Financial literacy

As “Buy Now, Pay Later” Begins To Impact Credit Scores, Financial Literacy Is A Must

When getting large loans for a big purchase like a house or a car, a good credit rating is key to getting the best interest rates. Those with the highest credit ratings can usually benefit from the lowest interest rates available, which translates into significant savings over time.

Yet, at present, UK consumers generally 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 up a credit history in the UK, and over 1.5 million adults are still unbanked.

Since early June, that has changed. Buy now, pay later (BNPL) fintech company Klarna will start sharing data on whether or not Brits have repaid an installment loan quickly to credit reference agencies (CRAs) TransUnion and Experian. Although UK consumer credit ratings will not be immediately affected until further updates to ratings mechanisms from rating agencies, this is expected to happen later in 2022.

This latest development is good news for the discerning consumer who pays off quickly and on time. For these consumers, regardless of age, it is an inclusive opportunity and a tool to build credit with those who may have previously been excluded or unqualified for financial services.

However, all consumers should understand that even missing repayment of a nominal sum such as £5 could hurt their credit score later on. After all, the black spots stay on a consumer’s credit report for six years: if a 19-year-old regularly misses payments on seemingly minor purchases, it could influence the type of mortgage they qualify for in the around twenty.

Klarna currently has around 16 million users in the UK. BNPL’s market has more than tripled in 2020, with BNPL e-commerce transactions estimated at $680 billion by 2025. Along with this meteoric growth, regulators have called for more consumer protections (especially more that the services are popular with younger generations) while advocates have argued that BNPL opens financial doors to those previously excluded.

Credit history is a crucial tool used to build financial health throughout life, but financial literacy remains the cornerstone of building healthy and lasting health. Mindfulness among consumers is now more critical than ever, as are clear money management tools from BNPL providers. Every purchase, no matter how small, could influence the most important financial decisions of their future.