A Smart Guide to Choosing the Right Payment Option
Buy now pay later (BNPL) plans and credit cards are both payment options for in-store and online purchases, but they have distinct differences. While they may seem similar at first glance, understanding how they differ is essential for making informed decisions about your finances. In this article, we'll compare BNPL plans versus credit cards, exploring factors such as eligibility requirements, fees and interest, and the impact on your credit score.
What Is Buy Now Pay Later (BNPL)?
A buy now pay later plan (BNPL) is not the same as a credit card; it’s a short-term installment loan or payment plan that allows you to make a purchase and pay for it over a set period of time. You can typically sign up for a BNPL plan by selecting it as an option when checking out online or in-store at participating retailers. Some popular BNPL plans include:
- Affirm
- Afterpay
- Klarna
- PayPal Pay Later
How Do Buy Now Pay Later Plans Work?
With a BNPL plan, you'll pay a portion of the purchase price upfront and then the remaining balance in regular installments. It's particularly useful for larger purchases that might be difficult to afford upfront.
Here's how a typical BNPL plan works:
- Choose BNPL at checkout. When making a purchase, select the BNPL option at the checkout screen.
- Pay an upfront deposit. If the purchase is $200, you might be asked to pay a 25% deposit or down payment, which would be $50 in this case.
- Make regular payments. The remaining balance is then divided into regular installments, usually three payments of $50 in this example. These payments are charged to your credit or debit card.
The specific terms and amounts may vary depending on the BNPL provider and the purchase amount.
Key Differences Between BNPL vs Credit Card
When it comes to flexible payment options, BNPL plans and credit cards offer different benefits. Explore these key differences to determine which one is right for you.
Applying for and Opening an Account
BNPL plans are generally easier and faster to open than credit cards. Most BNPL providers have minimal requirements, such as being at least 18 years old, having a mobile phone number, and having a debit or credit card for the upfront deposit. Even individuals with less-than-perfect credit may be able to qualify for a buy now pay later plan.
The credit card application process is typically more complex. Credit card issuers will consider your credit score, income, and credit history before making a decision. While some store cards may be approved instantly, it usually takes several days to receive your physical card in the mail.
Paying off the Balance
After your initial down payment, BNPL plans spread the remaining balance out over three additional payments, usually charged every two weeks. This provides you with more flexibility compared to credit cards, as you have over 30 days to pay off the balance interest-free. Some BNPL providers may offer even longer payment plans.
Credit cards are revolving accounts, which means you can carry over a portion of your balance to the next month. While you're only required to make the minimum monthly payment, it's highly recommended to pay off your balance in full each month to avoid accruing interest. This can be challenging for high-priced purchases, especially if you're on a tight budget.
Fees and Interest
BNPL plans typically do not charge interest or fees as long as you pay off the balance within the allotted three-installment term. But some longer-term BNPL plans may include interest charges, late fees, or fees for each payment.
Credit cards can charge a variety of fees, from late fees for making payments after the due date to foreign transaction fees for using your card for purchases in other countries. Check with your card issuer to determine which fees apply to you.
Additionally, credit cards charge interest on any remaining balance at the end of each billing cycle. Most issuers offer a grace period during which you can avoid interest charges by paying off your balance in full each month. But if you carry a balance, remember that interest will accrue daily.
Benefits and Rewards
Unlike credit cards, most BNPL plans are straightforward borrowing options without the benefits and rewards. Additionally, some BNPL plans may have limitations on returns, such as requiring you to return the item to the retailer in person rather than processing a refund through the BNPL platform.
Credit cards often offer a variety of benefits, such as rewards programs, purchase protection, insurance, and extra perks. You might earn points, miles, or cash back on your purchases. Some cards also offer coverage for unauthorized purchases or damaged goods and extended warranties or travel insurance.
How BNPL and Credit Cards Impact Credit Scores
Most BNPL providers only perform a soft credit check, which typically does not hurt your credit score. But if you fail to make payments on your BNPL plan, it may be reported to the credit bureaus, which could negatively impact your credit score. It's important to make your BNPL payments on time to avoid any adverse consequences.
When applying for a credit card, a hard credit check is usually performed, which can temporarily affect your credit score. But responsible use of a credit card can help build your score over time. Credit card issuers report your payment history to all three major credit bureaus, so making timely payments and keeping your balance low can improve your creditworthiness.
BNPL vs Credit Card: Which One Is Right for You?
The choice between BNPL versus a credit card depends on your individual financial situation and goals.
If you have a low credit score or a short credit history, a BNPL plan may be a better option. BNPL providers often have less stringent credit requirements and don't typically report to credit bureaus, making them more accessible for those with limited credit history.
If building or improving your credit score is a priority, a credit card can be a valuable tool. Responsible use of a credit card, including paying off your balance in full each month and keeping your credit utilization low, can positively impact your credit history.
Additionally, consider the following factors when making your decision:
- Spending habits. If you're prone to overspending, a BNPL plan with fixed installments can help you manage your budget.
- Rewards and benefits. Credit cards often offer rewards programs, purchase protection, and other perks that may be valuable to you.
- Acceptance. Credit cards are widely accepted, while BNPL options may be limited to specific retailers.
By carefully evaluating these factors, you can choose the payment option that best aligns with your financial situation and goals.
If you’re looking for a reliable card instead of enrolling in a BNPL plan, consider the HFCU Emerald Visa® Credit Card. It’s accepted worldwide and comes with great features and benefits, including:
- Low non-variable APR on all purchases (including cash advances)
- No annual fee
- 25-day grace period on all purchases
- No rate increase on late payments
- Free fraud protection
- Free eStatements
- No fee balance transfer
- Rewards on every purchase