Buy Now, Pay Later vs. Credit Cards, Which Should You Use?
Buy Now, Pay Later and credit cards are popular options for online purchases. Each has advantages depending on the consumer's budget and credit experience.
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Buy Now, Pay Later (BNPL) financing has exploded in popularity over the past few years– shoppers have embraced the option to split purchases into multiple payments. Even traditional credit card issuers have started offering installment payments as an option. Choosing between BNPL and a credit card can be tough, especially since both have appealing features. Here are a few things to consider:
Buy Now, Pay Later Pros and Cons
Instead of paying for purchases in full when you checkout, Buy Now, Pay Later allows you to break your purchase amount into a short installment plan. Your first payment is typically due the day of your purchase and the remaining payments are spread over several weeks. Usually there's no credit check and the application process is relatively quick and easy. You get a predictable, short repayment plan and in many cases, there's no interest.
Since your purchase is broken up into just a few payments with BNPL, your installment payments will be higher. For instance, a $1,000 purchase with four bi-weekly payments is $250 every two weeks or $500 for two months. It's important to be sure you can afford the payments before committing. Note, if you don't make your payments on time or fail to pay off your balance before the interest-free period ends, you could get hit with big late fees and interest charges.
One of the downsides of BNPL is that it offers fewer consumer protections, like the ability to dispute a transaction. The industry is relatively new and isn't regulated so payment terms aren't standard across the industry. You have to carefully read the terms of each provider to understand pricing, interest, repayment, etc.
Keep in mind that BNPL providers may report to credit bureaus, so your account history can impact your FICO® Scores. Initial findings from a recent FICO study reveal that while the change was small, on average, people tend to lose a few points when newly opened BNPL accounts reported as installment loans are included in credit data. The impact might be more pronounced if you have fewer than four accounts on your credit file or shorter than three years of credit history. (Note that this can also be the case when opening other types of credit, including credit cards!)
BNPL Compared to Credit Cards
A credit card gives you more time to pay and more places for using your card. Using a rewards credit card allows you to earn rewards that you can accumulate and redeem for flights, hotel stays, cash in your bank account and more depending on your credit card's rewards program. Some cards offer additional perks like rental car coverage, extended warranty, purchase protection, and trip cancellation insurance.
Rather than requiring a set monthly payment, credit cards offer the flexibility to make minimum payments towards your balance. However, unless you're under a 0% APR promotion, you'll be charged interest anytime you carry your balance from month to month. Interest rates vary and your exact interest rate could be high depending on your credit risk and the card you choose.
Opening a new credit card isn't as simple as taking out a BNPL loan. You have to complete an application and go through a credit check, which could slightly impact your FICO® Scores because of the associated inquiry posted on your credit report. Many credit card issuers can approve your application right away, but you may have to wait for your card to arrive in the mail before you can use it.
BNPL has become so popular, several credit card issuers now offer installment financing for select purchases. Options vary by credit card, but most set a minimum purchase amount and a flat fee to participate. You may have the option to finance for longer, e.g., 18 or 24 months. However, since most plans charge a fee, you won't save money by using your credit card, but you do get the other perks of using your card.
Which Option Should You Choose?
Both options have their advantages and disadvantages. BNPL could be convenient when it comes to small, short-term purchases but come with fees if you don't repay, while credit cards offer more flexibility for larger purchases, plus the opportunity to earn rewards, as long as you're ok with the interest cost. It's important to remember that credit cards and some BNPL accounts can get reported to the credit bureaus, so do your best to pay on time to positively impact your FICO® Scores.
Regardless of which option you go with—and you might use both for different types of purchases—tracking how much debt you're taking on is important to avoid getting overloaded.
LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.