Credit Cards

Are ‘Buy Now, Pay Later’ plans better than credit cards?

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In a way, yes, but there are also risks involved.

Key points

  • Buy Now, Pay Later plans allow you to pay for purchases over time.
  • Although these plans offer certain benefits over credit cards, they are not necessarily a better option.

The idea of ​​paying for purchases over time is not new. Years ago, stores used to offer installment plans for people who couldn’t pay for items they wanted outright. And credit cards have long been a means of helping consumers pay for products over time, albeit at a cost.

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

The great thing about BNPL plans is that they don’t charge interest up front like credit cards do when you carry a balance. Typically, you’ll get around three months to pay for your purchase with a BNPL plan. Stick to that arrangement and make your payments on time, and you’ll incur no interest or fees.

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

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The danger of BNPL plans

While BNPL plans don’t charge automatic interest in the same 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 may end up agreeing to a payment plan that you can’t afford, putting you at risk of falling behind on it. And that’s where things get ugly.

If you don’t make your BNPL plan payments, you’ll be charged interest on your purchases and potentially face a large number of fees. Also, at that time, your negative payment activity could be reported to the credit bureaus. Once that information appears on your credit report, your credit score may drop and it may become more difficult to borrow money when you need it.

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

Should you use a BNPL plan or a credit card?

If you’re looking to finance a purchase that you know you’ll be able to pay off in a few months (say, the money is already in your savings account but you’d rather not take it all out at once), then you may be fine going ahead with a BNPL plan. And you may be better off using 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 just as you should do your best not to charge items to your credit cards that you can’t pay by the time your bills are due. Also, while it may be fine to use BNPL plans for larger planned purchases, they’re not really intended for everyday purchases.

Also, BNPL plans don’t offer cash back or rewards for everyday items like credit cards do. Therefore, you should not rush to replace your credit cards with BNPL plans. 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.

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