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BNPL vs credit cards: The great debate
BNPL vs credit cards: The great debate
Personal Finance
Sep 9, 2021

BNPL vs credit cards: The great debate

It’s one of the greatest debates in the financial world: buy now, pay later - or credit cards?

It’s one of the greatest debates in the financial world: buy now, pay later - or credit cards?

If you’re not familiar with buy now, pay later (BNPL) platforms, here’s a quick recap: payment providers like Afterpay and Zip allow users to purchase a product, and either pay for it in instalments, or pay off the full amount at a later date. It’s like lay-buy, but without waiting to make the final payment to take the product home. 

More than 5 million Aussies have signed up to BNPL platforms. That’s compared to nearly 14 million Aussies that have a credit card. 

At their core, both BNPL platforms and credit cards allow users to purchase an item without using their funds to pay for it. But, they’re different. And they both have their pros and cons. 

Let’s take a look.

Buy now, pay later: Pros

Convenience

BNPL providers have got convenience down pat. Their platforms are integrated within an online store’s checkout, so you can easily sign-in to your existing account and make your purchase, rather than plug your credit card details in.

From there, some BNPL providers will take your first payment, and then schedule the rest over the next four weeks. Others will make the payment for you, and you have to repay it in a certain timeframe.

And you can even use BNPL platforms in some stores. Some will have a simple QR card that you scan at the checkout, which takes you to your profile so you can make the purchase. 

Quick approvals

Setting up a BNPL account normally takes around 10 minutes, and approvals are pretty much instantaneous. 

As most BNPL providers are not regulated under the National Credit Act, they do not need to conduct credit checks for prospective customers before giving them access to finance. 

This means BNPL applicants often get instantly approved, and are ready to spend within minutes.

Interest-free payments

One of the biggest advantages of BNPL is that some providers - like Afterpay - offer interest-free repayments.

This makes BNPL a lot more enticing than credit cards, which often have an average interest rate of around 17% per annum. 

Buy now, pay later: Cons

Encourages bad spending behaviour

Having a constant source of credit at your disposal can encourage you to make impulse purchases. 

This is because rather than deliberating over the purchase, and saving up over multiple weeks to purchase it, you can buy it straight away. This means often people spend more money than they usually would, and end up with more purchases than they actually need.

Late fees

BNPL providers make a lot of money from late payment fees. These are fees that you incur if you forget to make a scheduled payment. 

For example, Afterpay will charge you $10 if you make a late repayment. You’ll also be charged a further $7 if you don’t make that repayment within 7 days of the due date. Fees are capped at $10 for purchases under $40, and the lesser of 25% or $68 of the orders above $40.

Can affect your credit score

While some BNPL providers like Afterpay won’t show on your credit score, others, like Zip, will. 

And even though Afterpay won’t necessarily show on your credit score, repeated payments on your bank statement could signal to the bank that you’re not a responsible borrower. 

If you default on your repayments, the BNPL provider can let your credit provider or credit reporting agencies know, and the default may show up on your credit score. 

Having defaults on your credit report can negatively affect your credit score, which in turn affects your ability to get credit in the future. 

Credit cards: Pros

Build credit history

Not having a credit card may actually hinder your finance application, because lenders don’t have enough information about your financial habits to make a decision about whether to loan you money. 

And, if you make prompt and consistent credit card repayments, you’ll be able to build a healthy credit score and show financial responsibility.

Can earn rewards

Some credit cards will allow you to earn reward points for every dollar you spend on an eligible purchase. Then, you can redeem these points with the bank’s rewards programs.

Others allow you to earn frequent flyer points with partner airlines to put towards flights, upgrades or purchases in their store.

And there are often other complimentary features like travel or car insurance that come with credit cards.

Good for emergencies

Credit cards give you access to emergency money when you need it. They’re particularly handy if you get stuck in unexpected situations, like needing medical attention overseas or getting a particularly pricey bill. 

Credit cards: Cons

High interest rates

One of the biggest disadvantages of a credit card is the high interest rate. These rates can range from around 9% to 25% per annum. 

This means if you don’t make more than the minimum repayment each month, you end up paying hundreds - or even thousands - more in interest payments, which could slow down how long it takes you to repay your credit card.

Fees and surcharges 

On top of interest fees, credit cards may charge annual fees, which can be as little as $20 - or as high as $1,000 - depending on the card you choose. 

Generally, a credit card with no or low annual fees has a higher interest rate. And conversely, a credit card with a high annual fee may have a lower interest rate. So, it pays to check comparison sites and weigh up all your options before you pick a card.

On top of fees, some merchants will charge a surcharge when you pay with a credit card. And, when you use your card overseas, you’ll also need to keep foreign exchange fees in mind - which can be costly.

Affects your credit score

Applying for credit will appear on your credit score. 

If you apply for multiple credit cards at one time, this will negatively affect your credit score. As will missing credit card repayments. So, you’ll need to be sure you can afford to make your repayments before you dive in.

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