Klarna details will start to be added to TransUnion and Experian records from June 2022.
TransUnion says:
Incorporating this data into credit reports will support consumers that are using this type of point-of-sale finance, whilst also ensuring lenders have a comprehensive picture of a borrower’s financial position.
But this year TransUnion will not be using the BNPL information when it calculates your credit score.
Equifax seems to be planning the same approach. It has said it:
fully intends to include BNPL data in credit reports… its data will be ‘incorporated in a measured and proportionate way that doesn’t unduly skew consumers’ scores or disrupt methodologies we use.’
That quote from Equifax suggests difficulties but doesn’t explain what they are.
So let’s look at the problems. Why aren’t BNPLs being included in your credit score from the start? And does this matter to you?
Contents
Why report BNPL data on credit reports?
Most BNPL providers don’t report all borrowing to the Credit Reference Agencies (CRAs) at the moment. The FCA’s Woolard Review last year warned this is creating problems for lenders.
Without the BNPL information, other lenders can’t see the full picture of a customer’s borrowing. If you apply for a loan or ask for your credit card limit to be increased, the lender wants to know how much you need to pay off your current BNPL purchases, and how often you use BNPL.
There are reports that people are being rejected for mortgages when the mortgage lender sees BNPL payments on the applicant’s bank statements.
But most lenders don’t ask to check people’s bank statements – they want to be able to get the information about your BNPL purchases from credit records. This is why BNPL reporting is being introduced.
BNPL can’t be reported like other debts
It isn’t simple to report BNPLs like other loans and credit cards.
Every BNPL purchase is a separate amount of credit, effectively a loan for each purchase. There is no limit like a credit card where the BNPL lender will let you spend up to £x and not report the individual purchases. So even if you only buy one thing a month, that is going to be a lot of BNPL items mounting up on your credit report.
When a loan or credit card is taken out, it harms your credit score for the first few months. Then the good marks you get from repaying the credit on-time start to outweigh the harm and soon improve your credit score.
But BNPLs are repaid too quickly for this to work. A Klarna pay in 3 is completed just two months after the purchase. As is a Clearpay purchase, repaid with four fortnightly payments.
Using the current CRA credit score calculations would lead to the nonsensical result that a BNPL taken and repaid on time would always harm your credit score.
The CRAs have to come up with a new way to handle BNPLs.
This is the reason behind Equifax’s reference to “[not wanting to] skew consumers’ scores or disrupt methodologies we use”. It isn’t just a problem for Equifax – it applies to TransUnion and Experian as well.
Is excluding BNPLs from your score good then?
This is the reason BNPLs are only going to be reported on from the summer, not included in calculating your credit score.
It is expected to be 18 months before BNPL transaction affect your credit score.
So does that mean the BNPL reporting doesn’t matter at the moment? No. You can’t ignore this, if you use BNPL you need to know about this.
Lenders do not use the score that you can see
If you haven’t heard this before, it may sound very odd, but it’s true.
A lender uses the data from credit reports to make their own assessment of whether to give you a loan, a 0% balance transfer etc. This may involve calculating a score but it isn’t the one you see.
Until now it has been normal to say that lenders use roughly the same approach as the CRA customer credit score calculations. Lenders care about missed payments, defaults, credit utilisation, new credit etc.
So if your credit score improves you may find it easier to get cheap credit and if your score drops you are likely to find it harder. Your credit score is a useful guide to what a lender may think.
But from the summer, that may not be the case. Because lenders may take into account the BNPL information that will be on your credit record but that is ignored in your credit score.
Lenders will be able to see missed BNPL payments
At the moment, BNPL lenders don’t have to report missed payments to the credit reference agencies. For example Klarna says:
Klarna does not report missed payments to the CRA in relation to these products… To date, a customer’s credit score has not been impacted by using Klarna’s ‘Pay later’ products even if they have failed to pay on time.
