Credit Cards VS Buy Now Pay Later

There used to be a time where you could take an item off the shelf and not pay a cent for it.  It was called stealing!  Luckily, we now have the option to use credit cards or buy now pay later services.  But what are the differences between the two and which one is better?  To keep the process simple, we have chosen AfterPay to support our buy now pay later argument below.

You might want to grab a coffee, this read is a long one…

Credit Cards VS Buy Now Pay Later (AfterPay) – Repayments

A general consensus in the consumers mind is that AfterPay is safer than credit cards because credit cards charge interest and AfterPay is 100% free.  Well…

When you apply for a credit card, this is recorded on your credit report.  A lender will determine how much your credit card limit could be by analysing your income and expenses and making a decision based on your “serviceability” (your ability to make repayments).  A lender will also check your credit report to see if you have defaulted with other providers in the past.  If you have a lender will need to take that into consideration should they ever offer you credit.  In extreme cases of credit abuse and late repayments, your application for a new card or other loans may be denied.  Credit card fees can also be as high as 29%.

AfterPay, as an example, is 100% free, or is it?  AfterPay charge a $10 late fee if you miss a payment.  Which doesn’t seem too bad until you consider that AfterPay has reported that 24.4% of it’s income is earned from late fees!  This is a business now worth 4 billion dollars.  That means that AfterPay makes 1 billion dollars per year purely in late fees.  What does this tell you?

A typical balance of $1000 on a credit card can attract repayments of about $50 per month at an 18% interest rate.  A balance of $1000 on AfterPay will cost the consumer $250 per fortnight, or $500 per month as they allow the purchaser to pay 4 instalments due every 2 weeks.

It leads me to question… if you don’t know your numbers and don’t know what you can afford… how would you support a $250 per fortnight repayment over the next 4 weeks if you don’t have $250 in your bank account today?  It’s the same as stealing right… purchasing a product without any ability to repay?  It is today’s purchases that becomes tomorrow’s problems…

Which would you rather a $50 repayment or $500 repayment per month?  Which one can you afford?  Which one suits your budget better?  Do you know your numbers?

Credit Cards VS Buy Now Pay Later – Your Bank Statement

As we discussed above, credit cards are marked on your credit report as part of the application process and you have a bank statement for all credit card purchases.  Any purchase via a credit card is recorded on your credit card bank statement, and this means your lender can see where you purchased, what you purchased and this information can be used against you should you wish to purchase property.  When it comes to purchasing your first home or investment property, credit cards should be a consideration to be repaid in full with at least a 3-month, non-use period, balances lowered (if applicable), or closed altogether.

AfterPay is free right and it won’t affect me?  Well… no.  It does appear on your bank statement and can be used against you by a lender if you are looking to purchase your first home, refinance or purchase an investment property.  Why?  Well the lender would want to know why you are using AfterPay and why you aren’t using cash.  They can make a judgement call based on your spending conduct and if they determine that you have “poor conduct” or are a high risk they just won’t lend to you, which will reduce your options for the best deals available.  If applying for finance you must get rid of AfterPay to give yourself the best option of choices available to you.  A clear account conduct of 3 months + is a great start.

Want the lowest interest rate for your home refinance?  Remove AfterPay spending from your life to improve your chances!

Credit Cards VS Buy Now Pay Later – Your Credit Score

Credit cards will appear on your credit report when you apply for them.  Your credit score, different to your credit report will rise and fall based on how you make repayments with this service (and others such as utilities, phone bills etc).  If you are always late, making repayments past the due date, then this can have a significant affect on your credit score.  It is so very important to ensure that payments are made on-time, every time to keep your credit score from falling.  If your credit score falls it becomes very difficult to obtain finance for first home buyers, investors and refinancers.

AfterPay is free right and it doesn’t affect my credit score, right?  Well… no.  The same as above.  If you miss your repayment and are charged a late fee, then AfterPay can also mark your credit score.  If a lender determines you are high risk then you will not receive future finance.  Remember, AfterPay are making $1,000,000,000 dollars on late fees.  How many Australians do you think are in hardship due to their “service offering” and “convenience?”

Credit Cards VS AfterPay – Conclusion

When it comes to credit cards or buy now pay later which do you prefer?

Credit Cards –

  • Higher borrowing limits.
  • Lower repayments.
  • Interest charged up to 29%, and can mark your credit score for missed payment
  • Longer commitment to repay, making credit cards more affordable.
  • Can put you in financial hardship, but may take a lot longer and cause great damage.

AfterPay –

  • Lower borrowing limits.
  • Higher repayments.
  • Interest free, but does charge $10 late fees and can mark your credit score for missed payments.
  • Shorter timeline for your commitment to repay.
  • Can put you in financial hardship very quickly!

AfterPay and Credit Cards are CREDIT services, and we would argue that credit card and buy now pay later should be used only if you know your numbers, what your repayments will be, and the effect it could potentially have on your borrowing capacity and/or applications for further finance in future, or NOT AT ALL!  Any form of credit is stealing your future from you.

Consumers don’t view AfterPay as credit and think it’s a great easy solution when short on cash at the checkout… but when we spend using credit, we are using the lenders money for our purchases, not our own!  The best way to spend money in more recent times could be via your debit card, but mind your digital footprint as each purchase is recorded on your bank statement.  The best way to make purchases is by setting a budget, knowing all of your expenses and using a little old-fashioned thing called “cash.”

Thankyou to ABC News for their recent article on AfterPay and it’s income – https://www.abc.net.au/news/2018-08-24/afterpay-late-fees-24pc-income-asic-loophole-credit/10156902

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ABOUT THE AUTHOR

ANDREW MATES is the director, money coach and operator of Adelaide Budgeting and has always had a keen interest in numbers and the philosophy of succeeding financially in a world full of consumerism.  Andrew is a valued member of the team and is passionate about education and empowerment around finance and providing people with the confidence to successfully manage their own finances.  Equipped with a Diploma in Finance and Mortgage Broking (but not a broker), Andrew and his team can work with you to create a budget plan and savings strategy that is second to none which will see you kicking goals and doing the things you want to do but never thought you could!

In between helping clients and working on strategies, Andrew also enjoys walking on the beach, playing with Lilly his Labrador and road trips with his wife Alyssa.