Should I use BNPL or a credit card?

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With Buy Now, Pay Later financing options everywhere you look, a trend is developing to use BNPL to cover essentials such as groceries, gas and utilities. You too might be wondering: should you ditch your credit cards and use BNPL to cover your daily expenses?

The trend of BNPL installment financing has grown by leaps and bounds in recent years. More … than 59 million people are expected to use BNPL in 2022, primarily for apparel, electronics and furniture.

But the use of the BNPL for current expenditure is growing rapidly. According to a recent report by the Consumer Financial Protection Bureau, the share of these essential products in 2021 accounted for $229.2 million, or 0.9% of BNPL’s sales. That’s a 434% increase over 2020 levels – and 6,845% more than 2019’s $3.3 million level.

What is the BNPL?

The way BNPL works, a consumer pays for a purchase in four equal installments, typically. You pay the first installment as a deposit when you make your purchase. The other three installments would be due thereafter, in two, four and six weeks.

Overall, BNPL’s dollar sales volume grew 1092% to $24.2 billion between 2019 and 2021. One way for BNPL’s lenders such as Klarna, To affirmAfterpay, Zip and PayPal to acquire customers is by partnering with merchants, so that BNPL financing is promoted as a consumer choice for those who shop online on merchant websites.

These lenders are moving more towards direct interaction with consumers by approving them for credit on the BNPL lenders’ own apps. These consumers can then shop up to their approved credit limit with merchants using these apps.

While the funding is marketed as interest-free to consumers (the main source of income for BNPL lenders comes from merchants who use this source of funding to increase their sales), lenders assess late fees when you miss a payment . According to the CFPB, 10.5% of consumers were charged at least one late payment penalty in 2021, compared to 7.8% in 2020.

BNPL apps facilitate dark patterns

Regulation in the BNPL space is still in its infancy and federal regulatory authorities such as the CFPB and the Federal Trade Commission, as well as some state regulators, have only recently begun to take notice of this niche.

“We want competition to be based on product quality, customer service and price, not regulatory arbitrage,” CFPB director Rohit Chopra wrote. in a blog post.

One of the concerns with the online retail model is that it makes it easier for BNPL lenders to engage in what is known asdark patternsor use web design to manipulate consumers. For example, you might see an ad disguised as something else to trick you into clicking on it. Data collected by BNPL lenders also enables them to offer merchants personalized payments for individual consumers, based on each consumer’s purchase data.

The FTC warns against the shady schemes employed by BNPL lenders to collect consumer data and then use it to entice them to buy more. “Companies that focus too much on conversion risk hiding or obscuring important information from consumers,” says the FTC“whether asking users to navigate a maze of screens, using nondescript drop-down lists or small icons, or burying information in dense terms of service documents.”

The government agency warns BNPL lenders who deploy consumer data-driven user interfaces to ensure they avoid dark patterns that would interfere with the consumer’s “understanding of the material terms of the transaction”.

BNPL Debt vs Credit Card Debt

Another blow to the BNPL model is that, unlike credit card financing, there is no clear disclosure of loan terms. The FTC notes that any claim made by a BNPL lender should apply to the “typical consumer” and not just a subset of consumers. “Money is material,” according to the FTC. “False statements regarding the cost of a product or the terms of the transaction, including associated fees, are misleading and violate FTC law.”

Another shortcoming of the BNPL is that it is difficult to file a dispute in case a consumer is unhappy with their purchase, while credit card borrowers have a well-established dispute process, thanks to the Fair Credit Billing Act.

The FTC warns that the merchant and BNPL lender involved in a transaction can be held liable when consumers are deceived or otherwise unfairly treated.

And due to BNPL Financement’s lack of strong underwriting, consumers could take out multiple loans and overextend, making it difficult to meet their other financial commitments. Credit card lenders, on the other hand, look at the big picture of a consumer’s overall financial commitments before approving them for credit.

Other concerns include that consumers could pay for their BNPL purchases using credit cards, effectively using one form of credit to pay off another, which would also stretch them financially. And BNPL’s lenders’ practice of initially setting up loan repayments as an automatic default payment (consumers can usually change their payment method later) would be a violation of the Electronic Funds Transfer Act (which states that consumers should have a choice of payment methods to repay their debts).

BNPL credit impact

When it comes to credit score, there are clearly defined rules for credit card lenders to report your activity to the national credit reporting agencies (Equifax, TransUnion and Experian). When you make your payments on time and maintain good credit habits, it tends to have a positive impact on your credit score. And there are negative fallouts if you miss a payment.

However, when using BNPL financing, the CFPB finds that few of these lenders provide your opinion to credit reporting agencies, particularly if you are not delinquent. While major credit reporting agencies have announced plans to integrate BNPL data, the consumer protection agency fears their plans will vary.

For example, a credit bureau allows lenders to provide payment data in any format they choose. And others plan to keep BNPL entries in “specialty files” separate from their main files. “This inconsistent treatment will limit the potential benefits of data provided by the BNPL to consumers and the credit reporting system,” according to the CFPB.

What if you rely on BNPL for the most part

Why do some choose BNPL over credit cards? One of the main advantages of the BNPL is its ease of access if you need credit quickly. Perhaps that’s why consumers have turned to it to buy even the essentials.

It’s definitely not a good idea to use BNPL for essentials like gas and groceries that you’ll consume before you’ve finished paying for them, says Ed Mierzwinski, senior director of the federal program for consumption of the United States Public Interest Research Group.

“You will run out of food and be unable to travel as you go into ever-increasing debt,” says Mierzwinski. “If you started using BNPL for necessities, you need a new budget plan because you can’t earn.”

He still sees credit cards as a better choice — for all kinds of purchases. “If you can avoid racking up credit card debt, credit cards offer the best protections for consumers,” Mierzwinski says.

“If you use BNPL, you might be confused by the varying maturity dates of different BNPL providers,” he says. “You could end up paying late fees or even interest. Collection agents will call. It’s not as free as promises.

The bottom line

So, should you opt for BNPL or credit cards? If you want to be safe in the long run, experts agree that your best bet is to stick to the cards, at least for now. Credit cards offer protections that BNPL financing does not currently offer.

While regulators such as the CFPB and FTC take steps to regulate this space, there is still a long way to go before BNPL consumers benefit from the strong protections offered by credit cards.

Cash-strapped consumers should be careful not to rush into BNPL financing just because it is easy to access. If you have any complaints about your BNPL funding, you should contact the CFPB or the FTC. Your state may also have a consumer protection agency you can turn to.

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