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The Swedish firm, Klarna has announced it will start giving information to the UK’s top credit reference agencies regarding their customers’ behaviour in using their buy-now-pay-later (BNPL) services after fears that people are unknowingly getting into debt.

In February 2022, the government proposed rules for the unregulated BNPL sector to act more responsibly when offering BNPL products to their customers.  Although laws have yet to be passed regarding this, BNPL company, Klarna is staying one step ahead of the game.

Klarna has pledged that by June 2022, it will start reporting purchases on its platform to reputable credit reference companies such as Experian and TransUnion.  They have said that it will offer the industry greater visibility of the use of BNPL products.

Knowing who has paid on time, is late with their payments, or not paid for their purchases shows that the company is making a more conscious effort to ensure more transparency when customers want to get credit from other creditors.

Alex Marsh, Klarna’s UK head, said: “The vast majority of the 16m UK consumers who make Klarna BNPL payments in full and on time will be able to demonstrate their responsible use of credit to other lenders.”

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When will Klarna’s data reporting affect your credit files?

Klarna has said that its data reporting won’t feed through to the credit scores at present.  Experian and TransUnion are working on the scoring criteria to include this.  It is expected to impact credit scores by the end of this year.

Other BNPL companies, such as LayBuy, already share information with Experian; however, Clearpay has said that they have no intention to share information with any credit reference agency.

What is buy-now-pay-later, and why the increase?

BNPL has become a popular way for customers to get short term credit on their purchases.

BNPL allows users to spread the cost into smaller amounts over a shorter period and for many people, this can be a good way of spreading the cost of their shopping.

It was revealed that an estimated 15 million adults of all ages in the UK are using buy-now-pay-later products for their shopping, which was an increase of more than two million since the start of the year.  The industry is growing, and more than half of online retailers offer the buy-now-pay-later option to their customers.

Companies such as Klarna, Laybuy, Clearpay and PayPal have become market leaders in the BNPL industry.

Customer pockets are already feeling the strain with petrol prices, energy and food prices increasing.  So, firms such as Klarna can often be seen by many as a breathing space when buying goods.

Read more about UK’s cheapest supermarket.

As the products are presented at the checkout when customers make purchases, it is often enticing for consumers to use the service. It allows them to get credit on their purchases and pay it back in instalments.

The products often have no fees or interest charges attached to them.  In addition to this, companies do not need to conduct soft or hard credit checks before giving out credit.

However, this is when things become a problem.  The buy-now-pay-later (BNPL) option may seem attractive to many consumers; however, the scheme has come under a lot of scrutiny from debt charities.

Charities have expressed concerns that many referrals from clients who have used the BNPL service have gotten themselves into arrears or had visits from debt collectors.  Also, some of the companies are using tactics used by payday lenders.

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Why is buy-now-pay-later a problem?

Last year, the Financial Conduct Authority (FCA) commissioned a report called the Woolard Review, which suggested that as the industry is increasing in popularity, it should be regulated.

This report has come about after debt charities have shown fears that the BNPL products are targeting people who are spending more than they can afford.

Research published by Equifax showed that buy-now-pay-later users spend 51% more on clothes each month than online shoppers who pay now.

This would mean that users could quite quickly increase their debt by using various BNPL lenders without any of them knowing that this customer was in debt already.

Find out ways to improve your Credit Score if you are in debt.

What will the new buy-now-pay-later (BNPL) regulation mean?

The Woolard Review commissioned by the FCA has proposed a few rules for the BNPL sector.  These include:

  • Requirement of affordability checks – the new rules are proposing that lenders are required to carry affordability checks on all customers so that they are ‘treated fairly’, particularly those who have a debt problem.
  • Complaint to the Financial Ombudsman Service – Customers who have a problem with the buy-now-pay-later service will be able to complain to the FOS.
  • Access to debt advice and debt solutions – Ensure that debt solutions are available such as an emergency fund to pay the £90 debt relief order (DRO) application.  Find out more about Debt Relief Order

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