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People who sign up for 'buy now, pay later' services use more credit: What to know about managing multiple credit products at once

A personal finance expert explains what consumers should know about balancing a credit card and BNPL loan.

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You've probably heard the words 'buy now, pay later' (BNPL) in the news or seen a BNPL option when you reach the checkout page after an online shopping spree. BNPL services, which are essentially point-of-sale loans, have gained significant traction in the past year, with big names like Amazon partnering up with Affirm (a popular BNPL provider) and Mastercard announcing the launch of its own BNPL service. 

Why has BNPL exploded in popularity? Researchers at TransUnion looked at nearly 4.5 million POS applicants and found that the main reasons people wanted to use BNPL was to spread their payments over time and for its ease of use.

With BNPL, a $200 purchase can be split into four (potentially interest-free) payments of $50, paid every two weeks. Furthermore, most popular retailers have the option integrated on their websites, so consumers can almost instantaneously be approved for a loan as many don't require credit checks. 

The study also found that applicants were more likely to have a greater number of cards, like credit cards and retail cards than the general population. 

"From this research, it just seems like these consumers are more credit active and more credit hungry," says Liz Pagel, senior vice president of consumer lending at TransUnion. "So I think these are consumers that want to finance their retail purchases and they also want to finance other parts of their lives."

In the study, POS-loan applicants had similar credit utilization ratio levels across risk tiers. In other words, POS applicants were seeking out these loans despite being able to put purchases on their credit card. 

Should consumers be using POS loans when they already have credit cards? How can 'credit hungry' consumers balance multiple credit options?

We spoke with Kate Mielitz, Assistant Professor of Family Financial Planning at Oklahoma State University, about how consumers should manage their credit card and BNPL loans.

How to manage credit cards and BNPL loans

When you're juggling regular credit card payments on top of bi-weekly installment payments for a POS loan, it can be hard to keep track of all of your expenses. You'll want to know the due dates for all of your payments and set up autopay to make sure you don't miss any payments and incur late fees or high interest rates.

While some BNPL providers don't charge interest on their POS loans, others, like Affirm, may charge up to 30%. Furthermore, for a loan with a 0% interest rate, you could end up paying hefty late fees: Afterpay charges $8 or 25% of the transaction, whichever is less.

When it comes to your credit card, not making the minimum payment before the grace period ends could result in a late fee as high as $40. You'll also accrue interest if you don't make the payment in full. If you're not on time with your payments on both your BNPL loan and credit card, you could end up paying more in late fees and interest than you did for your initial purchases.

The other thing you want to consider is whether a purchase with a BNPL loan fits within your long term budget.

BNPL offers consumers instant gratification. You don't need to have enough money to cover the cost of a pair of new stilettos or a pricey exercise bike. Instead, you'll receive the product immediately (as long as you have enough for a down payment), regardless of whether you can actually afford it or not.

Mielitz suggests that customers refrain from making purchases with a BNPL loan that they can't afford up front. If you don't have enough money in your checking account to cover the cost, it's best to avoid the purchase if you can.

Lastly, you should compare and contrast the pros and cons of using a POS loan versus a credit card to finance your purchase. If you're looking to build your credit score, it's probably better to opt for a credit card because many BNPL providers don't report to the credit bureaus, says Mielitz.

While on-time payments on your POS loans should help your score, they could actually end up hurting it. By opening a new POS loan, you decrease the average age of your credit history which decreases your credit score.

With credit cards, you also have the opportunity to reap more rewards. The Chase Sapphire Preferred® Card is currently offering a welcome bonus of 60,000 points, which is worth $750 if redeemed for travel through the Chase travel portal, if you spend $4,000 within the first three months of account opening. While some providers like Klarna have rewards programs, you'll likely earn more money through credit card welcome bonuses and the cash-back and/or points that they offer for spending.

Chase Sapphire Preferred® Card

On Chase’s secure site
  • Rewards

    $50 annual Ultimate Rewards Hotel Credit, 5X points on travel purchased through Chase Ultimate Rewards®, 3X points on dining, 2X points on all other travel purchases, and 1X points on all other purchases

  • Welcome bonus

    Earn 60,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $750 when you redeem through Chase Ultimate Rewards®.

  • Annual fee

    $95

  • Intro APR

    None

  • Regular APR

    18.24% - 25.24% variable on purchases and balance transfers

  • Balance transfer fee

    Either $5 or 5% of the amount of each transfer, whichever is greater

  • Foreign transaction fee

    None

  • Credit needed

    Excellent/Good

Terms apply.

 

If you're attracted to the longer repayment period and 0% interest rates offered on some BNPL loans, you could also consider getting a 0% APR credit card — some even have a welcome bonus and rewards. These cards have an introductory period, typically between 12 and 20 months, where cardholders won't have to pay interest on their revolving balance.

The Wells Fargo Active Cash® Card is one such option. The Active Cash Card has a 15 month 0% introductory period on purchases and qualifying balance transfers from account opening (after, a variable APR of 17.99%, 22.99%, or 27.99% variable APR; for balance transfers, there's a introductory fee of 3% ($5 minimum) for 120 days from account opening, then up to 5% ($5 minimum) and comes with a $200 cash rewards bonus after you spend $1,000 in purchases within the first three months of account opening. With this card, you will score rewards like 2% cash-rewards on all eligible purchases and benefit from an introductory 0% APR period.

Wells Fargo Active Cash® Card

On Wells Fargo's secure site
  • Rewards

    Unlimited 2% cash rewards on purchases

  • Welcome bonus

    Earn a $200 cash rewards bonus after spending $1,000 in purchases in the first 3 months

  • Annual fee

    $0

  • Intro APR

    0% intro APR for 15 months from account opening on purchases and qualifying balance transfers; balance transfers made within 120 days qualify for the intro rate

  • Regular APR

    17.99%, 22.99%, or 27.99% variable APR on purchases and balance transfers

  • Balance transfer fee

    Introductory fee of 3% ($5 minimum) for 120 days from account opening, then up to 5% ($5 minimum)

  • Foreign transaction fee

    3%

  • Credit needed

    Excellent/Good

See rates and fees, terms apply.

Bottom line

When it comes to juggling monthly credit card payments and bi-weekly loan installment payments, consumers should have a clear understanding of when payments are due, what the late fees and interest rates are, whether their purchases fit within their budget and what effect either product has on their credit score. But most importantly, you'll need to make sure the purchases you make with your credit card or BNPL loan fit within your budget and that you can ultimately afford them.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
Plenty of rewards and benefits including 4X points per dollar for dining at restaurants worldwide