Credit card or buy-now-pay-later: Which should you be using?

What is BNPL?

Buy-now-pay-later services allow customers to purchase something now and pay for it at a later point. Each BNPL service differs slightly. Some services, for example, withdraw your repayments in quarterly amounts every two weeks with the first payment made upfront. So, after six weeks and three payments, you will have paid off those fresh new shoes or the latest smartphone on the market.

73% of Australian households shop online. And a BNPL payment option is one that many people will recognise but not necessarily use. Whether you’ve used these services or not, with the COVID-19 crisis directing even more consumers online, BNPL may be appealing at a financially tense time.

BNPL options are becoming more commonplace in-store too, with a growing number of retailers across Australia offering BNPL services at the checkout. That said, in 2019 BNPL accounted for less than 2% of total payments in the Australian economy compared to a combined 63% for debit and credit cards.

So, should you use a BNPL service? Well, it depends how you spend your money.

Uniform or something tailored to you?

Most BNPL methods use more rigid and unrewarding approaches. You want something? Sure, you can have it. But you won’t see any benefits come your way for repaying them on time. And if you fail to do that, you could find yourself with some additional fees.

Depending on which BNPL service you sign up for, some of the fees involved could include:

• Late fees – charged on each transaction you make if you miss a payment or pay late.
• Fixed monthly account fees – fees to stay registered with your BNPL service of choice. While not technically “interest”, you will be charged fees to borrow with some BNPL providers (essentially still a charge to you).
• Payment processing fees – some BNPL options charge an extra fee for each repayment.
• Set up fees — a fee to launch an account. While some BNPL services don’t charge an establishment fees, others may charge upwards of $90.
• Additionally, there may be extra bank charges if you don’t have enough money in the account linked to your BNPL service. 

Meanwhile, credit cards – not without their own fees – can be selected to better suit your needs. Credit cards can come with up to 55 days interest free, so depending on when you make your purchase the repayment period will be similar or longer than that of your BNPL provider.

Credit cards often also come with a variety of rewards such as insurance for items like smartphones and tablets, frequent flyer points, and travel insurance. Purchase rates vary across different cards – some are better than others depending whether you plan to repay in full each month – but ultimately provide helpful perks that benefit the varying needs of credit card holders.

Some BNPL providers can decide whether to approve or decline your transaction. So, you may not be able to make every purchase you plan to. A credit card, on the other hand, has a set limit which you can spend up to with confidence.

Credit card schemes also have clear processes to dispute transactions if there are any issues after purchasing. Simply contact your bank and the merchant investigation will be taken care of.

However, for some BNPL services it’s not so straightforward. Generally BNPL services require you to sort your dispute out directly with the merchant. They will only process refunds or changes once the merchant agrees.

Costs often associated with credit cards include:

• Purchase interest, if you do not pay your balance in full 25 days after receiving your statement
• Cash advance interest, if you choose to withdraw cash or make cash equivalent transactions – like gambling or money orders
• Cash advance fee
• Annual fee, if your card has one
• Late payment fee if minimum payment is not made
• International transaction fee if transacting on an overseas website.

Some credit cards may suit you better than others. The Low Rate First Credit Card is exclusively available to 18 – 25-year-olds, has low annual fees and one of the most competitive interest rates going.

Elsewhere, for those looking to reap greater rewards, a Platinum Rewards Credit Card lets you earn points as you shop that can be redeemed for an array of goods and services.

Another option is QANTAS Platinum, a card that brings your holiday closer with everyday purchases. And although travelling hasn’t been as easy recently, there’s never been a better time to accumulate points for your next adventure.

Be organised and prepared

We all have different spending habits, so what’s right for one might not suit someone else. Wherever you fall on the spending spectrum, organisation is key.

Monitoring your spending and being prepared for repayments will benefit you hugely.

They might be attractive options, but both BNPL services and credit cards are forms of lending and can prove costly if you fail to make repayments.

It’s your choice

Understand what you’re signing up for. Making an informed decision will ensure you choose an option that best fits your circumstances.

And remember to borrow and spend responsibly.