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With credit card debt at a record high, many Americans are looking for a different way to manage their payments. Some major credit card companies are offering a new alternative with installment payment options.
On-time payment is a response to the popularity of buy now, pay later plans. Although there are important differences, the basic idea is the same: break down payments for large purchases into more manageable chunks.
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Distributing payments this way has advantages and disadvantages.
“Instalment payment options on credit cards can be a beneficial tool for managing cash flow by allowing consumers to spread out large purchases over several months,” says Dayten Rynsburger, chief revenue officer at the lending platform Niche Capital. However, like other experts, Rynsburger is also concerned about timely payment plans.
“It can encourage more spending, which could lead consumers into more debt if not managed carefully,” he says.
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As with any financial tool, the key to successfully using on-time payment plans is understanding their benefits and risks.
What is time payment and how does it work?
The strange thing about credit card companies offering payment plans over time is that, by nature, credit cards already allow you to spread payment for purchases over time. After all, you don't need to pay off your balance every month. You can pay for purchases over time if you're willing to pay the interest expense.
Still, a few things distinguish installment payment features from regular credit card use:
- It's usually limited to major purchases, such as those over $100.
- Create a series of uniform repayment amounts instead of varying minimum payments.
- Those uniform payment amounts tell you how long it will take to pay off the purchase up front.
- Replaces a fee for interest charges.
To use this option, you would pay for a purchase with your credit card but then select the installment option at the time of purchase or shortly after. You can also choose from a variety of payment periods. As with a loan, the shorter the repayment period, the larger the payments, although this would mean fewer fees over time.
Payments and fees are calculated when you choose your payment period. The fee is calculated as a percentage of the original purchase and is added to each payment.
On-time payments are separate from your minimum monthly payment. So, let's say you had a series of routine purchases during the month plus one major payment-on-time purchase. The minimum monthly payment would be calculated as usual, based on the amount of your balance other than the amount designated as an installment purchase. Therefore, the extra payment will be added to your minimum monthly payment.
Other than that, purchases, balances, and paying on time are like any other credit card use in terms of how they affect your credit score, consumer protection, and rewards.
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Pros and cons of credit card installment plans
So what does all this mean for consumers? The following are some of the main impacts on credit card customers and the pros and cons they represent:
Fixed Payments Can Keep Debt Reduction On Plan
Typically, minimum credit card payments represent a small percentage of your balance, so the debt can drag on or even grow faster than you pay it off. On the contrary, fixed payments are usually larger and pay off your debt more quickly.
Still, anything that allows you to spread the cost of purchases over time can cause you to buy things you can't afford. Experts generally recommend reserving the installment payment method for essential purchases.
“While convenient, installment payments can lead to debt if used incorrectly,” says Les Perlson, CEO of NPA Benefits, a health insurance provider. “With discipline, it's a useful tool.”
Monthly Fees vs. Interest Charges on Installment Purchases
Timely payment plans are said to prevent balances from having to pay interest. However, since installment plans charge fees, it adds an element of confusion. Charging fees instead of interest makes it more difficult for consumers to determine whether the payment method over time is cheaper or more expensive.
“Depending on the card and specific plan features, the fees and interest associated with installment payment options can sometimes exceed normal credit card interest,” Rynsburger says.
For example, a prominent credit card issuer offers an extra monthly payment rate of 1.72% of the purchase amount. However, it just so happens that multiplied by 12 comes out to about the same APR as the card's base rate.
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However, there is a twist. The rate remains the same throughout the repayment period. So unlike a normal credit card balance, the cost of the loan won't decrease as you pay off the balance. This can make the installment payment option more expensive.
“The key is to choose a card with low fees and pay the balance on time to avoid exorbitant charges,” Perlson says.
Paying over time increases the minimum payments on your credit card
It's important to note that installment payment amounts are added to your normal credit card minimum payments. In other words, those minimum payments would be higher when you also have an on-time payment plan.
So, if you're having trouble making credit card payments, paying on time probably won't help.
Related: How to Really Protect Yourself from Credit Card Fraud
How payment over time affects credit score
How do on-time payment plans affect your credit score? The amounts in those programs are reported along with your regular credit card usage, which means:
- The amount you owe will count toward your credit utilization, which can negatively impact your credit scores.
- Timely payments should help your credit score.
- Late payments can affect your credit score.
Buy now, pay later versus credit card payment plans over time
Credit card installment plans are similar to buy now, pay later plans in that they spread large purchases into smaller payments. However, there are some crucial differences.
As Rynsburger notes, “Instalment payment options on credit cards are similar to buy now, pay later plans, but they generally come with the consumer protections and benefits that credit cards offer, such as fraud protection and reward points.”
Additionally, buy now, pay later plans typically do not count toward your credit history. Depending on whether your payments are on time, this can be good or bad.
Bottom line: On-time payment plans represent a different way to pay for credit card purchases. They also represent a different way that credit card companies can profit from you. Make sure you understand the details well enough to determine whether they will help more than they will hurt.
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