
I get a credit transfer offer every month from one or sometimes many of the cards, but I am only using a small amount of the total credit available for stoozing, I am retired with no mortgage so no problem there.
The profit is not that high as you say especially as I have a lot of my own cash on deposit taking me over the tax free limit but I like the idea of getting a cheeky few quid for free.
Anthony Simpson says
I think there’s a way you can do this workout incurring the balance transfer fee.
Make a payment to yourself via PayPal, friends and family. I’ve used credit cards on PayPal before to pay for purchases on eBay and Facebook and buying from friends.
If you set the payment as friends and family there’s no PayPal fee and also no credit card fee.
Guess you just need another PayPal user you trust.
Sara (Debt Camel) says
Yes but you have just paid for this on a credit card. Which defeats the purpose of using BNPL as interest free.
James says
Thanks for your reply but I am a bit confused.
If I use a credit card to take out cash via Paypal I will then have to pay a high annual interest rate on that cash, the only time the interest rate is zero for a year or more is when a credit card company gives me the offer of 0%.