Should you sign up for a 'buy now, pay later' plan or use a credit card? Get help deciding.

Maurie Backman
The Motley Fool

The idea of paying for purchases over time isn't new. Years ago, stores commonly offered layaway plans for people who couldn't afford the items they wanted outright. And credit cards have long been a means of helping consumers pay for products over time – albeit at a cost.

But in recent years, "Buy Now, Pay Later" plans, or BNPL plans, have emerged as an increasingly popular financing option. These plans allow consumers to make a down payment on purchases, bring their items home from the store (or have them shipped, in the case of online purchases), and pay them off in installments.

The great thing about BNPL plans is they don't charge interest off the bat like credit cards do when you carry a balance. Typically, you'll get about three months to pay off your purchase under a BNPL plan. Stick to that arrangement and make your payments on time, and you won't incur interest or fees.

It's for this reason consumers may be increasingly favoring BNPL plans over credit cards. But are they a better choice for financing purchases? Not necessarily.

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The danger of BNPL plans

While BNPL plans don't charge automatic interest the same way credit cards do when you carry a balance, they also make it easy to qualify for installment agreements. And that's not necessarily a good thing.

>When you apply to use a BNPL plan, there's generally no credit check involved. You may end up taking on a payment plan you can't afford, thereby running the risk of falling behind on it. And that's where things get dicey.

If you don't make your BNPL plan payments, you will be charged interest on your purchases and potentially face a host of fees. Plus, at that point, your negative payment activity could get reported to the credit bureaus. Once that information shows up on your credit report, your credit score could plunge, and it could become more difficult to borrow money when you need to.

In fact, the Consumer Financial Protection Bureau recently sounded a warning about BNPL plans and the dangers they pose to consumers. While it's easy to argue that credit cards open the door to similarly troubling consequences, credit cards may be better understood by consumers than BNPL plans because they've been around longer and have different regulatory requirements to follow.

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Should you use a BNPL plan or a credit card?

If you're looking to finance a purchase you know you'll be able to pay for within a few months (say, the money is already in your savings account but you'd rather not take it all out at once), then you may be just fine moving forward with a BNPL plan. And you may be better served using one over a credit card in this instance because a credit card will generally charge you interest if you pay off your purchase over a few months.

But otherwise, you should proceed with caution when using BNPL plans the same way you should do your best to not charge items on your credit cards that you can't pay off by the time your bills come due. Furthermore, while it may be okay to use BNPL plans for larger, planned-out purchases, they're not really meant for everyday purchases.

Also, BNPL plans don't offer cash back or rewards for everyday items like credit cards do. And so you shouldn't rush to replace your credit cards with BNPL plans. In fact, there's no reason to not use credit cards and BNPL plans at the same time – as long as you fully understand what you're signing up for.

► Use 'buy now, pay later' services?   That info will soon show up on Equifax credit reports

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