Holiday spending: Buy Now, Pay Later vs. credit cards

And speaking of the holiday season, buy now, pay later, but could that holiday deal end up costing you a lot more than it's supposed to? Because splitting your purchases into smaller payments can sound appealing, but fees and interest can certainly add up. So before you click That button at checkout, Sarah Rathner of Senior Credit Card Experts with NerdWallet is joining us now with what to watch for. Sarah, I appreciate you joining us. And this is like the perfect time to be talking about it. We're less than two weeks away from Thanksgiving and exactly two weeks away from Black Friday when I'm sure many people are going to be shopping. Yeah. It sounds like they've already started if we're already starting to see debt counts for Gen Z shoppers. Uh, but yeah, this is a very expensive time of year and we're all encouraged heavily to spend by lots of enticing sales. And so before you start paying for things, you really want to think about how you're going to pay for them. So, I mean, we've started seeing a lot more of these things pop up on websites. I think Afterpay is one of them. There's another company as well where it's like, oh, just four easy payments. You got this. It's going to be great. But what do people really need to be looking at before they check out and say, yes, I want to do the buy now, pay later? Couple things to look at. See if the plan that you're eligible for has any other fees or interest that will tack onto the price ultimately of the item you're buying. So are you paying more for that item because you're entering into one of these plans? Another thing to keep in mind is what are the consequences if you miss a payment? At NerdWallet, we found that 38% of holiday shoppers this year plan to use buy now, pay later. And of those people, 38% expect they're going to miss a payment on one of those plans. And that could affect your credit. And it can leave you subject to late fees and interest. Well, and so obviously some of these say that the plans are interest free, but there's still fees that sometimes pop up on this. What do people need to be aware of when it comes to that? I mean, I definitely have seen that, hey, no interest or no interest for a couple months, no interest at all. Before you enter into one of these plans, read the information it's providing to you about what you're going to owe and when, and that includes any fees or interest. What's nice about Buy Now, Pay Later plans is the transparency. You do actually see an accounting of what you're going to owe and when. And a lot of consumers really like that level of transparency compared to You know, credit card interest that feels kind of nebulous throughout the month and keeps growing and spiraling out of control. But you just want to know what you're signing up for. I know reading the fine print is boring, but it's going to save you a lot of agony when you maybe accidentally miss a payment and you know exactly what you're in for if that happens. And so obviously credit cards are another option for folks who have who have them. Interesting for me, though. I have seen, I have an American Express card and it offers every so often this plan, I think it's called Planet or something along those lines, where you're able to pay a fee and sometimes you're waiving that fee if you pay within a certain period of time. I mean, how different is a buy now, pay later versus like a credit card? Yeah, a lot of credit card issuers offer similar buy now, pay later installment plans, typically for purchases over $100. You can retroactively apply an installment plan to that purchase and then pay it off in several. Installments. What's nice about those compared to more traditional buy now pay later plans is one through a credit card you already have. So there's no additional application. You already have the card. And also in many instances, if your credit card earns rewards, whether it's cash back or travel rewards, you will earn rewards on that purchase, which you don't necessarily do with other buy now pay later plans. So if credit card rewards are something that are important for you, if you're able to make your payments on time and avoid credit card debt, so the interest doesn't those rewards, then that's sort of this hybrid approach where you are getting the credit card rewards, but you are also benefiting from the ability to spread payments out over time. So when might pay now pay by, I said that backwards, when will, when would buy now pay later be a better option than a credit card or just waiting to buy down the road? Buy Now, Pay Later can be a really helpful tool for a really big purchase, whether it's planned or unexpected. So things like having to replace an appliance in your home, your refrigerator breaks down, or your dog needs surgery and you're facing a huge vet bill. I've heard of people using Buy Now, Pay Later to buy wedding dresses or to book last minute flights to visit a sick loved one. It allows you to handle these types of expenses that pop up for everyone in a way that might be a little bit more sustainable for your budget and cash flow and when your paychecks arrive than having to front the money, drain your savings, and then replenish it later on, or even take on credit card debt to handle some of these unexpected costs. Well, and yeah, the unexpected costs. I mean, obviously, I know I'm going to spend X amount amount of money on. This group of people, X, Y, and Z, hey, this person's going to get this, this person's going to get this, this person may get this. And you can kind of spread it out. Like if you're buying something now and do a buy now and pay later, you can kind of spread out those installment payments. And obviously, if the item's, let's say, $200, $50 is a lot more reasonable each month than having to worry about shelling out that $200 immediately, especially since we know inflation is a concern for so many people. Are we seeing the popularity of these buy now pay later? plans really exploding in recent years? We're definitely seeing it increasing, especially across younger consumers who are more apt to adopt new technology and new ways of doing things. And so obviously, as today's young adults become Middle-aged adults, it'll become more ubiquitous and more normal for buy now, pay later to be part of everyday life. But you raise an interesting point with what you said. You're buying all of these gifts, $200 here, $50 there, and you're entering into multiple buy now, pay later plans at the same time. That's a place to be careful because you're going to have all these payments being taken out of your funding source at the same time over six or eight or 12 weeks. And you need to really think about how does that fit in with your other bills and your other financial obligations that are happening at the same time? Are you overextending yourself because you've entered into 10 different buy now, pay later plans to buy gifts for all of your loved ones? That's the last thing you want to do. And that is not a gift to yourself. No pun intended there. With I've always thought about this because I remember always seeing those commercials years ago, Kmart layaway. Is this, this is essentially layaway except you actually get the product be immediately, right? Yeah. Instead of making payments right and then eventually going to pick up the item you bought weeks or months ago, you get the item immediately. You get that instant gratification, but now you have to pay for it and you have to pay for it over time. And so back. I don't know, maybe that softens the effect of the instant gratification when the bills come due, and that could be a lesson for next time. If you feel like this holiday season, you overdid it, start thinking about next holiday season and how you might do things differently. So just one final question I want to ask you. You mentioned credit. It could affect your credit here if you're not careful. Obviously, there seems to be some benefits to these buy now, pay later plans, but if people decide or are not able to end up making the payments, this could have a real impact on them, correct? It can. There can be negative consequences for your credit. So you just want to remember that this is a form of borrowing. It doesn't feel like it because it's so short-term and you just think, oh, a couple of payments of $20 to $50 here and there, and then I'm done. Yes, but that's what borrowing is. It's paying off something over time that you got today. And so you just want to keep that in mind that hopefully the consequences are strong enough that You will be thoughtful and careful when you enter into these plans. Sarah Rathner from NerdWallet. I really appreciate your time on this Friday. I'm sure a lot of people are going to be doing lots of purchases over the course of the next about six weeks as we get closer and closer to Christmas and all the other holidays. So I appreciate your time breaking all this down for us. I learned something new and I hope our viewers did as well. Thank you for having me.