Shopping and payments service Klarna will start to report the use of buy now pay later (BNPL) products to UK credit reference agencies from June.
It will report consumer purchases paid on time, late payments and unpaid purchases for "pay in 30" and "pay in three" orders made on or after June 1 to Experian and TransUnion.
Klarna said the move will protect customers and provide the industry with greater visibility of BNPL use, helping to improve affordability assessments.
Alex Marsh, head of Klarna UK, said: "It is alarming that UK consumers are still being forced to take out high cost credit cards to demonstrate they can use credit responsibly and build their credit profile.
"That will start to change on June 1 this year as the vast majority of the 16 million UK consumers who make Klarna BNPL payments in full and on time will be able to demonstrate their responsible use of credit to other lenders."
While reporting on the use of BNPL products will be reflected on consumer credit files from June, it will not initially impact upon UK consumer credit scores as this requires further updates to scoring mechanisms, Klarna said.
Does Klarna work for you? Get in touch: mirror.money.saving@mirror.co.uk
It said other changes previously announced include updated text at checkouts to make it clear that BNPL options are credit products, with consequences for missed payments, and the introduction of an internal complaints adjudicator.
Concerns have been raised about the rapid growth in popularity of BNPL firms generally. While BNPL products can help people avoid paying interest on their borrowing, people may rapidly build up debts through using them as an option at online checkouts.
The Woolard Review previously found the use of buy now pay later products nearly quadrupled in 2020, amounting to £2.7billion.
In February, the Financial Conduct Authority said some BNPL firms had agreed to change the terms in their customer contracts to make them fairer and easier to understand.
The UK Government plans to change the law to bring some forms of unregulated BNPL products into FCA regulation.
Jenny Ross, Which? Money editor, said: "Using buy now pay later is an easy and convenient way to pay for millions. However, with currently little to no information or warnings about the risks of incurring late fees or getting into debt, it raises concerns that many shoppers do not fully understand the products they're using.
"BNPL providers' move to work with credit reference agencies to report customer BNPL usage and missed payments is a step in the right direction, as it could help mitigate the risk of consumers taking on more BNPL credit than they can afford.
"However, this does not remove the urgent need for Government regulation of all BNPL firms to follow as quickly as possible to ensure users are properly protected."
What are buy now, pay later providers and what's the problem exactly?
'Buy now, pay later' plans allow you to buy items and pay for them later - usually within 30 days without interest or any hidden charges.
Around £2.7billion has been spent on them in the past year - essentially debt that's been mounting up off the record.
It's available on hundreds of retailer websites and counting - from Asos to Halfords.
Worryingly, shoppers can take out multiple agreements with different providers and there are no affordability checks - which means no one is checking you can afford the debt, first.
If you cannot repay, your credit file will be marked and your score affected.
Debt charities and campaigners have argued that advertising these payment options via social media, often through influencers, has glamorised debt. They say it's targeting naive twenty-somethings.
They also suggest the services can make it too easy to fall into debt unaffordable borrowing.
Sarah Coles, finance analyst at Hargreaves Lansdown, said customers need to be aware of the "hidden dangers".
"Buy-now-pay-later has mushroomed in the shadow of the pandemic, and millions more people have taken on these debts," she said.
"The health crisis means millions of people are living on less, and looking for ways to spread their money further. Meanwhile, many of them have been stuck at home, where the temptation to go online shopping has been overwhelming.
"The fact this borrowing is interest-free makes it feel safer, but there are inherent dangers. Fewer checks on borrowers mean a bigger risk people are taking on debts they won't be able to manage. If shoppers can’t afford to make payments, they may have to make late payment fees, and will start carrying arrears."
