977. Laura answers a listener's question about whether to use a BNPL option or a credit card when shopping online.
977. Laura answers a listener's question about whether to use a BNPL option or a credit card when shopping online.
Find a transcript here.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! I love hearing from you and answering your questions. So, if something finance-related is on your mind, leave me a voicemail at 302-364-0308. You can leave your name or remain anonymous.
Today's topic comes from Joe, who sent an email saying, "I've started doing some online shopping for the holidays. The cart often shows one or more buy now, pay later options with good terms, but I'm unsure whether it's better than using a credit card. Can you review what buy now, pay later is, and when to use it instead of a credit card?"
Thanks for your question, Joe! Whether you're shopping for the holidays or restocking daily essentials, buy now, pay later (BNPL) options are available at many online checkouts. This post will review how BNPL services work, their pros and cons, and whether they're a better option than a credit card during the holidays or any time of the year.
What is buy now, pay later (BNPL)?
Defining BNPL can be challenging because different point-of-sale services have different business models. Some companies offer a short-term loan repaid with or without interest based on the term you choose.
Some BNPL options specialize in professional services, like for patients at an ophthalmologist, veterinarian, or dentist's office. For instance, if you don't have dental insurance but need a procedure you can't afford to pay in full, the office may have one or more BNPL options. You complete a short application and could be approved for the necessary work the same day, with financing available for 6 to 24 months or longer, with interest.
Other BNPL companies that appear in online checkout carts let you split a purchase into equal payments over a period, such as 4 or 8 weeks. You must complete a short application with your personal and payment information.
If approved, your first payment (such as 25% of the purchase price) is due at checkout, and the remaining payments will be charged automatically to your chosen debit or credit card in equal installments every two weeks, with no interest or fees.
What are the pros of buy now, pay later BNPL?
The most appealing feature of many BNPL options is that you pay no interest or fees if you make on-time payments. The payments are fixed and scheduled, and automatically deducted from your chosen account. Therefore, you know precisely when your debt will be eliminated, and that could help you manage cash flow.
Having BNPL payments charged automatically to a linked debit or credit card makes them really convenient. Plus, most services only do a soft credit check or none at all. That means BNPL approval has a high acceptance rate, happens quickly, and doesn't negatively affect your credit scores.
What are the cons of buy now, pay later BNPL?
The downside of a BNPL offer is that missing a payment comes with high fees. For instance, if you link it to a checking debit card and your account has insufficient funds, you'll get charged a late fee by the BNPL provider and an overdraft fee by your bank.
Plus, many companies that split payments over several weeks don't report them to the major nationwide credit bureaus. That means they won't help you build credit. However, some BNPL providers do report to the credit bureaus. So, check into that if you're trying to improve your credit scores.
Another con is that because the initial BNPL payment is so low, it may cause you to overspend. Attractively low payments can encourage consumers to take on more debt than they can afford.
LISTEN ALSO: 7 tips for excellent credit scores and more savings
What are the pros of credit cards?
Making purchases with a credit card gives you the most flexibility for repayment. For instance, you could make minimum payments, repay your entire balance in full, or pay any amount in between. If you pay your full card statement balance by the due date, you pay no interest.
Plus, using a card typically lets you accumulate rewards, such as cashback or points, that you can redeem for travel or products. They often include perks like purchase protection, extended warranties, fraud protection, and travel insurance that you never get with a BNPL offer.
Managing credit cards wisely also allows you to build a strong credit history, boosting your credit scores.
RELATED: How to get more value from your credit cards
What are the cons of credit cards?
The downside of credit cards is that it's easy to accumulate high-interest debt when you carry a balance from month to month instead of paying it in full. Depending on your interest rate (which typically runs between 12% and 30% or higher) and how long it takes to pay off charges, you could pay double or triple the original purchase price.
Remember that if you only make a card's minimum monthly payment, it could take decades to pay off a large balance and result in paying a significant amount of interest.
READ ALSO: How to pay off credit card debt faster
How to compare BNPL and credit cards
Whether you should use a BNPL offer or a credit card depends on how you plan to use them. The interest you pay could be 0% for each if you make payments on time or pay off your balance by the credit card's due date.
If you want to build your credit, a BNPL offer could help; however, credit cards have a strong positive effect on your credit when used responsibly. As I mentioned, cards typically offer many purchase protections and rewards, while you receive none with BNPL.
If you're disciplined with credit cards and pay them in full every month, they're the best choice. But let’s say you struggle with card debt or want to budget a necessary or emergency purchase over several months. In that case, a BNPL offer can be a good alternative if you can afford the automatic payments.
Always ask yourself if you genuinely need or want something before purchasing it. A good rule is to wait at least 24 hours before buying a high-priced item, so you have time to consider it and avoid an impulse purchase.
However, if you need to make an urgent purchase, such as dental work or a veterinary visit, and don't have a credit card, using a BNPL offer is a convenient way to make a purchase that could significantly improve your quality of life.
Joe, thanks again for the excellent question. I hope this comparison helps you make the best financial choices when you're checking out this holiday season or see BNPL options any time of year.
LISTEN ALSO: How to pay off credit cards when money is tight
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Holly Hutchings is our director of podcasts, Morgan Christianson is our advertising operations specialist, Rebekah Sebastian is our marketing and publicity manager, and Nathaniel Hoopes is our marketing contractor.