Australians were introduced to credit cards way back in 1974. Since then, we’ve embraced them with enthusiasm and for some 40 years, no other credit facility came close to offering a viable alternative.
Around 2015 however, the game changed with the introduction of Buy Now, Pay Later (BNPL) schemes. Platforms such as ZipPay and Afterpay enable users to pay purchases off in weekly or monthly instalments.
BNPL vs a Credit Card
BNPLs are essentially credit facilities, differing from credit cards by providing credit for a specific item. Credit cards, on the other hand, provide credit for unspecified items, even cash advances. The main difference though, is that there is no interest payable on BNPL purchases. You pay a deposit for your item, then make the remaining instalments via bank transfer or credit/debit card. However, beware of the fine print: BNPLs apply account-keeping fees, late fees, and interest for missed payments. Some charge an establishment fee and others, payment-processing fees. These can significantly increase the balance owed on the purchased item.
Debt and Overspending
The instant gratification of receiving an item while only parting with a quarter of the price upfront is very appealing. This can make BNPL services a recipe for overspending and consumer research agrees. ASIC conducted a review of BNPL arrangements in November 2018, among their key findings showed 64% of BNPL consumers believed they spent more than they normally would, 70% made more spontaneous purchases, and more than half believed that they were spending more on some items than before they started using these arrangements. It’s also very important to manage BNPL services with existing credit cards and be aware of their relationship. ASIC reported in late 2020, a consistently higher proportion of buy now pay later users with a credit card incurred interest charges on their credit cards than users of credit cards without BNPL debts. Using BNPL in conjunction with a credit card can be fraught with danger if not managed with caution.
Impact On Borrowing Power
BNPL services can cause issues beyond debt. One issue is their effect on your credit score and consequently your borrowing power. BNPL services are not regulated by the National Consumer Credit Protection Act 2009 which means they’re not recognised as credit providers. While not recognised as credit, BNPL services can still negatively affect your credit directly if you default on your payments or indirectly if you use a credit card and miss payments. Meeting your scheduled payments however won’t have a positive impact on your credit score. They can affect home loan approval as it may influence how lenders view your expenses. Being too reliant on BNPL services can signal to a bank that you’re experiencing financial hardship. Making sure to not overuse BNPL services, making your payments on time and disclosing to lenders how often you’re using these services can reduce doubt when applying for home loans.
How To Use BNPL Services Responsibly
- Read the terms and conditions: ensure you understand the fees each service charges as well as the conditions for how to avoid these fees
- Limit yourself to one BNPL service: having multiple services can make it hard to track so by limiting to one, you only have one app and schedule of payments to track
- Don’t make payments with a credit card: If you don’t pay off your entire credit card bill within the interest-free period, adding your BNPL repayments to the card may see you paying a high rate of interest on your purchases. It’s better to use a debit card or direct debit from your bank account and make sure there’s enough money in the account to meet payments
- Review your spending: Don’t just track your BNPL spending, make sure you review credit and debit card purchases too. Are you staying within budget across all your spending methods?
- Avoid overusing BNPL services if you’re saving for a home: Lenders may look at your use of BNPL as a sign that you don’t have significant savings and are living from payday to payday. The lower your debt, of all types, the easier it will be to get a mortgage
If you would like more information about how BNPL services may affect you, one of our advisers can help.
