How to choose between buy now, pay later and a credit card at checkout

You could have the choice to pay with a credit card, debit card, or buy now, pay later (BNPL) when you get to the checkout counter. If you’ve never used a BNPL service, you may be skeptical about how these consumer loans operate and if the conditions are advantageous when compared to other financing choices like a conventional credit card.

How to choose between buy now, pay later and a credit card at checkout

According to recent surveys, many customers have jumped on the BNPL bandwagon.

The number of BNPL loans created in the United States by the top five lenders increased by 970 percent between 2019 and 2021, according to a study from the Consumer Financial Protection Bureau (CFPB).

But which payment option should you use, and when does using a credit card vs BNPL make more sense?

Buy now, pay later: an explanation

Platforms that allow customers to buy now and pay later (BNPL) make it simpler for customers to spread out the cost of purchases over time. Depending on the platform, the length of these payments might vary from a few weeks to a year or more.

The drawback is that these installment loans often have fees and interest attached. Although some businesses provide a set rate for fees and APRs, the service may base this on your credit profile.

BNPL services are often partnered with by retailers, who then provide them as a payment option at the point of sale. After providing necessary information on themselves and their credit histories, consumers will be sent to the website of the provided platform where they may learn more about their financing possibilities. The platform will often use this data to do a soft credit check (which doesn’t affect your credit score) to decide whether to accept you for a line of credit and to set your credit limit, APR, and other details.

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Many businesses provide their consumers a variety of payment methods. When deciding between a credit card and BNPL, a consumer may take into account a number of factors, such as the item being purchased, the consumer’s desired repayment period, and the consumer’s credit history, according to Florin Arghirescu, chief product officer at Synchrony, a provider of consumer financial services.

BNPL vs conventional credit cards

A few significant aspects set BNPL services apart from conventional credit cards.

  • Payments are split up into installments on BNPL platforms. Revolving debt includes debt owed on credit cards. You usually get approval for BNPL purchases on a purchase-by-purchase basis. A revolving line of credit is provided via a standard credit card, though. A credit card might make managing repayment simple if you want to finance items in addition to this one-time transaction. Additionally, BNPL could only be accessible for certain transactions made by businesses that provide it as a service; in contrast, a credit card can be used almost everywhere that accepts credit cards.
  • A BNPL service may not have an influence on your credit, but credit cards can help you develop credit. The main credit reporting agencies get information about your payment history from all credit card providers. BNPL services can do the same thing, but many don’t. Consumers who have a history of making late payments may find this to be a relief, but those who make on-time payments are unlikely to see this reflected on their credit report. Later this year, when BNPL providers put mechanisms in place to disclose their data, consumers will start to see BNPL tradelines that are reported to Experian on their credit reports. Because queries, new tradelines, and usage rates are taken into consideration in credit score models, our early study indicates that adding information about all BNPL accounts on consumer credit reports may have a detrimental effect on those consumers’ credit ratings. In light of this, information about BNPL will be put on consumer credit reports if it is reported to us, but it will not be taken into account when calculating consumer credit scores, according to Rod Griffin, senior director of consumer education and advocacy at Experian.
  • BNPL services may not provide benefits and incentives that credit cards provide. Many people use credit cards not only to have access to more money but also to accumulate incentives, points, and cash back that may help them save money in the long term.
  • While it’s not always the case, certain BNPL services provide interest-free periods. Both of these payment options have a somewhat different interest calculation process. If you use a credit card, you may avoid paying interest on your purchases by making your monthly bill in full. Interest may be added from the beginning for BNPL services. Some platforms do provide an interest-free term, however it greatly varies by platform.

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How to choose a payment method

There are a few important questions you may want to ask yourself if you’re wondering whether to use BNPL or a credit card to fund your purchase in order to choose the best payment option.

  • Who or what are you buying? A BNPL service would not be a terrible choice if you don’t often use credit cards and want to finance a one-time buy. It may not be worthwhile to add a new credit card to your credit profile depending on the magnitude of your transaction. If you want to finance purchases on a frequent basis or make a bigger purchase, a credit card could provide you a higher credit limit and more payment options.
  • Additionally, a lot of credit cards give cash back or points, which may be quite beneficial for customers. Some credit cards also offer incentives, which might allow a customer to complete a transaction with little to no interest.
  • Are you attempting to raise your credit score? The payment information for many BNPL services is not reported to the credit agencies. Therefore, using a credit card properly is more efficient if your ultimate objective is to raise your credit score. Traditional credit cards are a good way to start developing credit if they are handled appropriately. If you can, try to pay off your debt in full each month. Using credit cards responsibly may help you establish a credit history and raise your credit ratings over time, according to Griffin.

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  • Check with the platform you’re contemplating utilizing to confirm that this isn’t true for all BNPL platforms. Arghirescu does point out that, in contrast to a regular credit card, BNPL services only need to pass a soft credit check in order to be approved, as opposed to the hard inquiry that happens with a new credit card application.
  • What does your repayment schedule entail? The amount of time you have to pay back a purchase is not limited by credit cards. You are just required to make your minimum payment each month, but a BNPL has highly tight requirements for payback. Think about using a credit card if you want a longer-term financing option.
  • How likely are you to get a job? The CFPB estimates that in 2021, 73% of BNPL services received clearance. Most general-purpose credit cards have an overall approval rate that is closer to 40%. Keeping in mind that each credit card issuer has its unique requirements for approval, you could still be granted a credit card even if your credit is less than ideal. However, your chances of being accepted could be lower with a credit card than they would be with a BNPL service.
  • Have you received a store card preapproval? Fast approval and a reduced entrance threshold may be features of BNPL loans. But it happens often for these consumer loans’ interest rates to go beyond 30%. Retail cards’ typical annual percentage rate (APR) is 26.72% in contrast. This provides you a longer payback period, is substantially cheaper than other BNPL services, and may even include discounts or benefits while still being pricier than regular usage credit cards.

The takeaway

Ideally, you would avoid the hassle of repaying an installment loan by having the cash on hand or in your bank account to cover a transaction. In certain cases, using a credit card or BNPL to stretch out a purchase over time makes the most sense. It may help you spend less each month while still being able to buy the items you desire.

Using a BNPL service has hazards of its own, including fees and excessive interest rates. Consider the possible drawbacks before using BNPL as a payment method and decide whether an alternative payment method makes more sense for you.

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