Should you use credit cards or buy-now-pay-later for your Christmas shopping?

It’s the time of the year when retail is buzzing and shoppers are spending hundreds, if not thousands, on their Christmas shopping.

Yet many who want to please their friends and family tend to get carried away during the festive season, some buying expensive gifts that they might not be able to afford.

Traditionally, many might have swept all the expenses into a credit card, brushing the thought of any debt repayments until the next year. 

But with the rise of buy-now-pay-later (BNPL) platforms, such as Afterpay and Zip, there are now other options that may also seem attractive.

With so much to buy and only 10 sleeps till Christmas, is it better to use a credit card or BNPL services to fund your shopping? We’ve helped you break down what you need to know, so you can focus on getting your last-minute shopping done.

Should you use a credit card?

For starters, it’s good to know the difference between credit cards and BNPL services. Credit cards are basically a form of unsecured loan, which means credit card holders aren’t putting down any collateral, like a property or car, to secure the loan. This grants lenders the power to take over the asset to cover the debt in the event the loan is defaulted.

Loans from financial providers are never free, but credit card issuers often charge higher interest than regular personal loan lenders because of this lack of security.

But some credit cards allow between 45 and 55 interest-free days, which is the period where you don’t have to pay interest on your purchases. Once this period lapses, you’ll be hit with the standard credit card purchase rate, which can be as high as 20 per cent. If you pay off your debt during the interest-free period, you may not have to worry about paying for more than your purchases.

Or is BNPL the way to go?

Compare this with BNPL services. These companies don’t charge interest, but “late fees” and sometimes other service fees. Because of this, they aren’t classified as credit providers and aren’t regulated by the National Credit Act. This means they’re not legally obliged to perform credit checks to make sure a customer can repay the debt, so there is a higher risk of lending money to people who can’t afford to pay it back.

Looking at Australia’s industry leader Afterpay, while the ASX-listed company doesn’t perform conventional credit checks, they may not allow you to use their service if you have any overdue payments with them. They might also run a pre-authorisation on your nominated credit or debit card as part of their approval process.

Afterpay allows customers to take their purchase home straight away and pay for their purchases over four instalments, due every two weeks. You may need to make a payment at the time of purchase.

If there’s one thing you need to remember, it’s this: fees apply if a payment is late. Afterpay will charge an initial late fee of $10 and if the payment is still unpaid seven days after the due date, the customer will be hit with a further $7 fee.

These late fees are capped, depending on how much your order is. So, it’s a good idea to keep an eye out on the maximum late fees you could be hit with.

Which is better, BNPL or credit cards?

When tossing up between credit cards or BNPL platforms like Afterpay, one thing to look out for is whether the interest from a credit card or the potential late fees from using BNPL would be higher. Make sure to do your research and calculations to find out how you can come out on top.

Another thing to think about is the interest-free period versus the instalment period of the BNPL service you’re considering. While these can differ provider to provider, the average interest-free days for credit cards is 52 days, according to RateCity data.

If comparing this with Afterpay’s staggered fortnightly payment system over four instalments, it’s possible you could have more time to pay back your purchases using a credit card. Regardless, it’s on you to check the fees and features of your own credit card and BNPL.

Both credit cards and BNPL can be handy for those who know they can repay debts in full on time and don’t want to feel the pinch after their Christmas shopping. If you do go ahead with using one or the other, it’s worthwhile doing your research and decide which option is better for you.

3 money tips for Christmas shopping

• Pay it upfront – If you know you can afford your purchases outright, it may be better to pay for everything upfront to avoid any potential interest or late fees. There is the potential risk you could be slugged with more charges beyond the purchase itself when you use credit cards or BNPL.
• Have spending limits in place – In simple words, don’t go beyond your means. Be realistic about what you can afford (and if you’re considering credit cards or BNPL, what you can repay). Set your budget for each item or expense and stick to it. And if you’re buying more than one gift, keep those multiple expenses in mind.
• Plan your Christmas shopping – Do you have an idea of how many people you are buying presents for or what you need to buy for that Christmas lunch you’re organising? Or are you browsing the stores and deciding as you go along? It’s a good idea to plan out what you’re buying, rather than risk an impulse shopping spree.

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