Are “Buy Now, Pay Later” Plans Better Than Credit Cards?

In some ways, yes, but there are also risks.

Key points

• Buy now, pay later plans allow you to pay for your purchases over time.
• Although these plans offer some advantages over credit cards, they are not necessarily a better choice.

The idea of ​​paying for purchases over time is not new. Years ago, stores typically offered layaway plans for people who couldn’t afford the items they wanted right away. And credit cards have long been a way to help consumers pay for products over time, albeit at a cost.

But in recent years, “Buy Now, Pay Later” plans, or BNPL plans, have become an increasingly popular financing option. These plans allow consumers to put down a deposit on their purchases, bring their items back from the store (or have them shipped, in the case of online purchases), and pay them back in installments.

The great thing about BNPL plans is that they don’t charge interest upfront like credit cards do when you have a balance. Typically, you have about three months to pay off your purchase under an BNPL plan. Stick to this arrangement and make your payments on time, and you won’t have to pay interest or fees.

It is for this reason that consumers increasingly prefer BNPL plans to credit cards. But are they a better choice for financing purchases? Not necessarily.

The danger of BNPL projects

While BNPL plans don’t charge automatic interest the way credit cards do when you carry a balance, they also make it easier to qualify for installment agreements. And that’s not necessarily a good thing.

When you apply to use a BNPL plan, there is usually no credit check involved. You might end up agreeing to a payment plan you can’t afford, running the risk of falling behind. And this is where things get risky.

If you do not make your BNPL plan payments, you will be pay interest on your purchases and possibly face a multitude of fees. Also, at this point, your negative payment activity may be reported to the credit bureaus. Once this information appears on your credit report, your credit score could drop and it could become more difficult to borrow money when you need it.

In fact, the Consumer Financial Protection Bureau recently issued a warning about BNPL’s plans and the dangers they pose to consumers. While it’s easy to argue that credit cards open the door to equally troubling consequences, credit cards may be better understood by consumers than BNPL plans because they’ve been around longer and have different requirements. different regulations to follow.

Should I use a BNPL plan or a credit card?

If you’re looking to finance a purchase that you know you can pay for in a few months (for example, the money is already in your savings account but you’d rather not withdraw it all at once), then you may be very well moving forward with a BNPL plan. And you might be better served using a credit card rather than a credit card in this case, because a credit card will usually charge you interest if you pay off your purchase within a few months.

But otherwise, you should proceed with caution when using BNPL plans in the same way that you should do your best not to charge items to your credit cards that you cannot pay by the time your bills come due. . Also, while it may be okay to use BNPL plans for larger, planned purchases, they’re not really intended for day-to-day purchases.

Additionally, BNPL plans do not offer cash back or rewards for everyday items like credit cards do. So don’t rush to replace your credit cards with BNPL packages. In fact, there’s no reason not to use credit cards and BNPL plans at the same time – as long as you fully understand what you’re signing up for.