Everyone loves immediate gratification. Get what you want today, and avoid paying for it until later.
At a cost, of course.
Credit cards have allowed consumers to do this for decades, but a growing number of buy now, pay later (BNPL) services have entered the market as an alternative. So how do the two models differ, and which one should you use, if any?
What Is Buy Now, Pay Later (BNPL)?
Buy now, pay later services offer short-term financing for consumer goods. You pay them back in installments over a short period of time, usually less than a year but up to four.
Most BNPL services require an upfront deposit, such as 25% of the purchase. Some come with a preset number of payments for the remaining balance. Others let you select from a range of payback schedules.
Let’s say your refrigerator goes kaput on you unexpectedly. You find a new refrigerator for $700 at the appliance store, but you don’t have $700 to spare in your checking account. So you use a BNPL service and put down $200 at checkout, agreeing to pay the remaining $500 over the next three months.
Some BNPL services don’t even charge interest when you choose a fast repayment plan.
Common BNPL services include:
Some, such as Affirm and PayPal, also offer credit or debit cards in addition to BNPL plans.
How Is Buy Now, Pay Later Different From Credit Cards?
Generally speaking, you can only use BNPL services to pay at retailers. You can pay with credit cards for virtually any cost, from gasoline to airfare to utility bills to even rent payments.
Credit cards also offer more flexibility for repayment. You can pay down your credit card balance at your own speed, although credit card companies typically charge high interest rates for any balance carried over from one month to the next. Most charge late fees if you don’t make the minimum payment on time.
In contrast, BNPL services often charge 0% interest. Some don’t even charge late fees.
Credit card companies sometimes charge other fees as well. These include balance transfer fees, annual fees, cash advance fees, and foreign transaction fees.
A credit card is a type of revolving credit, also known as a credit line. You pay down your balance then charge it up again as long as you don’t exceed your preset spending limit. A BNPL service is a fixed installment loan with a predetermined payment schedule, similar to a mortgage or auto loan.
Pros and Cons of Buy Now, Pay Later
Before choosing BNPL services over credit cards, make sure you understand the pros and cons of each.
Advantages of BNPL
When it comes to paying for retail goods, BNPL companies have several distinct advantages, including no hard credit check and the potential for fast approval.
- Fast Approval. When you create an account with a BNPL service, you often get prequalified instantly to pay with them. Then you simply pay with them when checking out at approved retailers.
- No Hard Credit Check. BNPL companies typically use a soft credit check to pull your credit report. This doesn’t ding your credit score the way that a hard inquiry does.
- Potential for Interest-Free Credit. While credit cards might offer a brief introductory 0% APR period, all start charging interest on balances eventually. Some BNPL companies offer true 0% interest options.
- Potential for No Fees. Moreover, some BNPL services don’t charge any fees at all, including late payment fees or prepayment penalties.
- Flexible Repayment Terms. Many BNPL companies offer a range of repayment schedules, from a few weeks to a few years.
Disadvantages of BNPL
Of course, buy now, pay later services come with their own downsides as well. Keep them in mind when opting for BNPL over a traditional credit card. And mind the typical risks of deferring payment as well, such as the risk of digging yourself into a hole of debt that you can’t easily climb out of.
- Not All Companies Accept BNPL. You can pay with a credit card almost anywhere. This isn’t the case with BNPL. If a particular retailer doesn’t accept BNPL payments, you’re out of luck.
- No Rewards. Many credit cards come with juicy rewards. These include travel reward cards, cash back reward cards, in-store reward cards, restaurant reward cards, and beyond. BNPL services generally don’t offer rewards programs.
- No Other Perks. Beyond rewards, credit card users often get other perks such as rental car insurance and airport lounge access. That’s not the case with BNPL.
- Potential for Interest. Depending on the service and plan you choose, you may pay significant interest on your purchase. The net cost could be comparable to or even higher than a traditional credit card.
- Downside Credit Reporting. Most BNPL providers don’t report monthly payments to the credit bureaus, which could improve your credit score over time. However, if you default on your BNPL loan, the lender may report your outstanding balance to the credit bureaus. This could harm your credit score and make it more difficult to qualify for credit in the future.
