The Hidden Debt Threat: How “Buy Now, Pay Later” Schemes Could Be Blocking Your Mortgage
Many consumers are unknowingly jeopardizing their chances of securing a mortgage due to unexpectedly high credit limits with “Buy Now, Pay Later” (BNPL) services like Klarna. A recent case highlighted by Norwegian media shows how a seemingly harmless shopping habit can translate into a significant financial hurdle when applying for a home loan.
The Klarna Credit Limit Surprise
Maria Svalastog, a senior financial consultant, was shocked to discover a pre-approved credit limit of 150,000 NOK (approximately $14,000 USD) with Klarna, despite never actively requesting it. This isn’t an isolated incident. Experts are warning that many individuals are unaware of the substantial credit lines accumulating through these services, which are then factored into debt-to-income ratios by mortgage lenders.
“It’s a hidden debt that people don’t realize they have,” explains Sindre Noss, Market Manager at Renteradar, a Norwegian loan comparison service. “A quick acceptance of a BNPL offer during online shopping can prevent you from getting the best mortgage rate, or even getting approved at all.”
The Rising Trend of BNPL Credit Limits
Renteradar’s data reveals a dramatic increase in Klarna credit limits among its 300,000 users. The average credit limit has surged from 7,000 NOK to 39,000 NOK in just over a year. This trend is fueled by Klarna’s practice of proactively offering credit lines to customers, often without a full understanding of the implications.
Did you know? Mortgage lenders are legally obligated to calculate your borrowing capacity based on the *maximum* potential debt, including unused credit limits. This means a high Klarna limit, even if untouched, can significantly reduce your approved loan amount.
Why Banks Are Concerned
Banks assess risk based on a borrower’s debt-to-income ratio. A high credit limit, even if unused, increases the perceived risk. With interest rates on BNPL services often exceeding 20%, the potential financial burden is substantial. This can translate to a reduction of up to 700,000 NOK (approximately $65,000 USD) in your potential mortgage approval.
The issue is compounded by the fact that many consumers don’t recognize BNPL credit as traditional debt. They view it as a convenient payment option rather than a line of credit that impacts their financial profile.
Klarna’s Response and the Regulatory Landscape
Klarna maintains that customers set their own credit limits within the platform, and that the company simply performs a credit assessment. Joel Hedin, Klarna’s press officer, emphasizes that customers can easily adjust or eliminate their credit limits through the app or website.
However, the situation prompted intervention from the Norwegian Consumer Authority (Forbrukertilsynet), which threatened Klarna with fines unless it complied with financial regulations requiring clear credit agreements. This led to Klarna implementing credit frames for customers using its payment deferral services.
Beyond Klarna: The Broader BNPL Risk
The issue isn’t limited to Klarna. Other BNPL providers are also offering increasingly generous credit lines, creating a similar risk for consumers. The ease of access and the perception of BNPL as “free money” can lead to a build-up of hidden debt that negatively impacts creditworthiness.
Pro Tip: Regularly check your credit reports from all three major credit bureaus (Experian, Equifax, TransUnion) to identify any unexpected credit lines or inaccuracies.
What Can You Do?
If you’re planning to apply for a mortgage, taking proactive steps to manage your BNPL credit is crucial:
- Reduce Your Credit Limit: Log into your Klarna (and other BNPL) accounts and lower your credit limit to the absolute minimum or zero.
- Pay Off Existing Balances: Ensure any outstanding BNPL balances are paid off before applying for a mortgage.
- Be Aware of the Impact: Understand that lenders will consider your unused credit limits when assessing your debt-to-income ratio.
- Disclose Everything: Be transparent with your mortgage lender about all your credit accounts, including BNPL services.
FAQ: BNPL and Mortgages
- Q: Does using Klarna affect my credit score?
A: Yes, Klarna reports to credit bureaus, and your usage (or unused credit limit) can impact your score. - Q: Will a zero balance on Klarna help me get a mortgage?
A: Not necessarily. Lenders consider the *available* credit limit, even if you haven’t used it. Reducing the limit is more effective. - Q: Are all BNPL services the same?
A: No. Different providers have different terms and conditions. Always read the fine print before using a BNPL service. - Q: What is a debt-to-income ratio?
A: It’s a calculation lenders use to assess your ability to repay a loan. It’s your total monthly debt payments divided by your gross monthly income.
Reader Question: “I just discovered a high credit limit on a BNPL account I rarely use. How quickly will lowering it impact my mortgage application?”
Generally, lenders will pull a fresh credit report closer to the closing date. Lowering your credit limit as soon as possible will likely be reflected in that report, but it’s best to do it well in advance of your application to allow for processing and reporting.
This growing trend highlights the importance of financial literacy and proactive credit management. Don’t let a seemingly convenient payment option derail your homeownership dreams. Take control of your BNPL accounts and ensure you’re presenting the strongest possible financial profile to lenders.
Explore further: Read more about the Norwegian housing market outlook on E24.
