Should you use a credit card or buy now pay later (BNPL)?

By Laura Adams | MBA and Host of Money Girl | Sponsored Content

With inflation at record highs, millions of Americans are tapping their credit to fund basic needs. But not everyone can afford to pay off their credit cards in full every month. So, many retailers partner with Buy Now Pay Later (BNPL) services to make buying their products and services more accessible for consumers.

While some BNPL options are similar to credit cards because you make purchases and pay for them over time, there are critical differences you should know. We’ll review different types of BNPL, how it differs from cards, the pros and cons of each option, and how both affect your credit.

What is buy now pay later (BNPL)?

Defining BNPL can be challenging because there are different business models and offerings. Some offer a short-term loan that gets repaid with or without interest based on your chosen term and credit. If approved, you can also finance a larger purchase with interest from six to 24 months.

Other BNPL offers allow you to split a purchase into equal interest-free payments over a period, such as four or six weeks. So, there's a range of BNPL offers, and consumers shouldn't mistakenly believe each is the same.

For many BNPL options, you don't see them until you add goods, such as clothing, furniture, or electronics, to an online shopping cart and begin to check out. If you select a BNPL option, you must complete a short application with your personal and payment information.

Once approved, your first BNPL payment is due at checkout, and the remaining get manually or automatically charged to your chosen debit or credit card. That's different from a credit card where you select an amount to pay, such as from the monthly minimum payment to your entire outstanding balance.

What are the pros and cons of BNPL?

The main benefits of many BNPL offers include not paying interest or fees or getting charged a relatively low rate if you pay on time. That could help consumers who struggle to manage their cash flow as prices rise during inflationary periods.

Also, having payments charged automatically to a debit or credit card linked to the account makes payment convenient. Plus, the transaction is quick and seamless because many BNPL options get integrated with online checkout.

However, a downside of using BNPL is that it may encourage overspending when you see an attractively low weekly payment. Plus, there are account fees if you don’t make payments on time or have enough funds in a linked account.

What are the pros and cons of credit cards?

A credit card gives you the most flexibility for repayment and may allow you to accumulate rewards such as cashback or points to redeem for products and services. In months when your budget is tight, you can cut your payment by making a card's minimum payments.

Plus, credit cards like a Citizens Cash Back Plus™ World Mastercard® credit card offer unlimited 1.8% cash back on all purchases*. Depending on your monthly spending, this could add up to hundreds of dollars in savings, during course of a year.

The downside of cards is that it's easy to accumulate high-interest debt when you carry balances from month to month instead of paying your balance in full. Depending on how long it takes to pay off charges, they could cost double or triple the original purchase price.

How does using a credit card or BNPL affect your credit?

While BNPL can be the right financial tool for life's necessities, one downside is that splitting payments over several weeks doesn't help you build credit because it's not a credit account that gets reported to the credit bureaus.

However, if you have a BNPL loan, your payments typically get reported to one or more national credit bureaus. So, making on-time payments helps you build credit, just like with credit cards. However, defaulting on either option or making late payments results in negative marks on your credit file, causing your scores to go down.

When should you use a credit card or BNPL?

If you're confident you can pay off a purchase within the next month or two, using a credit card may give you valuable benefits, including rewards, purchase protections, and extended warranties. However, if you need to make a purchase and are unsure when you can pay it off, using a BNPL offer is a convenient way to avoid credit card interest and still get essential products or services.

A good rule is to wait a minimum of 24 hours before buying a high-priced item, so you have time to fully consider it and make sure you don't fall prey to an impulse purchase that isn't in your budget.