Why credit cards can trump buy now pay later cards
The peak spending period of the year is upon us, and as many look for payment options to see them through, it can be worth considering a credit card for festive buys rather than relying on buy now pay later options.
With not long to go before the jolly man in red arrives for another year, research from Compare the Market¹ reveals Australians plan to spend an average of $715 on Christmas presents in 2023.
Of course, gifts are just one aspect of festive spending. Decorations, food, drink, parties, entertaining kids during the school holidays, planned get-aways and even the cost of visiting family and friends all add up.
Along with planning how much we spend, it’s worth considering how we pay for purchases.
Ways to pay for festive purchases
There’s no doubt that using your own money is usually the cheapest way to pay. So, it can be a good idea to reach for your debt card first at the check-out.
However, other payment options may help to spread or delay the full cost of spending at this busy time of year, which can make budgeting easier.
Two popular choices that can allow purchases to be paid off gradually are credit cards and buy now pay later (BNPL) options.
So, how do they shape up?
If you’re not familiar with BNPL, it works like a digital lay-by. You can take purchases home right away, with the cost paid off in equal instalments over a set number of weeks.
Both credit cards and BNPL offer opportunities to spread out paying for purchases, which can help with your personal cash flow.
If you pay off your credit card balance in full before interest charges apply, you generally face no additional cost for this convenience.
Similarly, as long as you pay each regular instalment on your BNPL account on time, no further charges should apply apart from possible monthly fees.
It all sounds good on paper. But there is a catch.
BNPL is not covered by consumer credit laws
Your credit card comes with a set credit limit. This draws a line in the sand for how much you can spend using your card, at least until part of the debt is repaid.
This credit limit is established by the card issuer based on your ability to repay. That’s because credit cards are covered by consumer credit laws, and the card issuer is legally required to be sure you can comfortably handle the card’s credit limit.
For the time being at least, BNPL is not covered by the same laws. It is unregulated credit, so it can be very easy to get in over your head in terms of the money owed.
As the Financial Rights Legal Centre warns, “Buy Now Pay Later can easily lead to a debt trap²”
A real danger zone can lie in having multiple BNPL accounts. That’s when trying to work out who you need to pay, and when, can start to become especially difficult.
Moreover, while the instalment amounts may feel digestible, once you start racking up a number of payment plans, your account can really start taking a hit, putting strain on your cashflow.
How do the costs compare?
If you run late with a BNPL payment, penalties will apply. These may appear small in dollar terms. However, they can work out to be the equivalent of a very high interest rate.
Curtin University crunched the numbers, and found the late payment penalties charged by some BNPL providers can equate to as much as 200%³.
That’s a hefty price just for running late with a payment. But it’s these sorts of penalties that can see BNPL users fall further and further behind.
Of course, you may start out thinking you will never miss a BNPL payment. But that’s often not the case. A report by money watchdog ASIC found one in five BNPL users miss a repayment⁴.
By comparison, Community First’s Low Rate credit card comes with a low ongoing rate. And remember, card interest is only applied to the balance outstanding – not the value of the original purchases as can be the case with BNPL.
Or, pay zero interest with Community First’s n0w credit card*. Instead of paying interest, you pay a low fee – as little as $9 per month depending on your credit limit.
Shop wherever Visa is accepted
The added beauty of using your Community First credit card for festive purchases is that you can shop wherever Visa is accepted.
As Visa is welcomed by more than 100 million merchants in over 200 countries⁵ you’re bound to find the perfect gift!
It certainly beats hunting for retailers that accept the BNPL option you’ve signed up to.
Community First Credit Union LimitedABN 80 087 649 938 | Operating as Community First Bank | AFSL and Australian credit licence 231204| BSB 512-170