As ‘Buy Now, Pay Later’ starts to impact credit scores, financial literacy is a must-have

When securing large loans for a big purchase like a home or a car, a good credit score is essential for securing the best interest rates. Those with the highest credit scores can generally lock in the lowest available interest rates, translating into significant savings over time.

Yet right now, UK consumers typically take out high-interest credit cards to build their credit profile - assuming they can be approved for a credit card in the first place. It can be a real struggle for immigrants and the underbanked to build a credit history in the UK, and more than 1.5 million adults remain unbanked.

From the start of June, this changed. ‘Buy now, pay later’ (BNPL) fintech firm Klarna will start to share data around whether Brits paid off an instalment loan promptly or not to credit reference agencies (CRAs) TransUnion and Experian. While UK consumer credit scores will not immediately be impacted until further updates to the CRAs’ scoring mechanisms, this is likely to happen later in 2022.

This latest development is positive news for the informed consumer who makes repayments in a timely and prompt manner. For these consumers, regardless of their age, it is an inclusive opportunity and a tool for credit building among those who might previously have been excluded or not qualified for financial services.

However, all consumers must understand that even missing a repayment of a nominal sum such as £5 could harm their credit score later down the line. After all, black marks remain on a consumer’s credit record for six years: if a 19-year-old regularly misses payments on seemingly minor purchases, this could influence the type of mortgage they qualify for in their twenties.

Klarna currently has about 16 million users in the UK. The BNPL market more than trebled over 2020, with BNPL eCommerce transactions estimated to reach $680 billion by 2025. Alongside this skyrocketing growth, regulators have called for more consumer protections (especially since the services are popular with younger generations) while advocates have argued that BNPL opens financial doors for those who have previously been excluded.                  

Credit history is a crucial tool used to build financial health over a lifetime, yet financial literacy remains the cornerstone of building that healthily and sustainably. Mindfulness among consumers is now more critical than ever, along with clear money management tools from the BNPL providers. Every purchase, no matter how small, could have influence on the most significant financial decisions of their future selves.