Credit Card vs. Buy Now, Pay Later in the UAE: Which is Better?

Introduction : The Changing Financial Landscape in the UAE

The United Arab Emirates had traditionally been a credit card-centric market, with banks offering a multitude of products designed for various needs. From cashback offers to travel rewards, it remained popularly the preferred mode of payment. The BNPL services, however, are increasingly very popular, and the consumer behavior is also changing with that. Tamara, Postpay, and Spotii, which offer interest-free installment plans, bring these traditional payment methods under irrelevance in young tech-savvy minds. With that emerging trend, the UAE Central Bank recently introduced a regulatory framework for BNPL providers, which has risen rapidly in the financial ecosystem. According to White & Case, the corresponding regulatory framework would protect consumers while promoting innovation. This new retail finance era in the UAE now calls for an examination of both BNPL and credit cards. 

BNPL Stands for Buy Now Pay Later.

BNPL is a short-term installment loan wherein the consumer pays for the purchase over time, usually in three or four interest-free installments. BNPL platforms usually do not require a hard credit check, and hence not many barriers exist between the supply of BNPL services and demand by the customers. Platforms such as Postpay and Spotii have gained considerable traffic in the UAE, and consumers use these services at popular retailers and online stores.

With BNPL changing the way customers in the UAE shop, with many young generations avoiding long-term debt by buying now and paying later, this type of purchasing model has taken such a high pace that the UAE Central Bank has had to step up and regulate the sector to protect the consumer as well as the financial institution.

How Credit Cards Work in the UAE ?

Credit cards have been part of the consumer wallet for decades in the UAE by providing alternatives for purchasing, which can be paid for with cash back rewards, mileage points with airlines, and loyalty points. However, credit cards also bring with them unpaid balances interest charges, annual fees, and in some instances, late payment penalties. Most rewarding cards, such as the FAB Cashback Card and the Emirates NBD Travel Card, even reward frequent travelers and shoppers, so responsibility is needed to keep from landing with interest charges.

Credit cards also play a very crucial role in building up your credit history, as paying them regularly would improve your credit score and would be useful for some of the bigger financial decisions like a house loan. However, the ways of misusing it—like missed payments and high balances—may even affect your credit.

BNPL vs. Credit Cards: Key Differences

Interest & Fees :

• BNPL : Almost all the BNPL service providers in the UAE offer interest-free installments if they are paid on time. If installments are paid late, then a fee can be levied installment after installment. BNPL may charge from AED 10 to AED 25 for late payment.
• Credit Cards : Credit cards bear a balance rate of interest that can be anywhere between 2-4 % per month. It may even attract an annual fee, but a steady spending might get you out of paying the annual fee.  Most of the banks offer fee waivers to their loyal customers based on a stipulated annual spend.

Impact on Your Credit Score :

• BNPL : BNPL only occasionally affects your credit score unless payments are late and reported to the agencies. Nevertheless, since BNPL providers are increasingly being included in the financial fabric, their reach to influence credit scores might become more prevalent.
• Credit Cards : Credit cards impact the credit score directly. On-time payments can create a good story for the credit history, while delayed payments and high credit utilization will damage it.

Benefits & Rewards :

• BNPL : BNPL platforms do not usually offer rewards; however, they are attractive in the interest-free installment options.
• Credit Cards : Credit cards offer rewards like cashback, miles, and points that can be used to purchase goods, travel, or gift vouchers. All of these rewards could prove to be of immense value for frequent users.

Consumer Protections : 

•  BNPL : BNPL services are also regulated now within the newly established framework for the UAE by the Central Bank. Still, BNPL has less consumer protection, such as purchase insurance or fraud protection, compared to credit cards.
• Credit Cards : Credit cards also have robust consumer protection in terms of purchase insurance, dispute resolution, and especially fraud protection. It is more secure for bigger transactions or riskier transactions.

Ease of Use :

• BNPL : Much more accessible than credit cards, BNPL services sometimes need just a soft check of credit and minimal documentations .
• Credit Cards : Applications for credit cards require one rigorous check on one’s credit and verification of one’s income, which in turn makes the application procedure highly impossible for people without a regular source of income or whose credit history is not even clear.

BNPL is best suited for small short-term purchases, especially for those who opt for the interest-free payment where the users make disciplined repayment. However, consumers must know that they might be charged with late fees and thus still have an opportunity of damaging their credit score soon.

Credit Cards offer wider acceptance, much larger rewards, and better consumer protections at a higher price – from the risks of accrued interest or even possible permanent damage to your credit rating if not managed well.

If flexibility and rewards are more important for you, a credit card would be the better choice. However, if you really need to use the money for handling smaller purchases and you think there is no other way to do it with zero interest, BNPL would suffice.

While regulation of BNPL in the UAE is likely to continue changing credit scores and financial habits, it will be far more assimilated into the financial system.

Conclusion

Both have their unique pluses and minuses, and the right choice for you would depend on your financial habits and goals. Credit cards do remain a major tool in building credit and maximizing rewards but for consumers who avoid interest charges or want to stretch payments out for a bit without wanting to deal with all the baggage of traditional credit, BNPL proves a fine choice, especially under the new regulatory framework from the UAE Central Bank that adds a layer of consumer protection.