Buy now pay later versus credit cards

Whether you are splurging on a new outfit or giving your living room a revamp, “buy now pay later” services offer a quick and easy way to spread the costs of your shopping. 

In this guide, we explain how BNPL services work and explore how they compare with credit cards.

Below, we discuss:

• Benefits of BNPL and how credit limits work
• Will BNPL affect my credit score?
• How BNPL repayments work
• Pros and cons of credit cards and BNPL

How is buy now pay later different from credit cards?

As the name suggests, buy now pay later lets you borrow money to fund your purchase. You will now often see it presented to you as a payment option when you are shopping online or on the high street.

Companies offering BNPL services include Klarna, Clearpay and Laybuy.

Like credit cards, BNPL is a form of credit that lets you spread the cost of your spending. However, the two are very different.

Each purchase you make using a BNPL scheme will be a separate credit agreement and they will only involve retailers that are participating in the scheme.

Klarna, for instance, says it has partnerships with 14,000 UK stores. These may advertise the service of a specific BNPL provider as a payment option.

Find out more: How to get a personal loan

How BNPL credit limit works

Your credit limit – the maximum amount you can spend – is per provider. It tends to be much lower than on a credit card where the spending may be spread across lots of different goods and services. 

Depending on the BNPL provider, you will be given an interest-free period – longer than the one month allowed by credit card providers – in which to repay the money.

You’ll also have the opportunity to do so in a number of instalments.

Interest or fees for not making repayments on time will vary between providers.

With a credit card, you will be given a higher maximum credit limit and be billed each month for all your spending on the card.

If you don’t clear the bill during the interest-free period, you will be charged interest on the outstanding balance.

BNPL credit checks

Another point of divergence comes with the checks carried out by the lender on your creditworthiness – in other words, whether or not you are judged to be a “good borrower”.

When you apply for a credit card, for instance, the lender will do a “hard check” on your credit history to see how much of a risk you represent.

A record of missed repayments, say, may lead to you being turned down for a loan or charged a higher interest rate for it.

BNPL lenders typically conduct “soft searches”. These do not involve such stringent checks. However, there are some checks, and some borrowers with bad records may be rejected.

Soft searches also leave no “footprint” – or record of the application – on your credit file. This means other lenders will not be able to see you have applied for that credit.

This can be important for the borrower because a large number of applications could give lenders the impression that you are struggling to manage your finances and might fail to make repayments.

Partly for these reasons, BNPL services have drawn in more shoppers – Klarna says it has 14m UK customers.

But another point to bear in mind with soft searches is that lenders will not be making the same judgments on the size of loan that you can afford to service.

“Affordability” is more of a decision for the individual, meaning the onus is on you to ensure that you will have the money in place to repay the debt.

However, the government has announced plans to regulate the BNPL industry, which include potentially requiring lenders to carry out ‘hard’ credit checks instead of ‘soft’ checks.

Find out more: Clueless about your finances? Help is here

Will BNPL affect my credit score?

It is important to remember that any missed or late BNPL repayments may show up on your credit file when it is viewed by other lenders, affecting your chances of having future credit applications accepted.

Klarna and Laybuy, two major BNPL providers, have recently begun sharing your borrowing data with Experian, a major UK credit reference agency. Klarna is also sharing data with TransUnion. This means that they, along with other lenders, will be able to see any payments you’ve made or missed.

This will only apply to your payment history from after 1 June 2022 for Klarna, or after 1 September 2022 for Laybuy.

Experian and TransUnion have yet to work out how they will modify credit scores based on BNPL payment history. So for the time being, it won’t affect your credit score.

However, it could affect your chances to get credit in the future. While payments made on time could benefit your credit file and increase your chances of getting credit, late or missed payments could have a detrimental effect and make it more difficult.

Find out more: Applying for a mortgage with bad credit

How do BNPL repayments work?

BNPL providers give you the opportunity to spread the cost of your purchase over a number of weeks – six with Clearpay, five with Laybuy and 60 days with Klarna.

How many instalments are available and the frequency of those payments also varies between the providers.

• Klarna: you make one payment at the time of purchase, then two more every 30 days
• Clearpay: four instalments – one at purchase and then one every two weeks
• Laybuy: six instalments – one at purchase and then weekly

So long as you meet all your repayments on time, there shouldn’t be any fees or interest charges for using BNPL. 

The catch for the consumer is that the BNPL payment method can quickly become expensive if you don’t meet repayments in full or on time.

Clearpay and Laybuy, for example, both charge a late fee of £6. And although maximum charge caps apply, you could be charged more than once for each missed instalment.

Klarna doesn’t charge a fee for late payments. But if payments are repeatedly missed, it may use a debt-collection agency to recover the cash. It may also refuse to let you use the service again if you don’t pay up on time.

Find out more: Is it better to use an overdraft or credit card?

So what’s in it for the providers?

Apart from any penalties, they receive commission from the participating retailers in return for the higher sales that they are helping to generate.

Some BNPL firms allow you to borrow over longer periods. However, you will be charged interest, with APRs of around 40%.

It is also important to note that you cannot choose which BNPL service you use. The only one available will be the one offered by the retailer you are shopping with.

Pros and cons of BNPL

There are a number of benefits to using BNPL, but there are downsides to consider too.

