Buy Now, Pay Later Versus Credit Cards: What You Should Know

CEO and Founder of Plinqit, the only savings app of its kind that pays users for learning about finance and savings. Between inflation, rising interest rates and other economic uncertainties, many Americans are concerned about their personal finances. These concerns impact their financial decisions. For some, this means relying on buy now, pay later (BNPL) products. In fact, a new survey from Credit Karma revealed that nearly 60% of consumer respondents said inflation is driving them to use BNPL products for items they need.

The survey also revealed that 13% of BNPL users surveyed rely on the service to pay for items at the supermarket, 18% are using it at warehouse stores and 17% are using it at discount stores. These stats indicate consumers are using BNPL services to pay for food and other household necessities.

Overall, BNPL usage has grown rapidly in recent years, and the BNPL market is expected to hit $3268.2 billion by 2030. It is more important than ever for consumers to understand how these products work so they can make informed financial decisions, especially in the current economic environment. Whether they opt to use BNPL or not, consumers need to know the risks, the difference between BNPL and traditional credit products, as well as the pros and cons of each, and the potential implications of using BNPL when it comes to their financial goals.

If It’s Available, Why Not?

Just as you would with any credit product, look out for overuse of BNPL. Most Americans believe they can handle one BNPL installment, but what happens when one installment turns into three? Juggling multiple BNPL payments makes it easy to overextend your budget and potentially lose track of payment due dates, resulting in a cycle of debt that’s hard to get out of.

If a person fails to pay their BNPL payment, their debt can be sent to collections, which can seriously damage their credit score. In fact, according to a Credit Karma survey of Americans who have used BNPL, 38% reported they have missed at least one payment. Of those, another 72% saw a decrease in their credit score afterward.

Additionally, BNPL is different from other forms of financing because BNPL providers currently do not review consumers’ other outstanding debts. This makes it difficult to understand whether a consumer can take on more debt. Consumers must also expect the unexpected. What if an unexpected expense comes up? Will this impact their ability to make payments toward their BNPL debt and other debts?

BNPL Versus Credit Cards—What’s Better?

BNPL is gaining popularity as an alternative to credit cards, particularly among younger consumers. Many younger adults fear getting into debt, so they avoid using credit cards for purchases and instead reach for the tech-friendly BNPL solution. Both methods come with their own pros and cons, and consumers should weigh the benefits and risks of each before blindly making purchases.

Due to the increase in online shopping during the Covid-19 pandemic coupled with the demand for convenience, many consumers started using BNPL services. Popular BNPL providers like Afterpay, Affirm and Klarna have little to no interest and no hard credit check. Some options carry no fees, essentially making it free financing for the customer. However, if a customer misses a payment, it can affect their credit score and there can be substantial fees for late payments.

Also, some BNPL providers do not currently report positive payment history to the major credit bureaus, which means consumers cannot build their credit score like they could by making on-time payments for a credit card.

On the other hand, credit cards can be used almost anywhere and are more versatile for things like groceries and gas. Credit cards also build credit history and offer rewards and points that can be used on travel and cash back. However, carrying a balance over to the next month can incur a significant amount of interest, making it even harder to pay off the new balance.

BNPL’s Implications For Financial Goals

No matter what a consumer’s financial goals are—whether it’s early retirement or buying a home or car—taking on debt has implications for those goals. When deciding between BNPL financing and other forms of credit, it is best for consumers to consider how the line of credit will impact their ability to save.

Do they need to build up their credit score in the long term to buy a house? If so, a credit card might be best. Do they need to make a necessary purchase now and pay it off over time without impacting their credit score? If so, BNPL may be a good choice.

It is also important to consider economic changes that can impact budgets and financial well-being. While the economy is still in recovery from the pandemic, inflation continues and the cost of everyday goods remains at record highs. Consumers should avoid overextending their budgets and steer clear of financing that may hurt their credit score and send them deeper into debt.

The Role Of Community Financial Institutions

For individuals considering alternative financing options, it’s worthwhile to leverage the resources at their bank or credit union to make an informed decision. Financial institutions are well equipped to educate consumers on the benefits and risks of BNPL, as they can accurately assess these financing solutions and determine whether they will help or hinder a consumer from achieving their goals.

The appeal of BNPL is clear, thanks to its convenient enrollment process and widespread availability. These services have become common among online retailers, and apps such as Afterpay and Affirm are quickly becoming household names. While these financing options appeal to many, individuals should be aware of the implications of using BNPL, and they need to look no further than their community financial institution for guidance.

With the help of their local bank or credit union, consumers can become more financially literate so they can weigh the pros and cons of BNPL versus traditional credit products. This will ensure consumers make smart financial decisions and take the right steps to create a positive financial future.