If you’re one of the many Australians currently feeling the financial pinch following the COVID-19 crisis, you may be wondering whether you should be sticking with your credit card or looking to other payment methods like Afterpay.
While interest rates for home loans, personal loans, savings accounts and more are plummeting thanks to five Reserve Bank of Australia cash rate cuts since 2019, credit card interest rates have mostly stayed put.
Meaning, your ability to potentially grow debt in a time when a recession may be imminent is a scary likelihood, if you’re not smart about how you use your credit card.
Meanwhile, buy-now-pay-later (BNPL) services like Afterpay have grown in popularity over the last few years, overtaking credit cards in terms of preferred payment methods – particularly for millennials and Gen Z. Other major BNPL services on the market include Zip Pay, Klarna and Humm.
But Afterpay is not without its risks. You can still incur fees and costs if you’re not able to meet your repayments.
So, what should you be using in 2020? The answer may lie somewhere in how you budget and spend your money.
Truth about credit cards
Credit cards are more than just a way to make payments. They can be an invaluable tool for making everyday purchases, travelling overseas and earning and spending rewards points, provided you can pay them back. That goes without saying for any form of credit service, but you may also benefit from perks like insurance and concierge services with your credit card.
Unlike BNPL services, credit cards aren’t a one-size-fits-all payment option. There are a range of credit card types, all with different advantages and disadvantages, including:
- Low rate credit cards
- Platinum credit cards
- Balance transfer credit cards
- Rewards credit cards
- Frequent flyer cards
- Travel credit cards
It’s no secret that the interest rates on credit cards can reach eye-watering numbers. When used carelessly, credit card usage may lead to snowballing debt.
According to RateCity research, the current average credit card purchase rate is 16.67%, with rates climbing as high as 24.99% in some cases. It’s not just interest that can leave a sting in the tail too, with the average annual fee currently $135.40.
But all of this is made clear when you choose to take out a credit card. Credit card holders accept that they are paying for the benefits and perks that come with credit cards.
All about Afterpay
Meanwhile, BNPL services like Afterpay are gaining traction in the race for the most popular payment method. According to research from Power Retail earlier this year, around 50 per cent of under-30s were found to have used BNPL services, compared to around 11 per cent of over-75s.
Launched in 2014, Afterpay is by far the most well-known BNPL service. Afterpay breaks down a purchase into four equal instalments to be paid every fortnight. This helps limit your chances of losing control over your debt.
Making payment installations is about all Afterpay allows users to do. This means it is a less competitive option for rewards points chasers or overseas travellers, for example.
Spending caps are also in place across BNPL services. For Afterpay, a linked debit card is capped at $500, and a linked credit card is capped at $1,500.
Unlike a credit card, Afterpay cannot be used everywhere. However, nowadays you can generally find these Afterpay in a range of online or brick & mortar stores.
How do the fees and costs compare?
When it comes to potential fees and costs, Afterpay typically comes out on top.
These are the main fees and costs associated with Afterpay:
- Initial $10 late fee, and further $7 if payment remains unpaid 7 days after due date
- Purchases below $40 – maximum of $10 late fee applied per order
- Purchases $40+ – late fees capped at 25% of original order value, or $68, whichever is less.
These are the main fees and costs associated with credit cards:
- Purchase rate
- Cash advance rate
- Annual fee
- Late payment fee
- International transaction fee
- Currency conversion fee
If it comes down to not paying your bills in time, credit cards will always eventually cost you more due to the interest charges on outstanding balances.
Both credit cards and Afterpay have its benefits, as well as its risks. To determine whether you should be considering using a credit card or Afterpay in 2020, you may want to review your own spending profile. Keep in mind the suggestions are general in nature, so you may want to consider your own financial situation before going for either BNPL or a credit card.
1. The Impulse Spender
You’re constantly searching ASOS for the latest sales. You only like to splurge on fun, impulse items, such as a new outfit or electronics. If you have a credit card, you don’t generally have credit card debt and tend to use it to order large purchases that you may not immediately have the upfront money for, but will have no problem paying off very shortly.
Suggested payment type:
2. The Habitual Spender
Habitual spenders instinctively put every purchase on their debit or credit card. They may also be constantly incurring interest charges and paying off debt. If you struggle to pay your bills each month, either service is less than ideal, and you may want to pivot away from payment methods that charge interest and can facilitate you growing debt.
Habitual spenders may want to work from their debit card so they know what they’re working with and don’t spend more than they have. However if they watch their finances carefully and know when they can pay — and are comfortable with payment schedules — either a low-rate credit card or Afterpay are suitable options.
Suggested payment type:
- Low-rate/low-fee credit card
3. The Everyday Spender
Whether it’s bills, grocery shopping or your daily coffee, you put every purchase through the one account.
If you have a credit card, you may be obsessed with earning rewards points for your rewards program, frequent flyer program, retail rewards program or cashback rewards program. You pay off your credit card balance each month to avoid interest charges, and care more about the card features and fees than its interest rate.
Suggested payment type:
- Low-fee credit card
- Rewards credit card
Regardless of what you end up using, whether it’s Afterpay or a credit card of some sort, always remember that you’re going to need the money to pay it off in the end. There’s no such thing as “free money”, and treating a credit service as such leaves you on a path to having bad credit, which can do more harm than good in the long run.