Are consumers choosing 'buy now, pay later' options over credit card rewards?

A number of consumers are forgoing credit card rewards in favor of "buy now, pay later" financing options for online purchases during the pandemic.

According to a study by C+R Research, more than half of online shoppers surveyed said they prefer programs such as PayPal Credit, Afterpay and Affirm over traditional credit cards. And a surprising 38% said "buy now, pay later" services will eventually replace their credit cards altogether.

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How BNPL works

BNPL services give users the option to make installment payments for a purchase on a weekly, biweekly or monthly basis. According to the survey, the most common types of purchases are clothing and electronics, with more than 40% of respondents for each category saying they’ve used BNPL services for those purchases during the COVID-19 pandemic.

Furniture, appliances, housewares and cosmetics purchases also rated among the top categories. While travel wasn’t one of the higher ranking categories in the survey, some services — Quadpay and Uplift are two examples — allow you to buy now and pay later for travel-related purchases, such as flights and hotels.

The appeal of BNPL

For consumers, BNPL services function as sort of a reverse layaway. Instead of making monthly payments toward an item and receiving that item after the purchase is paid off, you get the item right away, but continue to pay it off. Many of these services have an app to download and sign up for an account. You will typically have to link to a debit or credit card. Some retailers have partnerships with various services, allowing you to use your BNPL account at checkout. For other retailers, you may need to use the BNPL service’s app to set up your payment.

The difference between BNPL and traditional credit cards is that BNPL touts no interest and no credit check. If your credit cards have high interest rates, the ability to make installment payments with no interest can seem pretty appealing. And if your credit is poor or even nonexistent, there’s no credit check to qualify for a BNPL plan.

For those who need to make an expensive purchase but don’t have the money available to pay in full, BNPL can be a smart way to get the items you need and make small payments for them over time.

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The risks and drawbacks

While 0% interest is a big draw, if you’re late paying a BNPL service, you may be charged late fees. If you linked a debit card to the BNPL service and don’t have the funds when it’s time to make the installment payment, you risk an overdraft of your bank account, which can also trigger fees.

Although BNPL may seem more flexible than traditional credit cards, it’s still debt and if you don’t pay, you can potentially be sent to collections. For instance, Quadpay’s website states:

“Accounts that have past due installments are automatically sent to collections after a certain time period. This happens automatically by computer. Customer support agents do not have info as to when that will happen.”

For some, using these services could lead to overspending and encourage bad financial habits. Among those surveyed by C+R Research, 59% said they purchased an unnecessary item through BNPL that they otherwise couldn’t afford. More than half said they’ve fallen behind on a payment, and close to half said they’re likely to make a late payment in the next 12 months. If you’re using these services and falling behind on payments, it’s important to make a plan to get, and stay, out of debt.

Different services have different policies, fees and purchase limits. It may be easy to look at it as a couple hundred dollars here and there, but it adds up if you’re using multiple services. Survey respondents named 11 different services that ranked among the most common to use: PayPal Credit, Afterpay, Affirm, Klarna, Zip Pay, Quadpay, Uplift, Perpay, Sezzle, Zebit and Splitit.

Also, with some services, you can use a credit card as your installment payment method, but paying for your purchase with a credit card can be a slippery slope. You could wind up paying the credit card interest you were trying to avoid, if you’re not paying your credit card balance in full monthly.

If you do link a credit card to the BNPL service, you may not receive bonus points, miles or cash back. For example, let’s say you link The Platinum Card® from American Express to a BNPL service and purchase a flight. If you used your card to make the purchase directly with the airline, you would normally receive 5 points per dollar, but through the BNPL service, you may only receive 1x points, depending on how the purchase codes (5x points on up to $500,000 per calendar year). And if you link a debit card to a BNPL service, you lose out on the potential for rewards altogether.

Credit cards can also be a useful source of extended warranty and consumer protections for purchases in the event that a merchant doesn’t deliver as promised or something goes wrong with a product you’ve purchased. You may not have the same protections using a BNPL service. Return policies may also vary with BNPL services. You’ll want to make sure you understand the service’s return policies, so that you’re not still on the hook for installment payments for a purchase that you've returned to the merchant.

Alternatives to BNPL

Both Chase and American Express have jumped onto the installment plan bandwagon — with Chase's My Chase Plan and Amex’s Pay It® Plan It® feature (no enrollment required for the Amex feature) — as a way to appeal to consumers. These plans have fixed monthly fees, and the cost may be less than the typical credit card interest rate. Using these programs still allows you to earn rewards on your purchases.

If you’re going to be making larger purchases that you need time to pay off, signing up for a 0% intro APR card can also be an option. You can earn a sign-up bonus for a new card and slowly pay off your purchases within the specified 0% interest period.

Bottom line

Here at TPG, we advocate using credit cards to earn travel rewards and paying your monthly credit card bills in full as the interest rates or fees may outweigh the points and miles or cash back you can earn.

With the knowledge that consumers are favoring BNPL services, it’s understandable why some major credit card issuers have moved toward offering installment plans. This way, consumers have flexibility for repayment, but can still earn cash back or rewards for travel. Time will tell whether BNPL is a passing fad, or if even more consumers will begin to prefer it over traditional credit cards.