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Afterpay versus credit cards: which is better for your finances

Afterpay versus credit cards: which is better for your finances

15 Oct, 2020 - 7 min read

As credit card debt falls to the wayside, Buy Now, Pay Later services, such as Afterpay or Zip Co are more popular than ever.

But which payment method is better for your finances? And how are banks starting to fight back in the war for our spending money?

The growing popularity of Buy Now, Pay Later

A recent RateCity survey found that nearly a third (32 per cent) of respondents were now using Buy Now, Pay Later (BNPL) services to make purchases. And it’s not hard to see why.

Afterpay, with 3.3 million active customers in Australia and New Zealand, allows customers to spend up to $2,000 in purchases, and make part-repayments on these purchases in four instalments over six weeks. You are charged no interest on the purchases, but a $10 late fee per late payment may incur, plus an additional $7 if not paid in 7 days.

Zip Co comes in a close second to Afterpay, with 2.1 million customers in Australia. Customers are offered a flexible repayment schedule, as long as you meet minimum repayments of $40 a month. Customers can make purchases up to the value of $1,500, and a late fee of $5 applies after 21 days of not making minimum repayments.

Much like credit cards, this payment method can be successful and keep users out of debt, as long as they’re responsible and make repayments on time. However, it doesn’t always breed the healthiest of shopping habits.

The same RateCity survey also found that more than half (53 per cent) of BNPL users said they felt more likely to impulse buy when using these services.

In fact, almost a third (28 per cent) of respondents using BNPL found themselves in money troubles, including:

16 per cent of respondents overstretched the budget, leaving them struggling to pay for other expenses.
14 per cent of respondents paid a late fee.
Almost 1 in 10 (9 per cent of respondents) went into overdraft on their bank account because of BNPL payments.

The golden halo around BNPL, when compared to credit cards, needs to be examined carefully, especially by its users. Impulse spending can understandably lead to growing debts, even if it’s just in small increments from late payment fees.

Sally Tindall, research director at RateCity, spoke on impulse buying and how Aussies can keep on top of this bad habit.

“Hit pause before you pay, at least for 24 hours, and if you make a mistake, send your purchase back. There’s nothing worse than having a bad shopping decision hanging in your closet,” she said.

However, a huge component of BNPL services’ success is their seamless transition into digital spaces. Partnering with popular e-commerce sites, such as ASOS.com.au, as well as brick-and-mortar retailers, such as David Jones, means BNPL are not only accessible, they’re easily digestible for a younger generation.

With BNPL services only requiring proof of identification that you’re over 18, a bank account or credit card, and an app, they’re also considerably easier to access than credit cards.

Their most important advantage over credit cards has long been that you’re not charged interest on your purchases. However, it appears credit cards are stepping up to fight in the war for our spending money, with the creation of no-interest credit cards.

How credit cards are fighting for your finances

Credit card holders in Australia know that their piece of plastic is more than just a way to make payments. It can also be a helpful tool for a range of needs, including overseas travel, complimentary insurances, growing rewards points and earning perks and bonuses.

However, the main advantage of BNPL services over credit cards is that they do not charge interest. Instead, they charge ongoing monthly service fees and/or late payment fees.

As credit card interest rates have hardly moved since the Reserve Bank of Australia’s cash rate was 17 per cent in the ‘90s, it’s not uncommon to find credit cards still charging interest on purchases in the 20 per cent range.

And it’s not just the potentially high purchase rates and cash advance rates. Credit cards on average will typically charge more fees than BNPL services, such as annual fees, late payment fees, account keeping fees and more.

So, it’s no wonder a younger generation of Australians are turning to alternatives to fund their spending.

But two of the big four banks are stepping up to the plate, offering a no-interest credit card alternative to Afterpay and its competitors.

NAB came out swinging first with the StraightUp credit card. It does not charge interest on purchases, but customers will pay a flat monthly fee - tiered depending on your credit limit - up to $20. Customers may have access to credit limits of $1,000, $2,000 and $3,000. If customers do not use the card in a month, the monthly fee is not charged.

CommBank’s NEO credit card was announced a few days later, with a similar tiered monthly fee structure up to $22, depending on the credit limit given ($1,000, $2,000 or $3,000). It too does not charge interest on purchases made by customers.

While CommBank’s offering is not available until late 2020, NAB’s StraightUp card is active right now. Time will tell if this card, and if any emerging competitors, are able to compete for the business of BNPL customers.

Which is better: BNPL or credit cards?

It’s not a clear case of one payment method bad and another good. All financial products come with their own set of risks. It’s up to the user to try to make careful considerations around their budget and financial situation before applying for anything that essentially offers you a line of credit.

For credit card users who constantly find themselves stung by fees and interest, but not keen to make the switch, consider if low-rate or no-annual fee credit card alternatives may be a better fit for your finances.

However, as long as BNPL services continue to offer no-interest solutions with easy application processes – particularly within digital spaces – this method of payment may prove more popular for younger Australians.

Whichever method you personally prefer, keeping your ongoing costs down and paying your outstanding payments on time each month is invaluable for your financial health.

Can I use both BNPL and credit cards?

Something that the battle between BNPL and credit cards often misses, is that one does not negate the other. In fact, there’s no reason you cannot use both a credit card and BNPL services if you want to.

Credit cards can be an invaluable tool for responsible Australians. After all, you can use a rewards or frequent flyer credit card to make everyday purchases to earn rewards points, use a low-rate credit card to finance big, one-off purchases that you pay off slowly, or even use travel credit cards to make overseas spending and insurance more accessible. You could then link your BNPL service to your debit card and reserve this platform for your splurge items. It doesn’t have to be one or the other.

BNPL services will allow you to use your credit card as your linked account. The purchases you make with your chosen BNPL service will be debited from your credit card. Your credit card will still charge you interest on any outstanding balance you have at the end of your statement period. However, if you max out your credit limit or don’t pay your balance on time, you may incur fees and costs from both the BNPL service and your card provider.

Disclaimer

This article is over two years old, last updated on October 15, 2020. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent credit cards articles.

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This article was reviewed by Finance Writer Alison Cheung before it was published as part of RateCity's Fact Check process.

Alex Ritchie

Personal Finance Editor

Alex Ritchie was a Personal Finance Writer and Editor at RateCity, and has been writing about Australian finance for over six years. Her expertise and passion covers loans, credit, superannuation, and closing the gender pay gap, and she aims to help young Aussies to overcome their financial apathy. Alongside RateCity, Alex has been published in numerous publications, including Australia's Money Magazine, Business Insider, Lifehacker Australia, and in health via NPS MedicineWise.