Both retail credit cards and buy now, pay later programs can offer opportunities to spread payments for high-priced purchases, especially during the year-end holiday shopping season.
Buy now, pay later, or BNPL, is like a new form of old-school accommodation plans; The only difference is that you can take a purchased product with you instead of leaving it in the store until you pay. Using financing deals from retail credit cards also allows you to take an item home immediately after purchase, but these work differently than BNPL plans and serve different purposes.
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Shoppers who plan to spend hundreds of dollars on holiday gifts this year may want to compare both payment options.
“Either tool could work for you, it really depends on your specific situation,” said Matt Schulz, LendingTree’s chief credit analyst.
Here’s how to decide which program is best for you and your financial goals, according to experts.
Buy now, pay later deals can buy you ‘a little more time’
“If you need a little more time to pay off something, then a ‘buy now, pay later’ loan can be a really attractive thing,” Schulz said.
That’s because BNPL allows you to take an item home or have the item shipped to you immediately after you agree to make a certain number of payments within a certain period of time, according to Sara Rathner, credit card expert and writer at NerdWallet.
While consumers may find these programs slightly more palatable than carrying credit card debt, shoppers should find them more affordable. Rather, keep in mind that interest or fees may be reflected in these monthly payments, depending on the company and terms of the agreement.
Managing BNPL accounts can also be difficult if you have multiple different active accounts at the same time.
“If you bought a bunch of stuff and got into several BNPL plans at the same time, you’re going to have those withdrawals from your account in a short period of time,” Rathner said.
Depending on how tight your budget is, your financial situation can become complicated, Schulz noted.
0% discounts at retail stores can help with large purchases
But interest rates are much higher than regular credit cards: The average retail card APR hit a record high of 28.93%, according to recent Bankrate research. Consumers can skip interest payments by paying off their balance in full each month, Rathner said.
Additionally, retail credit card accounts, especially newly opened ones, often include “deferred” or zero-interest promotions. A “deferred interest,” or 0% interest, retail card can give you about six to 12 months to pay off a larger purchase, Schulz said.
However, it will be really important to pay the balance before the end of the period. Otherwise, not only will you be liable for interest on the remaining balance, but you’ll also incur retroactive interest on the original purchase price, Rathner warned.
Holiday debt can be pretty sticky for cardholders. NerdWallet found that nearly a third (31%) of Americans who incurred credit card debt while shopping during last year’s holiday season had yet to pay off their credit card debt in August.
But people still plan to finance their holiday purchases with debt. In fact, retail credit card registrations consistently increase in the fourth quarter each year, especially in November and December. according to this to the credit bureau company Equifax.
Retail cards are often the first line of credit a cardholder opens because they are easier to qualify for.
Unlike BNPL, a new retail card will mean you’ll be able to access that credit in the future when you need it, Schulz said, and it can also help rebuild your credit score.
Schulz said BNPL doesn’t help you improve your credit score because payment history isn’t reported.
Credit cards can also provide stronger consumer protection; If you need to issue a refund or a seller doesn’t hold up their end of the bargain with a purchase, you have the opportunity to dispute the charge and get the money back if it’s ruled in your favor, NerdWallet’s Rathner said.
“For better or worse, many people rely on credit cards as an emergency fund during tough times,” Schulz added. “That’s not something you can do with a BNPL.”