Buy Now, Pay Later vs. Credit Cards

More Shoppers Are Choosing Buy Now, Pay Later (BNPL) Loans

BNPL loans are becoming more popular among consumers as they allow you to purchase today and pay for them over time with regular installments that are often interest-free. But how do these loans stack up against credit cards?

It depends on factors like age, whether you’re looking to build credit, how well you can handle multiple loans, and your willingness to read the fine print. Below is a comparison between BNPL and credit cards.

Key Takeaways

• BNPL plans allow consumers to make purchases and split the payment into several installments, often in four payments.
• Credit cards let users pay off purchases over time but only require minimum monthly payments.
• Both options require users to be at least 18 years old.
• BNPL plans can be more straightforward and quicker to obtain than credit cards, and they typically don’t charge interest. However, they may have tricky terms.
• Credit cards offer more explicit language and benefits, such as cash-back rewards, airline miles, or points, that BNPL loans don’t.

What Is Buy Now, Pay Later?

BNPL is a short-term installment loan offered by many major retailers and online stores. Some of the most popular BNPL providers include:

• Affirm
• Afterpay
• Klarna
• PayPal

Although BNPL programs vary, they often share a few standard features.

Most BNPL companies only do a soft credit check, which means applying won’t affect your credit score. (However, some providers perform a hard pull, especially for long-term payment plans.)

The requirements to qualify for a BNPL loan are typically low. In most cases, borrowers must be at least 18, have a phone number, and own a debit or credit card for repayment. The company also needs to verify the borrower’s identity.

Repayment periods can range from a few weeks to several months. Many BNPL services set up four payments, but some allow customers to choose their repayment schedule. Most BNPL loans do not charge interest, but this depends on the provider.

BNPL Fees

BNPL may charge various fees such as:

• Late fees
• Non-sufficient funds (NSF) fees
• Service fees per payment
• Account reactivation fees
• Fees for rescheduling payments

As you repay the loan, the BNPL provider often replenishes your available credit. For example, if you borrow $500 and pay it off, the provider may allow you to borrow another $500.

Example of BNPL Use

Suppose you want a $100 shirt, and the retailer offers a BNPL loan at checkout. If approved, the loan might require a 25% down payment, meaning you’d pay $25 upfront (calculated by multiplying $100 by 0.25).

The remaining $75 would be divided into three equal payments of $25 each, typically deducted from your debit or credit card in weekly installments. Late fees often hover around $7 per missed payment on an average loan amount of $135, according to a 2022 Consumer Financial Protection Bureau report.

How Credit Cards Work vs. BNPL

While BNPL plans offer quick approval, credit cards take longer to obtain but provide more protection.

You’re given a grace period to pay off the balance when you use a credit card. If you don’t, you’ll accrue interest on the remaining amount. Some common types of credit cards for younger consumers include:

• Authorized user cards
• Secured credit cards
• Student credit cards
• Cosigned credit cards

Like BNPL loans, credit cards require applicants to be 18 or older. However, under federal law, credit card companies must be stricter when issuing cards to those under 21. A hard credit check is required, and the company must verify that you have enough income to cover the payments. If you don’t have a steady income, you may need a cosigner or have limited card options.

Credit Cards for Teens

There are exceptions. For example, you may only qualify for a student credit card if you have income. Still, you might be eligible for a secured credit card.

Secured credit cards require a deposit to set the spending limit, so accumulating debt requires more work. Still, they allow you to build credit, which could make it easier to secure future loans and credit cards.

Parents can add teens under 18 as authorized users on their credit cards. Depending on the card issuer, this can help build a teen’s credit history.

Time to Get a Credit Card

Once approved, receiving your physical credit card in the mail can take several days or weeks, making BNPL more useful for immediate purchases if you still need a credit card.

BNPL loans and credit cards can be used at physical and online stores. However, credit cards are more widely accepted, including for payments like gas and utilities.

