Buy Now, Pay Later or Credit Card: Which Option Is Better for Your Finances?
When you need to pay for something but don’t have the money available, you have a few choices. Primarily, the top two are to pay with a credit card or use buy now, pay later (BNPL) services — such as Affirm or Klarna — which more and more retailers are accepting.
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BNPL is essentially a short-term loan that enables you to buy what you need at cooperating businesses with only a “soft” credit check. Credit cards, on the other hand, require an application, a hard credit check, and typically charge high interest rates (though some will offer an initial 0% APR to entice new users).
Both forms of payment make it easy to buy things you can’t afford, but is one better or worse for your finances? Here, experts will explain.
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Demand Is Growing for BNPL
According to a recent report by Straits Research, BNPL service demand is growing, with around 360 million people using these services worldwide, because it’s easy to qualify for and often doesn’t charge interest.
BNPL is especially attractive to younger users, according to Trae Bodge, smart shopping expert at Truetrae.com. She cited data from Bread Financial that showed that millennials and Gen Z are four times more likely than boomers to want additional payment options like BNPL.
BNPL Helps You Avoid Credit Card Debt
One argument for BNPL, according to Bodge, is that “When the shopper is saddled with credit card debt, BNPL can be a good tool to use when making a large purchase, especially if the consumer is trying to avoid accruing additional credit card debt.”
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BNPL Offers Time To Pay Without Interest
If you do need some time to pay off a purchase through a payment structure, BNPL can also be helpful. Bodge said, “Where credit card debt can go on indefinitely, accruing interest along the way, BNPL loans offer the consumer some time to pay the debt off (rather than paying in full at the time of purchase), but they are typically paid off in a matter of months, usually interest-free.”
With this setup, she said you know how much you are going to pay, when you’re going to have to pay it, and can get the item you purchased without delay. This can be motivating to get that paid off without the dangers of accrued interest.
A Softer Credit Impact
Bodge said when the shopper doesn’t want a hard check on their credit, BNPL is superior because it only does a “soft” credit check — the kind that doesn’t show up on your credit score.
“BNPL approvals are also usually very fast, providing immediate access to funds,” she added.
A Tendency To Overspend
On the flipside, BNPL services often come with hidden fees and the potential for overextension of credit, according to Abid Salahi, co-founder of FinlyWealth.
“A recent study by Citizens Advice found that an alarming one in four BNPL users had missed a payment, leading to late fees and potentially negative impacts on their credit scores,” he said.
Kimberly Hamilton, founder of Be Worth Finance and author of the book, “Building Wealth on a Dime: Finding Your Financial Freedom,” added, “While BNPL may seem like a good idea at the moment, the fact that they spread your purchase into multiple smaller payments, also makes it easier for them to stack up if you’re not careful.”
Difficulty Tracking Purchases Via BNPL
With credit cards, you have an easy-to-follow monthly statement, and can typically access mobile banking as well.
“While it might be a helpful solution for an emergency purchase you truly need, using BNPL repeatedly can make it difficult to keep track of payments, making it more likely that you’ll owe larger sums of money in total than the individual purchase you had in mind,” said Hamilton.
Credit Cards Help You Build Credit and Rewards
While credit cards have a bad rap for how easy it is to accrue significant interest and debt, Salahi said, “When used responsibly, credit cards can be a powerful tool for building credit history, earning rewards, and gaining access to valuable perks.”
He cited Federal Reserve data that showed consumers with excellent credit scores (760 and above) can save a staggering $200,000 in interest over their lifetimes compared to those with poor credit.
“Furthermore, credit card rewards programs can provide substantial cash back or travel benefits, with some premium cards offering up to a lucrative 5% back on certain categories,” he added.
How Disciplined Are You?
Which option is better may come down to how well you manage your finances and what your financial goals are.
For those who struggle with credit card debt or lack financial discipline, Salahi said, “BNPL services may be a safer option, provided they are used judiciously and not as a means to overspend.”
Hamilton argued that credit cards aren’t always bad, so long as you use them responsibly and pay your statement balance off in full every month. “I would recommend using credit cards over BNPL because at least credit cards can help you build your credit, while BNPL options do not,” she said.
A strong credit history can help you save on interest when applying for a credit card, loan or mortgage, which can equate to thousands of dollars saved when considering large purchases like a home or personal loan.
In conclusion, credit cards are the better option for those seeking to build a credit history, earn rewards, and enjoy additional perks. However, “for those prone to overspending or struggling with credit card debt, BNPL services could provide a more controlled approach as long as the associated fees and potential credit impacts are carefully considered,” Salahi concluded.
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This article originally appeared on GOBankingRates.com: Buy Now, Pay Later or Credit Card: Which Option Is Better for Your Finances?