Pros:

• Buy goods straightaway and pay for them later, interest free
• Spread the cost of your shopping
• It is easier to get access to this form of credit because BNPL providers do not carry out hard searches and there is no mark left on your credit score

Cons:

• The ease and convenience of BNPL makes it easy to spend money you haven’t got and your debt may quickly spiral
• You can only use the BNPL provider offered by the retailer you are shopping with
• Charges can rack up if you miss repayments or make late ones
• Missed or late payments will have a negative impact on your credit score
• BNPL is not regulated by the Financial Conduct Authority (FCA) and so there is no recourse for making complaints to the Financial Ombudsman Service (the only exceptions are those charging interest for longer-term finance), although this is set to change in late 2023 (see below)
• You don’t get protection under Section 75 of the Consumer Credit Act for purchases where there are problems such as faulty or non-delivered goods. Section 75 protection covers credit card purchases of between £100 and £30,000
• Credit limits are lower than with than credit cards

Is buy now pay later bad for my credit score?

Like any credit product, the impact that BNPL has on your credit score depends on how well you manage the service. 

If you regularly use BNPL and make repayments in full and on time, it can boost your credit score and show other lenders that you are a responsible borrower.

However, if you make late payments or miss them altogether, your credit score will suffer.

This could make it harder to borrow with credit cards, loans or mortgages in the future.

What is a credit card and how does it work?

Credit cards offer you a line of credit that you can use to pay for goods and services. When you take out the card, you will receive a credit limit – the maximum amount of money you can put on the plastic.

When you spend on a credit card, you are borrowing money from the card company.

You will get a bill showing all your transactions on the card each month, and if you pay it off in full by the due date, you will not pay any interest.

If you don’t, you will be charged interest of over 20%. The only exception would be if you have a 0% credit card that offers interest-free borrowing for a longer period.

The pros and cons of credit cards

As with all borrowing products, there are advantages and disadvantages to using credit cards, and how helpful they are often depends on how well you manage them.

The pros of credit cards:

• Enable you to spread the cost of larger purchases
• Easy and convenient to use
• Can offer interest-free borrowing (all cards offer a short initial period, but 0% cards offer longer periods of interest-free borrowing on new purchases)
• You can earn rewards or cashback on your spending with specialist credit cards
• Offer protection on your purchase under Section 75 of the Consumer Credit Act
• You can boost your credit score if you manage your credit card debt well and show you have a good record for making repayments on time

The cons of credit cards

• Ease of access makes it easy to spend money you haven’t got
• Interest rates are often high
• If you don’t pay your bill off in full every month, interest charges can make your debt spiral
• It can take a long while to pay off your credit card debt if you only make the minimum repayment
• You will be charged a fee for missed or late payments, which will also have a negative impact on your credit score

So which one should I choose?

Which option works best for you will ultimately depend on how well you manage your repayments, the amount you are borrowing and your own personal preference.

If managed correctly, BNPL can offer you interest-free borrowing and enable you to spread the cost of purchases over up to a couple of months.

However, if you have a credit card, you can also get interest-free borrowing (typically up to 56 days or longer) if you have a card offering 0% for new purchases.

Both will hit you in the pocket and hurt your credit score if you don’t stay on top of repayments.

BNPL services can be arranged at the point of purchase, making credit quicker to arrange if you don’t already have a credit card. However, debt campaigners argue that this encourages people to make purchases they cannot afford and doesn’t give them the necessary space to consider the debt they are taking on.

It is also important not to overlook the benefit of Section 75 on credit card purchases between £100 and £30,000. This cover isn’t available at the moment if you use BNPL.

Reforms on the way?

The government has detailed plans for the FCA to regulate BNPL providers, with changes likely to kick in in the latter half of next year at the earliest.

The government expects that regulation will lead to tighter affordability checks, with customers likely to face ‘hard’ credit checks when applying for BNPL rather than the current ‘soft’ checks that are generally carried out.

A ‘hard’ credit check shows up on your credit file and is visible to other lenders, so it can affect your chances of borrowing in the future. A ‘soft’ credit check is only visible to you and does not leave a mark on your credit file.

Regulation of the BNPL industry is also likely to give customers access to the Financial Ombudsman Service for complaints, as well as forcing BNPL lenders to be FCA approved.

Which is most costly?

Both credit cards and BNPL offer interest-free borrowing if managed well and both can work out expensive if not. 

Exactly how much you would pay for your debt, however, will vary according to the terms of the BNPL service you are considering, the specifics of a credit card and the size of your debt.

BNPL or 0% APR credit card?

If you are likely to be making a number of purchases and would benefit from interest-free borrowing, a 0% purchase card might make more sense.

This is because you will get a longer interest-free period.

You will also have your borrowing all in one place rather than having numerous BNPL agreements with multiple providers.

Does your credit card already offer its own version of BNPL?

You may already be able to buy now, pay later using your credit card.

Mastercard recently launched its own payments-in-instalments service, enabling card holders to select whether they would like a BNPL option when they shop.

Will BNPL replace the use of credit cards?

BNPL has soared in popularity during the Covid 19 pandemic and many younger shoppers like its convenience.

However, it is unlikely to replace credit cards. BNPL is best suited to borrowing small amounts over the short term and doesn’t offer the repayment flexibility or credit limits of credit cards.