Buy now pay later VS credit cards: what’s the difference?

Back in the dark ages, if you couldn’t afford your spices, jousting sticks or flagon of rum at the marketplace, you walked away empty-handed. But thanks to a range of new payment methods, you no longer need to fork out for things up front.

While credit cards have been on the market for some time, the latest payment trend in Australia is buy now pay later plans.

What are buy now pay later services?

Buy now pay later services have exploded in popularity online and in-store recently, with roughly one in ten Australian's having used the service.

There are lots of different buy now pay later providers, but they’re all essentially the same – in that you can take home your purchase without having to pay for it in full at the checkout. You instead agree to pay for your purchase in a number of interest-free instalments.

For example, once you’ve settled on some new sunnies for $200, you can wear them immediately but you’d usually have to pay for them over eight weeks (or 56 days), in four fortnightly interest-free payments of $50.

If you fail to pay an instalment, you’ll be charged a late fee, which can be up to $15.

Each provider has a different fee structure, so shopping around is recommended and it also goes without saying that you should check out the T&Cs before committing – they’re not exactly fun bedtime reading, but they save you a pain in your wallet.

So should I get rid of my credit card?

Not just yet. Here are a few things to consider before ditching the plastic for a buy now pay later service.

1. Buy now pay later funds can be easier to access – but that’s not necessarily good.

When you apply for a buy now pay later service, you’re not required to fill out a detailed application form, listing your existing debts, and proving your income or ability to repay outstanding amounts – as responsible lending obligations do not apply to these services.

In fact, the majority of providers do not conduct credit checks as part of their application process. They instead use a mix of repayment history, demographic information and some form of basic financial information.

But the ease of access can also be buy now pay later’s biggest drawback, with customers often taking on too much debt. In fact, according to the corporate watch dog ASIC, the percentage of revenue from late fees rose from just 2% of total revenue in the quarter ending 30 June 2016 to a high of 14% in the quarter ending 31 March 2018.

So basically you’ve got more freedom and ease in applying– but it can come at a big cost.

2. When do I have to pay them back?

Both buy now pay later services and credit cards typically offer interest-free periods on purchases.

Many credit cards offer interest-free periods on purchases which are around the same time as the buy now pay later repayment window. You also don’t need to make instalment payments during this interest-free period unlike buy now pay later services.

Some people link their credit card to their buy now pay later account so they have a higher spend limit. If you do this, it’s important to remember to pay your credit card balance off in full by the due date or you may end up getting charged credit card interest on your ‘interest free purchase’ anyway.

3. Do you have it in my size?

Depending on your shopping behaviour and what you are looking to buy, a ‘buy now pay later’ arrangement might not have enough juice as they tend to only offer a limited amount of credit ($500 or $1000).

Credit cards usually offer a larger limit as the issuer looks at how much you can realistically afford to borrow based on your income and outgoings.

4. Can I pay for what I want with either?

Many retailers do not offer buy now pay later services, whereas credit cards are widely accepted in Australia and overseas – so it might be a choice you need to make, and other times be made for you.

So, about those sunnies?

There’s no right or wrong answer when it comes to credit cards or buy now pay later. It really depends on you and your personal circumstances. But it’s important to weigh up the benefits and disadvantages of each payment method and if there is a chance you won’t be able to pay back your purchase, consider saving up for it instead of paying for it on credit.