Buy Now Pay Later versus credit cards: Which one is right for me?

In November 2021, a survey from SaaS cloud banking platform Mambu showed that Aussies love Buy Now Pay Later (BNPL), with 24% of Aussies using BNPL compared to just 11% of people globally, and the trend has continued.

According to an Australian Finance Industry Association (AFIA) report published in June 2022, there are 5.9 million active BNPL accounts in Australia.

Additionally, 54% of respondents said they preferred the payment services to traditional credit cards.

That said, there are currently 13,150,592 active credit cards in Australia, according to May 2022 RBA data. Although that number is slowly declining, there are still far more active credit card users than BNPL users.

Whatever category you fall into, you’re probably reading this right now to figure out what type of credit suits you best. Should you carry on using your credit card and pay it off diligently? Or would you rather step into the brave new world of BNPL?

In this guide, we’ll dive into the differences and similarities between the two.

At the most basic level, Buy Now Pay Later and credit cards are both a form of credit. They are both services that allow you to purchase something without having the money upfront. However, there are differences in the way they work.

Although the details will differ slightly from provider to provider, generally, BNPL services require you to pay back your purchases in a set number of (usually) interest free instalments (often around four).

Unlike credit cards, most BNPL services are separate from banks and don’t usually come with a physical piece of plastic to pay with. Instead, BNPL is more like a subscription service. You can sign up for an account online, and depending on how often you use it and which provider you go with, you may or may not have to pay a monthly fee.

By contrast, credit cards have no set repayment schedule - they come with an annual interest rate and a number of interest free days. So, if you purchase something and pay it back within the allotted interest free period, you won’t have to pay interest on that item. Although, if you miss that window, the interest rates on credit cards are nothing to be sniffed at, currently averaging 17.05% p.a., according to the Mozo database.

To summarise, the main differences with BNPL and credit cards are:

• You don’t have to apply to a bank to use a BNPL service. 
• BNPL does not usually charge interest - although if you miss one of your instalments, you may be charged a late fee.
• BNPL comes with a set number of instalments, while credit cards do not. Although to use a credit card wisely, you will still want to pay off a purchase within the allotted number of interest free days.
• BNPL providers may charge a monthly service fee, while credit cards are more likely to come with an annual service fee.

As touched on above, both BNPL and credit cards can charge fees. Let's do a quick round-up of these. Fees for BNPL can include:

• A monthly account fee. A number of BNPL services may charge a service fee, if you have an account with them. This can range from around $8 to $10.
• A late payment fee. Most BNPL services will charge a late fee if you miss one of your instalment payments. You could even be hit with multiple late fees if you miss multiple instalments.
• An establishment fee. Some BNPL providers may charge a one-off establishment fee, when you first sign up.
• A service fee. If you are making a particularly large purchase, some BNPL providers may charge a fee to set up your instalment payments.

For credit cards, some fees to look out for are:

• An annual fee. This is pretty much a service fee for having and using the credit card. Some credit cards may not charge any annual fee, while others could charge you as much as $700.
• Interest. If you don’t pay off a purchase within the interest-free period, you will be charged interest on your outstanding balance.
• A late fee. Most credit card providers will charge a late fee, if you miss a payment due date. This could be around $10 to $30.
• A cash advance fee. Withdrawing cash on your credit card is not generally a great idea - mainly because not only will you be charged to do it, but it also often comes with a higher cash advance interest rate. The charge is usually a percentage of what you are withdrawing (generally around 2 or 3%) and the higher interest rate can be well over 20%. It should also be noted that interest free days often do not apply to cash advances.
• An overseas currency conversion fee. It is worth knowing that a regular credit card will usually come with a currency conversion fee if you’re travelling and spending abroad.

That really depends on how you spend: the BNPL service or credit card you select and if you pay your balance on time.

Utilising the AFIA average BNPL purchase of $151, a 2022 study from Curtin University and Financial Counselling Australia showed that for some customers, BNPL fees can end up costing the equivalent of a nearly-50% credit card interest rate!

Report author Dr Lien Duong, senior lecturer at Curtin University’s School of Accounting, Economics and Finance discovered, that for a customer who either incurred late fees or account keeping fees, there is an effective interest rate of 28.25% for Afterpay and a whopping 49% for Humm-Little Things.

This is significantly higher than the average interest rate of 17.05% in the Mozo database.

Dr Lien Duong explained that fees charged by BNPL services can act as a “quasi-interest rate that can be more costly than credit card interest rates.”

We’ve looked at how BNPL and credit cards work and what fees you can expect, but what about actually using these payment methods in the wild? If you have a credit card, then you’ll know that it’s usually not too difficult to swipe your plastic at Woolies or Big W. But what about BNPL? Can you use that in-store?

While most Australian credit cards are linked to one of three big payment networks (Mastercard, Visa or American Express), that is not often the case with BNPL. To use BNPL at a physical shop or website, you first need an agreement with the BNPL provider you want to use.

