Afterpay has taken Australian shoppers by storm, especially with the recent launch of PLAY, an Afterpay payment scheme that's designed specifically for travel expenses like accomodation or flights.
But there’s no such thing as a free lunch, and even a payment platform that promises you can shop now, use now and pay later – interest-free – has its downsides.
Let’s take a look at some of the traps an Afterpay user might fall into, and what they can mean for your bank balance.
Afterpay won’t affect your credit score, unless…
There’s no credit check before you apply for Afterpay and it won’t affect your credit history – as long as you use it responsibly.
If you read the fine print, you’ll find that Afterpay reserves the right to perform credit checks, and to report negative activity on your account to credit ratings bureaus, and this could result in a black mark on your record, just like with any other source of credit.
On the other hand, because there’s no credit check, your Afterpay history won’t officially go towards helping you build up a good credit history either. So, if you always meet your payments promptly, you could think of Afterpay as credit rating neutral.
The approval algorithm is a mystery
One of the common complaints about Afterpay is that some users are rejected from placing orders, seemingly for no reason. This comes down to the algorithm Afterpay uses to approve purchases.
Each approval is decided on a case-by-case basis, so if you’re rejected once, that doesn’t mean you will be next time, but it can be frustrating when there’s no way to tell whether you’ll be approved or not.
As a rule of thumb, the longer you use the platform, the more likely you’ll be approved, so one tip is to start with small purchases to work up a good repayment history and then try out a bigger spend.
Limits on your Afterpay orders
Similar to being approved for orders, there doesn’t seem to be a hard and fast rule on how many Afterpay orders you can have on the go at once. Instead, Afterpay’s algorithm looks at a number of different factors – like how many purchases you’ve got to pay off, whether or not you’re meeting repayments and what your history of payments looks like – to choose whether you will be approved for a new purchase.
Fees and charges for using Afterpay
Just like your credit score, if you use Afterpay responsibly, your bank account won’t be negatively impacted. Afterpay makes the bulk of its money from the retailers that offer it, so customers don’t have to pay for the service.
Afterpay works by splitting the cost of your shop into four equal payments, which are made every fortnight. But if you miss a payment, or don’t have enough money in your account for a direct debit, then you’ll be charged a $10 missed payment fee. If a week goes by and you still have an outstanding balance, you’ll be charged another $7 fee.
As of June 2018, Afterpay introduced caps on late fees which means you'll never pay more than $68 in late fees on top of your repayments.
If you have outstanding orders, you won’t be able to make a new purchase. And if you get into trouble with more Afterpay purchases than you can handle, there is a hardship program available.
Using Afterpay with a credit card can mean trouble
According to Afterpay, nearly 90% of its users pay for their purchases using a debit card. This is a smart move, because if you have your account linked to a credit card and let payments get away from you, what was a free take-home layby scheme can quickly become a money drain.
For example, say you make a purchase of $800 of flights on Afterpay using your credit card. The $200 instalments will be charged to your card – but if you let them build up on your credit card balance, it can wind up being just as bad for your credit history (and wallet) as if you had bought the flights using your credit card directly.
Which regulations apply to Afterpay?
Some finance experts have expressed concern over just which regulations apply to payment schemes like Afterpay and what kind of protection shoppers have.
Afterpay is regulated under the Payment Card Industry Data Security Standard (PCI DSS), which is the same regulatory standard applied to major credit card brands. You’re also still covered by consumer protection legislation, which includes things like the right to a refund for faulty goods.
On the other hand because it offers credit at the point of sale, Afterpay is exempt from the National Consumer Credit Protection Act (NCCP) which is designed to enforce ethics and protect consumers in the finance industry. Other examples of the point-of-sale exemption you might be familiar with is the “interest free loans” at shops like Harvey Norman.
Speaking of refunds…
In a nutshell, Afterpay doesn’t deal with your refund. Instead, if you need a refund, exchange or return, then you need to deal with the store directly.
Once your refund is approved, the store will let Afterpay know, and it’s only then that you’ll receive any money back from Afterpay. In some cases, this might mean you’re charged for a payment, even after you’ve sent your purchases back, but once it’s entered into the Afterpay system, you’ll receive your money back, or your Afterpay total will be adjusted accordingly if you’ve only returned part of an order.
How to use Afterpay responsibly
There are a few simple things you can do to make sure you’re managing your Afterpay account properly and reducing the risk of running into financial trouble.
- Stick to a budget. Although Afterpay’s approval algorithm is designed to stop you biting off more than you can chew, it’s a good idea not to rely on this. Make sure you crunch the numbers on your budget and work out how many purchases you can realistically pay off at once. It’s a good idea to set aside money for bills and expenses, some for savings, and then anything that’s left over is your Afterpay budget.
- Use a debit card. Steer clear of a mounting credit card balance by only linking your debit card up to Afterpay. This way, you can spread big costs out to make them more manageable, but you’re still only spending money you know you will have in the future (that is, if you’re sticking to your budget!)
- Set payment reminders. Afterpay automatically deducts payments from your account on the date they’re due. To avoid late payment fees, you need to make sure you’re prepared, and the funds are available on this date. It might be a good idea to set yourself reminders in advance, so you can check your account balance and top it up if necessary.
Want to read more about Afterpay? Head over to read our Afterpay report.