Is buy now pay later replacing credit cards?

With Monzo entering the buy now pay later market, is the future of credit cards at risk? Kate Anderson compares the two services.

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Young man shopping with credit card and laptop computer

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The buy now pay later market is booming – and more providers want a slice of the pie! Digital bank Monzo has just launched its own version of buy now pay later. And with more than five million consumers now using this form of borrowing, does this spell the end for credit cards?

Will buy now pay later replace credit cards?

Buy now pay later is on the up. In 2020, the number of transactions totalled £2.7 billion. In fact, five million people have used this type of borrowing since the start of the pandemic.

While the service was gaining popularity before Covid-19 hit, the pandemic drove it to new heights. A combination of booming e-commerce and a greater demand for credit created a surge.

So, is it replacing credit cards as a preferred payment option? While that may not be happening just yet, if things carry on the way they are, it could well become the case. Research from Marqueta found that 54% of Brits think that buy now pay later will replace their use of credit cards.

It’s for the simple reasons of affordability and ease of management. If used correctly, consumers can delay paying for their purchase and not face any interest charges. However, it’s important to note that missed payments or failure to pay off the debt can lead to financial penalties.

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So, is buy now pay later better than credit cards?

There is no definite answer as to which is better. Any form of borrowing carries risk if you don’t use it correctly.

Buy now pay later

There are concerns about the unregulated nature of the market. Debt campaigners such as StepChange say that these types of services don’t give users enough time or protection to stop and understand the consequences of their purchase.

While some lenders carry out affordability checks, not all do. And there is currently no protection in place around taking out multiple loans.

Having said that, if used correctly, buy now pay later can be an affordable short-term solution. Most services typically ask for the purchase to be paid off in a set number of instalments, interest free.

Credit cards

The credit card market is well-established and highly regulated.

Almost all credit cards have a grace period. This is the time period between the end of a billing cycle and when your next payment is due. During this time, you won’t be charged any interest on your purchase as long as you have paid your previous and current bill in full and on time.

There is also the option with credit cards to secure yourself a longer interest-free period. A 0% purchases card could give you a long runway in which to clear your balance.

And there are certain consumer protections that come with using a credit card. Under section 75 of the Consumer Credit Act, your card provider must protect purchases worth more than £100 for free.

But getting approved for a credit card can be tricky for some people. Plus, how you use your credit card and how many you have has a big impact on your credit score.

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Take home

Buy now pay later may seem like a convenient and easy option, but it’s worth understanding what you are taking on before applying. It’s largely unregulated, meaning there’s not much to stop you from taking on multiple agreements and finding yourself in trouble.

Having a credit card can help to improve your credit score if used correctly. Paying off your balance each month and keeping your credit utilisation ratio (the amount of available credit you actually use) around 30% both contribute. Plus, there are certain consumer protections in place for purchases bought with a credit card.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

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