Credit card or BNPL: which is better for me?

If you want to prolong the time of paying for something, just what’s the best way to do it? Here, I compare credit cards against BNPL.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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Buy Now Pay Later (BNPL) is a type of credit that has become increasingly popular over the last few years. Brands such as Klarna, Clearpay and Laybuy have popped up and expanded. David Sandström, Klarna’s chief marketing officer, said recently in Verdict that “one reason for the buy-now-pay-later (BNPL) sector’s huge expansion over recent years is customers simply having had enough of the raw deal offered by traditional credit card providers.”

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So, just how do they compare? Are credit cards the raw deal that Sandström claims when compared with BNPL?

How do BNPL and credit cards work?

BNPL companies make their money by contracting with retailers, who pay them a percentage of the sale as commission. Credit cards are payment cards used to make purchases, where the money paid to the retailer is then repaid later by the consumer, over time. Credit card issuers make their money on commission charged to retailers and on interest charged to consumers.

Which is best for me?

Interest free?

BNPL can help you spread payments and help with your cash flow. In theory, it shouldn’t cost you anything if you always make the payments on schedule.

If you always pay off a credit card in full each month, a credit card shouldn’t cost you anything either.

BNPL can seem attractive if you are struggling for money. If you buy a high-ticket item that you really need, you can defer payment without paying interest. The amount and payment schedule varies between providers. You could pay something at the point of purchase, pay at 30 days and then pay weekly, fortnightly or monthly. So, you might have a month with a big insurance bill and that cash flow will be easier.

However! If you are savvy and buy at the right time on your credit card, you can have the maximum time to pay, which could be up to 56 days. The billing cycle is 31 days with a further 25 days grace. So, buy on day one and Bob’s your uncle, for 56 days.

It is possible to play even more cleverly with credit cards, though! For example, by transferring your balance to another card that offers a 0% balance on new purchases for a varying number of months. You could do this more than once too! You’ll still be paying interest on the transferred amount.

Missed payments

If you miss a BNPL payment, you can end up paying a hefty penalty. Sometimes, it can be interest from the start of the monthly payments and other times from the month of the missed payment. You may also incur late payment fees. Some schemes offer repayment terms of 30 days and others up to 12 months.

Credit cards will always charge interest on outstanding balances and penalties for missed payments

Free benefits

Most credit cards have a points-based system of benefits. So, for every purchase you make, you can “earn” points that you can use towards products and services depending on which card you choose. In my own case, our credit card points pay for the car breakdown cover every year!

Section 75 cover

Credit cards benefit from an automatic “Section 75” cover for all purchases of over £100, allowing you to claim your money back from the credit card company if something goes wrong.

When making BNPL payments funded via a credit card, you do not get the “Section 75” cover. If something goes awry with a purchase, you are on your own and don’t have the fallback position, although you may still have cover through your bank’s voluntary “Chargeback” scheme.

Lack of regulation

Because BNPL is currently unregulated, providers do not have to carry out similar checks to other lenders which have to abide by financial regulations. These include conventional credit checks, which would ensure you can afford the payments and the lender would have to tell you in detail about the product and what will happen if you don’t pay. As a result, vulnerable people — who are more at risk of falling into arrears — are likely to use BNPL than a credit card.

Financial Ombudsman

Again, because BNPL is not regulated, you have no recourse to redress through the Financial Ombudsman. If you have an issue with a BNPL provider, the only option is to complain to them, and if you’re then not satisfied with the response to go through the Small Claims Court, which could be expensive.

And the winner is?

It would appear to me that using a tried and trusted conventional credit card has more benefits and fewer disadvantages than BNPL, if used wisely and when you have carefully planned all your other expenditure.

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