Buy Now, Pay Later vs. Credit Cards: Which Is Right for You?
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Buy now, pay later — aka "BNPL" — is having a moment. Popular providers like Affirm, Afterpay and Klarna allow shoppers to break up specific purchases into predictable installments, and plenty of consumers are opting in.
“The pandemic really accelerated the use of buy now, pay later services," says Collin Czarnecki, who was behind a recent report by market research firm C+R Research on buy now, pay later that found that 51% of consumers say they used such services amid the COVID-19 crisis. "There’s a convenience factor coupled with an increase in online shopping, so people became more aware of it, too."
Of course, credit cards are convenient financing tools as well. And unlike some BNPL services, they can be used almost anywhere. But credit card balances accrue until the cardholder pays them off, meaning there's less predictability. And it's BNPL's predictability that seems to resonate with a lot of consumers. Czarnecki's report found that among BNPL users, 38% said it will eventually replace their credit cards.
Still, credit cards offer benefits that many BNPL options have yet to match, such as robust rewards and insurances, as well as the reporting of positive payment history to the credit bureaus. Card issuers are also increasingly offering their own versions of BNPL.
Here are questions to ask when weighing buy now, pay later options against credit cards.
What kind of financing flexibility do you need?
The C+R Research report found that 45% of BNPL users said they thought it was easier to make payments that way compared with credit cards, and 44% said they thought it offered more flexibility.
“If 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," Czarnecki says. "You can set up the payment in different ways that work for you.”
Casey Merolla, a managing director in the consultancy Accenture’s payments group, says that kind of mental accounting is easier for some consumers.
“People feel they have more control over their payments. ... It’s a finite purchase and not revolving or open-ended," she says. "Then, you pay it off and it’s over. That helps people control their spending a little 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.
In some cases, BNPL options might apply only to a specific purchase from a specific merchant, while credit cards can generally be used anywhere to make many types of purchases. Plus, many credit cards now come with features that work like BNPL, meaning they, too, allow you to pay off individual transactions over a set number of fixed payments. More on that below.
How costly — and accessible — will the financing be?
BNPL interest rates and fees vary widely. Some options carry no interest or fees at all, which essentially makes it free financing for the consumer. (BNPL providers still make money on the merchant fees baked into the price of the product, much like payment networks do on interchange fees for credit cards.)
“They have either a fixed cost or no cost and are very upfront about showing you how much it will cost,” says Ginger Schmeltzer, a senior analyst for Aite Group’s retail banking and payments practice. “People like the predictability of it,” she adds.
Longer-term loans offered through BNPL — which can last up to 48 months — do typically carry an interest rate, she says, much like a traditional personal loan. But unlike a loan or a credit card, many BNPL providers don’t check credit when approving shoppers, which makes access to financing easier.
Credit card issuers, on the other hand, will almost always pull your credit when you apply, so depending on your credit scores, it may not be an option for you. If you already have a credit card and are considering using it to finance a purchase, be aware that credit card interest rates are usually 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, then the card's annual percentage rate is irrelevant; you'll owe no interest at all.
Some credit cards feature 0% intro APR offers on purchases, but most of those promotional periods top out at around 18 months, and you'll generally need good to excellent credit — FICO scores of 690 or higher — to qualify for them. You'll also still have to make minimum payments every month or risk losing that promo APR.
Do you want incentives or convenience?
When you use a credit card to make purchases, you can earn valuable cash back, points or miles. If you have good credit, you can find a card that gives you at least 2% back on every purchase, which can add up to big savings. Credit cards also generally come with other benefits, such as purchase protection and insurance.
BNPL providers don’t always feature these kinds of rewards or protections, nor do they always offer the credit-reporting benefits of credit cards.
“Most [BNPL providers] do not report back to the credit bureaus so [consumers] can't build that history,” says Schmeltzer, though she adds that some providers are starting to do so.
But there's clearly an intuitive aspect of BNPL that some consumers — and even some experts — find appealing in comparison with credit cards. When Czarnecki recently bought furniture after a move, he opted to finance the purchase with buy now, pay later.
“It just seemed really user-friendly," he says. "I could click on it from the cart and I knew the approval process would be immediate."
He also found it easier from a budgeting perspective. “I know exactly how much I have to pay off, as opposed to a credit card, where I might also have a tank of gas and groceries all adding up,” he adds.
He was willing to forgo rewards for that convenience.
Does your credit card already offer its own version of buy now, pay later?
Before jumping on a BNPL offer, you may want to check what's currently in your wallet. Credit card issuers and payment networks — which are watching the growth of BNPL carefully — are increasingly offering their own versions of predictable payment plans for certain purchases.
Availability varies, and terms and fixed monthly fees may also apply, depending on the feature. But some examples include:
The Plan It® feature, from American Express.
My Chase Plan, from Chase.
Citi Flex Pay, from Citi.
Credit cards from startup issuer Upgrade.
Mastercard Installments, from the Mastercard payment network.
Unlike BNPL, these kinds of plans tend to be offered post-purchase, rather than in the checkout line or at the point of sale.
"So it’s different, but it’s worth checking what’s available to you because it might offer more flexibility," Schmeltzer says.
Collin Czarnecki's name was misspelled in a previous version of this article. It has been corrected here.
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