More and more consumers are giving up credit card rewards instead of buying immediately and financing options for their purchases later.
According to a study by the C+R study, more than half of online shoppers surveyed said they prefer programs like PayPal Credit, Afterpay and confirmation of programs such as traditional credit cards, while a surprising 38% said that the BNPL service will eventually replace its credit cards entirely.
But is this really a good idea?
How BNPL works
Buy now, future services offer users the option to make installments in weekly, biweekly or monthly to make purchases. According to the C+R study, the most common types of purchases are clothing and electronics, and more than 40% of respondents in each category said they have used the BNPL service to purchase these purchases. Furniture, electrical appliances, household goods and cosmetics are also ranked first.
Some BNPL plans have an annual percentage of 0%, but others have a rate of up to 30%. Some companies, such as confirmation, also report loans to the credit bureau, which may affect your credit. If you missed your payment, you may be subject to fees and higher interest. It is important to read the beautiful print and make sure all payments are made on time.
Flex Pay (formerly elevated) usually does not perform hard credit queries when applying, but Canso be aware because it will affect things like a loan application or can prevent you from getting another credit card.
BNPL Travel
A growing number of travel brands, including companies such as Delta Vacations, Expedia and Carnival, now offer purchase, future payment plans. They allow you to make installments using providers like AKA, Krana and Flex Pay.
Several airlines offer passengers the option to use purchases now, paying later at checkout when purchasing a flight. Alaska Airlines, Border Airlines, Spirit Airlines, Southwest Airlines and United Airlines all offer flexible salaries. JetBlue and Delta Air Lines accept PayPal credits for flight purchases made on their websites. With American Airlines, you can use confirmation to pay for flights and seats, rather than extra fees like luggage.
For airlines or travel providers that do not have BNPL at checkout, you can still fund your purchase. Many BNPL services offer one-time virtual visa cards for the amount you want to make a purchase. So if you are buying a $500 flight and the BNPL service approves that loan amount, you can choose to receive one-time card details to access the airline or travel provider’s website to purchase your flight.
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The Attraction of BNPL
For consumers, buy now and use the later service function as a reverse driving. Instead of getting the item immediately, you pay once a month after purchase, you receive the item after purchase and continue paying it off. Many of these services have an app that can be downloaded and registered for an account. You usually have to link to a debit or credit card. Some retailers have partnerships with a variety of services that allow you to use a BNPL account at checkout; for other retailers, you may need to set up payments using the BNPL service’s app.
The difference between BNPL and traditional credit cards is that BNPL has no interest and no credit checks. If your credit card has high interest rates, the ability to pay installments without interest seems attractive. And, if your credit gap doesn’t even exist, there is usually no credit check to qualify for a BNPL program.
For those who need to make expensive purchases but don’t pay in full, BNPL can be a clever way to get the items they need when they pay for them over time.
Related: 6 Things to Improve Credit Rating
Risks and disadvantages
While 0% interest is a big attraction, if you are late to purchase now, please pay for the service later and you may charge a late fee. If you link your debit card to the BNPL service and you don’t have funds at that installment, you may overdraft your bank account, which may also trigger fees.
Although BNPL seems to be more flexible than traditional credit cards, it is still a debt. If you don’t pay, you may be sent to favorites.
For example, Zip’s website states:
Accounts with long installments have been sent to Favorites. This is an automated process – when this happens to a ZIP customer support agent for a given order or its installment.
For some, using these services can lead to overspending and encourage financial habits. Among the people surveyed by the C+R study, 59% said they bought unnecessary items through BNPL, which they could not afford. More than half said they were already behind payments, and nearly half said they were likely to pay within the next 12 months. If you use these services and fall behind payments, it’s important to have a plan and avoid debt.
Different services have different policies, fees and purchase limits. It’s easy to think of it as a few hundred dollars here and there, but if you use multiple services, it adds up. With some services, you can use a credit card as an installment payment method, but paying with a credit card can be a slippery slope. If you do not pay your credit card balance in full monthly, you can receive the credit card interest you want to avoid.
Some major credit card issuers, including Chase and Capital One, do not allow payments to the BNPL program – you may not receive reward points, miles, or cashbacks even if you do link your credit card to the BNPL service. You also lose the potential of rewards completely when you link your debit card to the BNPL service.
Credit cards can also be a useful source of purchase of extended warranty and consumer protection if a merchant fails to deliver or purchase the product you purchased. You may not have the same protections using BNPL services.
Return policies may also vary depending on BNPL services. You need to make sure you understand the return strategy of the service so that you still don’t pay on installments to purchase the purchase that has been returned to the merchant.
Alternatives to BNPL
Some banks have jumped into the installment plan trend – over time, Chase pays, pays and plans according to American Express (Amex feature does not require enrollment) and Citi Flex Pay – as a way to attract consumers. These plans have fixed monthly fees that may be less than a typical credit card rate. Using these programs can still allow you to earn rewards on your purchases.
If you are making a bigger purchase that takes time to repay, you can choose from an introductory APR card with 0% introductory. You can earn registration bonuses for your new card and slowly repay your purchases over the specified 0% interest period.
When it comes to financing travel, it is best not to participate if you can’t afford it. Buy now, future payment plans are not smart use of credit. If your trip is cancelled, you may still owe money on the loan. Rather than debt Disney vacation, open a card with a lot of registration bonuses, use it for your daily expenses and pay your balance monthly and then use those points or mileages to travel.
Bottom line
At TPG, we recommend using a credit card to earn travel rewards and paying your monthly credit card bill in full, as interest rates or fees may exceed the points, miles or cash back you can earn.
Given consumers’ knowledge of BNPL services, why some major credit card issuers have understood in the way they offer installment plans. This way, consumers can repay with flexibility, but still earn cash or travel rewards.
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