Credit Scores: Charging Beats Buy-Now, Pay-Later
DECEMBER 12, 2022
By Melissa Lambarena
Many people see “four easy monthly installments” as a smarter financial option than a charge card. But if trying to build credit scores to buy a home, go with the plastic.
NEW YORK – At first glance, a “buy now, pay later” plan’s promise of no interest or upfront fees can seem more appealing than a credit card’s terms. Dividing a transaction into, say, a pay-in-four installment plan sounds straightforward and manageable.
Unlike credit cards, though, these plans lack certain consumer protections and are sometimes unpredictable. In this way, credit cards can be superior to buy now, pay later plans, making it easier to manage payments, dispute transactions, get refunds, establish credit or access certain debt-payoff options.
Here are some cases in which a credit card can come out ahead:
Credit card issuers typically report on-time payments to the three major credit bureaus – Equifax, Experian and TransUnion – which can help you establish a credit history. That’s not always the case with buy now, pay later companies. Depending on the lender and the plan, you might only see an account reported to the credit bureaus if it is sent to collections after you default on a loan – and that kind of blemish can stay on your credit report for several years.
And late fees are possible, given how easy it is to rack up several buy now, pay later plans at once. Because these loans don’t always appear on credit reports, future lenders may not have visibility into how many you’ve opened.
Easier payment management
Credit cards simplify tracking multiple purchases and payments in one place. If you’re juggling buy now, pay later plans from several companies with different due dates, it’s not as seamless.
Some buy now, pay later companies may require automatic payments linked to a bank account, but that can lead to overdraft fees if that account lacks funding. Compared with light users of buy now, pay later plans, heavy users have a larger decline in financial health in factors like overdraft fees or late fees , according to the study “ Buy Now Pay (Pain?) Later,” co-authored by Ed deHaan, associate professor at the Foster School of Business at the University of Washington.
A credit card can also derail a budget, but it has a big guardrail: There’s a credit check that may factor in your income and other debts.
“That protection, which can be a frustrating thing for a consumer who is trying to get credit, actually can be a really helpful protection to stop someone from getting in over their head on multiple lines of credit,” deHaan says.
Regulatory requirements on credit cards can offer additional protections. The Truth in Lending Act requires credit card issuers to provide disclosures that show the card’s terms and a box that outlines 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 don’t provide these standard cost-of-credit disclosures or periodic statements.
If an item arrives damaged, its quality is less than ideal, it’s stolen or it never arrives, you might be unpleasantly surprised by your buy now, pay later terms.
Credit cards allow for easier disputes and returns. If you’re only making a return, the process to get money refunded to a credit card is simpler compared with that of some buy now, pay later plans. For billing dispute and error resolution, credit card holders have legal rights that may include not having to make a payment for the item while a claim is pending. The law also forbids credit card issuers from charging multiple late fees for the same missed payment.
Dispute resolution is the top-ranking buy now, pay later complaint category in the CFPB’s complaint database, according to its report. Terms vary by company, but some plans might still require payments while a dispute or refund is pending. With a linked automatic payment plan, the company may continue withdrawing funds from your bank account. Failure to meet payments may result in late fees. At least one buy now, pay later company investigated by the bureau imposed multiple late fees on the same missed payment, according to the report.
Debt management options
For burdensome buy now, pay later plans, debt payoff options may be limited compared with those available for credit card balances.
For instance, nonprofit credit counseling agencies have relationships with credit card issuers that may facilitate combining multiple balances into a debt management plan, with one payment and a lower interest rate. With buy now, pay later companies, the relationships with such agencies may be limited or lacking.
The nonprofit credit counseling agency GreenPath Financial Wellness, for instance, has assisted clients with paying down buy now, pay later balances since some companies are listed in GreenPath’s database of creditors, but it doesn’t have a standing relationship with a company, LaDonna Cook, a GreenPath manager of program performance and quality assurance, said via email.
“We’re certainly eager to work with (buy now, pay later) companies that are interested in offering their customers options for managing debt,” she said.
Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission. This column was provided to The Associated Press by the personal finance website NerdWallet. Melissa Lambarena is a writer at NerdWallet.