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At this point, many consumers are deep in the throes of holiday shopping. And if you still have a number of items to purchase in the coming weeks, you may be wondering how you’re going to pay for everything.
You may be inclined to swipe a credit card so you can rack up rewards on your purchases. But as you go from store to store, you may be tempted by offers for “buy now, pay later” plans, or BNPL plans.
BNPL agreements are expected to generate $17 billion in online holiday spending this year, according to Adobe Analytics as reported by USA Today. Plus, 1 in 5 Americans expect to use a BNPL plan to pay for holiday gifts. But while a BNPL plan might seem like a great way to spread out payments for your holiday purchases, going this route could end up being quite disastrous.
The option to spread out your payments over several months without automatically accruing interest might seem appealing, which explains why consumers tend to be drawn to BNPL plans. With a credit card, by contrast, if you don’t pay off your balance in full by the payment due date, you start racking up interest immediately. The only exception to this is if you have a 0% introductory APR on your card.
But while there may not be obvious fees associated with a BNPL plan, that doesn’t mean they don’t exist. You should know that if you fail to make your scheduled payments under one of these agreements, you can face costly penalties as well as interest. But that’s not the only negative consequence that might ensue.
It’s common practice for credit card companies to report delinquent payments to the credit bureaus, and BNPL plan companies can do the same. So if you sign up for one of these agreements and can’t make your payments on time, it could result in a major hit to your credit score. That could, in turn, make it difficult to qualify for a new credit card or personal loan.
Generally speaking, BNPL plans can be more trouble than they’re worth, so you’re better off avoiding them this holiday season.
There is, however, an exception. Right now, savings accounts are paying very generously. If you have money in the bank that you want to keep there as long as possible to earn interest, then it could make sense to sign up for a BNPL plan.
That way, you don’t have to part with as large a sum of money at once, but you also know that you have the money to cover 100% of your purchase right there in the bank. In that case, you’re not really taking such a risk, because you could conceivably just withdraw that cash on the spot and buy what you want instead. And even then, you’re still potentially dealing with a lot of hassle (like having to keep track of when payments are due) to earn what could be a small amount of interest.
But otherwise, proceed with caution if you’re considering signing up for a BNPL plan. You don’t want to land in a situation where a seemingly no-cost option for financing purchases ends up being far more expensive and damaging than expected.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
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