Buy now, pay later vs. credit cards: which should you choose?

Buy now, pay later services, such as Afterpay or Zip Pay, have exploded in popularity over the last few years. Their appeal as an alternative to credit cards to gain access to funds you otherwise wouldn’t have to purchase items is steadily rising, particularly among younger Australians.

The big four banks have entered the buy now, pay later (BNPL) field too, with Commonwealth Bank introducing ‘StepPay’ to its customers, while also partnering with European BNPL giant, Klarna.

However, RateCity research recently reported that one in three BNPL users were finding themselves in financial trouble. This includes 16% who overstretched their budget, 14% who paid a late fee and 9% who went into overdraft on their bank account because of BNPL payments.

And credit cards still have their place in the credit market, with 12.42 million credit card accounts still active in the country. While this number has decreased, the national debt accruing interest value has also decreased, indicating those that are still using their credit cards are choosing to do so more wisely.

After all, if you pay off your credit card balance each statement period then you can avoid purchase rate charges altogether, just like buy now, pay later services.

So, whether you’re a young Australian looking for your best option to gain access to credit, or a long-time credit card user wondering what the fuss is about BNPL services, let’s explore the benefits and risks of both options.

The benefits of buy now, pay later services

• Interest-free

A significant advantage BNPL providers have over credit card issuers is that they typically do not charge interest on purchases you make or cash advances. Instead, BNPL providers may charge several fees, including establishment fees, monthly account-keeping fees, and late payment fees.

Late payment fees are arguably the greatest ongoing cost associated with BNPL services and can range from $5 to $15. They tend to be capped at a set dollar amount or a percentage of the outstanding balance.

But when compared against an average credit card purchase rate of 16%, it may be a much more affordable option if you struggle to meet your repayments on time.

• Credit checks uncommon

Another advantage of BNPL services is that they generally do not come with credit checks or require the customer to have a good to excellent credit history. This may suit Aussies with poor credit history or young adults with no credit history who have been turned away by credit card issuers. Some BNPL providers, such as PayPal and CommBank, may still perform a credit check, so compare your options if this step is important to you.

However, expect all BNPL providers to carry out credit checks in future once new regulations are in place. The government has announced its decision to include BNPL providers as credit providers under the National Credit Act. Like other credit providers, all BNPL companies may soon need to hold an Australian credit licence and carry out credit checks on prospective customers to determine their suitability for credit.

Keep in mind that credit checks are an essential process in protecting you from entering into financial agreements that may put you at risk of financial stress or default. However, if you’ve set a careful budget and are prepared to meet your repayments on time, BNPL services may be a helpful way, at least for the time being, for those who don’t meet these criteria to purchase items without having the funds.

• Simple application

Speaking of eligibility criteria, signing up for BNPL services is generally much easier than applying for a credit card. Applying for a BNPL service can be as simple as being over 18, downloading the app and linking a bank account to said BNPL account.

Comparatively, credit card issuers may require copies of your bank statements, proof of income and employment and perform a hard credit enquiry to see if your credit score sits in the approved range. After this, you still may be rejected for the credit card. The application process for BNPL services is expected to remain relatively easy, but some additional steps may get included once the hard credit check requirements are in place.

Benefits of a credit card

• Perks and rewards

One of the biggest draws of credit cards is that they may offer customers perks and rewards, including flight upgrades, hotel accommodation, rental car access and complimentary insurances. You may also gain access to rewards programs or frequent flyer programs, which are designed to reward spending with generous perks.

BNPL services are simply designed to help you purchase items and schedule part-payments over several weeks. You are unlikely to gain the same benefits a credit card may offer with a BNPL service.

• Build credit history

Credit cards are also a helpful tool in building your credit history. By meeting your regular repayments and staying on top of your debt your credit history will grow and your score may improve.

As they are a serious financial product, if you run into issues paying your credit card bill, this can have adverse impacts on your credit score. While using BNPL services may not help improve your credit score, BNPL companies may still report you to credit reporting bureaus if you continue to miss your repayments, just as a credit card issuer would. However, it’s possible that using a BNPL service may help you improve your credit score in the future (provided you make your repayments on time) once the industry is formally regulated.

• Variety of choice

Credit cards offer Australians a much larger variety of options across the market to choose from that may suit a range of spending types. From emergency-only spenders to those who want to use their credit card every day to earn rewards points, there are hundreds of options to choose from. Comparatively, BNPL services are simply a means to help you pay off your purchases on a set schedule.

For example, if you’re looking to travel overseas and wish to avoid foreign transaction fees, there are travel cards designed to best suit this need.

So, which option is better?

Ultimately, the choice between BNPL services and credit cards comes down to your financial situation and your goals.

If you’re just looking to make smaller purchases, like clothes, or a one-off purchase, like an appliance, BNPL services may help you own these items more affordably. But if you have more specific plans in mind for your spending, such as earning rewards points or for emergencies, then a credit card may be a competitive option to consider.

Keep in mind that whichever option you choose, you carefully monitor your budget and set reminders, so you do not miss a payment. And try to set strict spending limits based on your income so you don’t begin to accrue debt.

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