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

A woman stands against a yellow background, shrugging.

The buzz around buying now and paying later is loud right now: according to Mozo’s research, 5.8 million Australians had a Buy Now Pay Later (BNPL) account in 2020. 

That’s 30% of the population!

Of this growing number of users in Australia, statistics from the RBA show that over half are under 40. Illion’s 2020 Credit Card Nation report illustrates this too - summarising that the Buy Now Pay Later market is dominated by under-35s and that over 50s make up only 15% of it. 

The report suggests that while younger Australians have been more willing to embrace BNPL later services, Gen X and Boomers have largely stuck with credit cards. Now we know these are generalisations. The truth is you might be a Millennial who has stuck with your credit card, or you could be a Gen X or Boomer ready to take the leap to Buy Now Pay Later. 

Whatever category you fall into, you’re probably reading this right now to figure what type of credit suits you best. Should you carry on using your credit card and paying 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.

Buy Now Pay Later and credit cards: How they work

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 installments (often around four). Unlike credit cards, most BNPL services are separate from banks and they 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. This means that 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 - well over 10% 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 installments, you may be charged a late fee.
  • BNPL comes with a set number of installments, 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.

Fees for BNPL versus credit cards

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 installment payments. If you miss multiple installments, you could even be hit with multiple late fees.
  • 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 installment 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. Although you might not be flying anywhere outside Australia anytime soon, it is worth knowing for future reference that a regular credit card will usually come with a currency conversion fee. 

Buy Now Pay Later and credit cards: Paying online and in-store

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 either a physical shop or website, you first need an agreement in place 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 instore and online, but you may be restricted as to who will accept it.

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 can be over $10,000. 

As you can see, credit limits for credit cards can be pretty high. Account limits for BNPL services on the other hand are often a lot lower. For instance, the maximum account limit for Afterpay is $2,000 and for Zip it’s $1,500. This means that you can’t have any more than these amounts owing at one time on your account.

BNPL: Should I be worried about my credit score?

Missing a credit card payment will be noted and can affect your credit score, but what about BNPL? If you miss an installment 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.

As BNPL is basically a different form of credit, it only follows that how you use it could also have some bearing on your credit score. This means missing installments, having multiple BNPL accounts and constantly reaching your account limit could be negatively impacting your credit rating. 

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

Are credit cards more secure than Buy Now Pay Later?

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.

This is not too dissimilar to what you would be asked when applying for a credit card. For this, a bank will usually ask you for a form of ID, details of your employment and how much you earn.

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 our our Buy Now Pay Later statistics page that get's into the nitty gritty of BNPL. 

*The average interest rate for all personal credit cards available in the Mozo database is currently 16.90%, correct as of 17 May 2021.