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

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.

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.

Another card you could consider is the Wells Fargo Active Cash^SM 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.

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.

Affirm has loans with interest rates up to 30% and charges no late fees. 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.