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Buy now, pay later (BNPL) services have entrenched themselves on every shopping platform and nearly every service you can think of. Not only can you use services like Klarna and Affirm to finance your clothing hauls and expensive new electronics, but it’s also possible now to finance smaller, more immediate buys like DoorDash meals.
Some consumers may choose BNPL instead of using a credit card, but that may not always be the best choice when it comes to paying off the balance and building credit. Here’s how BNPL works, how it compares to credit cards and why cards are sometimes better.
How Does Buy Now, Pay Later Work?
Buy now, pay later (BNPL) services are a short-term financing option that allows you to break a purchase into multiple installments, which you can often make interest-free over a set period. You can opt in to these services by using Klarna, Affirm or Afterpay at checkout. If you make all your payments, which are often automated, on time, you won’t be charged any fees or interest. Sometimes, a small down payment may be required at once, with the remainder to be paid in installments. According to the Consumer Financial Protection Bureau (CFPB), most BNPL services collect payments on autopay to minimize the risk of defaults.
How Is BNPL Different From a Credit Card?
The structure, fees and impact on credit score can vary between BNPL and credit cards.
BNPL services allow consumers to break their purchases into smaller payments, often using a “pay-in-four” model. Credit cards can come with higher interest rates and fees, while offering more flexibility as long as the consumer can pay off their balance in full.
The upside to using a credit card is that it often allows shoppers to earn rewards on their purchases, and paying off those purchases on time can help build credit. But not all BNPL services report to credit bureaus, so they may not help build credit.
BNPL services can be especially appealing to those with low credit scores. A Consumer Financial Protection Bureau report revealed that in 2022, more than 20% of consumers with a credit record used BNPL loans, with most holding “subprime or deep subprime credit scores.” Those who depended on BNPL services often came back for more, with approximately 63% of borrowers taking out multiple simultaneous loans at some point during the year, while 33% took out loans from multiple BNPL lenders.
Nearly two-thirds of BNPL loans went to users with low credit scores, and the issue is especially prevalent among members of Generation Z. BNPL purchases made up 28% of total unsecured consumer debt for consumers ages 18 to 24, compared to just 17% for all other age groups.
What the Experts Say
Mathew Goldberg, a financial advisor at Manhattan Wealth Management Group, warns shoppers of the risk of depending on BNPL services for “instant gratification.”
“That instant gratification may just be delaying pain, financial pain,” he said. “ People could be up to their eyeballs in monthly payments because it’s more of a mindset and a behavior than really, a good, smart financial strategy.”
The CFBP agrees, noting in its report that BNPL services bear “discrete consumer harms,” thanks to an unclear structure that may present consumers with “undesirable operational hurdles, including the lack of clear disclosures of loan terms, challenges in filing and resolving disputes, and a requirement to use autopay for all loan payments.”
While Goldberg says it can be easy to let BNPL payments spiral out of control, the best use of the service would be to finance a one-time, large purchase that you know you can pay off over time.
“Maybe you’re moving and there’s furniture that you need to purchase,” he said. “It allows you to spread out the payments over months, which might be something where it’s a one-time thing rather than a behavior of a want versus a need.”
That way, users can avoid storing high credit utilization on their cards, which can lower their credit score if they need to qualify for something else down the line, like a new apartment application.
Goldberg added that he’s generally a fan of 0% APR credit cards, which give consumers the chance to purchase items on credit with no interest on payments for a certain number of months.
“I think the consumer wins when they don’t pay any interest,” he said.