Should you use a credit card or Buy Now Pay Later?
There are more ways to pay for purchases than ever before. But whether you’re in-store or online, traditional credit cards are still one of the most popular payment methods.
Another option gaining traction online is called a buy now pay later (BNPL) plan. BNPL plans generally let you split a purchase into installment payments without charging any interest or fees. However, they might not be as versatile as credit cards, nor do they offer as many benefits.
If you're not sure whether you should use a credit card or BNPL (or a mix of the two), learning their differences is a good place to start.
Credit Cards vs. BNPLs—How They Differ
Credit cards and BNPLs can both present enticing offers, and some of the distinctions between the two are starting to blur. If you qualify, many major credit cards let you sign up for pay-over-time installment plans, and some BNPL services now offer virtual and physical cards. However, they're also still unique in important ways.
Opening and Using an Account
You'll need to apply for a credit card before you can use it, and the requirements can vary depending on the card issuer and the specific card. Your credit score, income, monthly bills, and history with the card issuer are often factors in the decision.
Once you open a credit card, you can generally use it for any purchase until you reach your card's credit limit. And then again, once you've paid down the balance. While merchants might not accept every credit card network (e.g., American Express, Discover, Visa, or Mastercard), credit cards are widely accepted around the world.
You can often apply for a BNPL for a specific purchase at checkout or open an account ahead of time. BNPLs generally don't require a hard credit check—the type that can affect your credit scores—and may be available to people who don't have good (or any) credit. However, a BNPL provider might approve or decline purchases on a case-by-case basis.
Your ability to use BNPL could depend on your previous usage with the provider, how much you're spending, what you're buying, and where you're shopping. You may also be limited to using BNPL at certain stores. However, some BNPL companies have virtual or physical debit cards that you can use at any store that accepts the associated mobile wallet or card network.
Paying Off the Loan
As a revolving credit account, credit cards let you pay off part of your balance and carry the rest to the next month. The minimum required payment may be a few percent of your total balance, although there's often a floor—such as $25 to $35.
Your credit card statement should show you how long it will take to pay off the balance if you only make minimum payments.
BNPL services generally split the purchase amount into four equal parts. You pay the first quarter when you make the purchase and then make three equal payments every two weeks for the next six weeks. Some BNPLs also offer longer payment plans.
Fees and Interest
Credit cards may charge annual fees, late payment fees, and usage-based fees (such as a fee for foreign transactions or balance transfers). Credit cards also often have high interest rates.
Most credit cards have a grace period, and you won't pay any interest on purchases if you pay your credit card bill in full every month. If you make a purchase at the start of your billing cycle, you might have about 51 days to pay off the balance without paying any interest—an approximate 30-day billing cycle and at least 21 days before the bill is due.
However, if you pay less than the full amount, the debt you revolve could accrue interest daily. Additionally, your purchases start accruing interest right away.
BNPLs generally don't charge any fees, aside from a potential late payment fee. Also, there are usually no interest charges for the “pay in four" plans—the BNPLs make money from the merchants. But alternative BNPL plans, such as a monthly payment plan, could have interest charges.
Credit cards may offer cardholders a variety of benefits, including rewards, purchase protections (such as extended warranties and return periods), and insurance on purchases. Some cards also have additional perks, such as complimentary access to airport lounges and statement credits.
Most BNPL plans don't come with these types of benefits. They may also lack consumer protections, such as zero liability for unauthorized transactions available to credit cardholders. Additionally, returning items that you bought with a BNPL could be complicated.
Impact on Your Credit Scores
Most major credit card issuers will report your account to all three major credit bureaus: Experian, Equifax, and TransUnion. The card issuer can report various details about your account, such as when you opened it, the credit limit, how much you paid, and whether you're behind on payments.
These data points can all impact your credit scores in different ways. In general, having old accounts, making your payments on time, and only using a small portion of your credit limit is good for your credit scores.
A BNPL plan won't impact your credit if the lender doesn't report your accounts to the credit bureaus. Some BNPL companies don't report anything, while others only report on past-due accounts or longer-term BNPL plans.
If the BNPL plan is reported to the credit bureau, it could be as an installment account rather than a revolving account. Making your BNPL payments on time could help your credit, while missing a payment could hurt it. The amount of debt you've paid off can be a credit scoring factor as well. But it's not as important with installment loans as your balance on revolving credit accounts.
Pros and Cons to Consider
Now that we've explored how credit cards and buy now pay later plans differ, here's a quick snapshot of the pros and cons of both options.
Pros of Credit Cards
- Widely accepted
- May offer rewards and other benefits
- Consumer protections that limit your liability
- No interest on purchases if you pay your bill in full every month
Cons of Credit Cards
- May require a good credit score
- High interest rates
- High balances can be difficult to manage
- May have a variety of fees
Pros of BNPL Plans
- You don't need good credit
- There are generally no interest charges or fees
- You'll know exactly how much you'll pay and when the payments are due
- The bi-weekly payments align with some people's pay schedule
Cons of BNPL Plans
- You can only use them with certain purchases
- Plans with longer repayment periods may charge interest
- Might not help you build credit
- Late payments could still hurt your credit
What's The Best Form of Payment?
Choosing between a credit card and a BNPL plan isn't an all-or-nothing option, and some people switch between one or the other depending on the purchase.
For example, it might make more sense to use a credit card with travel-related insurance benefits to pay for your next vacation. However, a BNPL might be best for a large purchase that you can pay off within six weeks.
BNPLs can also be helpful for short-term budgeting, particularly if you can't get approved for a good credit card. But it's important to keep in mind that both credit cards and BNPLs are types of debt. Even if you don't have to pay interest, you'll have to repay what you spend.