Credit Card Fees

Credit cards may also charge several fees, such as:

• Annual fees
• Late payment fees
• Foreign transaction fees
• Balance transfer fees
• Cash advance fees

Example of Credit Card Use

Consider using a credit card with a 20% annual percentage rate (APR) to buy a $100 shirt. No interest is charged if you pay the entire $100 by the end of the month. However, if you pay only the minimum payment of $25, you’ll owe interest on the remaining $75.

Next month, you could pay the $75 plus $1.50 in interest or the minimum payment again. Continually paying only the minimum can make credit card use expensive due to accumulating interest.

Buy Now, Pay Later vs. Credit Cards: Key Differences

Age Restrictions

BNPL loans are available to individuals of legal age, typically 18—however, in Alabama and Nebraska, the minimum age may be 19. Similarly, secured and cosigned credit cards are available to those 18 and older. However, some issuers allow teens 13 and older to be added as authorized users on an adult’s card.

Access and Ease

BNPL plans have high approval rates. In fact, according to the Consumer Financial Protection Bureau (CFPB), 69% of 18-24-year-olds are approved for BNPL loans. These loans are often a solution for individuals with low credit scores or thin credit files, making it difficult to obtain a traditional credit card.

Credit card approval can be more complex and depends on factors like your credit history and income, especially if you’re under 21. Gen Z, the generation with the lowest average credit score, also has the fewest credit cards—about two per person.

If you have no credit history, consider getting a secured credit card or asking someone with good credit to be a cosigner on your application.

Interest and Fees

Credit cardholders can avoid interest by paying their balance in full each month. BNPL plans, on the other hand, often feature short-term, interest-free repayment plans. However, they tend to involve smaller borrowing amounts.

Longer-term BNPL plans may charge interest, especially for larger purchases, which can sometimes go up to $10,000. A Harvard Business School study found that 20% of low-income BNPL users (those earning $25,000 to $45,000 per year) were hit with overdraft fees, and 17% incurred low-balance fees.

Credit Impacts

Most BNPL providers only perform a soft inquiry, so they won’t affect your credit score when you apply. However, most BNPL services don’t report on-time payments to credit bureaus, meaning using them won’t help build your credit. On the other hand, if you miss payments, they might report your delinquency, which could hurt your credit score.

Credit cards, however, will perform a hard inquiry upon application and consistently report payment behavior to credit bureaus. Making timely payments and keeping balances low will boost your credit score, while missed payments can cause it to drop.

Protections

Credit cards offer more consumer protections than BNPL loans. According to the CFPB, credit cards have more precise terms and conditions, making it easier for consumers to understand their rights and responsibilities. BNPL loans, by comparison, often come with unclear language, making resolving disputes and understanding fees more challenging.

Debt Problems

Although BNPL is marketed as a debt-free alternative, it can still lead to financial troubles, particularly for younger consumers or those living beyond their means. According to the Harvard Business School study, 45% of BNPL users purchase items outside their budget, often spending more than they would with a credit card.

What Is the Minimum Age for BNPL?

To apply for a BNPL loan, you must be at least 18 years old. Some BNPL providers, like Klarna and Afterpay, require applicants to enter their birthdate when approving. Providers verify this information against other details like name and address.

Is BNPL Replacing Credit Cards?

A survey by C+R Research found that 38% of respondents believed BNPL services would eventually replace credit cards. Additionally, 56% of respondents preferred using BNPL over purchasing credit cards.

However, BNPL merchants only accept some plans, while most retailers accept credit cards like Visa and Mastercard. Moreover, credit cards offer greater flexibility for emergencies.

What Are the Disadvantages of Buying Now and Paying Later?

Some of the downsides of BNPL loans include:

• Confusing or inconsistent terms and fees
• Autopay requirements for specific payment plans
• Potential to take on multiple BNPL loans
• Late or missed payments that could harm your credit score, depending on the terms

Conclusion

BNPL and credit cards each have their benefits and drawbacks. BNPL loans offer a simple way to make purchases and pay for them over time, but they often come with tricky fees and terms that require careful attention. Meanwhile, credit cards provide greater consumer protection. They can help build credit, but they may be more challenging to obtain, especially for younger consumers.

Whatever option you choose, you must know the risks and responsibilities of using BNPL or credit cards.