The advent of Buy Now, Pay Later credit card plans

Photo: Pixabay

Over the last few years, Buy Now, Pay Later loans, or just BNPL, have become one of the fastest-growing payment methods online. Buy Now, Pay Later is a type of installment loan offered to a shopper at the checkout, either online or at the point-of-sale terminal. It allows the customer to make a purchase immediately and defer payment over several installments. It is easy and that simple! Besides that, most BNPL loans do not do a hard credit check on your credit history, which could lower your credit score.

Indeed, customers have appreciated the simplicity of the new method of payment, which resulted in the explosion of BNPL payments worldwide. In 2022, the global BNPL market was valued at $6.13 billion. And it is projected to grow with a compound annual growth rate (CAGR) of 26.1% from 2023 to 2030.

Thus far, the BNPL market is dominated by fintech companies. According to McKinsey & Company insights, fintechs are already “diverting $8 billion to $10 billion in annual revenues away from banks”. The most notable BNPL fintech providers include PayPal Credit, Afterpay, Klarna, Affirm, Zip, FuturePay. Fintechs promise to revolutionize how we consume products in the age of total digitization. Until recently, the valuation of one of the major BNPL fintech players, Klarna, reached $45.6 billion alone.

It is not surprising that banks are trying to catch up and seize new opportunity. One obvious possibility for banks is to expand payment options with the existing credit cards and provide Buy Now, Pay Later financing for qualified purchases. Some big banks, such as Chase and Citi, have already implemented this innovation and offer their clients BNPL credit card plans: My Chase Plan® and Citi Flex Pay.

Whereas BNPL offers from fintech providers have clear advantages, some experts believe banks can successfully compete in this crowded market. By leveraging the bank’s existing strengths, i.e., brand equity, consumer trust, and typically lower rates and fees, banks find themselves better positioned to conquer the rapidly-growing BNPL market. While similar to traditional BNPL loans in many ways, the BNPL credit card plans from banks generally come with better customer protection. They are also packed with unique features like a reward program and other card perks. Needless to say, that major BNPL providers are still in their infancy, and the explosive growth of BNPL has already drawn the attention of regulators. Before you sign up for a BNPL service from any on-the-market fintech provider, check if your bank already offers you a comparable financing option, such as the credit card BNPL plan.

What is Buy Now, Pay Later credit card plan?

Like the traditional Buy Now, Pay Later loans from fintech companies, the BNPL credit card plans let you pay off a purchase over time with multiple installment payments. Once a purchase is placed on the BNPL plan, you do not pay any interest on the purchase,instead banks charge you a fixed monthly fee.

To keep your account in good standing, you still need to pay the minimum monthly payment on your credit card, which will also include the BNPL installment. Before putting your purchase on the plan, banks allow you to calculate the BNPL plan options - repayment period, monthly payment, and total estimated fee charges.

However, not every purchase is qualified to be placed on the BNPL plans. To trigger the BNPL offer on your credit card, the purchase needs to meet the minimum amount requirement. Although for most credit cards, the minimum amount is in the range of around $100, it still makes smaller purchases not eligible to be placed on the plan.

In a nutshell, Buy Now, Pay Later credit card plans are just installment loans similar to banks’ personal loans, except that BNPLs are more straightforward to qualify for if you already have a credit card account.

How do I make payments for my Buy Now, Pay Later credit card plan?

The way you make payments on your credit card would remain the same even if you started the BNPL plan in it. You still make your monthly payments following the usual credit card schedule and must meet the minimum required amount.

What does change, though, is how this minimum payment is calculated. When you have an active BNPL credit card plan, to determine your new minimum payment, the bank adds the BNPL installment to your otherwise ordinary credit card minimum payment amount.

Your new minimum payment is just a sum of two components - the BNPL installment amount and your regular credit card minimum payment. And your payment schedule stays unchanged whether you have an active BNPL plan or not.

What are the advantages of the Buy Now, Pay Later credit card plan over the traditional Buy Now, Pay Later loan?

When comparing traditional Buy Now, Pay Later loans from fintech providers, and the credit card Buy Now, Pay Later plans from banks, the latter has some notable advantages.

• Consumer Protection. Traditional BNPL loans do not offer the same consumer protections as the BNPL credit card plans. When financing your purchases through the BNPL credit card plan, you are covered with the same consumer protection that applies to credit cards. E.g., dispute protection, item return policy, purchase protection, etc.

• Rewards Program. With the credit card BNPL plan, your purchases earn rewards points, cashback, or miles like any other qualified credit card purchases.

• Travel benefits. With credit card Buy Now, Pay Later plans, you enjoy all the travel benefits applicable to your card and described in the card’s terms and conditions.

  On the contrary, if you consider financing your travel through a traditional Buy Now, Pay Later loan, you are unlikely to receive travel benefits comparable to the credit card’s BNPL plans. In particular, you should pay close attention to the cancelation policy when financing with traditional BNPL loans. If your travel arrangement changes, you might still be subject to continue making installment payments. You will need to contact your travel company to get a refund for the trip.

When traditional Buy Now, Pay Later services might have the edge over the Buy Now, Pay Later credit card plan?

Most traditional BNPL loans typically have four installments with no interest or fees. The installment payments are due every two weeks, and these loans are known as the Pay in 4 plan. By far, they are the most widespread BNPL offers on the market. The longer-term plans are less popular and may also charge interest and fees. Compared to the credit card BNPL plans, traditional Buy Now, Pay Later loans have some distinct advantages.

