With new financial tools emerging every month, the way we manage our money is rapidly evolving. One of the most significant shifts is the growing popularity of “Buy Now, Pay Later” (BNPL) apps. These services, offered by companies like Afterpay, Klarna, and Affirm, allow consumers to make purchases and pay for them over time, often with little to no interest. But as Christians trying to be good stewards, we need to ask: Are BNPL apps good alternatives to traditional credit cards?

A Brief History of Easy Credit

Easy credit leading to financial challenges has been around for a long time. If you’re over 40, you likely grew up in the age of “layaway.” You could select what you wanted to purchase and make interest-free payments for a few weeks or months. However, the buyer was not allowed to take possession of their purchase until the final payment was made. Today, that plan has been modified to make it even more enticing and risky.

Understanding Buy Now, Pay Later Apps

Buy Now, Pay Later services work by allowing consumers to split their purchase into several installments, typically paid over a few weeks or months. This can be particularly appealing for larger purchases, as it reduces the immediate financial burden. Here’s how it usually works:

  • Purchase: At checkout, you choose the BNPL option.
  • Approval: The service approves your purchase, often within seconds.
  • Payments: You make an initial payment (usually a percentage of the total amount), and then the remaining balance is split into equal installments, which are automatically deducted from your bank account.

The Appeal of BNPL Apps

There are several reasons why BNPL apps have gained popularity:

  • Interest-Free Payments: Many BNPL services offer interest-free payment plans if you pay on time.
  • Ease of Use: The approval process is quick and often does not involve a hard credit check.
  • Budget Management: Splitting payments can help with managing monthly budgets, especially for larger purchases.
  • Accessibility: BNPL options are widely available at many online and physical stores.

The use of buy now, pay later (BNPL) plans is growing fast. In 2023, total BNPL spending came to $75 billion, a 14% jump from the previous year. Experts expect usage to double or even triple over the next five years. More than one-third of U.S. adults are estimated to have used a BNPL service, where purchases are divided into several interest-free installments. With only a few questions to answer and flexible requirements, buyers are given a plan to split their payments over several weeks.

Bankrate senior industry analyst Ted Rossman says, “BNPL terms vary widely. Sometimes it’s four interest-free payments over six weeks, other times the plan can stretch on for many months or even years. And while some of those longer plans charge a low interest rate — or no interest at all — other times there is an interest rate, and it can be even higher than what a credit card would charge.”

Potential Risks and Drawbacks

While BNPL apps have their advantages, there are also potential risks and drawbacks that need to be considered:

  • Overspending: The ease of use and delayed payments can encourage impulse buying and overspending. Unfortunately, in a recent survey, many admit to overspending, missing payments, regretting purchases, or facing challenges getting a refund or returning items.
  • Fees and Penalties: Missed payments can result in late fees, which can accumulate quickly and outweigh the benefits of interest-free installments. There are late fees, deferred interest, and other penalties.
  • Credit Impact: Although BNPL services often don’t require a hard credit check, missed payments can negatively impact your credit score.
  • Debt Accumulation: Using BNPL services without careful planning can lead to accumulating multiple installment payments, making it difficult to keep track of obligations.
  • Few Protections: Few protections and regulations are in place compared to credit cards.

Comparing BNPL Apps and Credit Cards

To determine if BNPL apps are good alternatives to credit cards, we need to compare the two options across several key factors:

Interest Rates:

  • BNPL: Often interest-free if payments are made on time.
  • Credit Cards: Typically charge interest on carried balances, although some offer introductory 0% APR periods.

Fees:

  • BNPL: Late fees can be significant.
  • Credit Cards: Late fees, annual fees, and other charges can add up.

Credit Impact:

  • BNPL: Generally, no impact on credit if payments are made on time, but missed payments can hurt your score.
  • Credit Cards: Regular use and timely payments can build credit, but missed payments can significantly damage your credit score.

Payment Flexibility:

  • BNPL: Fixed installment plans.
  • Credit Cards: Flexible payment options, allowing minimum payments, full payments, or any amount in between.

Phantom or Shadow Debt

“Buy Now, Pay Later” has been described as phantom debt, a term some economists use to describe debt that is not centrally monitored. A problem exists in regulating how data is given to the major credit bureaus: Equifax, Experian, and TransUnion. As a result, lenders may not know how many loans a consumer has outstanding.

“It’s hard to know how much of this debt is out there,” says Ted Rossman, senior industry analyst at Bankrate. “It’s this kind of shadow debt that’s hanging over people.” Tim Quinlan, senior economist at Wells Fargo, told CNBC, “Because no central repository exists for monitoring it, growth of this ‘phantom debt’ could imply total household debt levels are actually higher than traditional measures.”

A Problem of Fraud

BNPL can invite synthetic identity fraud. Cecilia Seiden, VP of market strategy at TransUnion, says, “This is when fraudsters use a combination of legitimate but unconnected pieces of personally identifiable information (PII) to fabricate a person or entity and use it to apply for credit with a low bar to entry, like BNPL… Once a synthetic identity is established and begins to build credit, institutions often have no idea what their level of exposure is.”

Discernment and Self-Control

If used responsibly, BNPL can help in financing a large expense without interest charges. The key is discerning needs from wants and understanding the terms. Self-control is needed to avoid overspending and entrapment to debt. It goes without saying that couples must be transparent about their purchases so that they don’t get overwhelmed with multiple payments.

From a Christian perspective, we should manage the resources God has entrusted to us in a way that honors Him. This includes making wise and prudent financial decisions. Here are some biblical principles that can guide us in evaluating BNPL services:

  • Avoiding Debt: Proverbs 22:7 says, “The rich rule over the poor, and the borrower is slave to the lender.” While BNPL may not seem like traditional debt, it still involves a commitment to future payments, which can lead to financial bondage if not managed carefully.
  • Contentment: Hebrews 13:5 encourages us to “Keep your life free from the love of money, and be content with what you have.” BNPL services can tempt us to make unnecessary purchases and foster discontentment.
  • Wisdom: James 1:5 reminds us to seek wisdom from God. Making informed and prayerful financial decisions can help us avoid the pitfalls associated with BNPL services.

Shop in a Way that Supports Your Values

Buy Now, Pay Later apps offer a convenient way to manage purchases, but they are not without significant risks. As Christians, it’s essential to approach these services with wisdom and discernment. By understanding the potential pitfalls and comparing them with traditional credit cards, we can make informed decisions that honor God and promote sound financial stewardship.

Not only do credit cards offer several economic advantages over BNPL, such as cash back on purchases, they can also support causes that align with your values. With an AdelFi VISA® Everyday Gold Cash Back Credit Card, you’ll enjoy 1% cash back on every purchase, enhanced security and fraud protection, and support Christian causes while you shop. From travel insurance to auto insurance waivers, you’ll gain additional protection as you build your credit.