Are credit cards replaced by buy now and pay later?

A new study finds that young people are increasingly ditching credit cards in favor of buy-now-pay-later schemes.

Nearly half of adults under the age of 35 do not currently have a credit card in their name, according to research from GlobalData, a data and analytics company.

It found that 47 percent of young adults chose to avoid credit cards, which is up from its previous study in 2016 — at the time 39 percent of them did not have a credit card.

It is believed that one of the main reasons why young people reject credit cards is the increasing popularity of buy now pay later schemes.

The largest provider in the UK market, Klarna, has seen its customer base more than double from 7m to 16m since the start of 2020.

“Not only are alternative financing options like BNPL increasingly popular on social media, where young people shop, they are also making buying on credit easier,” said Jaimini Pattani, Banking Analyst at GlobalData.

BNPL allows buyers to simply view credit options when making a large purchase, rather than having to apply for a credit card at the bank.

Furthermore, BNPL services offer interest-free purchases, have softer credit checks, and can often be managed via apps.

GlobalData’s search also aligns with recent analysis by comparison site, Finder.

It found that 51 percent of millennials — those born between 1981 and 1996 — own a credit card, compared to 71 percent of those born between 1965 and 1980.

Among those who don’t own a credit card, 93 percent never plan to check out a single card, preferring to use alternative, newer methods of delaying payments instead.

Keith Kilkors, credit publisher at Finder, said: “Nowadays, young people prefer convenience and are looking for an alternative way to distribute payments.

In particular, the popularity of BNPL schemes such as Klarna has recently risen among the younger generation which may have played an important role in why credit card usage is so low from the scores.

In fact, our research shows that millennials and Gen Z are more likely to choose BNPL as a payment method when purchasing goods.

Although banks are taking steps to appeal to the younger generations, their efforts remain in vain, according to GlobalData.

And I found that the typical introductory rates, interest-free periods, and cash-back perks were no longer attractive.

Only one in five people ages 16 to 34 said traditional low or zero introductory interest rates would encourage them to get a credit card.

Patani suggests that banks will need to demonstrate the advantages their products have over BNPL or risk continuing to lose out.

“There is a lack of knowledge or concern about the implications of using BNPL,” Patani said.

Banks have an opportunity to educate customers about how BNPL systems often operate in an unregulated environment, have a lack of transparency about missed payments, and the impact this has on their credit profiles.

“However, they also need to directly address the benefits of BNPL, providing a credit card that caters to younger shoppers or risk being pushed back even further.”

Does it matter if you don’t have a credit card?

The biggest potential risk to those who choose not to have a credit card is its effect on a person’s credit rating.

A credit report shows a list of a person’s credit accounts, such as bank accounts, credit cards, utilities, and mortgages. It will also display your payment history, including late or missed payments.

A credit score, also known as a credit rating, is a three-digit number that reflects this information and enables lenders to determine how reliable you are when it comes to paying money back.

By not having a credit card, there will be less evidence for the lender to judge how reliable you are in paying debts and sticking to credit agreements.

This means that a person without a credit card may have fewer options available to them when they apply for a mortgage or personal loan which may in turn result in them paying a higher interest rate.

“Information on your credit report isn’t the only thing lenders look at, but it’s one of their main criteria for judging your level of risk as a borrower,” says Kilkors.

If you are viewed as being in a riskier category due to a lack of credit history, this could result in your application being denied or your interest rate going up.

“A slight increase in the interest rate may seem small but it can add £100 or even £1000 to the cost of the loan.”

Of course, when poorly managed credit cards can hurt a person’s credit score, however, when well managed and paid off in full each month, they can help do just the opposite.

James Jones, head of consumer affairs at Experian, said: “While you can build an winning credit score without using credit cards, they provide an excellent opportunity to prove your financial reliability to lenders, if managed properly.

“For example, a five-year-old credit card with a high limit, low balance, and perfect payment history can boost your Experian credit score by 200 points, which alone can raise your score from fair to excellent.”

Unlike credit cards, paying BNPL debt on time will not currently improve a person’s credit score, regardless of who the provider is.

In theory, providers could report on-time payments you make to a credit reference agency, but at the moment none of them do that.

However, most BNPL providers reserve the right to report missed payments to credit reference agencies, and they, in turn, can then be shown on a person’s credit report, which can negatively affect the outcome.