Klarna says its new card will help customers avoid credit-card debt - but the interest rate could be up to 34% in some cases

By Zoe Han

The buy-now-pay-later provider says its new card isn't a credit card, but that doesn't mean it won't charge interest

A popular buy-now-pay-later provider is offering a new card that it's calling a "welcome alternative to high-cost credit cards with hidden fees." But the new Klarna Card comes with risks, experts say - including what one consumer advocate called a "dangerous" 33.99% interest rate in some instances.

Klarna, the buy-now-pay-later company from Sweden, announced Wednesday that it will soon offer a "new and improved" Klarna Card to U.S. customers. Similar to a card Klarna previously introduced in Sweden, Germany and the U.K., the U.S. version will let users make purchases in stores where Visa (V) is accepted.

As long as a customer pays off their balance in full each month, no interest is charged. But if a user wants to pay off their purchase over time in three to six monthly installments, or delay paying for a purchase until the next month, the Klarna Card will charge an interest rate ranging from 14.99% to 33.99%, a Klarna representative told MarketWatch.

Klarna Card users will only pay interest on the payments they choose, instead of on the entire statement balance as with traditional credit cards. The interest doesn't compound over time, and each purchase can only be split or "extended" once.

Though the Klarna Card sounds much like a credit card - it has the Visa logo on it and it's issued by WebBank - it should not be seen as a credit card, and it's not a traditional buy-now-pay-later service either, a Klarna representative told MarketWatch in an email.

"Unlike many traditional credit cards, the Klarna Card is transparent with no hidden fees [and] gives consumers increased payment options, flexibility, and cashback when they use the card in our app, meaning they have a smarter way to manage their finances," Sebastian Siemiatkowski, co-founder and chief executive of Klarna, said in a statement.

The Klarna Card comes with some perks typically offered by credit cards, including 10% cash back when card holders use it in the Klarna app. It has no annual fee.

Klarna is among the major buy-now-pay-later providers. The company is best known for providing no-interest, four-installment payment plans that allow shoppers to pay off a purchase over the course of several weeks. Buy-now-pay-later was initially considered the domain of younger consumers with lower incomes and poor credit, but 39% of Americans have used buy-now-pay-later services, and users now come from all income levels, a recent Bankrate survey showed. It's most popular among millennials.

In announcing its new card, Klarna referenced record-high credit-card debt in the U.S., and said its new card offers users a "healthier and more sustainable option" that promotes "responsible spending without the pitfalls of traditional credit cards."

When will Klarna Card customers be charged the 33.99% interest rate?

The interest rate when card users choose to "extend" or split up their purchases over time will range from 14.99% to 33.99%, a Klarna representative told MarketWatch in an email. The card's interest rates could be subject to future changes once the card goes live; at the moment, consumers can sign up for the Klarna Card on a wait list.

While Klarna is positioning the card as an alternative to "high-cost" credit cards, consumer watchdogs and credit-card analysts are doubtful about that claim, given the maximum 33.99% interest rate.

"I'd be hard-pressed to come up with a scenario when it makes sense to pay 33.99% APR for any length of time," said Ted Rossman, a senior industry analyst at Bankrate specializing in credit cards.

The maximum rate on the Klarna Card is unusually high. The average interest rate on a traditional credit card was 24.66% as of April 8, according to a LendingTree analysis. Your credit card's interest rate depends on your credit score; for people with "really crummy credit," the average was 28.15%, while for people with "really good credit," the average was 21.16%, LendingTree found.

Klarna did not immediately respond to MarketWatch's question on which users will be subject to the 33.99% interest rate.

The 30% APR level has traditionally been a line that credit-card companies have been hesitant to cross, according to LendingTree. But that's changed in the last year following a series of rate hikes by the Federal Reserve, which has seen the share of credit cards with rates of 30% or higher grow.

"This sounds potentially very dangerous," said Teresa Murray, director of the U.S. Public Interest Research Group's Consumer Watchdog office, referring to the Klarna Card's maximum 33.99% rate. It's higher than most credit-card penalty rates - the interest rate that credit-card companies charge when a card holder skips a few payments - that Murray has heard of in recent months, she told MarketWatch.

"Is there a time and a place where this transaction might make sense? Maybe. Not often," she noted. Such a high rate would only make sense in the case of emergency purchases, such as for a prescription, a refrigerator or tires for your car, Murray said.

But it's also true that Klarna's card could create an opportunity for people to avoid racking up ever-increasing credit-card debt, said Melissa Lambarena, credit cards expert at NerdWallet.

Credit-card debt can be hard to pay down because the interest compounds, meaning the debt becomes bigger and bigger at the end of each cycle. The Klarna Card does not allow revolving credit for either the pay-in-installments option or the pay-later option - meaning that users can't carry a balance on an ongoing basis, and the interest rate does not compound.

"Unlike traditional credit cards, these options create a hard stop to cycling the same debt over and over again," Lambarena said.

Over half of buy-now-pay-later users say they have experienced problems while using the service, according to the recent Bankrate survey. Overspending is one of the most common problems, the survey found.

Some buy-now-pay-later providers offer longer-term loans that charge interest rates, and a rate of close to 34% is not unheard of.

The Klarna Card comes with no hidden fees, according to the company. If a card user is more than 10 days late paying their bill, Klarna will charge them a late fee of no more than $7. After multiple late payments, they could eventually be restricted from using the service, Klarna said on its website.

How will the new Klarna Card affect your credit score?

Some shoppers say they prefer buy-now-pay-later because they believe it will improve their credit score - but experts say that's not necessarily the case.

At the moment, there is no set timeline for when the new Klarna Card will report customers' payment histories to credit bureaus, according to a Klarna spokesperson. In an email, the spokesperson said the company hopes to report customer activity to credit bureaus in the future. The equivalent British version of the card reports to Experian if a user misses payments.

Because buy-now-pay-later providers don't consistently report to credit bureaus, consumer advocates have expressed concerns in the past that users could be racking up debts that they cannot afford to pay back. Banks and credit bureaus don't have the full financial picture for those users, said Adam Rust, director of financial services at the Consumer Federation of America.

Two recent reports by the New York Fed found that "financially fragile" people are more likely to use buy-now-pay-later services, and that they are also more likely to use it for smaller purchases. People who have a credit score below 620, have been declined for a credit application in the past year, or have fallen 30 or more days delinquent on a loan in the past year are more likely to use the service akin to a credit card to make medium-sized, out-of-budget purchases frequently, the reports found.

While services offered by buy-now-pay-later providers can be helpful for coping with higher prices brought on by inflation or for covering emergency expenses, users should be aware of the potential drawbacks and learn to be savvy about them, said Teri Williams, president and chief operating officer of Boston-based OneUnited Bank, the largest Black-owned bank in the U.S.

It's crucial to read the disclosures and figure out exactly what will happen if a customer fails to pay back their purchases, Williams told MarketWatch. Buy-now-pay-later services are not always clear about disclosing late fees and interest, and it can be confusing for borrowers to determine which ones have such charges and which don't, a report by Consumer Reports found.

It's also important for people to understand how a buy-now-pay-later service compares to other financial products like credit cards in the context of reaching their personal-finance goals, Williams added. For example, buy-now-pay-later services are a less useful tool than secured credit cards for those looking to improve their credit scores.

"In my community, the main focus should be on rebuilding credit, but buy-now-pay-later doesn't help you do that," she told MarketWatch.

-Zoe Han

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04-20-24 0600ET

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