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Credit cards vs buy now pay later

Is it better to use a credit card or a buy now pay later service like Laybuy? Here’s how they compare.

American Express or Afterpay? Zero-interest or Zip? Both credit cards and buy now pay later services give you a way to shop for what you want, then pay off the purchases over time. However, there are differences between these two options.

For starters, most credit cards charge interest when you have a balance. Most buy now pay later services have fixed payment instalments, with late fees if you can’t make them on time. These examples are really just the tip of the iceberg, so let’s take a closer look at how credit cards and buy now pay later stack up.

How do you sign up?

With most buy now pay later plans, you can set up your account online in a few minutes. Some plans are also available when you shop in a store. Usually, you need to be at least 18 years old, have a New Zealand bank account or debit/credit card and contact details.

With credit cards, you need to fill in an online application that asks for many more details than most buy now pay later plans. This is because all credit card applications require a credit check (where the bank or provider looks at your credit history). In addition to being 18 years of age, common credit card requirements include:

  • Being a New Zealand citizen or permanent resident
  • Earning a regular income
  • Providing details of income, assets, debt and regular expenses (this helps show you can meet payment requirements)
Bottom line: It’s easier to sign up for a buy now pay later account than a credit card.

How much does it cost?

Most buy now pay later plans don’t cost anything when you sign up and are free to use if you make payments on time over a short period (e.g. within 2 months). Some buy now pay later plans, for example, Humm charge a small monthly fee, but popular options, including Afterpay, don’t.

Most plans also charge late payment fees if your payments aren’t made on time. Late payments usually cost approximately $10 if you miss one payment, but it could be higher if you leave the account unpaid.

How do companies like Afterpay make money?

Afterpay and other buy now pay later companies usually make most of their money by charging fees to the businesses that offer its plan. With Zip, the rate is set when a business signs up, and retailers pay a merchant fee per transaction. Afterpay also charges the merchant a fee of 6% + 30c (plus GST) per transaction.

Traditional credit cards have annual fees that range from $0 to $390 or more. Interest rates are the other major cost to watch out for, with ongoing rates that range from 9.95% p.a. to 25.99% p.a. You can also get cards that offer introductory 0% interest periods.

Bottom line: Buy now pay later plans don’t usually cost you much if you make payments on time. However, they aren’t always upfront about potential fees, and costs can vary.

Credit cards typically offer more consistent details of costs because the interest rate stays the same no matter what you buy or when you pay (meaning you can calculate charges and repayments). They also have to provide a key facts sheet with details of all the main rates and fees. Considering these differences between buy now pay later and credit cards, we’ll call this one a tie.

Where can you use them?

You can only use buy now pay later with businesses that offer it. While some, including Zip and Afterpay, are available with major retailers, they are still less widely accepted than cards. What’s more, if you shop at many different places, you could end up juggling a handful of buy now pay later accounts.

With credit cards, you can use them at any business that accepts payment by card, including overseas retailers. In New Zealand, most places accept Visa and Mastercard, and many places also accept American Express.

Bottom line: You can use credit cards at more places than buy now pay later plans.

How much can you spend?

This varies a lot between buy now pay later plans. Some give you a spending range or let you apply for a set amount, such as Zip, which offers up to $1,000. Others, such as Afterpay, offer an estimated amount you can spend. If you make smaller purchases or know exactly how much you’re going to spend, this type of limit is probably fine. If not, it could become trickier to use buy now pay later.

With credit cards, you are issued a credit limit when you open the account. Minimum limits for traditional credit cards may range from $500 to $20,000 and are based on the bank or provider’s assessment of your application. Credit cards are regulated products, and per the Credit Contracts and Consumer Finance Act (CCCFA) – “Lenders must be satisfied that the borrower or guarantor will likely make the payments under the agreement without suffering substantial hardship. They must be able to meet essential day-to-day expenses and any other financial commitments.”

Bottom line: You always know how much you can spend with a credit card, while it can vary with buy now pay later.

How do repayments work?

Buy now pay later plans typically offer instalment repayments, where you pay the same amount over a few weeks or months – for example, 4 equal repayments over 8 weeks.

Some buy now pay later services offer a set interest-free period before fees and charges apply. For example, with Zip, you pay 25% of the purchase price with the initial transaction, then you pay the remainder in three equal payments over 6 weeks. With Genoapay, you can make purchases of up to $1,000. You then pay 10% of the purchase price immediately, and the remaining balance is split over the following 9 weeks.

If you make all your payments on time, you avoid the late payment fees charged by most plans.

Example: Paying off a purchase with Afterpay

If you pay for a $1,000 purchase with Afterpay, you will pay 4 fortnightly repayments of $250 each. These payments are automatically taken out of your linked debit or credit card.

