High interest rates don’t seem to be stopping many consumers from using store credit cards. In a recent survey by LendingTree, when given the option, 58% of shoppers favored store cards over buy now, pay later (BNPL) plans. The remaining 42% leaned towards BNPL loans. This poll, which took place in September, included responses from 2,040 U.S. adults.
Matt Schulz, LendingTree’s chief credit analyst, pointed out that this preference may indicate shoppers are seeking more long-term financial assistance. Interestingly, the Consumer Financial Protection Bureau found that as of December, new credit cards from the top 100 retailers carried an average annual percentage rate of 32.66%, an increase from 27.7% a year before. While most BNPL plans don’t charge interest on short-term loans, longer-term ones do, which can make their rates similar to those of store cards.
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Younger consumers, particularly Gen Z and millennials, have embraced BNPL early on, reflecting their payment choices. According to LendingTree, around 59% of Gen Z and 51% of millennials prefer BNPL over retail credit cards, which contrasts with 38% of Gen Xers and just 22% of baby boomers. Schulz notes that "Buy now, pay later started as a trend driven by millennials and Gen Z. They were the pioneers."
Regardless of your chosen payment method for holiday shopping, experts emphasize the importance of understanding the cost of carrying debt.
How Store Cards and BNPL Work
Understanding the difference between retail store credit cards and BNPL loans is crucial. Store credit cards are long-term credit options offered by stores in partnership with banks. They often entice new users with discounts on the first purchase or other financing deals and are typically linked to the store’s loyalty program, offering extra rewards to cardholders.
On the other hand, BNPL breaks a purchase into installment payments over a defined period. While some providers offer longer repayment terms with interest, they allow users to make multiple purchases simultaneously, each with its repayment schedule. Regardless of the payment method, timely repayment is essential to avoid fees and interest charges.
Retail credit cards can impact your credit history since they’re reported to major credit bureaus like Equifax, Experian, and TransUnion. Traditionally, BNPL hasn’t appeared on credit reports, but companies like AfterPay, Affirm, and Klarna now report certain BNPL loans to credit bureaus.
These options both appeal to shoppers for different reasons. Retail store credit cards are generally easier to get than other credit cards, particularly given banks’ recent tighter approval criteria, according to Schulz. In the third quarter of 2024, the Federal Reserve reported that banks had tightened their lending standards, reduced credit limits, and raised minimum credit score requirements due to rising delinquencies and economic uncertainty.
BNPL is usually straightforward to apply for and qualify for. Ted Rossman, a Bankrate industry analyst, remarked that BNPL’s rise is a significant factor in why fewer Americans are opening new store cards.
‘Consider the Total Cost of Ownership’
As the holiday season kicks in, many will turn to buying gifts for loved ones. If you’re contemplating using a store credit card or BNPL to manage your budget, it’s wise to think about the "total cost of ownership," advises Rossman. Both methods can be beneficial, yet they could lead to debt and overspending if not handled carefully.
Rossman warns that having multiple BNPL loans simultaneously can complicate financial management. It’s essential to track your payments and be prepared for automatic deductions. Schulz also highlights that if you don’t settle your retail card balance by the end of the statement period, any initial savings could be overshadowed by the interest charges. "Paying 30% interest to save 15 or 20% isn’t a financially sound decision," Schulz stresses.
