Credit cards versus the growing raft of buy now, pay later schemes


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We pit BNPL against credit cards to see which comes up trumps.

Credit cards have been around for decades, but there's a new kid on the financial block - buy now pay later (BNPL). On the face of it, both offer much the same thing - the ability to make a purchase putting very little cash on the table, and pay it off at a later stage. However, there are important differences.

BNPL is offered by a rising number of providers including Afterpay, Zip Pay, and Openpay. The Commonwealth Bank has joined the line-up, with plans to roll out its own BNPL offering in mid-2021.

credit cards versus buy now pay later

The common thread across all BNPL platforms is the option to enjoy purchases from day one and pay down the cost through a set series of instalments. All the convenience of traditional lay-by with the benefit of instant gratification.

That's seen BNPL enjoy rapid growth. Reserve Bank figures show the

Despite this, BNPL is still a relatively small player on the financial scene, with payments amounting to just 2% of the total value of debit and credit card purchases in 2020. But when a major bank comes on board, it's a fair bet the market is expected to skyrocket.

Know the danger zone

For consumers, the appeal of BNPL is putting off the pain of paying for purchases. That's also where the danger zone lies.

Unlike credit cards, BNPL doesn't involve interest charges. Instead, late payment fees apply - and they're certainly hitting the hip pocket of some BNPL users. Money watchdog ASIC found one in five consumers are missing payments. In 2018/19 that saw BNPL users fork out over $43 million in late fees, up 38% on the previous financial year.

One issue that's caught the eye of regulators is that BNPL is favoured by younger generations - 55% of users are aged under 40. That's a worry because some of these consumers are getting into financial hot water with BNPL. ASIC found 55% of users have multiple accounts, and one in five are going without essentials like food to keep up their BNPL payments.

New industry code

In February 2021, a self-regulatory code of conduct came into effect for BNPL providers. Under the code, transactions above $2000 will now require credit checks including income and expense information, with more stringent checks for purchases above $15,000.

However, BNPL providers are only required to assess if a borrower can make the first payment - there's no requirement to see if they can handle subsequent payments. Karen Cox, Chief Executive of the Financial Rights Legal Centre, says, "These services are growing at a breathtaking rate. As this industry continues to grow, we will see increased debts and increased financial hardship."

This is an area where credit cards come with a built-in safety mechanism. Card issuers are required to check you can comfortably manage the card's credit limit. That said, just like BNPL users who fall behind with payments, cardholders who allow a debt to build up can quickly face escalating interest costs.

How to avoid additional costs

BNPL and credit cards can be handy financial tools. Both offer the potential to be virtually cost-free (especially if you use a card with zero annual fee). The key is to only make purchases you can afford to pay off before charges apply.

From October 2021, we could see changes to the BNPL market. New obligations will require the industry to design fit-for-purpose products that meet consumer needs. More importantly, providers will need to take steps to ensure their products are reaching the right consumers.

Correction: This story was amended on June 1, 2021, to include the BNPL self-regulatory code of conduct.

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A former Chartered Accountant, Nicola Field has been a regular contributor to Money for 20 years, and writes on personal finance issues for some of Australia's largest financial institutions. She is the author of Investing in Your Child's Future and Baby or Bust, and has collaborated with Paul Clitheroe on a variety of projects including radio scripts, newspaper columns, and several books.