Buy now, pay later. It looks great, but what’s the catch? Let’s look at the buy now, pay later vs credit card debate to find the answers.
Various payment methods that avoid taking out an installment loan to make a single purchase have been around since money and credit began. Layaway purchasing was popular for ages until a huge uptick in the popularity of credit card use in the 80s and 90s. Today, there’s a new strategy that combines the low cost of layaway with instant gratification. It’s called buy now, pay later, or BNPL.
What Does Buy Now Pay Later Mean?
Where layaway purchasing plans incurred no interest, you couldn’t take the product home with you until you had made all the payments. With credit cards, you can take the product home immediately but will be subjected to interest charges if you don’t pay for the item within a month.
Buy now, pay later plans are simple from the consumers’ standpoint. You choose the item you wish to have, online or in a retail store, charge the purchase to a BNPL app or the store’s BNPL plan, and make payments in several monthly installments that include no interest charges or other fees.
Buy now, pay later systems allow you to have the item you desire right now while avoiding interest payments. With CNBC reporting lately that consumer credit card spending has reached an all-time high of $1.17 trillion, it’s no wonder consumers are looking for an alternative to the fees associated with credit cards, like interest and annual membership fees.
Taking part in most BNPL plans requires no hard credit check and involves only a soft credit inquiry that won’t appear on your credit report or count against your credit score. However, apps and providers don’t offer BNPL services for free.
To make money, BNPL companies charge the retailer you’re doing business with a percentage of your purchase, equaling between 2% and 8%. Additionally, you’ll pay hefty penalties for not making your payments on time after your purchase. Late fees range from $7 to $50, and interest is added to the amount you still owe on the purchase.
How to Get Buy Now Pay Later
Unlike credit cards, in which consumers typically apply for the use of the convenience well before making any purchases with it, BNPL services are available in retail stores, on retail websites, or as a mobile app you can take with you as another payment option for goods and services.
Annie Cole, EdD, founded and is a Money Coach at Money Essentials for Women. Of the BNPL business model, she says, “If you’ve been shopping lately, you may have noticed an increasing number of retailers providing a Buy Now Pay Later (BNPL) option: It allows you to get the item you want while paying it off over time. Major retailers like Macy’s, Best Buy, Pottery Barn, and Target are offering BNPL options.”
Can you use buy now pay later with bad credit?
The primary BNPL feature that sets it apart from credit cards and other credit accounts is that applying for the use of a BNPL payment plan involves no hard pull on your credit. Applying for a credit card or other credit types will almost always involve taking a temporary hit on your credit report and score for the hard inquiry.
The difference is that the soft inquiry made by most BNPL companies will only reveal your credit score, that you are who you say you are, and a few other details. In contrast, a hard inquiry will divulge details of your credit history to the lender, allowing the provider to make a more informed decision about your creditworthiness, often leading to credit denials.
Because of this difference and the better approval odds that come with it, BNPL services are particularly appealing to those with fair or poor credit. Most BNPL apps and services don’t reveal the lowest credit score requirements for approval, but experts and consumers report little trouble getting approved with some providers with credit scores below 600.
Buy Now Pay Later Vs. Credit Cards Pros and Cons
Taking part in a buy now, pay later payment plan helps cover the cost of a large or small purchase over time. Many consumers use it as a simple way to avoid carrying cash or credit cards to pay for goods and services. However, it’s essential to consider the following factors before choosing the method as your go-to payment solution.
BNPL Pros and Cons
Pros
- No hard credit check is necessary for most BNPL plans
- Offers similar consumer protections for purchases
- Allows consumers to have and enjoy purchases immediately
Cons
- Promotes overspending
- Steep late fees with interest added
- Returning goods can have complications
Credit Card Pros and Cons
Pros
- Many credit cards feature useful rewards programs
- Minimum payment can be as low as 1% of your balance
- Accepted nearly everywhere
Cons
- Your credit limit represents your maximum spending
- Can incur late fees and increased interest percentages
- Often carry annual fees to continue using
Cole sums up with this statement. “With BNPL, you can put a down payment down on your purchase, then pay off the rest of the purchase over time with no added interest. This is a major perk compared to using a credit card, which can grow interest if the balance is not paid off by the due date.
However, BNPL can also make it too easy to buy purchases that you don’t need. Be careful not to convince yourself into buying something because the down payment and monthly payments are low; always consider the total cost of the item and whether it’s truly worth the total cost”.
Can Using BNPL Increase My Credit Score?
Using BNPL will not improve your credit score. While a small handful of BNPL companies report to credit bureaus, most of them don’t bother telling credit bureaus about your good BNPL account standing, on-time payments, or successful payoffs. However, BNPL providers do report missed payments and delinquent accounts. This means that if you miss payments, it can hurt but never help your credit score.
If improving your credit score is on your list of goals, there are other effective ways to do that. The best way is to make consistent, on-time payments to creditors that do report regularly to credit bureaus. Utilizing one of the best budgeting apps is an excellent way to help ensure success.
Getting a personal loan to improve credit is a common tactic. Obtaining a secured loan is another method that comes with a built-in incentive to continue making payments while often involving a low APR compared to other credit accounts.
Pursuing a credit card for consumers with a low credit score can help improve your credit standing over time. However, avoiding paying the higher associated interest rates by paying off monthly balances is highly recommended.
Related Article: Can Taking Out a Personal Loan Improve My Credit Score?
Buy Now Pay Later Vs Credit Cards
There are just a few other considerations to sort out before deciding if using buy now, pay later is worth it for you.
- Many consumers use BNPL as a convenient way to avoid carrying cash or cards and pay off balances as they become due instead of making installment payments.
- Paying off your credit card balance in full each month is also an effective way to avoid paying interest while helping maintain or improve your credit score.
- Applying for a credit card involves a hard inquiry, which most BNPL services don’t require.
- Approval based on credit is more likely with BNPL than with credit cards for those with fair or poor credit.
- Returning goods purchased with a credit card is simple, while returns of items paid for with BNPL are more complex and often involve continuing to make payments for the item using the money returned to you from the retailer.
- While most BNPL providers don’t charge a membership fee, some do. Similarly, some credit card providers charge an annual fee for membership.
