Are Credit Card Pay-over-time Options A Smart Financial Move?

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With credit card debt at a record high, many Americans are looking for a different way to handle their payments. Some major credit card companies are offering a new alternative with pay-over-time options.

Pay-over-time is a response to the popularity of buy-now, pay-later plans. Though there are important differences, the basic idea is the same: breaking up payments on large purchases into more manageable pieces.

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There are pros and cons to spreading out payments in this way.

"Pay-over-time options on credit cards can be a beneficial tool for managing cash flow by allowing consumers to spread large purchases over several months," says Dayten Rynsburger, chief revenue officer for lending platform Niche Capital. Like other experts, though, Rynsburger also has concerns about pay-over-time plans.

"It can encourage more spending, potentially leading consumers into further debt if not managed carefully," he says.

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As with any financial tool, the key to successfully using pay-over-time plans is understanding their benefits and risks.

What is pay-over-time and how does it work?

What's odd about credit card companies offering pay-over-time plans is that by nature, credit cards already allow you to spread payment for purchases out over time. After all, you don't have 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 pay-over-time features from regular credit card use:

• It's typically limited to major purchases, such as those over $100.
• It creates a series of uniform repayment amounts rather than variable minimum payments.
• Those uniform repayment amounts tell you how long it will take to pay off the purchase up front.
• It substitutes a fee for interest charges.

To use this option, you would pay for a purchase with your credit card but then select the pay-over-time option either at the time of purchase or shortly afterward. You also get to choose from a variety of repayment periods. As with a loan, the shorter the repayment period, the larger the payments, though this would mean fewer fees over time.

The payments and fees are calculated when you choose your repayment period. The fee is calculated as a percentage of the original purchase and added to each payment.

Pay-over-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 large pay-over-time purchase. The minimum monthly payment would be calculated as usual, based on the amount of your balance other than the amount designated as a pay-over-time purchase. The pay-over-time payment would, therefore, be added to your minimum monthly payment.

Other than that, pay-over-time purchases, balances, and payments are like any other credit card usage in terms of how they impact your credit score, consumer protections, and rewards.

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Pros and cons of credit card pay-over-time plans

So what does all this mean for consumers? The following are some of the major impacts on credit card customers and the pros and cons they represent:

Fixed payments can keep debt reduction on schedule

Normally, minimum credit card payments are a tiny percentage of your balance, so debt can drag on or even grow faster than you pay it off. In contrast, fixed payments are typically larger, and pay your debt off more quickly.

Still, anything that lets you spread the cost of purchases out over time can cause you to buy things you can't afford. Experts generally recommend you save the pay-over-time approach to essential purchases.

'While convenient, pay-over-time can lead to debt if misused," says Les Perlson, CEO of NPA Benefits, a health insurance provider. "With discipline, it's a useful tool."

Monthly fees vs. interest charges on pay-over-time purchases

Pay-over-time plans say they save balances from being charged interest. However, since pay-over-time plans charge fees, it adds an element of confusion. Charging fees rather than interest makes it harder for consumers to determine whether the pay-over-time approach is cheaper or more expensive.

"Depending on the card and the specifics of the plan, fees and interest associated with pay-over-time options can sometimes exceed regular credit card interest," says Rynsburger.

For example, one prominent credit card issuer offers a monthly pay-over-time fee of 1.72% of the purchase amount. As it happens, though, multiplied by 12, that works out to about the same APR as the base rate on the card.

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However, there's a twist. The fee stays the same throughout the repayment period. So, unlike with a normal credit card balance, your borrowing cost won't go down as you pay down the balance. This can make the pay-over-time option more expensive.

"The key is choosing a low-fee card and paying the balance promptly to avoid exorbitant charges," Perlson says.

Pay over time raises the minimum payments on your credit card

It's important to note that pay-over-time amounts are added to the normal minimum payments on your credit cards. In other words, those minimum payments would become bigger when you also have a pay-over-time plan.

So, if you're having trouble making your credit card payments, paying over time will probably not help.

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How pay over time affects credit score

How do pay-over-time plans affect your credit score? Amounts in those programs are reported along with your regular use of the credit card, which means:

• The amount you owe will count towards your credit utilization, which can negatively affect credit scores.
• On-time payments should help your credit score.
• Late payments can hurt your credit score.

Buy now, pay later vs. credit card pay-over-time plans

Credit card pay-over-time plans are similar to buy now, pay later plans in that they spread large purchases out into smaller payments. However, there are some crucial differences.

As Rynsburger points out, "Pay-over-time options on credit cards are similar to buy now pay later plans but typically come with the consumer protections and benefits offered by credit cards, like fraud protection and reward points."

Also, buy-now, pay-later plans don't typically count toward your credit history. Depending on whether your payments are on time, this can be good or bad.

Bottom line: Pay-over-time plans represent a different way of paying for credit card purchases. They also represent a different way credit card companies can profit from you. Be sure you understand the details well enough to figure out whether they'll help more than they'll hurt.

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