Buy now, pay later services are ubiquitous at checkout screens and shopping apps, offering installment plans with convenience and typically no interest. It can break up a $1,000 purchase into smaller $250 payments. As BNPL options become more common, could they replace credit cards altogether?
With inflation and strained consumer budgets, BNPL can be a compelling alternative for consumers — but it’s not a perfect substitute for credit cards. Both payment options are fundamentally different tools, and consumers can benefit from using a mix of both.
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Why Consumers Turn to BNPL
With ease of access, low-to-no-interest marketing and short-term affordability, BNPL is an attractive option. As consumers fight inflation, high interest rates and tight budgets, a payment option that allows you to turn a $400 purchase into $100 at checkout can offer the illusion of affordability.
“When interest rates are high and prices are rising, the idea of splitting a payment into four interest-free chunks feels like a no-brainer,” says Michael Rodriguez, certified financial planner with Equanimity Wealth. “For a lot of families, it’s a way to make ends meet without racking up credit card interest. But if there’s no repayment plan in place, that ‘no-brainer’ can turn into debt pretty quickly.”
The Rise of BNPL
BNPL is a fast-growing financing option. As of fall 2023, the Federal Reserve Bank of Boston reports that about 9% of consumers use BNPL, which increased by about 40% from two years before. Its use is typically higher among financially vulnerable consumers and disproportionately high among women, Black and Latino consumers.
BNPL Financial Inclusion
BNPL can be an attractive option for consumers with limited access to credit. With a quick and typically limited application process, BNPL can be a fast and low-friction way to finance purchases over time and sometimes more accessible than other forms of credit, such as credit cards and loans.
“BNPL won’t replace credit cards, but for some credit-averse or poor-credit customers, it certainly can be used as a vehicle to finance a purchase that they may otherwise be unable to afford,” says Adam Neiberg, global banking senior marketing manager at SAS.
The Consumer Financial Protection Bureau found that most consumers with a credit record who used BNPL loans in 2022 had subprime or deep subprime credit scores, and many of those had multiple BNPL loans, some from various providers.
Drawbacks of BNPL
Though attractive, BNPL can present challenges for consumers, including inconsistent visibility on credit reports and the risk of overdraft fees. Unlike credit cards, you might not be able to build credit with BNPL because some providers don’t report payments to major credit bureaus.
“The programs are marketed as a way to control payments and make them manageable over time, but it typically results in making a tight or overextended budget even worse,” says bankruptcy attorney Ashley Morgan.
If consumers lose track of payments, the consequences can be more severe than missing a credit card payment. Morgan says that BNPL takes payments directly from your bank account.
“If your budget is tight or you miscalculate your total expenses, you could face overdraft fees for your bank account or late fees for any payments on your account,” she says.
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Credit Cards Offer BNPL-Style Products
Major credit card issuers have taken notice of BNPL and have adapted by rolling out similar products, including Chase Pay Over Time, American Express Plan It and Citi Flex Pay. These financing options are a feature of credit cards that allow you to split purchases into a payment plan that typically has a flat plan fee rather than traditional interest charges.
Rodriguez says these products are the credit card issuers adapting to what people want. “The difference is, when your card does it, you usually still get the rewards, the protections and a more complete picture of your financial situation.” he says.
Could BNPL Really Replace Credit Cards?
It’s not likely we’ll see credit cards eliminated in favor of BNPL but rather a shift in how consumers divide spending.
We could see BNPL become a more preferred method for large purchases, while everyday spending is on credit cards. For example, you might break up a travel purchase or emergency expense into payments with BNPL, while charging and paying off grocery and gas purchases on your credit card.
How to Use Credit Cards and BNPL
Consider this approach for using BNPL and credit cards strategically:
— Use BNPL for large, planned purchases when interest-free options are available.
— Avoid overcommitting with BNPL by being cautious about taking on multiple BNPL loans.
— Manage everyday spending with debit or credit cards, budgeting for and paying off purchases each month.
— Use credit cards when you want to earn rewards or benefits such as purchase protection.
— Have a credit card available for flexibility during emergencies.
“BNPL has its place, but it’s not a one-size-fits-all replacement for credit cards,” says Rodriguez. “I’ve seen how it works well for small, short-term purchases, but when life throws you something big — like an unexpected expense or a family emergency — credit cards still offer more flexibility and protection.”
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Will Buy Now, Pay Later Replace Credit Cards? originally appeared on usnews.com
