On day two of #ThePerfectStorm, we investigate the impact of buy-now pay-later schemes – is our shopping causing our credit card rating to drop?

In recent years, there has been a cultural shift. Rather than save for something we want, increasing numbers of people are using cost-spreading services such as Clearpay and Klarna to break payments up into monthly, digestible chunks in order to ease the strain on our already stretched bank accounts.  

These services have revolutionised the way we shop online. They offer a digital payment service for the goliaths of online retailers including Topshop, Urban Outfitters and ASOS. When buyers reach the checkout instead of using their debit or credit card, they are seduced into “paying later with Klarna”.  

The business model of “Buy now, pay later schemes” overcomes two of the greatest obstacles associated with online shopping; “cart abandon” and buyers waiting for returns to be credited. Many customers take several items out of their online “basket” when they reach the checkout, moving them to a wish-list because they can’t afford them – this is known as cart abandon. Klarna and Clearpay offer retailers a solution: they tell shoppers that if they don’t have the money right now to pay for their cart, they can “Klarna it”. The Klarna cost of their cart, broken up into four instalments, is placed tantalisingly close next to the actual cost of the cart.

These schemes also help facilitate buyers ordering hundreds of pounds worth of clothes, trying them on, returning any they don’t want and only paying for the ones they do. This makes it easier to buy items online and, of course, when people get those items home, if they do fit, chances are they will end up keeping more than they would have done as well. 

Klarna and Clearpay are offering a service that retailers and many shoppers find valuable. But who is this service actually serving? Are buy now, pay later schemes leading some people unwittingly into debt?  

Anna, 24, found herself in a sticky situation through using Klarna, not once but twice. Anna had placed an order from Topshop back in September, she took half of them back to the store and was refunded. However, she still had to pay Klarna because they had not recognised that she had brought them back to the store. 

“I was super confused as to why I was still paying for clothes I had brought back.” Anna said. 

The second time, she was also similarly bewildered by the small print. She bought some jeans again from Topshop, back in November.  

“Usually Klarna just automatically takes my money and it didn’t this time so I received two or three letters in January asking for payment,” Anna said. “Then my bank told me that Klarna could affect my credit score especially as the letters are now traced to me – I don’t think many people are aware of this.” 

Saskia, 21, had a similar issue.  “I forgot to send something back, and when I did, it turned into ASOS credit instead of refunding to my bank,” she says. “Then I got an email saying a debt collector wanted money from me and I had to pay them.”  

Saskia says she didn’t realise this kind of thing could happen. “It’s happened a few times now, and I’m worried it’s going to hurt my credit score.” 

When asked if the debt collector letters were threatening; Saskia said she’d had three letters now. “It was never explained how bad it could get”. 

Iona Bain, from the Young Money blog, which was launched to help young people understand personal finance, has warned against the perils of buy now, pay later schemes that are leading young people “blindfolded” into debt.

“Firstly, services like Klarna are dangerous for young people because even at their most benign they are encouraging young people to spend more money,” explains Bain. “Klarna risks being debt by another name for the millennial generation.” 

“Companies like Klarna and Clearpay make their money from the fees that retailers are prepared to pay for that very valuable resource/service that they are providing,” Bain says. “So it’s clear that it is benefitting the retailers much more than it is benefitting the individuals”. 

“At the benign end of the spectrum, it’s encouraging people to spend more money and live beyond their means, at the more sinister end is the threat to credit rating.” 

Bain explains that some level of debt is unavoidable, “Even the most responsible person will want to take on debt in order to fund bigger purchases like a home or start up a business.”

To give approval for loans, lenders want to see a credit score. But Bain thinks there is a lack of understanding about how credit works, and that is why some young people are finding themselves in deep water with schemes like Klarna: they are “walking blindfolded” into debt.

“What happens is that they are offered this kind of service and don’t understand the impact it will have on their credit score,” she says. “If you use these services, like Klarna, they will have a hard credit search and that hard credit search will show up on their credit file – because what lenders will see is that this person is borrowing money unnecessarily.”

Bain argues young people don’t understand that schemes such as Klarna can lead to lasting debt if they are not careful. “Young people think it’s just something that is helping them buy things online and easing their cash flow,” Bain says. “But what they don’t realise, is that what they are doing in the process is potentially significantly harming their finances in the long run.” 

Klarna is often a young person’s first introduction to credit. Bain is adamant that Klarna is not compatible with fostering budgeting behaviours in young adults, and is merely adding fuel to the fire of the “I want it now” generation.