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'Buy Now, Pay Later' vs. Credit Cards: What's the Difference?

Buy now, pay later services let you spread the costs of purchases into multiple payments, but so do credit cards. Learn how the two payment options compare.

An illustration of buy now, pay later and other financing options for purchases
Buy now, pay later services and credit cards provide two easy ways to finance purchases.
TarikVision/Getty Images

Found the perfect chainsaw, cat condo or chaise longue, but don't quite have the scratch to cover the full cost? After a quick application with no hard credit check, buy now, pay later (BNPL) services will let you spread the price of your item over a set period of time, often six weeks with a total of four payments. 

Whether you call them installment plans, payment plans or layaway programs, BNPL services have been used in markets around the world for centuries. But never have they been so quick and easy as on today's smartphone apps.

Companies like PayPal, Amazon, Affirm, Klarna, Afterpay and Apple are investing heavily in BNPL, while credit card providers are filling short-term financing gaps with their own BNPL services. And customers love BNPL, spending $120 billion through these programs in 2021, per GlobalData.

According to Paul McAdam, senior director of banking and payment intelligence at J.D. Power, "Customers like BNPL because it helps them to pay for things over time, they appreciate the ease of purchasing and checkout, and overall, they feel that loan and repayment terms are easy to understand."

But credit cards do the same thing, right? Well, yes. And no. Both credit cards and BNPL give you goods and services (think hair salons or tattoo parlors) now that you pay for later, but some big differences separate the two. Learn more about the two major methods for short-term financing of purchases, and how to decide which one will work best for you.

How do buy now, pay later services work?

Buy now, pay later services give customers the same basic functionality of credit cards -- easy payments with no cash -- but they usually eliminate fees and interest in exchange for an agreement that you'll pay back the loan within a very short term, usually six weeks. You'll also generally need to make a payment from a debit or credit card at the time of purchase.

Though the customer gets free financing, the merchant is paying for that sale, usually 4% to 9.5% of the purchase price, per NPR. That statistic then leads to the big question about BNPL -- why would businesses pay such high rates to make sales? (And do businesses bake those fees into inflated prices?)

"Overspending, overspending, overspending," says Todd Christensen, education manager at Money Fit, a nonprofit debt relief program. "Anytime retailers make the process of purchasing more convenient for the consumer, consumers will spend more money. It's human nature."

The approval process for BNPL is quick and easy, with no hard credit check and an upfront explanation of payment amounts and due dates. For online purchases, the BNPL application will usually be built into your shopping cart. For in-store purchases, you'll probably need to have an accepted BNPL app installed on your smartphone (though I'm sure any eager sales associate will be patient while you install it).

Most BNPL services use four payments over six weeks, while Amazon breaks it up into five payments over four months.

The catch? One big detail is that BNPL is all downside and no upside for your credit score. While missed payments and defaulted accounts will bring your score down, you'll get no credit for your on-time payments. 

"The credit bureaus are preparing for such reporting, though BNPL accounts will require some sort of standardization to make the data meaningful," according to Martin Lynch, director of education for Cambridge Credit Counseling.

Also, BNPL companies might charge late fees if you miss payments and turn your debts over to collections agencies after long periods of no payments.

How are credit cards different from buy now, pay later?

Technically, credit cards have the equivalent of BNPL functionality mandated by US federal law. All purchases included at the close of your statement period receive a grace period of at least 21 days before you must make a payment. 

That means you get free baked-in BNPL for at least three weeks, half of the usual BNPL term. If you make your purchase at the very start of your monthly statement period, you could get more than seven weeks of no-interest financing, with payment only due at the end.

After that, however, the interest comes rolling in on credit cards. If you don't pay off your balance in full after that grace period, your annual percentage rate (APR) will start adding interest to your debt. The average APR for credit cards as of July 1 is 16.13%, per Bankrate, or about $15 per month interest on a $1,000 balance.

Credit cards with 0% intro APR periods are a big exception that can often trump BNPL options. These cards let you spend up to your credit limit with no interest for six to 21 months if you make your minimum payments

Lynch notes that, "0% cards are still the very best option if you only need to make a few purchases, but they're limited as well, since the promotional period will eventually end."

One advantage for credit cards is that all your purchases are tracked in one place. Every online or physical retail store will likely accept your credit card, while each might have a different accepted BNPL service. Would you rather have four different accounts with four different payment plans, or one payment per month that adds a risk of potential interest when carrying a balance?

Finally, credit cards offer purchase protections and rewards for spending that BNPL services generally do not. Rewards card point junkies who pay off their balances monthly will likely want to keep grinding on their money-back instead of opening separate BNPL accounts.

Credit cards and banks have their own buy now, pay later services

To complicate things further, credit card companies are starting to launch their own buy now, pay later services. My Chase Plan, American Express' Plan It, and MasterCard Installments are likely the only start of credit card BNPL services.

Lynch says that the credit card companies have generally done a good job mimicking the BNPL model while preserving some of the advantages of a traditional credit card. BNPL purchases with credit cards often retain the same rewards as regular credit card purchases, and buyers keep the same purchase protections.

The downside? According to Todd Christensen, "Any debt on a credit card BNPL service will affect the consumer's credit card balance." That means you'll have less room to spend on your credit card, and your credit ratio will go up, bringing down your credit score slightly.

Credit card BNPL services also may have a broader range of options for repayment. There might be a fee involved, or interest charged for longer payment terms. Regardless, it's worth investigating your own credit card provider's options before purchasing with a new service.

How to decide between a credit card or buy now, pay later?

As usual, the decision to use a BNPL service or your credit card for a purchase depends on your personal situation, the amount of your purchase, your credit history and how you normally use your credit cards.

For those who struggle to organize multiple accounts, a credit card might make a better option than BNPL -- all of your purchases and payments are tracked in one account. Depending on your credit limit, credit cards will usually give you a bit more spending power for larger ticket items, and they may provide purchase protection and rewards on your spending.

On the flip side, of course, not everyone can get approved for a credit card, and BNPL services can provide financing options to customers who previously didn't have any. BNPL services provide wider accessibility and detailed information on the exact payments for your specific purchases.

If you can't make your payments on credit cards, watch out for late fees and penalties. BNPL plans may charge neither or have much lower costs. Affirm charges no late fees, while Klarna and Afterpay charge far less than most credit cards -- Afterpay charges up to $8 (and no more than 25% of purchase), while several Klarna affiliates list late fee charges that top out at $7. Credit cards in 2022 have average late fees of $30, according to CreditCards.com.

There's no hard credit check required for BNPL services, and you'll see the exact amount of your payments and the schedule for paying off your purchase ahead of time. Also, the conventional biweekly payments might line up well with your paycheck periods.

However, there are a few downsides. Every BNPL purchase requires an application, and while most are quickly approved, there's always the uncertainty that you won't be able to complete your transaction. If you've got room on your credit card, you're quite assured your purchase will go through.

You'll also need to track all your BNPL purchases separately, potentially with multiple accounts. 

According to Martin Lynch, "The greatest risk [of BNPL] has to do with the consumer's ability to stay organized and disciplined. BNPL users have reported losing track of the BNPL contracts they've effectively entered into, while a fairly high percentage report falling behind on their installments and incurring fees and negative credit score impact."

Todd Christensen concurs. "About 1.73% of credit card company debts are 30 days or more late. Affirm [a leading BNPL provider] is seeing their 30-plus day late debt hit double those statistics at 3.7%."

As Lynch indicates, even if you pay back your BNPL debts on time and in full, you'll get no benefit from your diligence on your credit report. BNPL debt can only hurt your credit score, not help it.

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