Should you be using “buy now, pay later” services instead of credit cards?
Buy now, pay later – aka “BNPL” – at a time. Popular providers like Affirm, Afterpay, and Klarna allow buyers to break specific purchases into predictable installments, and many consumers opt.
“The pandemic has really accelerated the use of buy now, pay later,” says Collin Czarnecki, who was behind a recent report by market research firm C + R Research on buying. now, pay later which revealed that 51% of consumers say they have used these services amid the COVID-19 crisis. âThere is a convenience factor associated with an increase in online shopping, so people have become more aware of that as well. “
Of course, credit cards are also convenient financing tools. And unlike BNPL, they can be used almost anywhere. But credit card balances accumulate until the cardholder pays them off, which means there is less predictability. And it’s the predictability of BNPL that seems to resonate with many consumers. Czarnecki’s report found that among BNPL users, 38% said it would eventually replace their credit cards.
Still, credit cards offer benefits that BNPL’s options have yet to match, such as rewards and reporting a positive payment history to credit bureaus. Card issuers are also increasingly offering their own versions of BNPL.
Here are the questions to ask when weighing buy now, pay later options against credit cards.
How much financing flexibility do you need?
The C + R Research report found that 45% of BNPL users said they think it is easier to make payments this way compared to credit cards, and 44% said they thought it offered more flexibility.
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âIf you have a credit card, you have to pay at least the minimum payment at the end of the month, but with buy now, pay later, you might have a three, five, or 12 month option,â Czarnecki explains. . âYou can set up payment in a number of ways that are convenient for you. “
Casey Merolle, managing director of the payments group at consulting firm Accenture, says this type of mental accounting is easier for some consumers.
âPeople feel like they have more control over their payments. â¦ It’s a limited purchase and not renewable or open, âshe says. âThen you pay and it’s over. It helps people control their spending a bit more. It also gives people who don’t have a credit card a new financing option, she adds.
But flexibility is in the eye of the beholder.
BNPL options only apply to a specific purchase from a specific merchant, while credit cards can generally be used anywhere to make many types of purchases.
In short, BNPL may offer more flexible terms, while credit cards will generally offer more flexible acceptance.
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How expensive and accessible will the funding be?
BNPL’s interest rates and fees vary widely. Some options bear no interest or fees, making it essentially free financing for the consumer. (BNPL providers still make money on merchant fees embedded in the product price, just as payment networks do on interchange fees for credit cards.)
âThey have a fixed cost or no cost and are very clear in showing you how much it will cost,â says Ginger Schmeltzer, senior analyst for Aite Group’s retail banking and payments practice. âPeople like its predictability,â she adds.
The longer-term loans offered by BNPL – which can last up to 48 months – typically carry an interest rate, she says, much like a traditional personal loan. But unlike a loan or credit card, many BNPL providers don’t check credit when approving buyers, making it easier to access finance.
Credit card issuers, on the other hand, will almost always withdraw your credit when you apply, so depending on your credit scores, this may not be an option for you. If you already have one and plan to use it to finance a purchase, be aware that credit card interest rates are generally variable and tend to be quite high.
But it’s important to note that if you pay your credit card bill in full by the due date, the card’s annual percentage rate is irrelevant; you will owe no interest.
Nerdy tip: Some credit cards have introductory 0% APR offers on purchases, but most of those promotional periods end at around 18 months, and you’ll typically need good to great credit – FICO scores of 690 or more – to benefit from it. You will also still need to make minimum payments each month or risk losing that promotional APR.
Do you want incentives or convenience?
When you use a credit card to make purchases, you can earn cash back, points, or miles. If you have good credit, you can find a card that gives you at least 2% cash back on every purchase, which can mean big savings. Credit cards also usually come with other benefits, such as purchase protection and insurance.
BNPL providers do not offer these kinds of rewards or protections, nor do they always offer the credit score benefits of credit cards.
“Most [BNPL providers] do not report to the credit bureaus in order to [consumers] can’t build that story, âsays Schmeltzer, although she adds that some vendors are starting to do so.
But there is clearly an intuitive aspect of BNPL that some consumers – and even some experts – find attractive compared to credit cards. When Czarnecki recently bought furniture after a move, he chose to finance the purchase with buy now, pay later.
âIt sounded really user-friendly,â he says. âI could click on it from the cart and knew the approval process would be immediate. “
He also found it easier from a budget perspective. âI know exactly how much I have to pay, as opposed to a credit card, where I could also have a tank of gas and groceries that add up,â he adds.
He was willing to forgo rewards for the convenience.
See: 8 tips to maximize your credit card rewards
Does your credit card issuer already offer their own buy now, pay later version?
Before jumping on a BNPL offer, you might want to check out what’s currently in your wallet. Credit card issuers – who are watching BNPL’s growth closely – are increasingly offering their own versions of predictable payment plans for certain purchases.
Availability varies by issuer, and fixed monthly conditions and charges may also apply, depending on functionality. But some examples include:
The Plan It feature, from American Express. AXP,
My hunting plan, from Chase. JPM,
Citi Flex Pay, by Citi. CIT,
Upgrade Starter Issuer Credit Cards.
Unlike BNPL, these types of plans are post-purchase. âSo it’s different, but it’s worth checking what’s available to you, as it might offer more flexibility,â says Schmeltzer.
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Kimberly Palmer writes for NerdWallet. Email: [email protected] Twitter: @kimberlypalmer.