3 Tips for Using Buy Now, Pay Later for Holiday Shopping

These services can be an affordable way to pay for gifts, if you know how to use them.

Holiday shopping can get expensive, and sometimes buying gifts for everyone costs more than you bargained for. If you've found the perfect gifts, but they don't quite fit your budget, you could use a buy now, pay later (BNPL) service.

Quite a few stores offer this option, and it's popular with consumers who don't want to put too much on their credit cards. With most of these services, there's no interest charges if you pay off your full balance within a certain time period. But to avoid any costly mistakes, here are some tips to follow when using BNPL.

1. Don't overuse it

Since so many merchants offer BNPL now, you could probably use it for a good portion of your holiday gifts. And when the option's there, it's tempting to choose payments of, say, $50 over paying $200 all at once. That's a big part of the reason these services are so popular.

Be selective about making purchases with BNPL. If you can pay for something in full, that's usually the better option over taking on holiday debt. Small monthly payments still add up if you take on a lot of them. One new payment of $50 per month may not be a big deal for you, but five or six of them could become a financial strain.

When you have more payments to manage, it's also more likely that something could go wrong. You might miss a payment and get charged a late fee or not be able to complete a payment plan in time.

2. Always pay on time

One of the things to watch out for with BNPL is missed payments. This might seem obvious, but keep in mind that many of these services have payments due every two weeks. If you're used to the typical monthly schedule of most bills, biweekly payments could throw you for a loop.

Not all BNPL providers charge late fees, but several do. And with some of them, a single late fee can cost more than $35.

To avoid late fees, see if the provider allows you to set up automatic payments. Just make sure you have enough money in your bank account so you don't get charged a return payment fee. If autopay isn't an option, you could also set a reminder on your phone or computer.

3. Pay off your balance during the interest-free period

With BNPL, there's normally a set amount of time where you can pay off your purchase interest-free. That could be six weeks, six months, or some other period, depending on the service.

The catch is that some of these services offer what's known as deferred interest. If you don't pay off your entire balance within the specified time, then you're charged interest going back to when you made the purchase. To make it even more complicated, the minimum payment amount may not be enough to pay off your full balance within the interest-free period.

This is why it's important to understand how BNPL services work before you use one. You don't want to get charged all that interest you thought you were avoiding because you didn't pay enough. Keep track of your progress and make sure your balance will be paid off in time so you don't get stuck with a big bill.

When used sparingly, BNPL can be helpful for covering holiday shopping. What's important is only using it if necessary, paying on time, and paying off what you owe before the interest-free time is up.