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Inside Klarna
Jun 30, 20215 min read

Understanding the true cost of “traditional” credit.

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by Klarna

UK consumers are skipping the fine print and getting hit by unexpected credit-card charges. Fortunately, shoppers are exploring payment alternatives that offer low- and no-cost flexibility. 

Ignorance is not bliss when it comes to credit cards. Despite their having been around for more than half a century and in wide use, many consumers don’t really understand how credit cards work or how much they charge. Over a quarter of UK consumers do not know how much interest their credit-card charges, according to Klarna’s quarterly report on shopping and money management trends. 

To be fair, few people read all the fine print when they sign up for a service of any kind. In 2017, thousands of people inadvertently committed to 1,000 hours of community service when they enrolled for free Wi-Fi as part of a stunt to raise awareness on reading policy documentation. This goes to show how important providing clear and simple information at the point of decision can be, rather than relying on consumers reading full terms and conditions. Indeed, almost 60 per cent of UK consumers would rather go to the dentist or do household chores than read their credit card’s fine print or work out the cost of its annual percentage rate (APR) of interest, according to the latest findings in May’s global Pulse report. Somewhat at odds with this, a majority also say they are highly interested in personal finance.

Unsurprisingly, some of these people are getting fleeced. The majority (66 per cent) of Brits own at least one card and 23 per cent of those surveyed have been hit by unexpected charges. Another 15 per cent repay only the minimum each month, racking up charges at vertiginous interest rates every month. Credit cards are more widely used by older generations, putting them especially at risk of high charges. 

The good news, for consumers at least, is that the use of credit cards is waning. British households repaid billions of credit-card debt and other consumer loans last year as they cut back on spending during the Covid-19 crisis. Yet credit-card borrowing remained weak in May. This trend away from credit-card borrowing pre-dates the pandemic. Growth in credit-card lending has lagged other forms of credit over the past decade, according to analysis by Capital Economics

The shift towards online shopping is continuing, even as lockdown movement restrictions recede. Almost half of UK consumers shop online at least once a week, up 26 per cent from the first quarter of the year, according to the Klarna research. Online buyers are also diversifying their payment methods in ways that help manage their finances, including using buy now, pay later (BNPL) products. This payment method allows consumers to spread the cost of purchases across interest-free instalments, and in Klarna’s case, no late fees. It has been used by over a quarter of those surveyed. BNPL accounted for nearly 4 per cent of online retail sales in 2020 and its use more than trebled in volume last year. 

One of BNPL’s main attractions is its flexibility, making it easier for customers to try products and only pay for the ones they keep. Another benefit is that it is interest-free. A quarter of those who have not used BNPL assumed it attracted high interest, when the reality is that it saved Britons an estimated £76m in credit-card interest last year alone. 

With BNPL, it is the merchants – not the consumers – that pay the fees, making it easier to see the real cost of a purchase. This is especially true of Klarna’s BNPL products, which charge no interest or fees. What’s more, Klarna’s approach to granting credit – performing a robust eligibility assessment on every single transaction, including a soft credit check, and only granting small amounts of credit for individual purchases – offers further protections for consumers. This approach stands in contrast to the credit-card practice of offering large credit lines with just one upfront check.

UK consumers are getting their mojo back, as shoppers hit the high street after the easing of restrictions. Though the spread of new Covid-19 variants and the threat of inflation have dented the rise in consumer confidence, UK consumers are generally optimistic about their household finances. Many believe these will continue to improve over the coming year, according to the Klarna report. Understanding the true cost of traditional credit – and using alternatives like BNPL – will help them realise that hope.