But from June, BNPL repayment information will start to appear on credit reports. I expect other BNPLs will follow Klarna’s lead. And Equifax will also start to include this data.
Other lenders may well take this into account when deciding to lend to you. Your credit score may not change but it will still be harder to get credit.
Lenders will be able to see how much you use BNPL
Other lenders will now easily be able to see how much you use BNPL. They may be interested in:
- how much on average you spend a month. That may affect how affordable the new credit you have applied for is.
- if you have suddenly started to use BNPLs a lot more in the last couple of months. This may be a sign you are in financial difficulty.
If you have a big credit application coming up – a mortgage or car finance say – it may be sensible to reduce or eliminate any BNPL spending for 3-6 months beforehand.
Will old BNPLs be reported?
No – this only applies to new BNPLs.
How much will my score change if…
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Natasha says
Will this include previous BNPL? E.g if I did one with clear pay in November 2021 will that be included from Summer 2022 or will it only include new ones taken out after this time?
Sara (Debt Camel) says
There are no details about this. But I would be VERY surprised if old BNPLs that have been paid are reported.
Gary says
I took out a zilch in December 2021 paid it all back in two weeks I closed the account straight away will that be on my file
To be honest the quite handy in December when you don’t get paid until 10th Jan to get kids presents
Only used 1 as don’t have any credit cards but won’t be using again
Sara (Debt Camel) says
I would be very surprised if it is, but there are no details published.
For you, if it was repaid on time and there was only one, I don’t think it would be a problem at all.
Liz says
Hi Sara, will this data include old data from previous years, or will the BNPL data only be from purchases from summer onwards? Just as bit concerned as I did fall behind payments on both klarna & Clearpay but was a few years ago. Thanks
Sara (Debt Camel) says
I think it will just be new data. But I am guessing here, there are no details published.
abdul hussain says
i have received a reply from newday regarding my aqua card, which is currently open, but will be closed shortly.
can i post my response letter here? as i feel they have not been fair on the refund of interest and even though agreed the acount was not suitable for me, they did not compensate me.
i need someone please to read and help me understand if they did the right thing or not
thank you
Sara (Debt Camel) says
Sorry no, if you need someone to read the email, you could go to your local Citizens Advice.
Can you copy out the interesting bits?
Why did they say the account was not suitable?
Have they offered to do anything?
Or you could simply decide they have not been fair and send your complaint to the ombudsman. It’s really common for lenders to reject good complaints, hoping you will just give up.
ffionpearl says
Wow, Interesting! Any ideas how this might affect affordability complaints? Would a responsible lender see enough to consider the BNPLs in further lending decisions? I’m trying to get my head around what lenders will see when this hits, & whether it could strengthen irresponsible lending complaints or not. I would think a lot of BNPL on certain goods would indicate financial problems but will lenders be expected to factor tis in if its not affecting the score?
Sara (Debt Camel) says
isn’t it!
The lenders won’t be able to see what the BNPL was used for.
Lenders always have the problem about how much to look for. Some deliberately seem to take an “eyes tight shut” approach by only checking Equifax and therefore missing out on a lot of bad credit lending.
Another interesting question is whether the BNPLs will be taken into account at all in the alternative scores the CRAs do for lenders – there are several variations a lender can opt for. But they are all commercially confidential so we have no way of finding out.
ffionpearl says
Hi
“Lenders won’t be able to see what the BNPL was used for”.
Agreed.
Just wondering if the types of store used might indicate that people are using it for essentials. If lots of BNPL with a retailer like Asda (That’s a for instance as I don’t know if Asda even do BNPL) might ring alarm bells.