• Convenience and Simplicity. The BNPL services do not require a lengthy application process; they allow you to access BPNL financing quickly and without extra hassles. Besides, many merchants directly integrate BNPL payment options through their close partnership with the BNPL provider. When a BNPL payment option is unavailable at the checkout, many BNPL services provide a mobile app that conveniently facilitates the purchase. The convenience and flexibility of traditional BNPLs are really unparalleled.

• No fees or interest. Generally, Pay in 4 plans do not charge customers any interest or fee if the purchase is paid in full within six weeks. Some providers have even longer interest-free periods. For example, PayPal Credit offers interest-free Buy Now, Pay Later loans with a repayment period of six months, with no penalties for paying off debt earlier.

• No hard check on your credit. In most cases, the approval decisions are made instantaneously without requesting your credit history from a credit bureau. Some providers, however, do perform a soft credit check to approve and fund your purchase. Although this is convenient in some situations and leaves your credit score unaffected, it also means that your loan might not be reported to credit reporting companies, preventing you from building a credit history.

  By not doing full credit checks, BNPL services open a new way to buy on credit for customers with limited or no credit history. Less strict approval criteria make Buy Now, Pay Later loans a popular option among people without access to traditional credit cards.

Tip: if you are considering financing a purchase with the traditional BNLP loan, always make sure you carefully read the BNPL agreement. Before agreeing to the loan’s terms, check all BNPL plan documents and understand any charges for which you might be liable. In particular, pay close attention to the late payment fee, penalty APR, early payment fee, etc.

Should I place my credit card purchase on the Buy Now, Pay Later plan or leave as it is on the credit card?

The answer to this question really depends on the situation.

A major difference between the usual credit card purchase and the one placed on the BNPL plan is that you can pay down for the credit card purchase as little as you want, provided that you meet the minimum monthly payment. With the BNPL plan, you are obligated to make fixed payments every month over a set amount of time.

Keeping a revolving balance on the credit card is not necessarily the most cost-efficient option, but it does offer a lot of flexibility in terms of your payment strategy. That said, your total payment for the usual credit card purchase over time will be larger than that financed through the credit card BNPL plan because credit cards tend to have higher average interest rates.

On the opposite, credit cards’ BNPL plans tend to have lower average interest rates, and your total payment is likely to be lower, but you will not have as much payment flexibility - you need to make fixed installment payments on a monthly basis till the end of BNPL plan term.

Generally, credit cards are considered a better option to pay for small, everyday expenses. And the BNPL plans are more suitable for relatively large one-off purchases when you are unable to pay for the purchase right away.

As the bottom line, credit cards’ BNPL plans may help you save money on interest and turn out to be a lower-cost alternative to usual credit card purchases. They are best for financing larger purchases, but you will have to commit to making fixed, regular payments over time.

Tip: if you need to finance your car purchase, consider getting a car loan instead.

Alternatives to the credit card’s Buy Now, Pay Later plan

Putting a purchase on the BNPL plan is relatively straightforward: you make a purchase using your credit card that meets the minimum amount and choose a payment plan on the website or mobile app. Despite the BNPL convenience being obvious, other financing methods might still be more suitable.

• 0% APR Credit Card. Even though applying for a new credit card would likely lower your credit score, it very well might be worth the effort, especially if you are planning to make large purchases. The 0% APR Credit Card is effectively an interest-free loan over an extended time period. With the 0% APR Credit Card, you will not be charged any interest or fees over the introductory period, which usually varies between 12 and 21 months (provided you meet minimum monthly payments and keep your account in good standing). On top of that, you may receive a sign-up bonus for account opening.

• Personal Loan. You also might be better off if you shop around for a personal loan instead of using a credit card BNPL plan. Depending on the credit score, your personal loan may have a longer repayment period as well as a higher loan amount. Unlike the credit card BNPL plans, you will be charged interest on your loan, but with a longer repayment period, your monthly payments might be lower and, therefore, will fit within your budget more comfortably.

  Being an installment loan type, a personal loan can also help improve your credit score. Having credit cards and installment loans at the same time indicates your ability to successfully manage different types of financing.

  Additionally, most credit cards set a limit on the total number of active BNPL plans you can have at one time. For example, My Chase Plan® allows you to place on a BNPL plan up to 10 purchases. Thus, if you are planning several large purchases, getting a single personal loan to fund all your purchases might be a better option.

Buy Now, Pay Later possible risks

While a BNPL credit card plan might be an appealing option, it still means you are taking on debt. It has been reported that by paying for purchases using traditional Buy Now, Pay Later loans, people tend to overspend and buy items they couldn’t otherwise afford. Many also reported regretting purchasing an item because it was too expensive.

Whether these results hold true for the credit card BNPL plans or not is less obvious, yet it is never a good idea to take on debt just because you can or to finance non-essential purchases. Remember that credit cards are powerful financial tools, but they need to be used and managed responsibly! And that also applies to the Buy Now, Pay Later credit card plans.

Top Credit Cards offering Buy Now, Pay later plans

Check out our list of top credit cards offering BNPL plans to their customers. You may also explore alternatives - the 0% APR credit cards from our list of Best Credit Cards with 0% Introductory APR .