Buy Now, Pay Later vs. Credit Cards

More shoppers are using buy now, pay later (BNPL) loans. These loans allows you to buy something today with the program, then repay the amount over time with regular, interest-free installments. But how do they compare to credit cards?

Much depends on your age, whether you want to build credit history, can manage loans without getting into trouble, and whether you will read the fine print. Here's how buy-now-pay-later compares to paying with a credit card.

What Is Buy Now, Pay Later?

Buy now, pay later is a type of short-term installment loan accepted by major retailers and online stores. Companies offering BNPL plans include

• Affirm
• Afterpay
• Klarna
• PayPal

Each buy-now-pay-later plan is unique, but generally you'll find a few things in common.

Many BNPL companies only perform a soft credit check to approve shoppers for loans. That means applying won't hurt your credit score. (But be sure to check—some providers do perform a hard pull, especially for longer-term plans.)

BNPLs can have very low requirements to qualify—but for most, borrowers must be 18, have a mobile phone number, a debit or credit card for repayment, and the company must be able to verify your identity.

Repayment of the loan could take a few weeks or a few months. Many BNPL services set the total number of payments at four, while others allow borrowers to select their payment schedule. Usually, no interest is charged for the repayment plan, but it depends on the provider.

BNPL may charge fees including:

• Late fees
• Non-sufficient funds (NSF) fees
• Service fees for each payment
• Account reactivation fee
• Rescheduled payment fee

As you repay the original amount borrowed, the BNPL provider can replenish your available credit. So if you borrowed $500 and then paid off $500, then the provider could make another $500 loan available to you for spending.

Example of BNPL Use

You want to buy a $100 shirt, and at checkout you are offered a BNPL loan. If approved, BNPL loans typically require an upfront deposit payment, such as 25% of the purchase amount. To find the required deposit, you multiply the total by 0.25. As an example, for that $100 shirt, the BNPL plan would require a deposit of $25.

The remaining $75 must be paid off in regular installments, typically through automated payments. For example, you may have three more payments of $25 each charged to your debit or credit card over the next three weeks.

How Credit Cards Work vs. BNPL

Compared to BNPL plans, applying for a credit card takes longer, but credit cards come with some protections that BNPL plans lack.

When you pay for something with a credit card, if you don't pay it off by the due date on your credit card statement, you will be charged interest on the unpaid balance. Teens and young adults often use the following credit card types:

• Authorized user card
• Secured credit card
• Student credit card
• Cosigned credit card

Like with BNPL loans, you must be 18 to apply for a credit card. But federal law requires credit card companies to be more strict about offering a card to people under age 21. The card company must perform a hard credit check and determine your ability to pay based on your income. If you don't yet have a steady source of income, you may not qualify or need to ask an adult to be your cosigner.

There can be exceptions. You may not qualify for a student credit card if you don't yet have any income, for example. But you might be eligible for a secured credit card.

Parents can add teens under 18 as authorized users. A teen can build credit history depending on how the card reports authorized users to the credit agencies.

Once you're approved for a credit card, it still may take several days or even weeks for the physical card to show up in the mail. So, they usually won't fill an immediate purchase need in the way a BNPL plan can if you don't already have the card.

Like buy-now-pay-later loans, credit cards can be used at online and physical stores. But credit cards can also be used to purchase gasoline, make utility bill payments, and pay for other expenses. They are accepted by a majority of retailers.

Credit cards also charge fees:

• Annual fees
• Late payment fees
• Foreign transaction fees
• Balance transfer fees (optional)
• Cash advance fees (optional)
  

Example of Credit Card Use

To illustrate how a credit card works, say you get a credit card with a 20% annual percentage rate (APR) and buy a $100 shirt. At the end of the month, you can either pay the $100 and not owe any interest or pay the $25 minimum payment and owe interest on the remaining $75.

If you pay only the minimum, next month, you can pay either $75 + $1.50 (in interest) or the minimum payment. If you pay only the minimum, you will be charged interest again on the balance. The accumulation of interest payments can make using a credit card expensive in the long-term.

