Buy now, pay later vs credit cards

Buy now, pay later (BNPL) credit is the fastest-growing online payment method in the UK. Online purchases using BNPL are growing at a rate of 39% per year and market share is set to double by 2023.

The huge popularity of these schemes is mostly being driven by the younger generation who enjoy the convenience BNPL brings. BNPL offers the opportunity to “try before you buy” with flexible, interest-free payments.

However, as more shoppers turn to BNPL services, the credit card market is taking a hit. Barely half of the millennial generation (those born between 1981 and 1996) own a credit card (51%), compared to 71% of generation X (born between 1965 and 1980). Of those who don’t own a credit card, 93% never plan to take one out, preferring to use newer, alternative ways to delay payments instead.

What is BNPL and how does it work?

BNPL is simply a way of delaying full payment for goods you buy. You can use BNPL in stores or online and the BNPL provider pays the retailer for you. You then repay the BNPL provider at designated intervals, whether that’s weekly, fortnightly or monthly – although some providers offer a defined interest-free period in which the amount can be paid off.

The main attraction is that no interest is charged on your repayments. You’re simply spreading the cost of your purchases into more manageable payments over a longer period of time.

Some of the biggest BNPL providers include Klarna, Laybuy and Clearpay, but there’s also Openpay, Splitit, Zilch and DivideBuy.

How buy now, pay later is different from credit cards

Both BNPL services and credit cards let you spread the cost of your spending into more manageable payments. However, they both work in different ways.

Credit cards will typically have higher credit limits compared to BNPL and payments are made on a monthly basis. In comparison, BNPL services give you the option of repaying weekly, fortnightly or monthly, depending on the scheme.

If you spend on a credit card, you’ll have a grace period of around 56 days in which you won’t pay interest on any purchases, providing you repay your balance in full. However, this grace period applies from the start of your billing cycle, so if you buy something just before your statement was generated, you might only get around 26 days’ interest-free.

In comparison, Klarna gives you 60 days in which to repay your debt interest-free, while Laybuy and Clearpay both give you 6 weeks. These periods start from whenever you’ve made your purchase, so there’s no billing cycle to worry about. However, if you don’t make any of your repayments on time, you may be charged a late payment fee.

Another key difference is credit checks. Most BNPL providers will only run a soft credit check on you, which won’t leave a “footprint” on your credit file for other lenders to see, as a hard search would. This means it can be easier to get access to credit with a BNPL service than through a credit card, where a hard check will always be carried out.

Will BNPL affect my credit score?

Credit reference agencies (CRAs) Experian, Equifax and TransUnion have recently announced that BNPL debt will start showing on credit reports from spring 2022. (For more information about the announcement, read our news article.)

This has been a much debated topic and the risk of debt has become an increasing problem, according to Citizens Advice, with figures showing that 1 in 10 buy now, pay later shoppers have been chased by debt collectors. But as a general rule, if you stick to the terms and conditions of your BNPL scheme, it’s unlikely that your credit score will be negatively affected.

Where it might become a problem is if you miss payments. Most BNPL providers charge a late payment fee and reserve the right to report missed payments to CRAs, and these will then be noted on your credit file. Although nothing is written in stone as of yet, the announcement that BNPL debt will start showing on credit reports from spring 2022 could have a negative impact on your credit rating and future lending or the rates you’re offered. But it could also help your score if you borrow and repay on time and responsibly.

Another point to bear in mind is that as the BNPL market becomes regulated, the Financial Conduct Authority (FCA) could require BNPL providers to share data about missed payments with credit reference agencies on a more frequent basis. This would have a much greater impact on consumers’ credit scores.

Pros and cons of BNPL

How credit cards work

Credit cards enable you to pay for items and goods up to your set credit limit. The amount owed is then repaid to your credit card provider in monthly instalments.

Your credit card provider will send you a bill each month and if you clear your balance by the due date, you won’t pay interest. If you are unable to pay off the balance in full, interest will be charged – unless you’ve taken advantage of a 0% offer.

Monthly repayments are not fixed, but you must pay off at least the minimum monthly repayment. If you don’t, you may have to pay a penalty fee and the late payment will likely be recorded on your credit file.

One of the biggest benefits of using a credit card is that purchases between £100 and £30,000 will be protected under section 75 of the Consumer Credit Act. That means that if something goes wrong and your item doesn’t turn up or is faulty, your card provider is jointly liable with the retailer and you should get your money back.

Pros and cons of credit cards

BNPL vs credit cards

Do any credit cards offer their own version of BNPL?

This will depend on your card issuer and provider. Mastercard, for example, offers Instant Payment Services which allows cardholders to spread the cost of big purchases into smaller monthly chunks. You will have the flexibility of being able to choose your instalment plan and decide how many payments you would like to make. Interest and fees will apply.

Are BNPL schemes regulated?

Not at the moment, no. However, this is due to change after the FCA announced in February 2021 that BNPL services will face stricter rules and regulations. The measures will include forcing BNPL services to carry out affordability checks before lending to shoppers, and ensuring the vulnerable (those struggling with repayments) are treated fairly.

Will BNPL replace credit cards?

Even though BNPL services are becoming increasingly popular, credit cards still have a lot to offer. As well as being able to take advantage of cashback and rewards, users can also benefit from section 75 protection. What’s more, credit cards are currently well regulated, while BNPL services are not.

Credit cards can also help you to rebuild your credit score much quicker than a BNPL service can. For these reasons, it’s unlikely that credit cards will be replaced by BNPL.

Frequently asked questions

• Is buy now, pay later bad for my credit score?

  If you use a BNPL scheme sensibly and keep up with your repayments, there should be no negative impact on your credit score. However, if you miss repayments, your credit score could go down which will affect your ability to get credit again in the future.

• Why shouldn't you use BNPL?

  The main issue with BNPL is that it could encourage you to spend more than you can afford to repay and your debt could quickly spiral. If you’re thinking of using a BNPL service, always be sure you understand the terms and conditions fully and set a spending limit so that you don’t end up spending more than you can afford. Be sure you can make your repayments on time too.

• Should I use BNPL or a 0% APR credit card?

  If you want to make a number of larger purchases (or even pay for a one-off big-ticket item) and would like to spread the cost interest-free over several months, a 0% purchase credit card will likely be the better choice. Providing you pay off your balance in full before the interest-free period is over, this can be a convenient and flexible option. Managing one credit card can also be easier than keeping track of multiple BNPL services across different retailers.

  However, if you’re looking to pay for smaller purchases over the short term and you’re comfortable you can afford to repay what you are spending, or you simply can’t get accepted for a credit card, BNPL may work for you.