How is Afterpay different to a credit card?

Whether you’re struggling financially, or just running a fiscal health check in preparation for a new financial year, you may be considering whether your credit card is still the best tool to make payments, or if you should switch to other methods, such as Buy Now Pay Later (BNPL) services like Afterpay.

Afterpay has surged in popularity since the company was founded in 2014. Its functionality and accessibility, particularly compared to credit cards, has made it a commonly used financial tool amongst Gen Z and Millennials.

Meanwhile, the number of credit card accounts in Australia has recently been in steep decline, potentially due to cost-of-living pressures. The latest Reserve Bank of Australia (RBA) data shows about 12.6 million fewer personal credit and charge card accounts in Australia in June 2024. That’s almost two million fewer than five years ago.

Afterpay is different to credit cards in several ways, including its fees and costs, rewards and perks, and application process. When deciding between Afterpay and credit cards, it’s important to consider these differences to see which comes out on top.

Fees and costs: credit cards versus Afterpay

Note: Data accurate as of 13 September 2024

Winner = Afterpay (but there are low-fee, low-rate credit cards available)

Afterpay breaks down a purchase into four equal instalments paid fortnightly. You are not charged interest on these repayments but will be charged a late fee for any missed payments.

When comparing fees and interest rates between Afterpay and credit cards, it’s easy to assume that the former is the only option you have to keep costs down. After all, we typically associate credit cards with eye-wateringly high interest rates and fees. However, a little research can still find you low-fee, low-rate credit card options. 

Purchase rates can run as high as nearly 25% on some credit cards, such as rewards cards. However, there are also many credit cards with interest rates of 10% or below. In fact, the lowest on the RateCity database sits under 8%. Some of the big banks like NAB, CBA and Westpac, have even started offering special 0% interest credit cards to compete with Afterpay and other BNPL providers.

The biggest fee associated with a credit card is typically its annual fee, which can range from $0 to $1200, depending on the type of credit card. But there are a range of credit cards that don’t charge annual fees – even some rewards cards.

Keep in mind that there is a chance you may be able to keep costs nearly as low as you would through Afterpay, if you’re the type of person who:

• always pays their bills on time,
• never accrues interest on their balance,
• avoids cards with annual fees, and
• never makes late payments.

It’s all about how you choose to use your card.

Rewards and perks: credit cards versus Afterpay

Winner = credit cards

Afterpay is a one-size-fits-all style payment platform compared to the variety of credit cards available in Australia. Its purpose is to aid you in paying off your purchases in smaller, planned payment increments. If this is all you are looking for, then Afterpay may better suit your finances.

Afterpay rolled out its loyalty program, Pulse Rewards, in 2020, which offered customers smaller-scale perks and rewards like a credit card. However, this rewards program shut down at the start of 2024.

If you’re looking for greater flexibility, perks and rewards, you may want to consider a rewards credit card.

Keep in mind that these perks and rewards may come from premium credit cards that typically have higher interest rates or annual fees, as these costs help to fund these reward programs. It’s generally accepted that you’ll pay a little more for the bigger perks, but the perks themselves should ideally outweigh the card costs.

Applications: credit cards versus Afterpay

Winner = Afterpay for simplicity but credit cards for building credit history.

In terms of simplicity in the application process, Afterpay comes out on top. Card providers ask customers to jump through more hoops to be approved for credit, though this is for good reason.

Cards have become more heavily regulated and therefore stricter about which customers they approve in the last few years. This has been to reduce the number of Aussies falling into debt through the easy-access of credit cards, particularly ones with higher-than-needed credit limits. Meanwhile, getting approval for Afterpay can be as simple as downloading the app or signing up on the website if you’re over 18 and have a bank account.

However, this may all be changing soon, with Australia’s Federal Government making moves to increase regulation of the BNPL sector. If the proposed legislation passes parliament, BNPL services will be considered credit products under the Credit Act, and will need to comply with Responsible Lending Obligations and hold Australian Credit Licences. This could mean that signing up to Afterpay or similar BNPL services in the future may require a credit check, as well as providing more details of your personal finances.

Credit card providers will also perform hard credit checks on applicants. A rejected application may not directly hurt your credit score, but making multiple applications over a short period can make you appear ‘credit hungry’ to a lender, making it harder to get approval. Multiple rejected credit applications may hurt your credit score, limiting your ability to access other financial products in the future.

Keep in mind that credit cards can help you to build a credit history and potentially boost your score if you use them responsibly. Customers who always pay their balance in full each statement period may have this positive information reflected on their credit history. Building a good credit history may help with your approval chances for financial products in the future. You’re also more likely to receive more competitive interest rates from lenders and banks, as you are seen as a lower-risk customer.

The verdict: Afterpay versus credit cards

Deciding between using Afterpay or sticking to a credit card is really all up to your own budget and finances.

Afterpay may appeal to you if you expect you’d struggle to manage a credit card. After all, a significant part of its appeal to younger generations is that it can help you to avoid building up the hefty credit card debts your parents warned you about.

But if you’re diligent about paying your bills on time and are responsible with your finances, credit cards can be a helpful tool for not only making purchases, but earning rewards and perks, and growing your credit history.

If you’re still unsure, it may be worth looking into your own spending habits, and figuring out your spending profile. Impulse/occasional spenders may be better off using Afterpay to scratch their shopping itches while avoiding fees and interest charges. But points chasers, like the everyday and big spenders, may potentially want to consider sticking with a credit card.

At the end of the day, you want to assess the level of risk any financial product will have on your finances. If you believe you can manage the risks associated with credit cards (interest rates and fees) then cards may still serve you well. If you’re looking to simplify your spending, Afterpay may be able to help you.

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