Data Snack: Credit and debit cards are king; BNPL’s ‘dangerous illusion’ is fueling overspending

The use cases offered by a certain payment type and the life stage that the user is in appear to have an influence over which payment method they prefer to use. In both cases, though, credit cards were found to be prized for the rewards they offer and the ability they grant to spread expenses over time.

Older consumers – those aged 45 and above – use credit cards for different reasons than younger consumers do. The study found that while 61% of the older consumers used credit cards to earn rewards on purchases, only 36% of the younger consumers swiped their credit cards to earn incentives. Furthermore, 25% of younger consumers preferred credit cards because they enable them to spread out their payments over time, while only 15% of older consumers cited that as a reason for usage.

Education is a big deal. Younger people report using credit cards less for the rewards they offer because they lack an understanding of different payment methods. Across all the different types, younger consumers were found to have less of an understanding of alternate payment methods — resulting in a lower likelihood of them taking advantage of rewards, an increased probability of struggling to pay balances off in time, and higher chances of overdrawing their account balances.

In the survey, while 72% of older consumers reported feeling they completely understood payment methods, only about half of the younger consumers shared the confidence. Approximately 38% of younger consumers said they had only a partial understanding, while 5% said they don’t understand payment methods at all. In comparison, 26% of older consumers said they had a partial understanding, while 2% said they don’t have any.

(While the above question demonstrates the confidence different age groups feel with regard to their financial understanding, it is important to address its limitations. Feeling more confident about their knowledge does not mean that they actually have sufficient knowledge.)

This reflects how consumers from different age groups pay for their credit card spending. Around half of older consumers report paying off their balances in full each month, and earning valuable reward points, as compared to 40% of younger consumers who pay off in full each month and just 38% that earn valuable rewards.

In all cases, for all age groups, financial education is extremely important. For younger consumers, however, it should be mandatory, particularly when a young person has access to a credit or debit card, according to Cyndie Martini, CEO and founder of Member Access Processing. 

For example, young people might not understand the fact that while a credit card purchase incurs no debt for 30 days, there is interest applied to that purchase if it is held on a card for longer than 30 days. 

“Concepts such as interest, compound interest, both good and bad, are essential for any student to understand. Also, while someone below the age of 18 cannot build a credit score, they can damage their financial future by accumulating debt, missing payments, and incurring overdraft fees,” Martini told us.

Debit cards are preferred, by older and younger consumers alike, for their lack of interest charges and debt. 

Younger consumers have come to use debit to fund large recurring expenses — like rent, car payments, or insurance, while older consumers use it more for smaller recurring expenses — like utility bills, cell phone bills, cable, or subscriptions. 

A lack of financial understanding among younger consumers is reflected in debit card usage, too. While 31% of those under the age of 45 said debit cards help them stay within their budget, 28% said they sometimes end up overdrawing their checking accounts. In comparison, while 22% of older consumers say debit cards help them stay within budget, only 6% report often overdrawing.

BNPL's 'dangerous illusion'

BNPL challenges credit and debit cards when it comes to consumer satisfaction. Both the age groups rated credit cards highest for overall satisfaction, and BNPL was a quick second. A notable drop was witnessed between the second and third, where debit cards sat. 

BNPL is popular due to a number of reasons: low payments, the ability to buy more expensive purchases, no interest charges, and promotions and rewards offered. Low payments is the most popular reason for both younger and older consumers.

BNPL adoption has been led by younger consumers – the digital nature of the offering and user-friendly interfaces have primed it for them. Younger consumers tend to have multiple active accounts and are likely to be paying off multiple purchases at once. However, while nearly half of those 45+ say they pay for their purchases on time, only about a quarter of those under 45 say the same. Almost 30% of younger consumers say they end up spending more than their budget with BNPL.

Additionally, there is a notion that buying stuff with BNPL "feels like it is free".

"The simplicity of the interface combined with the immediate gratification these digital payments solutions provide is creating a potentially dangerous illusion that many purchases are either without cost or something to worry about later," the report read.

With BNPL, it's easy to find yourself feeling detached from the balance in your bank account. Money spent on BNPL doesn’t feel tangible to many users. Therefore, it’s easy to overlook how that may affect one’s financial situation for the months to come. 

“BNPL spending feels completely effortless and puts you into a mindset where you feel you can address the situation at a later date and reap the rewards now,” Matthew Debbage, COO at Creditsafe, told Tearsheet. "The best way to tackle this is to take the same BNPL mindset, but actually put the money away each month beforehand and then purchase the item once you’ve saved. This not only makes you more financially savvy, but you may also find that after a few months you no longer want to purchase the item that you were impulsively seeking out in the first place."