How is buy now, pay later different from credit card? Credit cards quickly became popular after their introduction in the late 1960s, increasing certainty about the inevitability of a shift to a cashless society. Fifty years later, there is still talk of the move to cashless technology, but the role of credit cards in this brave new world has become increasingly uncertain, with some saying that plastic (debit and credit cards) go the same way as the check and old school.
Even before the pandemic, credit card growth slowed, with the annual growth rate of credit card loans declining by 5.5% between 2018 and 20201. Due to dissatisfaction with traditional banks’ credit options, which came with high-interest rates, penalties, and hidden fees that have alienated the consumer. Faced with tighter restrictions, banks have also become increasingly reluctant to lend to those they consider to be at risk. Banks are now obligated to help customers with persistent debts pay off their balances, threatening their main source of income and reducing the incentive to offer credit cards to risky borrowers (a growing number of consumers due to lack of credit history and loan debt).
The COVID-19 pandemic: a driver of change
The pandemic has irrevocably changed the way people buy and pay for renewal, and credit systems are no different.
Outstanding credit card balances have fallen by more than £14 billion to £41 billion between the start of the pandemic in February 2020 and June this year. The most optimistic estimates do not predict that credit card balances in the UK will return to 2019 levels before the end of 2023.
Even though some commentators argue that this will decrease once consumers have used up their savings (after having reduced their ability to spend during the pandemic and opting to pay off existing debt), there is evidence that this indicates a change, more permanent behavior. †
The use of debit cards has not shown the same sustained decline: the value of debit card transactions increased by 13.4% year-on-year in June 2021 and the number of transactions increased by 53%.
What Is Buy Now, Pay Later?
Buy now, pay later is a form of short-term financing. BNPL plans often do not charge interest or fees other than late fees for late payments. These installment loans are offered by various companies including:
- Affirm
- Afterpay
- Klarna
- Paypal
- Zip (formerly quadpay)
BNPL can be used at several major retailers, which vary from plan to plan. Some credit card companies, including American Express, also offer payment plans for eligible cardholders. Each Buy Now, Pay Later plan is unique to the carrier, but they generally have a few things in common.
For example, BNPL loans typically require a down payment that represents a portion, such as 25%, of the purchase amount. After that, the remaining balance must be paid in installments over a few weeks or several months. Some BNPL services set the total number of payments at four, while others let borrowers select their payment schedule.
Just over half of Americans (51%) used a buy now, pay later service at least once during the pandemic in 2020 or 2021. The most frequently purchased items included clothing, furniture, appliances, electronics, household items, and cosmetics.
On average, as of April 2021, buy now, pay later, buyers had $883 in debt with one or more of these payment plans.
How Does Buy Now, Pay Later Work?
“Buy Now Pay Later (BNPL) allows customers to spread the cost of their purchases (ranging from a top £20 to expensive furniture) over three to seven interest-free payments over several months. Despite the similarity of these loans to traditional point of sale financing, the convenience and growing ubiquity of BNPL (in the UK you can use BNPL to do your shopping), along with the new generation of branding and marketing, has made BNPL popular and fast.
Another advantage is that most schemes are free for consumers. Instead of the consumer paying interest to get credit, the retailers themselves pay a fee for each transaction. While this may not sound like a great deal to retailers, “buy now, pay later” can lead to a 20-30% increase in sales and a 10-15% decrease in cart abandonment, encouraging consumers to make more expensive purchases, order more items and reduce purchase decision times6.
Britons spent at least £2.7bn through BNPL in 2020, almost four times more than in 2019. By 2026, Brits are expected to spend nearly £40bn a year through this method. More interestingly, it’s not just young consumers: While adoption of digital options, e.g., digital wallets, has been notoriously slow among older generations, Klarna’s fastest-growing user base is between the ages of 40 and 50.
BNPL was identified by the FCA in its recent investigative report as an affordable alternative to other forms of credit, particularly for consumers who find it difficult to meet the credit card requirements of strong credit history. As BNPL has grown stronger, the need for regulation has become clear.
The Financial Conduct Authority (FCA) plans to begin consultations on new rules next year; it is expected to have a significant impact by making the schemes more secure and giving them the seriousness of a formally recognized and regulated institution.
BNPL’s main pain point is also addressed: schedules associated with a store rather than a customer. The FCA notes in its report that many consumers find it difficult to keep track of their debts with multiple providers.
PayZilch and Klarna are now offering their customers virtual cards, allowing them to use BNPL in any store that accepts mobile payments, a trend commercial banks are following as they try to keep up with the change.
Ignoring the trend is no longer an option, as a July Mckinsey report found that US banks, which were slow to respond to BNPL’s demand, had lost $8-10 billion in annual revenue to fintech BNPL providers. With HSBC and Natwest, existing cardholders can now create structured payment plans for individual purchases at a much lower cost than their credit cards.
Emerging banks such as Monzo and Revolut have announced similar schemes, with no interest on purchases paid within two months and with the addition of pre-approved credit limits like traditional credit cards.
Linking credit to the consumer, rather than to the business, has the added benefit of avoiding conflicts of interest that can arise if retailers pressure the BNPL schemes they partner with to approve more loans to make the sales increase.
Credit Card Reform
An overhaul of the credit system could mean offering a wider selection of credit options to consumers, from both start-ups and traditional banks. Transparent terms, lower interest rates, and fewer hidden costs would encourage competition and innovation and encourage consumers to deter debt and interest rates that are perceived as exorbitantly high.
New technology, such as Zopa’s, which weighs the creditworthiness of consumers with limited credit histories from traditional reference bureaus, including those applying for loans through BNPL, offers more opportunities for people to benefit from using the credit.
