Summary:
Both credit cards and Buy Now, Pay Later loans provide a way to finance purchases, though they differ in how you pay them back, how interest and fees are charged, and when you can use them.
In this article:
How payments work
Interest and fees
How credit cards and BNPL loans impact your credit score
When should you use BNPL loans vs. credit cards?
Credit cards and Buy Now, Pay Later (BNPL) loans are both used to finance purchases, but they have distinct features. Credit cards tend to be a more flexible payment option: Most merchants accept credit cards and you can use them for a variety of purchases. Whereas BNPL loans are typically used for a single purchase and merchants may not provide BNPL loans as a payment option with the frequency of credit cards.
Whether you should apply for and use a credit card or take out a BNPL loan depends on your preferences and financial situation. Here’s how credit cards and BNPL loans work and some important differences:
How payments work
With a credit card, you have a credit limit, and you can make purchases up to that limit. You’re required to make minimum payments each month, which can include a percentage of the unpaid balance and interest. It’s smart to keep the balances on your credit cards as low as possible. That’s because your credit utilization measures how much of your available credit you’re using, and it’s an important credit score factor. Using less than 30% of your available credit can help improve your credit scores. You can access more of your available credit limit when you pay down your credit card balance.
Your bank may also allow you to spread out an individual purchase on your credit card into smaller, regular payments. This acts like an installment loan, but the outstanding balance is still pulled from your revolving credit line and impacts your credit utilization. Not all credit cards offer this kind of payment plan and if yours does, it may only be available for certain purchases. These types of payment plans typically have interest and other fees attached.
BNPL loans, also referred to as point-of-sale (POS) loans, are used for a single purchase at the time of checkout. BNPL loans are installment loans; you pay for your purchase over time on a fixed schedule. There are different types of BNPL loans. Short-term BNPL loans are typically marketed as “pay in four” and feature one payment at checkout, followed by three biweekly payments, whereas longer-term BNPL loans typically require monthly payments with terms ranging from six to 12 months. When the BNPL loan is paid off, the loan is closed.
Interest and fees
If you carry a balance on your credit card beyond the grace period, which is the time between the end of the billing cycle and your payment due date, you may be charged interest on the remaining balance. Credit cards may also come with various fees such as annual fees, late payment fees and foreign transaction fees.
Typically, short-term BNPL loans are interest-free. Loan providers may charge late fees if you miss a payment. Some longer-term BNPL loans may charge interest.
How credit cards and BNPL loans impact your credit score
Your credit card accounts can impact your credit score. Typically, applying for a credit card results in a hard inquiry, which can have a temporary, negative impact on your credit score. Your payment history can also affect your credit. A long history of on-time payments reflects responsible credit behavior and will be reflected positively in your credit score. Alternatively, missed payments can have a negative impact on your credit score. Your payment history and credit utilization, which was mentioned above, are two important credit score factors.
Not all BNPL companies report their data to credit reporting agencies. Applying for a BNPL loan requires a soft inquiry, which doesn’t affect your credit score.. At this time, BNPL information provided to TransUnion is visible to you, but scoring providers, lenders, insurers or other authorized companies that may access your credit report are unable to use this data. Because of this, BNPL data provided to TransUnion does not impact your credit score at this time. Though, if you miss payments on your BNPL loan, your loan provider may send the loan to collections, which can have a negative impact on your credit score.
When should you use BNPL loans vs. credit cards?
Credit cards are a versatile form of payment because you can use them for a variety of purchases. BNPL loans, however, can typically only be used for a single purchase at participating stores. When or whether you should use a credit card or BNPL loan depends on your own financial situation. Before taking on any type of loan, consider creating a budget to help determine if you can pay down your credit card balance in full or make the regular, fixed payments on a BNPL loan.
