When is a 0% APR credit card better than a ‘buy now, pay later’ loan?

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Buying a pricey Peloton bike or spending hundreds of dollars on skincare at Sephora is easier than ever thanks to the rise of ‘buy now, pay later’ services, also known as point-of-sale (POS) loans. With POS loans, consumers can spread out the cost of their purchases into installment payments paid over several months, occasionally with 0% interest rates. 

POS loans have been most popular among young people: A survey done by LendingTree in April found that nearly 60% of Gen-Z respondents surveyed had used a point-of-sale loan. This age cohort was also less likely to view using POS loans as a form of debt.

With the average APR on credit cards around 16%, it’s easy to understand why people are opting for POS loans at the checkout page of their favorite retailers. But today, many credit cards offer a 0% APR introductory period on purchases and balance transfers, making us wonder which really is the better method of payment.

Select explores the pros and cons of using a 0% APR credit card or a POS loan for your next purchase.

Using a 0% APR credit card

Let’s first explain what an APR is: Known as the annual percentage rate, an APR is the interest rate you’re charged if your credit card balance is not paid off on time and in full each billing cycle.

The biggest pro of of signing up for a card with a 0% APR introductory period on purchases is that you’re able to carry a balance during the specified introductory period without incurring any interest.

Some cards also come with a 0% APR introductory period on balance transfers, which allows people to transfer their outstanding balance from one credit card to another in order to get a break from accruing additional interest. This interest-free period typically lasts between 12 and 20 months. 

To qualify for a 0% APR credit card, you’ll typically need either a good or excellent credit score, or a score of 670 or above. It’s possible to qualify for a 0% APR credit card with fair or average credit but you might get a shorter introductory period.

Another major benefit of a 0% APR credit card is the opportunity to earn rewards. With a POS loan you won’t have the ability earn a welcome bonus or get any cash back on your purchase. There are many 0% APR credit cards on the market, so you can easily find one that saves you on interest and lets you earn a welcome bonus and cash back for your everyday spending.

The Capital One SavorOne Cash Rewards Credit Card is one card that has a 15-month 0% introductory APR period on purchases (after, 15.49% to 25.49% variable APR). It gives cardholders 3% cash back on dining and entertainment, 3% on eligible streaming services and 3% at grocery stores, which makes it a good choice for cardholders who dine out regularly and frequent concerts or shows. The SavorOne also has a $200 welcome bonus after you spend $500 within the first three months of opening the account.

Capital One SavorOne Cash Rewards Credit Card

Information about the Capital One® SavorOne® Cash Rewards Credit Card has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

  • Rewards

    3% cash back on dining and entertainment, 3% on eligible streaming services, 3% at grocery stores and 1% on all other purchases

  • Welcome bonus

    Earn a one-time $200 cash bonus after you spend $500 on purchases within 3 months from account opening

  • Annual fee

  • Intro APR

    0% introductory APR for the first 15 months that your account is open

  • Regular APR

    15.49% to 25.49% variable

  • Balance transfer fee

    3% for promotional APR offers; none for balances transferred at regular APR

  • Foreign transaction fee

  • Credit needed

Another card you could consider is the Wells Fargo Active CashSM Card, which is a flat 2% cash reward card with a 15-month 0% APR introductory period on purchases (after, 14.99% to 24.99% variable APR). This card also has a welcome bonus of $200 cash rewards after you spend $1,000 within the first three months of account opening.

Wells Fargo Active Cash℠ Card

  • Rewards

    Unlimited 2% cash rewards on purchases

  • Welcome bonus

    $200 cash rewards bonus after you spend $1,000 on purchases in your first 3 months from ac
    count opening

  • Annual fee

  • Intro APR

    0% APR on purchases and qualifying balance transfers for the first 15 months from account opening

  • Regular APR

    14.99% to 24.99% variable on purchases and balance transfers

  • Balance transfer fee

    Introductory fee of 3% ($5 minimum) for 120 days from account opening, then up to 5% ($5 minimum)

  • Foreign transaction fee

  • Credit needed

While qualifying for a 0% APR credit card requires a decent credit score, using one responsibly by making on-time payments can also help you build your credit score. This means making sure you have a payment plan in place so you don’t have a balance once the introductory period ends. Be aware that you may be required to make a minimum payment on your card each month or risk having your introductory period ended early by the card issuer. 

Getting a new credit card in general can also lower your credit utilization ratio, or the ratio of credit used to the amount of credit you’re extended, which can also increase your credit score.

Credit cards offer protections that POS loan providers do not. If you end up buying an item that is faulty or a scam with a credit card, you can dispute the charge because of the Fair Credit Billing Act. On the other hand, POS loan providers are not regulated in the same way, so returning items or disputing charges can be more complicated.

Using a POS loan

A POS loan can be a good choice for you if you’re unable to qualify for a 0% APR credit card or if you’re not looking to expand your credit beyond a single purchase, explains Matt Schulz, chief credit analyst at LendingTree.

Affirm, Afterpay and Klarna are some of the most popular BNPL loan providers. They offer financing options with 0% interest rates typically over shorter repayment periods which makes them good choice if you can’t get a 0% APR credit card. (Afterpay doesn’t consider themselves a POS loan provider because they don’t charge interest, but the company is still often classified as one.)

One of the most important factors you should consider when getting a POS loan is the interest rate and the fees.

Affirm has loans with interest rates up to 30% and charges no late fees. Klarna can charge up to 25% of the order value in late fees. Make sure to read the fine print on your specific POS loan before deciding whether it’s right for you.

A major benefit of using a POS loan is that some providers don’t look at your credit score at all or don’t heavily weigh your credit score when determining your eligibility for a loan. Afterpay doesn’t check your credit history while both Affirm and Klarna perform soft credit checks (though Klarna may perform a hard inquiry for some loans).

If, however, you’re looking to improve your credit score, POS loans might not be your best option. Some POS loan providers report your payment history to the credit bureaus while others do not.

Affirm only reports some loans to Experian. On the other hand, Klarna doesn’t report any of it’s interest-free loans and Afterpay doesn’t ever report to the credit bureaus.

However, be warned that even if you’re on time with payments on your POS loans, they could still end up hurting your credit score if they’re being reported to the credit bureaus. Here’s why: Every time you get a POS loan, you’re opening a new line of credit and closing it whenever you pay it off. This could end up decreasing the average age of your credit history and therefore decrease your credit score.

Bottom line

When deciding if you should get a 0% APR credit card or a POS loan, you should consider a variety of factors.

First off, you should consider if you have a good enough credit score to qualify for a 0% APR credit card. Additionally, do you need additional credit beyond a single purchase? Does your POS loan have an interest rate? How much do you value the welcome bonuses and rewards offered by credit cards?

These are all questions you should ask yourself when deciding between the two and if you make the right choice, you could end up financing your purchase without paying any extra interest or late fees on that exercise bike or eye cream.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.