Maximizing Benefits, Minimizing Debt: BNPL or credit card for your spending strategy?

[Siddarth]

In today's fast-paced world, smart shopping and flexible payment options are key. We're often faced with a choice between two popular methods: Buy Now, Pay Later (BNPL) and traditional credit cards. Both offer the convenience of purchasing items without immediate full payment, but they operate differently and cater to distinct financial needs. Understanding these differences is crucial for making informed financial decisions that align with your spending habits and goals.

Let's dive in and explore which option might be the best fit for your financial journey!

What Exactly Is Buy Now, Pay Later (BNPL)?

• Buy Now, Pay Later (BNPL) allows purchases to be made with installment payments over time.
• It often features interest-free EMIs if repaid within the specified period.
• Transactions are treated as separate plans, aiding budgeting for individual items.
• BNPL is accessible without comprehensive credit checks, benefiting those with limited credit histories.
• Popular BNPL providers include Amazon Pay Later, Flipkart Pay Later, and others.

And What About Credit Cards?

• Credit cards provide a revolving line of credit for purchases.
• Repayment options include minimum payments or paying the full balance each month.
• Interest charges apply if the total amount isn't cleared within the grace period.
• Credit checks assess eligibility; good credit scores are often required.
• They offer flexibility for both short-term and long-term financing and are widely accepted globally.

BNPL vs. Credit Card: A Friendly Comparison

Let's explore the key differences to help you decide which option aligns best with your financial habits and goals.

1. Definition and Core Functionality

BNPL:

• Enables purchases with payment in installments over a set timeframe.
• Billing can be settled using pre-approved credit.

Credit Card:

• Offers a revolving line of credit for purchases.
• Users can repay the outstanding balance monthly.
• Enables buying now and paying later.
• BNPL includes specific plans beyond standard credit card cycles.

2. Interest Charges and Fees

BNPL:

• Offers low or zero-interest periods or interest-free EMIs for specific durations.
• Interest is avoided if paid within the time frame.
• Missing payments incur late fees and interest charges.
• Some providers may impose processing or membership fees.
• Usually, there is little to no joining fee.

Credit Card:

• Interest charges apply to unpaid balances after the grace period (30 to 50 days).
• Credit cards in India have high APRs, ranging from 24% to 49%.
• Additional fees may include annual, joining, cash advance, and late payment charges.

3.###### Credit Checks and Accessibility

BNPL:

• Providers often skip traditional credit checks for approval.
• It is accessible to those with limited or no credit history.
• Approval typically relies on "soft checks" instead of credit scores.
• Most financial institutions offer BNPL to salaried individuals over 18.
• Basic KYC documents, such as PAN and Aadhaar, are usually required.

Credit Card:

• Issuers conduct credit checks to evaluate creditworthiness.
• Good credit scores (e.g., over 750) are often required.
• Positive financial health is necessary for qualification.

4. Repayment Flexibility and Budgeting

BNPL:

• Transactions function as separate installment plans with fixed payment schedules.
• This approach aids in budgeting and managing payments for specific purchases.
• Repayment tenures typically vary from 15 days to 24 months.

Credit Card:

• Provides a revolving credit line.
• Allows for minimum or full balance payments monthly.
• Flexible for both short-term and long-term financing.
• Suitable for various expenses and emergencies.
• Purchases can be converted into EMIs, possibly incurring interest charges.

5. Usability and Acceptance

BNPL:

• Services are tailored for specific partner merchants or platforms.
• This restricts usage to select outlets only.
• The Bajaj Finserv Insta EMI Card has 1.5 lakh partner stores in India.

Credit Card:

• Widely accepted for online and in-store purchases.
• Usable globally across various retailers.

6. Credit Limit

BNPL:

• Initial limits for Simpl applications range from ₹500 to ₹1,500.
• Amounts are typically lower or capped.

Credit Card:

• Credit limits vary based on individual creditworthiness.
• Higher credit limits are typically available for those with better credit scores.

7. Impact on Credit Scores

BNPL:

• BNPL services like Bajaj Finserv Insta EMI Card may not directly affect credit scores.
• Providers usually don't report payment history to credit bureaus in India.
• Defaulting on or missing payments could indirectly impact credit scores if reported.

Credit Card:

• Responsible credit usage positively affects your credit score.
• Timely EMI payments are crucial for good credit management.
• Building a good credit history enhances the chances of loan approval.
• Effective credit card usage is key for obtaining future financial products.

8. Consumer Protection

BNPL:

• The BNPL industry is relatively new and less regulated.
• There is limited consumer protection compared to credit cards.
• Potential risks include over-indebtedness.
• The RBI is scrutinizing BNPL for these risks.

Credit Card:

• Provides enhanced consumer protections.
• Ensures zero liability for unauthorized transactions.

9. Rewards and Benefits

BNPL:

• Typically lacks rewards points.
• No cashback incentives.
• Does not provide travel benefits.

Credit Card:

• Credit cards offer various rewards such as cashback, points, miles, and discounts.
• Some also include insurance benefits.
• Example: The Fibe Axis Bank Credit Card offers cashback and lounge access.

10. Debt Risk and Impulse Purchases

BNPL:

• Splitting payments is convenient but can encourage overspending.
• Impulse purchases may increase due to the ease of payment.
• Responsible use is essential to avoid financial strain.

Credit Card:

• Credit cards offer convenience but can lead to overspending.
• Not paying balances in full may result in debt accumulation.
• This situation can create a "debt trap" for users.

11. Financial Flexibility for Large Purchases

• BNPL has restricted flexibility for substantial purchases.
• Credit cards offer a versatile line of credit for diverse expenses and emergencies.

What Should You Choose?

The choice ultimately depends on your individual financial needs, spending habits, and credit situation.

Choose BNPL if:
• You prefer interest-free options for specific purchases.
• You have limited or no credit history and are looking for accessible payment solutions.
• You want to enjoy budget-friendly installment plans for select transactions.
• The BNPL service offers attractive deals and discounts at your preferred partner merchants.
• You plan to make smaller, frequent purchases with predictable payments.

Choose a Credit Card if:
• You seek a flexible credit line for diverse purchases and transactions.
• You prioritize building or improving your credit history with responsible management.
• You value the convenience of widely accepted payment methods, both online and offline.
• You aim to benefit from rewards, cashback, and credit card perks.
• You require a versatile tool for various expenses and emergencies.

Important Considerations for Smart Financial Planning

Regardless of your choice, remember that responsible usage is paramount. Overusing either facility can be detrimental to your finances.

• Plan your budget and assess your repayment ability before making purchases.
• Understand all terms, fees, and penalties associated with the services you choose.
• Consider hybrid products like the Bajaj Finserv Insta EMI Card for flexible financing options.

In conclusion, both Buy Now, Pay Later and credit cards help manage purchases effectively. BNPL is convenient and low-cost for specific purchases, making it beneficial for building credit. Credit cards provide more financial flexibility and can strengthen your credit history if used wisely. Evaluating your financial needs and discipline will guide your decision.