When you hit the checkout counter, you may have the option to pay with a credit card, debit card, or buy now, pay later (BNPL). If you’ve never used a BNPL service, you might have some skepticism about how these consumer loans work and whether or not the terms are favorable compared with other financing options like a traditional credit card.
Recent studies suggest that many consumers have hopped on the BNPL bandwagon.
According to a report by the Consumer Financial Protection Bureau (CFPB), between 2019 and 2021, the number of BNPL loans originated in the U.S. by the top five lenders grew by 970%.
But which payment method should you use, and when does it make more sense to use a credit card vs. BNPL?
Buy now, pay later—explained
BNPL or buy-now, pay-later platforms make it easier for consumers to finance purchases over time by breaking the overall cost into smaller installments. The terms of these installments vary by platform, but typically can range anywhere from a few weeks to a year or longer.
The catch: These installment loans often come with interest and fees. The service may base this off of your credit profile, although some services have a flat rate for fees and APRs.
Merchants will typically partner with one or multiple BNPL services and offer it as a payment option at checkout. Consumers will be redirected to the given platform’s website and learn more about their financing options after filling out key information about themselves and their credit history. In many cases, the platform will use this information to perform a soft credit check (which doesn’t impact your credit score) to determine whether or not to approve you for a line of credit and determine your credit limit, APR, and more.
“Many merchants will offer customers a choice of payment options. There are various factors that a consumer may consider when choosing between a credit card and BNPL, including the item being purchased, the consumer’s desired repayment period, and the consumer’s credit history,” says Florin Arghirescu, Chief Product Officer at Synchrony, a consumer financial services company.
BNPL vs. traditional credit cards
BNPL services differ from traditional credit cards in a few key ways.
- BNPL platforms break payments down into installments. Credit cards are a form of revolving debt. When purchasing using a BNPL service, you’re typically approved on a purchase-by-purchase basis. Whereas a traditional credit card gives you a revolving line of credit. If you plan to finance purchases outside of this one-time purchase, a credit card can make it easy to manage repayment. Moreover, BNPL may only be available for certain purchases made from merchants who offer it as a service—a credit card can be used virtually anywhere credit cards are accepted.
- Credit cards can help you build credit—a BNPL service may not impact your credit. All credit card issuers report your payment history to the major credit reporting bureaus. While BNPL services can do the same, many do not. This may be a relief for consumers with a track record of late payments, but consumers who make on-time payments likely won’t see this reflected on their credit report. "Consumers will begin to see BNPL tradelines that are reported to Experian on their credit reports later this year as BNPL providers implement processes to report their data. Our preliminary research shows that including all BNPL account information on consumer credit reports can negatively impact their credit scores because of the way inquiries, new tradelines and utilization rates are reflected in credit score models. With this in mind, while BNPL information will be included on consumer credit reports if it is reported to us, this information will not be factored into consumer credit scores," says Rod Griffin, senior director consumer education and advocacy at Experian.
- Credit cards may offer perks and rewards that BNPL services do not. One of the reasons many consumers lean on credit cards isn’t solely to have access to more capital, but to rack up rewards, points, and cash back that can save them money in the long run.
- Some BNPL services offer interest-free periods, but isn’t always the case. Interest works a little differently for both of these payment methods. If you’re using a credit card, you won’t pay interest on your purchases if you pay your balance in full each month. BNPL services may charge interest from the start. Certain platforms do offer an interest-free period, but this highly depends on your platform.
How to choose a payment method
If you’re unsure whether to use BNPL or a credit card to finance your purchase, there are a few key questions you may want to ask yourself to determine the appropriate payment method.
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What are you purchasing? If you typically don’t rely on a credit card and want to finance a singular purchase, a BNPL service may not be a bad option. Depending on the size of your transaction, it may not be worth adding a new credit card to your credit profile. However, a credit card may give you a higher credit limit and greater payment flexibility if you plan to finance purchases regularly or make a larger purchase.
“Credit cards can be a great tool for everyday purchases, as well as larger ticket purchases where the consumer may need a larger credit line or prefers to pay for the purchase over time,” says Arghirescu. “Think about buying a couch and then a lamp and the end table. Having an open line of credit is more seamless for the consumer. In addition, many credit cards offer cash back or points that can be very rewarding for consumers, and certain credit cards also offer promotions, which may enable a consumer to make a transaction subject to reduced or no interest.”
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Are you working on boosting your credit score? Many BNPL services do not report payment information to the credit bureaus. So, if your end goal is to bump up your credit score, responsibly using a credit card is more effective. "When used responsibly, traditional credit cards can be an effective tool for building credit. It’s best to pay off your balances in full each month if you can. The responsible use of credit cards can help you build your credit history and increase your credit scores over time," says Griffin.
This is not the case for all BNPL platforms, be sure to double-check with the platform you’re considering using. Arghirescu does note that, unlike a traditional credit card, BNPL services only require a soft credit check for approval, unlike the hard inquiry that follows a new credit card application. - What does your repayment timeline look like? Credit cards don’t set a time limit on how long you have to repay an item. You’re only held to your monthly minimum payment, whereas a BNPL has very strict repayment terms. If you prefer a longer-term financing solution, consider a credit card.
- What are your approval odds? According to the CFPB, the approval rate for BNPL services stood at 73% in 2021. The overall approval rate for most general-use credit cards sits closer to 40%. Remember, each credit card issuer has its own criteria for approval, so you may still be approved for a credit card even if you have less than stellar credit. Still, your odds of approval may be lower with a credit card than it would be with a BNPL service.
- Are you pre-approved for a store card? BNPL loans may offer fast approval and have a lower barrier to entry. However, it’s not uncommon for interest rates on these consumer loans to surpass the 30% threshold. In comparison, retail cards have an average annual percentage rate (APR) of 26.72%. This is still higher than general use credit cards, but is significantly lower than most BNPL services, gives you a longer repayment timeline, and may come with discounts or rewards.
The takeaway
Ideally, having the cash on hand or in your checking account to cover a purchase would save you the headache of repaying an installment loan. In some instances, spreading out a purchase over time with a credit card or BNPL makes the most sense. It can make it easier to afford the things you want, without putting a massive dent in your monthly budget.
Relying on a BNPL service comes with its own risks in the form of fees and high interest rates. Before you use BNPL as a payment method, consider the potential downsides and weigh whether or not an alternative payment option makes more sense for you.