If I was looking at it and saw this, I would be racking up questions to ask about how they are managing finances, but then I’m not a lender
Its really annoying that we cant find more out about how the lenders will view this, on the scores, if at all…
Thanks for your reply Sara. This was really good to know
Sara (Debt Camel) says
Just wondering if the types of store used might indicate that people are using it for essentials. If lots of BNPL with a retailer like Asda (That’s a for instance as I don’t know if Asda even do BNPL) might ring alarm bells.
yes but I don’t think that will show either – it will show as a purchase you use Klarna for, not where…
ffionpearl says
Ah I see, the lender not the retailer is noted on CR. Makes sense.. Hey, that’s really good stuff to know. I guess we will find out more when they start reporting …
qq says
That’s a good question. I do buy somewhat expensive tools on Klarna’s pay in 3 (or 10-but always one at the time), I would be surprised if it would be treated the same as grocery shopping.
Mike_p says
Do you know if this applies to Amazon’s pay in 5 option or the payment assist scheme you get from places like National Tyres? Neither of those seem to check your credit report at the moment.
Sara (Debt Camel) says
I am guessing here… all we know at the moment is the TransUnion announcement and what Equifax told Which? (links in the article above.) Klarna have told me that they will be reporting in the summer.
I expect that Amazon’s pay in 5 would be reported. It may be included in your credit score though as 5 monthly payments are long enough for the current credit score rules to work properly.
National Tyres – my guess is they would not be included. One of the reasons the Treasury is taking so long to come up with the new laws so BNPLas can be regulated by the FCA is that it doesn’t want every gym, dentist, sports club that is allowing people to spread payments to need to be FCA authorised. I suspect National Types would come under this category.
kate says
Hi, I had a clearpay and klarna account and have decided to close both accounts today after reading your post, do you think these closed accounts will show on my credit file from summer still? i will be applying for a mortgage later this year and dont want anything to affect my application
Sara (Debt Camel) says
I don’t think that old accounts/debts will be added to your credit record in the summer.
Ness says
Hi Sara, I pulled my credit report from checkmyfile yesterday and was very surprised to see Klarna history on there dating back to 2018 with late payments showing (that I have no recollection of being late!). Should I dispute this with transunion or Klarna? Looking to take out a mortgage in the next 6-12 months so concerned about the impact.
Sara (Debt Camel) says
dispute it with Klarna.
Cory says
Will this still be the case if you use the ‘pay it all’ option On Zilch? Will it show up like the BNPL transactions?
Sara (Debt Camel) says
So far as I know Zilch hasn’t yet signed up to CRA reporting.
Col says
Hi, I bought something with Klarna over a year ago (to be paid back over 24 mths). At the time I purchased it Klarna didn’t report to credit agencies and this would have affected my decision to use them if they did.
They’ve now started reporting this to on my credit file. Can they do this even though this wasn’t part of the agreement when I signed up? How can they change the goal posts half way through? I’m sure they wouldn’t let me change the agreement half way through….
Sara (Debt Camel) says
Klarna would normally have reported a 2 year loan to the credit reference agencies – it’s the very short-term BNPLs that haven’t been reported until this summer.
HAve you missed any payments?
Col says
No, I’ve not missed any payments but it’s only started showing on my credit file in the last few months.
I remember getting correspondence from them a while ago saying that future loans after a certain date would start getting reported to credit reference agencies and remember thinking that I wouldn’t use them again but the way it was worded sounded like anything taken out in the future would be reported, not existing agreements. I’ll try to dig it out.
Sara (Debt Camel) says
that would be useful if you want to challenge this.
Andrew says
Hello Sara/ Everyone,
My mum as run into serious money issues with high cost lenders (iv already submitted unaffordability claims) however on top of this she as taken out Karla, Clearpay and Laybuy items for “months and months” taking income from essencial household running/living cost. Most of these have been paid now without interest been added.
But considering it affect and was unaffordable at the time can any compensation claims be submitted to these companies?
Many thanks
Sara (Debt Camel) says
No. These BNPL loans are not FCA regulated and you cannot complain to the Ombudsman about them. Even if you could, the only redress for an affordability complaint is a refund of the interest and she didn’t pay any.