More stores are offering BNPL these days, although most will not offer more than one or two options. For this reason, Buy Now Pay Later users will often have an account with more than one provider. So, yes, you can use BNPL in-store and online, but you may be restricted as to who will accept your specific provider.

Another thing to note is payment limits. Credit card users will know that there is a limit to how much uncleared debt you can have on your card at one time. This is usually called your ‘credit limit’ and for credit cards, it often can be over $10,000.

On the other hand, account limits for BNPL services are often a lot lower. For instance, the maximum account limit for Afterpay and Zip is $2,000. This means that you can’t have any more than these amounts owing at one time on your account.

Missing a credit card payment will be noted and can affect your credit score, but what about BNPL? If you miss an instalment, does that also negatively impact your credit rating?

Having a good credit score is important if you want to apply for any form of credit or loan in the future. This includes a home loan, personal loan or even another credit card. As well as noting bad behaviour, credit card providers will also report on good behaviour. For example, if you always pay your bills on time, this will be reflected in your credit score.

The 2022 Mozo Buy Now Pay Later Report has found that 82% of Australians cite ‘ease of login’ as their main reason for splitting their spending with a BNPL platform. But what these providers offer in ease, they lack in regulation: BNPL companies have been legally distinct from credit cards and personal loans and do not fall under the same laws.

So, although BNPL is basically a different form of credit, it does not usually require a credit check in order to open an account. That said, how you use it could have some bearing on your credit score. Things like missing instalments and having multiple BNPL accounts could be reported to your credit history, depending on the policies of the specific BNPL platform.

The long and the short of it is that even though BNPL is not a traditional form of credit it could possibly affect your credit score.

Also, you should keep in mind that as of 2022, the Australian Prudential Regulation Authority APRA announced that banks and lenders must now consider BNPL debt when offering loans.

Finally, one of the biggest questions around any new kind of digital payment is security. In an age where companies constantly collect data, being skeptical of a service such as BNPL is understandable. However, the information collected is typically routine in nature. 

For example, information BNPL providers may request from you includes:

• Contact details. When you sign up to a Buy Now Pay Later service you will most likely have to provide your full name, home or business address, phone number or email address.
• Personal information. This could be your date of birth, a form of ID such as a driver's license or passport.
• Financial information. You may be asked to provide your bank or credit card details, your current income and financial status.

The process is not too dissimilar to what you would be asked when applying for a credit card. Nearly all credit card applications will ask for the same information and documentation, so to be best prepared, it’s a good idea to have these ready before starting the application:

• Personal details - You should be prepared to share basic personal information on your application, including your name, date of birth, address and contact information. Some creditors may also ask for your marital status and number of dependants to provide a complete picture of your financial situation. Additionally, you will likely need to provide a form of identification, such as your driver’s license number, passport number or Medicare number.
  Proof of financial status - As well as your regular work income, you will likely need to share any other money you have, such as shares or savings. Applicants should also be prepared to provide information on any debts and liabilities. You will also likely be asked to estimate your weekly or monthly expenses, such as rent or mortgage payments, bills and food costs.
  Employment information - Most credit card applications will require you to provide information on your current employment status, including your salary, job title, place of work and contact information for your employer. Some creditors may ask for your employment history, or if you’re self-employed, you might be asked to provide details of your work. Sometimes, the provider can contact you with follow-up questions or might request further documentation, such as payslips, a recent tax assessment or your employment contract.

Long term, preparing your credit score to be closely analysed by a creditor will put you in the best position to be easily approved for the card of your choice. An applicant with an excellent credit score is always more likely to be approved for a financial product than someone with good or poor credit.

In terms of unauthorised spending on your card or account, credit cards usually come with a zero liability policy. This means that so long as you haven’t given out your details or PIN, you should be able to get your money back.

As BNPL services do not usually charge interest and installments must be paid back in less than 62 days, providers are not regulated by the National Credit Code. That said, in March 2021 the Australian Finance Industry Association introduced a new Code of Practice for the Buy Now Pay Later sector. BNPL providers accredited to this code include: Afterpay, Brighte, Humm, Klarna, Latitude, Openpay, Payright and Zip. 

Besides this, a number of BNPL providers are subject to the 1988 Privacy Act, as well as the Australian Privacy Principles and the 2014 Privacy Credit Reporting Code. These laws act as a guide for what standards and obligations BNPL providers (who abide by them) should follow when looking after customer data. 

One last thing to note is that to keep your details safe from hackers, BNPL companies will often conduct frequent software security checks. Some will even require users to have two-factor authentication set-up. 

From fees, to how they work, and security, we’ve covered a lot in this guide. That said, if there is something we haven’t touched on here feel free to check out Mozo’s Buy Now Pay Later homepage. This includes FAQs on how BNPL works and a list of some providers in Australia right now. If you're looking to crunch some numbers, check out our Buy Now Pay Later 2022 report page that gets into the nitty gritty of why Aussies turn to BNPL.