- Rigid Repayment Plan. When you pay with BNPL, you lock yourself into a rigid payment plan. You have no flexibility to pay your loan back more slowly if you hit a financial emergency.
The Verdict: Should You Choose Buy Now, Pay Later or Credit Cards?
Keep the following in mind as you decide whether to use a BNPL service or traditional credit card.
You Should Use Buy Now, Pay Later If…
Buy now, pay later is a better fit if:
- You Like Fixed Payment Schedules. Some people prefer fixed start and end dates. If you appreciate having exact installment payments due on specific dates, rather than the more open-ended repayment schedule typical of credit cards, BNPL is a better fit.
- You Have Trouble Opening a Credit Card. If you have weak credit or no credit history, you may have a hard time opening a credit card. You may find it easier to get approved for BNPL services.
- You Hate Late Fees. If you can’t abide by late fees, you’ll appreciate that some BNPL services don’t charge them. However, if you routinely fail to make your owed payments, you may have a deeper budgeting problem that you should fix first.
You Should Use Credit Cards If…
You might love BNPL services, but you can’t use them for every cost. Consider opening at least one credit card, even if you set it aside for emergency use only.
In situations where you do have a choice of payment method, credit cards are a better fit if:
- You Maximize Rewards. You can score free travel, meals, hotels, and cash back with reward credit cards. BNPL services rarely if ever offer rewards.
- You Can Actually Use the Perks. If you travel frequently, credit card perks like airport lounge access and rental car insurance are a real help. Opt for a credit card rather than a BNPL plan if you actually use these sorts of perks and they justify any annual fee you have to pay.
- You Consistently Pay Off Your Balance Each Month. For responsible consumers who pay off their balance in full each month, credit cards offer nothing but upside. You can come out ahead by earning rewards without actually paying a cent in interest. Just make sure you earn enough to offset any annual fee.
- You Want Extra Cushion for Your Emergency Fund. Your emergency fund can consist of more than just your savings account. I like to keep an unused credit card set aside as another resource I can fall back on in an emergency.
- You Want to Build Credit. Credit cards report to the three major credit bureaus, every month, good or bad. If you make payments on time each month, credit cards offer an easy way to build credit history. Just remember that if you don’t pay off your balance in full each month, you’ll have to pay interest charges.
Both Are Great If…
It doesn’t hurt to have both credit cards and one or two prequalified accounts with buy now, pay later services.
It’s possible that you’ll find both in the same package. Some credit cards have started offering built-in BNPL options, such as the American Express Plan It and Citi Flex Pay features.
If you can’t find a suitable credit card with built-in BNPL, consider the following scenarios where it helps to have both.
- The Seller Doesn’t Accept BNPL. Sometimes you don’t have a choice but to pay with plastic, even if you prefer BNPL.
- You Need Longer Than a Month to Pay Off a Large Purchase in Full. Carrying a credit card balance over from one month to the next means paying interest on it. If you put your everyday costs on a credit card but you know you’ll need longer than a month to pay off a one-time large purchase, you can opt for a BNPL service offering 0% APR.
- You Have a Retailer-Specific Card. You might love BNPL services but have one retailer you frequent that offers stellar rewards on their in-store card. You can use that card exclusively with that retailer for the rewards, while opting for BNPL elsewhere.
- You Have a Travel-Specific Card. Likewise, you might prefer BNPL for everyday purchases, but use a card for specific purchases like car rentals for the perks.
Even if you love buy now, pay later services, consider opening a credit card for the flexibility and credit reporting it offers. If you’ve had trouble qualifying for a credit card in the past, start with a secured credit card
As you research BNPL services, double check the interest rate, fees, payment schedule flexibility, retailer variety, credit requirements, and refund and exchange policies. You may discover that it helps to set up accounts with multiple BNPL companies to maximize the number of retailers you can use them with.
And regardless of whether you pay with a credit card or BNPL service, make your payments on time. Otherwise, you’ll find it’s much easier to spiral into debt than it is to escape it.