Is ‘buy now, pay later’ replacing store credit cards in shoppers’ wallets?

Buy now, pay later financing is increasingly popular, and forecasts suggest the amount consumers spend using buy now, pay later will triple in size over the next two to three years. Although not a perfect substitution for store card spending, buy now, pay later plans are likely to supplant some store card spending more than traditional bank-issued credit cards.

And buy now, pay later plans aren’t only used by those without credit cards: Some consumers prefer that mid-sized purchases be front-of-mind and paid down, even though they have plenty of credit available on either a store card or credit card.

Buy now, pay later plans usually don’t rely on traditional credit scores to determine a consumer’s creditworthiness; they rely on what’s broadly referred to as alternative data. That said, most buy now, pay later consumers have a credit score, one that’s similar to those with retail store cards.

As far as which type of spending that growth will supplant, the most obvious choice seems to be revolving store card users, at least based upon similarity of FICO scores.

Those consumers using retail cards, and paying interest on those transactions, will quite possibly also qualify for a buy now, pay later plan for larger purchases that they may be otherwise reluctant to add to a revolving balance.

But consumers thinking about larger transactions, even though they already have credit cards with sufficient available credit, may also prefer buy now, pay later plans for similar reasons. They may not want to increase their credit utilization, which could reduce their FICO scores. Nor do they necessarily want to pay additional interest if an interest-free solution is possible for a big-ticket item.

Consumer psychology in action

But finally, much of the behavior surrounding a consumer’s preference for buy now, pay later may have more to do with psychology than accounting. Many consumers seem to prefer paying off one buy now, pay later purchase at a time instead of managing balances on a store card or credit card.

A recent industry survey by PYMNTS found that users—by a wide margin—consider buy now, pay later more of a budgeting tool than a type of credit. Many common repayment terms for some buy now, pay later plans are biweekly, which coincides with many consumers’ paycheck frequency. So, for many, buy now, pay later is thought of more as a cash flow management tool, as opposed to simply another way to leverage credit to make purchases.

Methodology: The analysis results provided are based on an Experian-created statistically relevant aggregate sampling of our consumer credit database that may include use of the FICO Score 8 version. Different sampling parameters may generate different findings compared with other similar analysis. Analyzed credit data did not contain personal identification information. Metro areas group counties and cities into specific geographic areas for population censuses and compilations of related statistical data.

This story was produced by Experian and reviewed and distributed by Stacker Media.