Buy Now, Pay Later vs. credit cards

In recent years, a range of new lending products have come onto the market known as ‘Buy Now, Pay Later’ (BNPL), and Aussies have taken to them enthusiastically. In fact, recent data from Frollo found that 32% of its users accessed BNPL services in the first quarter of 2023. This rise in popularity has not gone un-noticed by the federal government, and back in May 2023 it was announced that the BNPL industry will soon be regulated under the Credit Act.

So, what’s the difference between using a BNPL service versus a more ‘traditional’ credit card? And what should you be aware of when choosing to use one – or both – of them?

There are several differences between the two payment methods – and not just that one of them is a physical item that lives in your purse or wallet. To start with, applying for a credit card is a more involved process than opening an account with a BNPL provider, and you’ll be subject to a credit check before being accepted for a credit card. Buy Now Pay Later services only require you to be at least 18 years old with an Australian bank account and Australian contact details.

Where you can use BNPL depends on the service provider and the retailer you are shopping with - not all retailers accept the same services. For example, one may offer you the ability to pay using Klarna, but another will only accept Zip Pay. Credit cards on the other hand are widely accepted by businesses around the world.

Those are just two differences between the two payment options, but let’s take a closer look at the costs associated with each. Reviewing the costs of each product will help you get an understanding of whether BNPL or a credit card suits your financial needs better.

Interest

BNPL products charge fees and credit cards charge interest (some may also charge fees). As you likely know already, interest is what you’re charged when you borrow money from a bank or lender – and what you earn on your savings held in an interest-yielding account. Interest is applied to a range of different credit products, not just credit cards, including home loans, personal loans and car loans.

Lenders usually charge two different types of credit card interest, and these are identified as the ‘purchase rate’ and the ‘cash rate’. The purchase rate applies to transactions used to buy goods and services, whereas the cash rate applies to cash advances (withdrawals) as determined by the lender and their terms and conditions. Some lenders also charge a ‘balance transfer rate’, which applies when you close one credit card and transfer the outstanding balance to a new card and lender - this is usually a promotional rate.

Credit card purchase interest is calculated as a percentage of the money borrowed. For example, the equation lenders use to calculate this interest often looks like this:

• average daily balance x daily interest rate (%) x the number of days in the month.

Your average daily balance can be calculated by adding up the balance from each day of the month (or other statement period) and then dividing it by the number of the days in the period. The daily rate is your APR (annual percentage rate) divided by 365 (or the number of days in the year).

All sound a bit complicated? Here’s an example to help:

• You spent $500 in the month of January which has 31 days, and the amount was owning for the entire month. Your credit card has an interest rate of 18.00%p.a., which is 0.0493% (0.000493) when divided by 365 days.
• This means your monthly interest looks like this:
  0.000493 x $500 x 31 = $7.64

If you’re not paying your balance off in full each month, remember that your monthly interest will be added to your outstanding balance until you pay it off. And bear in mind that interest isn’t all you’re required to pay. According to ASIC, the commonly accepted minimum repayment on credit cards is between 2-3%, or a set dollar value of around $20, whichever is higher.

Fees

Credit cards may also charge fees on top of the interest rate, such as an annual fee or for other things, such as transferring a balance from one credit card to another or advancing cash. You may also be charged a late payment fee if you do not make the required payment by the due date. Most banks will not charge this fee for a period of between five - 14 days after the payment due date.  Only one late payment fee is permitted for each late payment.

There are some Buy Now Pay Later providers offering interest-free periods but most charge fees instead of interest. Some providers charge monthly account fees and payment processing fees depending on your chosen payment method (by credit card, direct bank transfer, debit card etc.). Other fees are charged when a BNPL payment is missed or late, and this is how the providers make a profit.

For example, Afterpay charges a fee of $10 if an instalment payment is late and an additional $7 if the payment still hasn’t been made within seven days of the due date. The maximum amount Afterpay will charge for late fees on a single order is $68. However, that’s for one order/transaction; customers who miss the instalment payments on multiple transactions may end up paying a lot more than that. And if you have accounts with several different BNPL providers, you’ll be facing charges of different amounts from them too.

Remember, BNPL companies aren’t regulated in the same ways banks are. Although this will soon change as we mentioned at the beginning of this article, it currently means that they don’t have to go through the same series of checks to ensure it’s a responsible decision to lend to a customer. This means you should consider all the costs and what you can afford now and in the future before signing up and using a BNPL service.

We have more tips on deciding if Buy Now Pay Later is right for your situation in a previous blog post.

If you’re experiencing financial stress or struggling with debts, please call the National Debt Helpline on 1800 007 007, or visit the Financial Counsellors Association website to find a financial counsellor within WA. The MoneySmart website also provides helpful resources on debt, budgeting and other financial matters.