With the rising prices of goods and services, it can be tempting to turn to “buy now, pay later” packages when checking out. With no interest or fees, not to mention predictable installment plans, this option seems like a more ideal payment method than a credit card. But using these plans to simplify your finances can be hit or miss. When the road isn’t so smooth with a buy it now, pay later plan, you might wish you hadn’t used a credit card if you had the option. Learn how credit cards can outperform buy-it-now, pay-later plans.
At first glance, the promise of a “buy now, pay later” plan with no interest or upfront fees may seem more appealing than the terms of a credit card. Splitting a transaction into, say, a four installment payment plan seems simple and manageable.
Unlike credit cards, however, these plans lack certain consumer protections and are sometimes unpredictable. This way, credit cards can be superior to four-way payment plans, buy now, pay later, making it easier to manage payments, dispute transactions, get refunds, set up a credit or access to certain debt repayment options.
Here are some cases in which a credit card can be a winner:
1. CREDIT REPORTS
Credit card issuers typically report on-time payments to the three major credit bureaus — Equifax, Experian, and TransUnion — which can help you build a credit history. This is not always the case with companies that buy now, pay later. Depending on the lender and the plan, you may only see an account reported to the credit bureaus if it’s sent to collections after you default — and this kind of default can stay on your credit report for years.
And late fees are possible, given that it’s easy to rack up multiple purchases now, paying for later plans at the same time. Since these loans don’t always show up on credit reports, prospective lenders may not have visibility into how many loans you have open.
2. EASIER PAYMENT MANAGEMENT
Credit cards make it easy to track multiple purchases and payments in one place. If you’re juggling buy now, pay later plans from multiple companies with different due dates, it’s not as seamless.
Some Buy Now, Pay Now Later businesses may require automatic payments tied to a bank account, but this may result in overdraft fees if that account runs out of funds. Compared to light users of buy now, pay later plans, heavy users have a greater deterioration in their financial health due to factors such as overdraft fees or late fees, according to the “Buy Now Pay” study. (Pain?) Later,” co-authored by Ed deHaan, associate professor at the University of Washington Foster School of Business.
A credit card can also derail a budget, but it has a big safeguard: there’s a credit check that can take into account your income and other debts.
“This protection, which can be a frustrating thing for a consumer trying to get credit, can actually be a very useful protection to prevent someone from getting in over their head on multiple lines of credit,” deHaan said.
3. TRANSPARENT DISCLOSURE
Credit card regulatory requirements may provide additional protections. The Truth in Lending Act requires credit card issuers to provide information showing the terms of the card and a box outlining the costs of carrying the card such as fees, interest rates, minimum interest charges , grace periods and other details.
After launching an investigation, the Consumer Financial Protection Bureau, or CFPB, determined in a report that most buy now, pay later lenders do not provide this standard cost of credit information or periodic reporting.
4. CONSUMER PROTECTION
If an item arrives damaged, less than ideal, stolen or never arrives, you may be unpleasantly surprised with your Buy Now, Pay Later.
Credit cards help facilitate disputes and returns. If you’re only making a return, the process of getting the money back to a credit card is easier than some buy-it-now, pay-later plans. For billing disputes and error resolution, credit card holders have legal rights which may include not having to make payment for the item while a claim is pending. The law also prohibits credit card issuers from charging multiple late fees for the same missed payment.
According to its report, dispute resolution is the top category of “buy now, pay later” complaints in the CFPB complaints database. Terms vary from company to company, but some plans may still require payments while a dispute or refund is pending. With a linked automatic payment plan, the company can continue to withdraw funds from your bank account. Failure to keep payments may result in late fees. According to the report, at least one “buy now, pay later” company the bureau investigated imposed multiple late fees on the same missed payment.
5. DEBT MANAGEMENT OPTIONS
For expensive buy-it-now, pay-later plans, debt repayment options may be limited compared to those available for credit card balances.
For example, nonprofit credit counseling agencies have relationships with credit card issuers that can make it easier to combine multiple balances into a debt management plan, with one payment and interest rate. inferior. With “buy now, pay later” companies, relationships with these agencies may be limited or non-existent.
Non-profit credit counseling agency GreenPath Financial Wellness, for example, has helped clients pay off purchases now, pay balances later, as some companies are listed in GreenPath’s creditor database, but she does not have an ongoing relationship with a company, LaDonna Cook, a GreenPath manager of program performance and quality assurance, said via email.
“We certainly look forward to working with (buy now, pay later) companies that want to offer debt management options to their customers,” she said.
Melissa Lambarena is a writer at NerdWallet. Email: firstname.lastname@example.org. Twitter: @lissalambarena.
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