The current consensus is that it’s best to be careful with credit cards; their place in the future of payments is not guaranteed and seems less and less likely.
How Is Buy Now, Pay Later Different From Credit Card?
Just like buy now, pay loans later, credit cards can be used at retailers. But they can also be used to buy gasoline, pay utility bills, and accommodate other types of expenses. If the cardholder pays his balance in full each month, he will not owe any interest. Otherwise, interest is accrued on your balance at the annual interest rate (APR) of the card.
Credit cards can also charge fees, including:
- An annual fee
- Balance transfer fee
- Cash advance costs
- Foreign transaction costs
- Late fees
A credit card is an example of revolving credit. With this type of credit arrangement, you have a fixed credit limit against which you can borrow. If you make purchases with a credit card, your available credit will be reduced by that amount. When you make a payment, your available credit is released.
Buy Now, Pay Later vs. Credit Cards: Which Is Better?
Buy now, pay later plans, and credit cards are options to consider when shopping online or in stores. But each has some pros and cons.
Benefits Of Buy Now, Pay Later
- Convenience: Apply online and get approved almost instantly
- Get approved without a hard credit check, which can lower your credit score
- Pay for purchases in installments, usually with no interest charges
- Choose a payment frequency that suits your budget (with some BNPL providers)
Disadvantages Of Buy Now, Pay Later
- Since you don’t have to pay the full amount right away, it’s easy to overspend
- Payment plans are not always interest-free
- Skipping a payment or being late with payment can hurt your credit score
- Not all retailers accept buy now, pay later
Advantages of credit cards
- Can be used in a wider range of retailers and for other purposes
- Pay for overtime purchases at your own pace, with no fixed installments
- Potential to earn discounts, miles, or points on purchases
- The cards can provide other benefits such as travel insurance and car rental.
Disadvantages of credit cards
- Interest charges can add up quickly if you keep a balance from month to month
- A hard credit check is usually required to qualify
- Late payments can be bad for your credit score
- Credit cards can charge numerous fees, adding to your total cost
How To Choose the Right Buy Now, Pay Later Plan
When comparing Buy Now, Pay Later plans, keep the following in mind:
- Which retailers accept it?
- Requirements for the first deposit
- Number of required installments
- Any interest costs
- Fees, if applicable
- Restrictions or exclusions on purchases
- Credit check requirements
- Shipping policy
- Refund & return policy
Also consider how a buy now, pay later arrangement can affect your creditworthiness. While many BNPL companies only perform a soft credit check to approve buyer loans, your credit score can still make a dent if you’re late in paying and the company reports it to a credit bureau.
FAQ
What is buy now and pay later?
Buy Now Pay Later plans do exactly what they say: you get the chance to buy something without having to pay for it later. Also known as point of sale credit, some schemes give you 30 days to pay, while others allow up to 12 months.
How much does it cost to buy now and pay later?
In general, you will not pay any interest if you return the price of what you purchased within the delay period. These periods are usually interest-free.
If you buy now, pay carefully later, you can put off paying for something for several months or even a year and not pay a cent in interest. Many of the big companies won’t charge you interest if you pay off your balance before the delay period ends, even if you don’t pay until the day before.
Alternatively, some offers allow you to spread the cost over a longer period but may charge a high-interest rate, e.g. 39.9% APR.
Don’t miss a payment
Because of the way Buy Now, Pay Later works, it can quickly become expensive if you don’t make your payments on time.
If you don’t pay off your debt before the delay period ends, some providers will charge you an interchange fee or a lump sum of interest may be added to the debt.
In addition, late fees may also be charged. Late payments can also show up on your credit report and affect your credit score.
So be sure to set up calendar alerts and reminders to make sure you pay off debt before interest is added.
Does Buy Now Pay Later Affect Credit Scores?
Buying now, paying wisely later, and paying your money back on time can improve your score. That’s because when you use credit responsibly, you show lenders that you are a trustworthy borrower.
But if you’re behind on agreed payments, it’ll show up on your credit report for at least six years. This can lower your credit score and may affect future loan, credit, or mortgage applications.
Why wasn’t I eligible to buy now and pay later?
Because of the way Buy Now, Pay Later works, it’s a form of credit: the price of the item is lent to you. That means buy now, pay later, and providers can check your credit score before deciding whether to approve your application.
If you have a bad credit score, you may be refused purchase now and credit later. Learn more with our guide to why companies are rejecting credit applications.
It’s worth checking your credit score before applying to buy now, pay later to see if there are any issues you can fix to improve your score.
What are the alternatives to buy now and pay later?
Used correctly, buy now and pay later can be a convenient way to purchase an item without having to part with your money for a while. But there are other ways you can do this.
For example, you can apply for a credit card with an interest-free offer for purchases and spread the cost of paying for items over several years without paying a penny of interest. The advantage of a credit card over buy now and pay later is that it can be used in most stores, so you can spread the cost of several items instead of just one.
Conclusion – Buy Now, Pay Later vs. Credit Cards: Which Is Better?
Buy now, pay later plans can make it easier to buy things online or in stores and pay relatively quickly, often with no interest charges. These point-of-sale installment loans may be especially suitable for people who have had trouble getting approved for a traditional credit card, either because of a low credit score or bad credit history.
Like credit cards, BNPL loans must be repaid promptly to avoid possible damage to your creditworthiness. And it’s still helpful to have at least one credit card to use in situations where buy now, pay later doesn’t apply. For example, you may need a credit card to book flights or rent a car. Finally, if you want more information on the best credit card guides, make sure to always check the Best Credit Cards Guide.
