How Do ‘Buy Now, Pay Later’ Apps Compare to Credit Cards?

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If you’ve been shopping for a vacation, back-to-school or just sprucing up your wardrobe after the pandemic, you may have noticed your favorite stores and shopping websites offering “buy now, pay later” options.

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BNPL options are becoming more popular, especially for online shopping, and are marketed as a consumer-friendly way to shop,” says Nirit Rubenstein, co-founder and CEO of Dovly, a platform that helps consumers improve their credit.

BNPL programs enable shoppers to take home an item immediately and then pay for it over time in monthly or weekly installments. It is a twist on old “layaway” programs introduced during the Great Depression, when consumers would make payments on an item and — when they had paid in full — could take it home. Layaway began disappearing in the 1980s as shoppers began using credit cards, which gave them the ability to take home the merchandise immediately and pay off their credit card bill over time.

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The new BNPL programs, which include services like Afterpay and Klarna, work similar to credit cards, in that you receive your merchandise immediately. However, these services do not report payments, delinquencies or balances to the credit agencies, which means they don’t affect your credit score in any way — positively or negatively.

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Annie Kim at Savings.com outlined some of the advantages of BNPL programs over credit cards: “Many Buy Now, Pay Later plans have 0% APR for a specific period of time, whereas the average credit card APR is between 15% and 20%,” she said.

Best of all, for those with no credit history or a low credit score, most BNPL programs only run a soft credit check, Kim said. Opening an account won’t impact your credit score, and qualifications for approval are typically more lenient.

Rubenstein added, “Because BNPL agreements aren’t treated like credit card debt, they typically won’t increase your credit utilization, a factor that would otherwise weigh down your credit score.”

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However, it’s important to know what you’re getting into before you start your spending spree, Rubenstein warns, highlighting some of the questions you should consider: “How much interest is being charged? How much less would the item cost if you paid now? How many months will it take until you have paid in full? And how often will payments be due?”

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Another factor to consider is late fees. Afterpay, one popular BNPL service that offers consumers six weeks to pay, may charge late fees as high as 25% of the purchase price. While these services do not report late payments to the credit bureaus — therefore, not damaging your credit score —  late fees can wreak havoc on your budget.

It’s also important to remember that BNPL programs won’t help you build your credit, which is an important step to a secure financial future. Building credit is important if you are looking to purchase a home or even get lower rates on things like auto insurance. If you are looking to build or re-build your credit, it might be better to consider a secured credit card for purchases.

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Finance experts agree that you should only use BNPL programs for necessary emergency purchases. “Try to save Buy Now, Pay Later purchases for necessary expenses that are higher in price, like replacing a broken laptop,” Kim says. “You’re still accumulating debt, so you don’t want to overextend by using it for non-essential purchases.”

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Rubenstein says, “When your cash or credit aren’t enough, BNPL can help you handle an unexpected or emergency purchase. But if BNPL helps you make purchases you really can’t afford, you may end up digging yourself even deeper into debt.”

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Last updated: August 24, 2021