Buy Now Pay Later Catalogues vs Klarna: What's the Difference?
Buy Now Pay Later services are growing - but you probably already knew that. It’s constantly in the news, and odds are someone you know has made a purchase using a Buy Now Pay Later (BNPL) service. But did you know that BNPL already has a long history?
Once upon a time, retail purchases could be made by post through catalogues with payments spread over a period of time. Today, Buy Now Pay Later catalogues have moved online with the likes of Klarna and ClearPay offering digital BNPL services to thousands of customers on a daily basis via exclusive partnership with retail partners.
If you’re confused about the differences between traditional Buy Now Pay Later catalogues and services like Klarna, don’t worry - you’re not alone. In fact, a quick look into the differences between the two can muddle the not so clear distinction even more.
So what’s the difference between a service like Klarna and a Buy Now Pay Later catalogue, and what should you know before using either of them? In this post, we’ll examine the key differences and the impact of each service on your credit score.
Let’s get to it!
What is a Buy Now Pay Later Catalogue?
A Buy Now Pay Later catalogue is a physical catalogue or website that offers to purchase a range of selected products through various payment plans. Instead of paying immediately, payments can be distributed over time. Buy Now Pay Later catalogues are also commonly referred to as ‘shopping accounts’ or ‘mail order accounts’, although the services provided are generally the same.
What is Klarna?
Klarna is a digital BNPL service or in other words a payment solution provider offered by hundreds of thousands of retailers across the globe. Klarna is a major player in the global BNPL space with over 450,000 active monthly users recorded in June 2020 alone. The way Klarna works is generally similar to BNPL catalogues however the one major difference is that Klarna can be used with countless online merchants.
Differences Between Klarna and Buy Now Pay Later Catalogues
On the surface, both BNPL catalogues and Klarna seem incredibly similar. However a close inspection will reveal key differences between the two. Let’s take a closer look:
Repayment Terms: For BNPL catalogues, payment timelines often depend on the amount spent. This means that payments can be distributed anywhere from a month to a year after the purchase has been placed.
For Klarna, on the other hand, the payment timeline is much more rigid. Users typically have 30 days to pay for their purchase, or can opt for instalment payments to spread payments across 6 to 8 weeks (depending on the chosen option).
Regulation: Today Klarna is unregulated in the UK and isn’t subject to the supervision of the Financial Conduct Authority (FCA). BNPL users also aren’t protected under the Credit Consumer Act (CCA).*
Whereas traditional BNPL catalogues tend to be regulated by many of the same bodies supervising standard credit agreements.
Credit Checks: Many BNPL catalogues have an application process similar to credit agreements for smaller lines of credit, such as credit cards. They often perform a credit check to assess the creditworthiness of potential customers. This can impact your credit score.
By comparison, Klarna only performs soft credit checks to determine the ability to repay. This has no impact on your credit score.*
Payment Reporting: When you use a traditional credit card, your payments are reported to credit reference agencies. If you make these payments on time and in full, this will help your credit score. However, Klarna currently doesn’t report payments to credit reference agencies. As BNPL catalogues are a form of credit, they may report these payments, but it depends on the terms of each particular service, so always do your due diligence if you choose to use a BNPL service.
*In recent news, one of the biggest credit rating agencies - TransUnion - has announced the inclusion of BNPL data in its credit checks from summer 2022. More information to follow as announcements are released. Keep an eye out for upcoming blogs!
Similarities Between Klarna and Buy Now Pay Later Catalogues
Digital BNPL providers and BNPL catalogues share some similarities too.
Impulse Purchases: Both services encourage impulse spending. Breaking a full payment down into smaller chunks can be used as an excuse to justify a purchase, whether it’s essential or not. In fact, a survey conducted by Which? concluded that 24% of BNPL users report spending more than they intended when BNPL was a payment option.
Credit Score Consequences: Both digital BNPL services and BNPL catalogues come with risks. Buy Now Pay Later catalogues can negatively impact your credit score if your application is denied or if payments are missed. Plus, many catalogue schemes often impose interest rates higher than those charged by traditional credit line providers. This can lead to burdensome debt if precautions are not taken.
While Klarna doesn’t charge interest or late fees, it can pass information about your outstanding balance to a debt collector. This can leave a lasting impact on your credit file. And with TransUnion planning to include BNPL data in credit reports, this may soon affect the ability to secure other lines of credit.
Rigid Monthly Budgets: Regardless of what service you use, both Klarna and BNPL catalogues require weekly or monthly payments that can make forecasting and budgeting rigid. In other words if an unexpected expense comes up, you may be unable to cover it without missing a payment for your upcoming BNPL instalment.
Pave Can Help You Build Credit The Right Way
The bottom line is that Buy Now Pay Later schemes, regardless of their nature, can be a risky business. If you’re focused on building healthy credit, and becoming financially fit - making regular payments on-time and being aware of your credit utilisation ratio can be far more beneficial than trying to build credit via BNPL schemes. Equally, using BNPL payment methods for goods and services you don’t need or require can impact your credit score if you’re not careful.
We understand that building credit can be hard, but Pave makes it easier. Through bills monitoring, personalised credit fixes, and payment reporting, we’ve helped over 90% of our customers improve their credit scores.
Pave is backed by early investors in N26 and the founders of Monzo and Indeed. Pave has been voted the Best Credit Building Product in 2021 by customers in the Consumer Credit Awards and was voted the Best New Personal Finance App 2021 by Moneynet.