Student, 21, issues warning over ‘buy now, pay later’ firms after late payments cut her credit score by HALF – as a debt charity urges companies to be more transparent with customers

  • British student Erin Phillips used Klarna to spread the cost of online purchases
  • After missing payments, Erin, 21, discovered that her credit score had ‘halved’
  • A debt charity urged ‘buy now, pay later’ firms to be more transparent

A student has issued a warning over ‘buy now, pay later’ firms after her online shopping habits crippled her credit score. 

Erin Phillips, 21, who lives in the UK, claims she saw her credit score cut by half after missing payments with online payment service Klarna, which is used by a number of major retailers including ASOS, H&M and Topshop. 

‘Buy now, pay later’ companies give customers the option to pay for online purchases after the fact, either in a single lump sum or in installments spread across a period of time. 

The flexibility has made Klarna and other ‘buy now, pay later’ services like Clearpay (used by M&S, Urban Outfitters and Boohoo) and Afterpay (Bare Minerals, Fenty Beauty, Forever21) a hit with customers.  

Warning: Erin Phillips, pictured,claims she saw her credit score cut by half after missing payments with online payment service Klarna, which is used by a number of major retailers

However debt charity Stepchange warned customers are not always made fully aware of the ‘commitments and consequences’ of using these services, which can include credit checks and involvement of debt collection agencies, and called for greater transparency. 

Speaking to the BBC, Erin told how she used Klarna, based in Sweden, to spread out the cost of buying new clothes online. 

Problems arose when she missed several payments and eventually led to Erin’s credit score being cut by half. The student insists she was not made fully aware of the risks associated with missing payments. 

Erin said: ‘All they [the company] say is you’ve missed a payment, and you have one extra week. There’s not much information in them really.’

Klarna did not comment on Erin’s individual case but said the debt is only passed to a debt collection agency if the debt remains unpaid after ‘several months’, during which time the customer is contacted ‘repeatedly’ and asked for repayments.  

What is ‘buy now, pay later’ and how does it work?

Installment payment methods are becoming increasingly popular, with customers looking for a way to spread out payments for their purchases, especially larger ones, without using a credit card.

Buy now, pay later companies work by allowing customers to pay for their online shopping in installments or in one payment at a later date.

This encourages customers who may not be able to afford something at that particular moment to still buy the product and then pay the rest of the funds later – often payday. 

It has become a huge industry in recent years – Swedish owned Klarna, for example, was valued at £4.5billion in the summer.  

Erin, who is otherwise an organised and fiscally responsible student, added: ‘I was quite naive, and I didn’t think these little purchases would affect me so much, usually between £20 and £80. If I had known, I would have just used my credit card.’

Klarna offers customers different payment plans to customers. 

Its most popular is the ‘pay later’ product, which gives customers 30 days to pay for their purchase from the date it is shipped. Some retailers opt for a 14-day period.

Klarna promises customers: ‘No interest. No fees. Ever.’ 

The option is attractive to online shoppers as they can order items to try at home and return the item within 30 days  without paying anything. 

As the Klarna website explains, it puts an end to ‘waiting around for refunds’. 

Another option is interest-free instalments, which allows customers to pay for a purchase in three even, interest three instalments. A payment is taken on the day on the order is shipped, and every 30 days after that.

Flexible payment options lead to customers spending more on average, making firms like Klarna, Afterpay and Clearpay attractive business partners for retailers. 

The flexibility has made Klarna and other ‘buy now, pay later’ services like Clearpay (used by M&S, Urban Outfitters and Boohoo) and Afterpay (Bare Minerals, Fenty Beauty, Forever21) a hit with customers. Pictured, an advert on Klarna’s Instagram page promoting its service

However Stepchange claimed customers are not being made aware of the full extent of the consequences of missed or late payments and called for greater clarity upfront.

The charity said this is of particular concern as ‘buy now, pay later’ is particularly prevalent among retail brands popular with young people’. 

Sue Anderson, head of media at Stepchange said: ‘For some time we have been expressing concerns about the transparency to consumers on the commitments and consequences involved in using ‘buy now, pay later’ services. 

Risks of ‘buy now, pay later’

Customers looking to use buy now, pay later firms should make sure they will have enough money to be able to pay for the item at a later date. 

This is because a significant amount of interest could potentially be added to your original purchase or, in the case of Klarna, if you miss a number of payments, you can be passed to a debt collection agency.

In this situation, you could potentially find yourself stuck in a debt cycle or with a bad credit rating affecting future purchases.  

‘The potential consequences of being unable to pay are not always clear at the outset, and at a time when consumers may be more focused on the underlying product than the financial agreement it’s particularly important the service provider makes the nature of their commitment very clear.

‘Given that buy now, pay later is particularly prevalent among retail brands popular with young people – who are increasingly overrepresented among StepChange clients – care needs to be taken they are not being encouraged to take on credit they cannot afford.

‘We’d like “buy now, pay later” providers to ensure they give clear, comprehensive information to customers. We would also encourage the regulator to keep a close eye on how well consumers understand the types of services they’re being offered at the online checkout – especially those that could have the potential to see them build up debt.’

Luke Griffiths, UK General Manager of Klarna said in a statement: ‘We are very clear about the terms of our pay 30 days later product, which allows shoppers to try before they buy, and is a form of invoice. Customers have up to 30 days to pay for their goods after they are shipped, with no interest or fees.

‘It wouldn’t be responsible for us to lend to everyone, every time – so we do eligibility and affordability assessments, including a soft credit check (which does not impact a customer’s credit score), to ensure customers who choose to pay later can use our product in a safe and sustainable way, and they have the ability to repay. Because it’s a soft credit check, whether they are accepted or declined, it will not show up on their credit record.

‘If they do not pay after 30 days, we reach out to them repeatedly over a period of several months to ask for repayments. If the debt remains unpaid after several months, we will refer it to a debt collection agency. 

‘A customer’s credit score will only be impacted if the debt remains unpaid beyond this point – and this is made clear in our communications. However, we work closely with our customers to try and make sure this doesn’t happen. During this process no interest or late fees will be charged, ever.

‘We have a dedicated team in place to support the very small minority of our customers who fall into financial difficulty.’

If anyone is struggling with debt or wants to get advice on how to manage their money, they can speak to Stepchange, the Money Advice Service or even Citizens Advice.  

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