The Ins & Outs of Financial Products: Credit Cards, Loans & Buy Now, Pay Later

Have you ever found yourself in a tough spot where you come across something that you would love to buy for yourself or someone else, but unfortunately, it's not within your current budget? To make matters worse, you need it sooner rather than later so layaway isn’t an option, putting you in a tricky situation. Or, perhaps an emergency has come up and you don’t have the money to take care of it. If so, you’re not alone! Fortunately, there are financial products that you can use when you’re in a bind, and we’ll talk about some tips to help you navigate such products.

Okay, so let’s first talk about credit cards, everyone has heard of them even if you have lived under a rock…but let’s get into the nitty gritty.

A credit card, often referred to as "plastic", is a bank-issued loan that provides a line of credit, or limit, determined by your credit score. A credit score is exactly what it sounds like… a rating that represents how responsible you have been with credit in the past. It is used by lenders to determine your creditworthiness and trustworthiness and the higher your credit score, the higher your limit and the lower your interest rate will be. Credit cards can be a convenient way to make purchases, but be mindful of these factors when deciding whether to use a credit card or not:

• Interest rates: In exchange for a line of credit, the banks charge you interest. Now just in case you’re saying what’s the big deal because you’re thinking about the interest your bank pays you…that 0.03%, nope it is quite the opposite…the average credit card interest rate is around 24%. As you can see, it can be costly carrying a balance because credit cards come with higher interest rates. To avoid throwing your hard-earned money into a burning flame, better known as interest charges, I recommend paying off your balance in full each month.

• Credit Utilization: Credit utilization is the amount that reflects how much of your credit limit you have used. When using credit, always aim to keep your credit utilization low, 30% or less is the rule of thumb. If you are planning to make a purchase and your limit is $5,000, you should aim to spend a max of $1,500 to avoid surpassing that 30% mark.

• Rewards Programs: When making purchases with a credit card, look to see if your card may offer a reward for that intended purchase. If it does, be sure to activate it to earn points, cashback, or other rewards for using the card.

• Annual Fees: An annual fee is a fee that you pay to the credit card issuer so that you can use the card. Most cards do not have an annual fee, but if you have a credit card with an annual fee or you’re interested in applying for one, just make sure that all of the benefits are worth it.

So if your credit is in tip top shape, and you haven’t maxed out all your cards, a credit card is a great option to make that purchase that you don’t happen to have the money for now. However, it's important to only buy the item if you have a significant amount to put towards it and will be able to pay the full amount by the card's billing date to avoid high interest rates.

Next, let’s discuss loans…

Loans are typically used on larger purchases such as cars, homes, or large emergency expenses. Like a credit card, lenders will assess your creditworthiness to first decide if they’ll approve the loan and then it is used to determine your amount and interest rate. The interest rate of a loan is usually lower than that of a credit card and some lenders may require a minimum credit score just for you to be eligible to take out the loan. When considering taking out a loan, keep these factors in mind:

• Interest Rates: So similar to credit cards, loans will also come with an interest rate. When applying for a loan, be sure to review the interest rate and ensure that it is a number that you are comfortable with.

• Repayment Terms: The repayment terms of a loan is the amount of time you have to repay the loan. When taking out a loan, be sure to review the repayment terms and make sure that the payment is within your budget.

• Collateral: Sometimes when taking out loans, they may require collateral which just means if you default on the loan, you will lose the asset.

• Prepayment Penalties: Who would’ve thought that paying what you owe before it’s due would cause a penalty? For some loans they do, known as a prepayment penalty, which is a fee you’ll be charged if you pay the loan off early. Before you decide to pay a loan off early, ensure that there are no prepayment penalty fees.

To ensure you are making the best financial decisions, it's crucial to consider those factors, whether you're applying for a personal loan, auto loan, or mortgage. But what if you're just starting out, or if you've made some mistakes in the past that have damaged your credit score? If you have no established credit history, or if you've defaulted on bills and ended up in collections, you may find it challenging to get approved for a credit card or other forms of credit. That’s where the sort of new phenomenon comes in, “Buy Now, Pay Later,” with companies such as Klarna and Affirm.

Buy Now, Pay Later (BNPL) has changed the game, people that could only rely on their cash can now use this financial product to their advantage. How does it work? Well, unlike credit and loans, BNPL could care less about your credit score and more about the cash flow that’s in your bank account. There are interest free options, Pay in 4, so every 2 weeks an automatic payment would be made and also options that allow you to have a six month payment plan with interest usually around 15%, which is still much less than credit cards. Now there isn’t much to consider when using BNPL, but still keep these factors in mind if you decide to go this route:

• Payments: Ensure the cost of each payment is an amount that you can keep up with and is within your budget, if not opt for a longer plan or a cheaper alternative. With BNPL, if you default on the payments you can no longer use the service and it can possibly be sent to collections, and negatively impact your credit score.

• Avoid Overspending: Since BNPL does not reflect on your credit utilization, many might use it as a tool to overspend. Always ensure that you are remaining within your budget.

• Fees and Interest Rate: When making a purchase with a BNPL platform, review the fees and interest rate, and decide if it’s worth it.

Today, there are options available for everyone, credit cards, loans and Buy Now, Pay Later. However, it's important to evaluate whether the fees and interest rates associated with the credit card, loan or BNPL service are worth the intended purchase and if it fits into your budget. While these options can be beneficial if used wisely, it's essential to have a clear understanding of the tool of your choosing before using it. So, whether you have an excellent credit score or none at all, be sure to weigh your options carefully and make an informed decision.