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

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.

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 (see rates and fees) is currently offering a welcome bonus of 75,000 bonus points after you spend $5,000 on purchases in the first 3 months from 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.

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 0% intro APR for 12 months from account opening on purchases and qualifying balance transfers. 18.74%, 24.74%, or 28.74% variable APR thereafter; balance transfers made within 120 days qualify for the intro rate and fee of 3% then a BT fee of up to 5%, min: $5 and comes with a $100 cash rewards bonus after spending $500 in purchases in the first 3 months. With this card, you will score rewards like 2% cash-rewards on purchases and benefit from an introductory APR period.

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.