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'Buy now, pay later' debts will now damage your credit score

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Klarna
Klarna

Shoppers who fail to stay on top of "buy now, pay later" repayments could damage their credit scores, after the first ratings agency announced it would incorporate the controversial debts into credit checks.

TransUnion, one of the biggest credit rating agencies, will begin including buy now, pay later data in its credit checks from this summer. This could limit access to finance, such as mortgages, for people who have shopped beyond their means during the pandemic.

Buy now, pay later services allow customers to purchase items and pay the cost off in interest-free instalments, as long as they keep up with the payments. The largest firms include Klarna and Clearpay.

Mark Dyason, of Edinburgh Mortgage Advice, a mortgage broker, said formalising buy now, pay later debt into affordability checks would disproportionately impact the cost of borrowing for people on lower incomes, as they were more likely to pay for large goods, such as computers or sofas, in monthly instalments.

“All debt is going to affect what you can borrow. Just because it is different from traditional debt, it is still a commitment to pay every month and affects what someone can afford to pay for a mortgage.

“Buy now, pay later is more tempting to use for people on lower incomes but is more damaging, as the costs will be a greater proportion of their disposable income,” he said.

These services exploded in popularity during the pandemic. TransUnion research showed more than a third of consumers used this type of payment in 2021, with many of the country’s biggest retailers offering it during their online checkout process, including Marks and Spencer, H&M and Asos.

However, buy now, pay later shoppers have racked up an average debt of £538 each and total debt and shoppers owed more than £4bn, according to credit score firm Credit Karma.

Citizens Advice said it was concerned the service encouraged people to take on unmanageable debt. An Opinium poll of 2,000 buy now, pay later customers found 10pc had been chased by a collection agency after using the service, with the proportion rising to one in eight for people under 34.

TransUnion said the changes would be beneficial to people with thin credit files and support financial inclusion.

Shail Deep, of the firm, said: “These changes will be really beneficial for those with thin credit files, supporting financial inclusion and wider access to credit, as well as helping to ensure finance providers have a holistic view of an individual’s borrowing, so they can use these insights to help ensure the right outcomes for consumers.”