The buy it now, pay later industry has grown significantly in recent years.
Global funding for the service soared to $10.8 billion in 2021 from $6.5 billion the previous year, according to The Telegraph.
But some financial watchdogs have criticized this relatively new payment method, which is particularly popular with younger shoppers.
On February 14, the Financial Conduct Authority (FCA) announced that it had secured changes to potentially unfair and unclear terms in the contracts of Buy Now, Pay Later (BNPL) companies Clearpay, Klarna, Laybuy and Openpay.
Previously, the terms required consumers returning goods to continue paying deposits until BNPL received confirmation from the retailer that the goods had been received and/or BNPL received a refund from the retailer.
In addition, three of the four companies in question charged late fees (with the exception of Klarna).
Read more: Buy now, pay later companies to repay costs as watchdog rages
Still, some are concerned about the possible negative effects of this service on credit history.
How does buy now, pay later work?
Buy Now, Pay Later programs allow users to purchase products and pay later in installments.
Some give you 30 days to pay, while others give you up to 12 months.
BNPL companies make their money from retailers by taking a share of each transaction.
Read more: Here’s what to know about “buy now, pay later” options
The difference between BNPL and traditional forms of credit is that you don’t have to pay interest.
In the case of Klarna, if you miss the payment, the company will continue to send you reminders until you pay and if you are several months late, they will contact a collection agency to follow up.
Does buy now, pay later affect your credit history?
Clearpay and Klarna only perform gentle checks on your credit report.
A soft credit check reviews certain information from your credit file to determine the success of your application – it has no impact on your credit score or on future credit applications you make.
But, Laybuy and OpenPay do a thorough search of your credit history, which could negatively impact your attractiveness to lenders in the future, as it gives the impression that you are desperate for credit.
In terms of missed payments, a Klarna spokesperson said Yahoo Finance UK they do not affect your credit history.
However, Laybuy has confirmed that if you miss a payment for them, it could affect your credit score and impact your future financial goals.
At the same time, if you make all your repayments on time, your credit score could improve.
On February 10, credit reporting agency TransUnion announced that it would start including BNPL payments on its records from summer 2022, which could see millions of people see their credit rating negatively affected. in a close future.
At the moment, however, the biggest problem with BNPL is that it can rack up personal debt.
Last year, the charity Citizen’s advice claimed that one in 10 buyers who used this service were being sued by debt collectors.
Therefore, he calls on companies to do more to warn consumers about the dangers of these payments.
Dame Clare Moriarty, Managing Director of Citizens Advice, said: ‘The sheer number of buyers facing debt collection is surprising. We know from our frontline advisors how stressful this can be.
“A transparent buy-now-pay-later checkout process shouldn’t mean buyers have to dig into the fine print to find out they’re taking out a credit agreement, and could be referred to debt collectors if they don’t. can’t pay. The warnings must be inescapable.
“The buy it now, pay later industry has exploded and we need consumer protection to keep up with our changing lifestyle. We hope the Treasury can keep pace.
A Klarna spokesperson added, “Sometimes people’s circumstances change after they have made a purchase and if anyone is concerned about this, we always ask them to contact us as soon as possible so that we can resolve the issue. problem.
“We are available 24/7 to help them.”
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