Buy Now, Pay Later vs. Credit Cards: Key Differences

Age Restrictions

BNPL plans are only available for teens of legal age in your state. Legal age is the age you're considered an adult, which is typically 18. You may need to be 19 years old if you live in Alabama or are a ward of the state in Nebraska.

Credit cards—specifically secured credit cards or credit cards with a cosigner—are also only available for teens 18 and older, depending on state. But a teen can be added to an adult's credit card as an authorized user after age 13, depending on the issuer.

Access and Ease

Short-term BNPL plans have a high approval rate. According to the CFPB, 69% of applicants between ages 18 and 24 are approved for BNPL loans. These loans may be a fit for those who've had trouble getting approved for a traditional credit card due to a low credit score or an insufficient credit history, or thin file.

Credit cards are more difficult to get approved for than BNPL loans. Approval may depend on many factors, including your credit history and your ability to repay if you're under 21. Gen Z also has the lowest credit scores of all generations, which may be why they have the fewest credit cards (an average of around two cards) of all generations.

If you are over 18 with no credit history, consider a secured credit card, which can help you build good credit with regular payments and learn to manage a credit card. If you're in school, you can also consider a student credit card, which has less strict approval terms but generally comes with a smaller credit limit.

Interest and Fees

If you have a credit card and pay off your bill in full each month, you won't owe any interest payments. Otherwise, you will owe interest next month on the part of the bill you didn't pay.

Buy-now-pay-later plans often have short-term repayment plans without interest and don't allow you to borrow as much as you could with a credit card. But BNPL plans may also offer longer-term repayment plans for larger amounts (for example, up to $10,000) that do charge interest.

One Harvard Business School study found that among people with lower incomes (those who earn $25,000 to $45,000 a year) who used BNPL, 20% wound up with overdraft fees, and 17% paid low-balance fees. So if you're using BNPL to stretch paychecks, be aware of the fees.

Credit Impacts

Most BNPL plans only perform a soft inquiry to approve you for credit. If you're hoping to build credit, know that most BNPL companies don't report to credit bureaus or do so consistently. But if you make late payments or if you don't repay the loan, some BNPL will report you to credit bureaus. Your credit score could go down.

Credit cards, on the other hand, will perform a hard inquiry when you first apply. Then, they provide your borrowing and repayment information to credit reporting agencies. Paying your credit card bills on time and keeping your debt amounts low can help you earn a better credit score. On the other hand, missed payments and large credit card debts can hurt your credit score.

Protections

Credit cards give you more consumer protections than BNPL loans.

The Consumer Finance Protection Bureau found that credit card products are often more transparent with consumers than BNPL loans. It may be easier for you to find and understand terms for repayment, consequences for not paying bills on time, and ways to dispute charges.

In contrast, the BNPL loan's terms and fees may be more difficult to decipher. If you need to return something or report a wrong charge, you may find that BNPL services are not as easy to work with as credit card companies.

Debt Problems

Carrying credit card debt from month to month can impact long-term financial health.

While BNPL users might sign up for services to avoid credit card debt, buy-now-pay-later can still lead to debt and credit problems, especially for young or anyone living beyond their means. This can happen when borrowers borrow too much or for too long.

In fact, Harvard Business School's study found that 45% of users rely on BNPL plans to make a purchase outside their budget, and often spend more than they would with a credit card.

The Bottom Line

Saving up to buy something, or using a debit card or preloaded card to buy it may be better than using BNPL plans or credit cards for online shopping or other purchases you can't afford to pay for immediately in full.

Used responsibly, BNPL loans could be a good fit for those who want to avoid interest and don't yet have credit files. But they also may not help you build good credit, even if you regularly pay them on time. And any unpaid or late debts could damage your credit score. And piling up BNPL loans, even if you pay them on time, can be hard to manage.

Credit cards can be a good option in you have regular income and can pay off the card every month. With credit cards, you can build a credit history, which can help you get other financial products like mortgages or auto loans. Finally, consider the value of rewards that some credit cards provide.