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After making a big purchase with your credit card, you may log in to see your card balance and notice a new option to segment that purchase out and pay a lower interest rate on it over a fixed amount of time.
The offer may sound tempting, given today’s record-high interest rates on debt, which now average 20.5% for credit cards, according to Bankrate. Experts say that you should be careful before agreeing to the terms. While those started with a typical model of four interest-free payments over six weeks, offerings have since extended to higher rates over more time, according to Ted Rossman, senior industry analyst at Bankrate.
While those BNPL companies are acting more like credit card issuers, the latter, in turn, have taken on features similar to BNPL, he noted.
The choices come as rising interest rates have made carrying debt more expensive. The latest data shows consumers are struggling under rising balances, with total credit card debt recently topping $1 trillion for the first time.
For consumers considering their borrowing options, credit card BNPL programs are like “the least dirty shirt in the laundry,” Rossman said.
The credit card deals may carry more costs than other BNPL plans and may come with more extended timelines, noted Matt Schulz, chief credit analyst at LendingTree.
“These programs can vary fairly widely, so it’s really important people do their homework,” Schulz said.
1. Rossman said that while credit card rates are typically 20.5%, BNPL programs can have rates as low as 9% or 10%. Rossman said.
Part of what people love about buy now, pay later is its predictability and transparency.
chief credit analyst at LendingTree
While that BNPL-like rate is better than what a credit card would generally charge, it’s still at or near a double-digit rate, he noted.
Other BNPL options offered by fintech companies may offer a range of interest rates between 0% and 36%, he said.
“Part of what people love about buy now, pay later is its predictability and transparency,” Schulz said, with regular monthly payments that make it easier to budget.
“But you have to weigh whether that predictability is worth potentially paying a little bit extra for,” Schulz added.
2. Beware the fine print
“Fine print is always important, but especially when you’re talking about significant purchases that you’re trying to finance,” Schulz said.
Generally, you are still able to earn credit card rewards on these purchases, he said.
But because BNPL options on credit cards kick in after you’ve made a purchase, the balance will count toward your total credit utilization, a measure used in determining your credit score. If you choose to pay off a balance over time, you may end up with a higher credit utilization ratio. This is the difference between the credit you have available and the credit you are using. It can lower your credit rating. Consider other options
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Other companies specializing in BNPL options may not report those balances to credit bureaus, though the Consumer Financial Protection Bureau is working on changing that.
However, having multiple BNPL plans is not ideal.
Other borrowing options, such as offers for a 0% balance transfer or 0% introductory annual percentage rate card, may be a better choice, Rossman noted. Those deals may last as long as 21 months, he said.
Retailer-specific financing programs may also help plan for bigger purchases. However, it’s important to beware of deferred interest, which can leave you paying retroactive interest if your balance isn’t paid in full after a stipulated timeframe.
For borrowers with existing debt, nonprofit credit counseling may provide rates of 7% to 8% over four or five years that may rival the best personal loan rates, Rossman noted.