Credit Building > Klarna vs Credit Cards: Which Is Better for Your Credit Score?

Klarna vs Credit Cards: Which Is Better for Your Credit Score?

Wollit Team2 minute read · Updated 18th February 2025

With the rise of buy now, pay later (BNPL) services, many UK consumers find themselves weighing up Klarna against traditional credit cards. Understanding the key differences between these payment methods can help you make smarter financial decisions and potentially improve your credit score in the process.

The Evolution of Payment Options

The way we pay for purchases has transformed dramatically in recent years. While credit cards have been a staple of British finances for decades, Klarna and other BNPL services have surged in popularity, particularly among younger shoppers. But how do these options really compare when it comes to managing your money and building your credit profile?

Understanding the Basics: How Each Option Works

Klarna's Approach

Klarna offers a modern take on retail financing, letting you split purchases into manageable chunks. Their most popular options include paying in 30 days or spreading costs across three interest-free instalments. The approval process typically involves a soft credit check, making it accessible to many shoppers who might struggle to get a traditional credit card.

Traditional Credit Cards

Credit cards provide revolving credit – a flexible borrowing limit you can use and repay repeatedly. With an average UK credit card APR of 24.8%, they may seem more expensive than Klarna's interest-free options. However, they offer broader acceptance and, crucially, can be powerful tools for building your credit score when used responsibly.

Impact on Your Credit Score: A Critical Difference

Building Credit with Klarna

Historically, Klarna's impact on your credit score was limited. However, recent changes mean they now report payment information to credit reference agencies. While this offers some credit-building potential, it's generally less impactful than traditional credit cards. Missing payments, however, can harm your score.

Credit Cards as Credit Builders

Credit cards typically offer stronger credit-building potential. Regular payments reported to all major credit reference agencies can help establish a positive payment history – the single most important factor in your credit score. Your credit utilisation ratio (how much of your available credit you use) also influences your score, giving you more control over your credit-building journey.

Costs and Flexibility Compared

Klarna's Cost Structure

Interest-free on short-term plans
Late payment fees if you miss due dates
No annual fees to maintain the service
Some longer financing options may incur interest

Credit Card Expenses

Interest charges on unpaid balances
Potential annual fees (though many cards are free)
Late payment penalties
Additional fees for cash advances

Making Your Choice: Key Considerations

When deciding between Klarna and a credit card, consider your financial goals:

Choose Klarna If:

You're making occasional online purchases and want to spread the cost without interest. It's particularly useful for planned, specific purchases where you know you can meet the payment schedule.

Choose a Credit Card If:

You're focused on building your credit score and want more flexibility in how you manage your spending. Credit cards also offer additional benefits like purchase protection and rewards programmes.

Smart Usage Tips for Either Option

Whichever option you choose, following these principles will help protect your financial health:

Never borrow more than you can afford to repay
Set up payment reminders or automatic payments
Keep track of your total commitments across all platforms
Regularly check your credit report for changes
Understand all terms and conditions before using either service

Looking Ahead: The Changing Landscape

The BNPL sector faces increasing regulation in the UK, with new rules set to make services like Klarna more similar to traditional credit products. This could mean stricter credit checks and more comprehensive credit reporting in the future.

Making the Right Choice for Your Future

While both Klarna and credit cards offer convenient ways to manage purchases, their impact on your financial future differs significantly. Credit cards generally provide more robust credit-building opportunities and wider acceptance, but require more discipline to manage effectively. Klarna offers simpler, interest-free payments for specific purchases but may offer limited credit-building benefits.

Consider your long-term financial goals, particularly around credit building, when making your choice. Remember, responsible use of either option is key to maintaining good financial health.