If payment is declined, you could be charged a late payment fee of $10, then $7 if the payment is not made within 7 days (up to a maximum of $68).

With credit cards, you need to make a minimum repayment each month, which is often 2-3% of your balance but could be fixed if you set up an instalment plan. You also have the option of paying more some months or making repayments more often (every payday, for example).

If you only pay the minimum amount on a credit card, it could take years to pay off your purchases.

Example: Paying off a purchase with a typical credit card

Say you spend $1,000 on a credit card with a low rate of 12.99% p.a. and minimum monthly payments of 3%. If you make the same $250 fortnightly payments you will make with Afterpay (or even $500 a month), it will take you about 9 weeks to pay off the balance and cost around $16 in interest.

If you want to pay a lower amount of, say, $125 a fortnight ($250 a month), it will take you 5 months (about 20 weeks) to pay off and cost you about $28 in interest. However, if you only pay the minimum amount (around $30 a month), it would take 42 months to pay off the purchase and cost you $247 in interest.

If you want to look at other repayment options and costs, you can use Finder’s credit card repayment calculator.

Most credit cards offer up to 44 or 55 days interest-free in each statement period (the time from when your last statement was issued to when your next payment is due). Usually, you need to pay off your balance in full by the due date to take advantage of interest-free days.

As a point of comparison, with Afterpay, you technically get 56 days to pay off your purchase (4 payments over 8 weeks). So there are scenarios where either option would give you a similar outcome.

Bottom line: This category probably comes down to these scenarios:

  • If you can typically pay off purchases in 6-8 weeks: There’s probably not much difference between using a credit card or a buy now pay later plan like Afterpay.
  • If you like the structure of instalment payments: Look at buy now pay later plans or a no annual fee credit card that offers instalment plans.
  • If you want the option to pay off your shopping over a few months: Credit cards usually give you more flexibility and offer clearer costs than buy now pay later plans.

Other key differences between BNPL plans and credit cards

These details might not be your priority, but they are worth weighing up when you’re trying to decide if a credit card or buy now pay later is the better option.

🔎 Credit check

When you apply for a credit card, the bank or provider checks your credit history. This check is listed on your credit report whether you receive approval or not. That’s why it’s not ideal applying for too many credit cards in a short amount of time.

In comparison, BNPL providers do not do a full credit check when you sign up, or say that they “may” in some cases – so it’s worth finding out before you sign up for one. Bear in mind that a credit check isn’t necessarily good or bad, but having many checks and not much else usually won’t be seen positively.

🗂 Building credit history

If you want to buy a home in the future or think you may want a loan for something else, your credit history affects your approval chance.

All credit cards add to your credit history and credit score. If you get a credit card and meet the repayment requirements, these details are recorded on your credit report and can help improve your credit score – as well as your potential to receive other loans and accounts in the future.

The flip side is that if you don’t meet the card’s repayment requirements, it could hurt your credit score. BNPL providers are also authorised to report negative info which could impact your credit rating

✈️ Rewards

If you want to get something back for your spending, bear in mind that buy now pay later plans don’t offer their own rewards programmes. This means the main way you could get points or other perks when you use them to shop is to stick with stores with their own loyalty programmes (such as The Warehouse).

Credit cards offer much more variety (and competition), with cards that earn points for travel and shopping, as well as cash back or gift cards.

🔏 Regulation

Regulation helps protect you from unfair and unreasonable costs or situations, giving you a clear way to make complaints and get support if something goes wrong. Overall, buy now pay later has less industry or government regulation than credit cards, although there are calls for more regulation. In comparison, you definitely have protection under the CCCFA when you have a credit card.

Verdict: is it better to use buy now pay later or a credit card?

Let’s be real: there isn’t a one-size-fits-all solution to this comparison. It really comes down to how you shop and make payments. So, here are some situations where one could work better than the other.

Buy now pay later might be right if:

  • You need to buy an item today, don’t have a credit card and don’t have much cash
  • You want to split your payments up without worrying about lots of extra costs
  • You want to know exactly how long it takes to repay what you buy
  • You only really want to buy retail items and maybe some speciality services (e.g. a vet)

A credit card might be right if:

  • You want to know how much you can spend at any time
  • You want to build a good credit history
  • You want the option of repaying what you buy over a few months or longer, without worrying about late fees
  • You want an option you can use for unexpected costs without being limited to certain retailers or other businesses

It’s easier to sign up to most buy now pay later plans than to get a new credit card – and there are usually fewer costs. However, credit cards give you more spending and repayment options – including some that are pretty similar to buy now pay later plans.

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