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Buy Now Pay Later vs. credit cards

Learn the differences between Buy Now Pay Later (BNPL) and credit cards

woman holding phone and looking at craft items on a desk
If you shop online, then chances are you’ve seen an option for a Buy Now Pay Later (BNPL) plan at checkout. So what is Buy Now, Pay Later, and how does it stack up against other payment methods?

What is Buy Now, Pay Later?

Buy Now, Pay Later (BNPL) plans – also known as “installment payment services” – allow you to break up a purchase into smaller payments over a set period of time. To be eligible for a BNPL plan, you must be at least 18 years of age, have access to a debit/credit card or bank account, and be willing to submit to a soft credit inquiry. Once you make a BNPL purchase, the cost is typically split into four equal installments due every two or four weeks, with little or no interest charged.

Let’s say you’ve just discovered you need a new winter coat, but it will cost you $300, which will uncomfortably stretch your budget. But if you choose to pay for that coat using a BNPL service, your grand total is split into four equal payments of $75 that are due every four weeks (depending on the terms of the BNPL service). As long as you make each payment in full and on time, BNPL can be a great tool for spreading out large expenses.

What are the benefits of BNPL?

  • Convenience: Take out a loan with a click of a button as you check out.
  • Quick approval: Be approved within seconds rather than days or weeks.
  • Soft credit pull: BNPL takes a soft credit inquiry, so your score isn’t negatively affected like a hard credit inquiry.
  • Zero-interest financing: As long as all payments are made on time, you can avoid interest charges.
  • Auto-pay: You can set up auto-pay to avoid missing payments.

What are the risks of BNPL?

  • Fees: If you miss a payment, you might be charged a fee.
  • Returning items gets difficult: Return policies vary across plans. In some cases, the retailer has to credit your lender if you return an item, while other retailers simply don’t allow you to return online-bought items in-store. Affirm, for example, requires shoppers to request a refund from a vendor while still making payments until the return is approved.
  • Impulse spending: Not having to pay immediately may make it easier to buy more than you can afford. The same risk applies to credit cards as well.
  • Each BNPL plan is a separate payment: If you take on multiple BNPL plans at once, it can be hard to know how much you have outstanding at once and to keep track of your ongoing payments.

Is BNPL similar to a credit card?

Credit cards and BNPLs both allow you to make quick payments at a merchant and pay the amount back over time. However, there are some important nuances between the two that are helpful to note before you purchase using a credit card, BNPL, or a combination of both. 

Credit cards, like BNPL plans, allow you to avoid paying interest on purchases if you pay within a specified amount of time. Credit cards call this time the “grace period,” which typically lasts until your next due date. If you don’t pay the entire amount before that time, you’ll begin to accrue interest on any outstanding amount. It’s important to understand that your credit card payment will go first to any outstanding balances from previous statements. If you don’t pay your entire balance each month, you will pay interest on your purchases.

Like BNPL plans, if you are late on a credit card payment, you’ll pay late fees and possibly a higher interest rate on your outstanding balance. In addition, your credit score could take a hit, as your credit card payment history will be reported to one or more of the national credit bureaus.

Many BNPL companies don’t report BNPL payment histories to the credit bureaus. While this might seem like a good thing if you miss a payment, if your on-time payments aren’t being reported, they aren’t helping to improve your overall credit score.

Why choose a credit card over Buy Now Pay Later?

  • Near universal acceptance: Credit cards from the major card providers (Mastercard, Visa, Discover, American Express etc.) are accepted at most merchants in the U.S. and around the world. Chances are, if you have an available credit limit, you’ll be able to make your purchase.
  • Rewards: Many credit cards offer you rewards for making purchases. Whether that’s points for merchandise or travel or cashback, when you buy on your credit card, you’re getting a type of rebate for your spending. Be sure to research rewards cards before you use them, as they may have higher interest rates and annual fees than non-rewards cards.
  • One place to pay: When you buy something on your credit card, the purchase amount is added together with your other purchases to make one consolidated balance. That makes it easier to track how much you owe, when your payment is due, and where to send it.
  • Purchase protection: When you make a purchase using a credit card, you can dispute charges if the purchase wasn’t as advertised or you didn’t receive it. You also aren’t held responsible for unauthorized charges. That is not necessarily true for BNPL plans.

BNPL plans can effectively spread out the financial impact of a large purchase, but make sure to take a good look at the exact costs involved – including any potential fees or penalties – so you can make the best decision on how to pay off your purchases. It’s always wise to make sure you’ll be able to pay off your BNPL balance on time so you can avoid interest charges and late fees. As an alternative, several credit cards have special offers for new cardholders, including introductory Annual Percentage Rates (APR). First Tech offers credit cards with an introductory APR for 12 billing cycles.

Check out our financial calculators and start crunching numbers on interest rates so you can see how much using a credit card might cost as you pay over time.

We can help you understand when you should use a BNPL plan or a credit card for your purchases. We can also help you create a sustainable budget and payment plan, so you can get in control and stay in control of your finances. To learn more, schedule a free consultation.

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