Gone are the days when cash was king. Now, when it comes time to pay, you have a whole world of payment opportunities open to you. Sure, you could pay with cash if you want to keep it old school, but it’s much more likely you’ll pay another way, using your debit card, credit card or digital wallet. Or, of course, BNPL.
Over the past few years – and even more so since COVID hit – Buy Now Pay Later services have experienced an overwhelming surge in popularity. They are literally everywhere. Whether you’re at your local shopping centre, at the dentist, at the vet, at the mechanic, ads for BNPL services have become so much part of the scenery that we often don’t notice them anymore.
But how does BNPL compare in the real world? While we covered the ins and outs of BNPL in our earlier post on the topic of BNPL vs. credit cards, we thought we’d dig a little deeper in an effort to compare BNPL specifically to credit cards with 0% purchase offers. After all, one of the main selling points of BNPL is the fact that it doesn’t charge interest.
In this post, we’ll quickly cover the main aspects of how 0% purchase offers and BNPL work, to then get into the pros and cons of using each option. We’ll hit obvious areas such as the costs involved, as well as aspects you may not have considered. And from there, we’ll look at where one option might work better than the other – and how to make that option work for you.
First, the basics. What is a 0% purchase offer and how does it work?
What is a 0% purchase offer? Like balance transfer offers and bonus points offers, a 0% purchase offer is just an introductory deal offered on a credit card, designed to entice new cardholders to sign up.
How does it work? When you apply for a credit card with a 0% purchase offer, you will pay zero interest on your purchases over the card’s introductory period. This period may last six months, 12 months, or even up to 18 months, but rarely beyond that.
What does it offer? The main appeal behind a 0% purchase offer is that it allows you to buy what you want and pay no interest over an extended period.
What happens after the offer ends? If you have a balance at the end of the intro period, it will revert to your card’s purchase rate. As your balance will now start attracting interest, this is not an ideal situation to be in. Your goal with a 0% purchase offer is to be smart with your purchases, and repay them before the intro period ends.
Just five years ago, if someone asked you if you wanted to pay with Afterpay, you would have likely said, ‘After-what?’ Buy Now Pay Later just wasn’t a thing. Unless, of course, you were making use of the layby services at your local Target.
Now, Afterpay is everywhere. It has more than 11 million active users around the world, and was recently purchased by global payments giant Square for a cool $39 billion.
But it’s not just Afterpay in the game. There’s Zip, Humm and Openpay. There are newcomers PayPal Pay in 4 and CommBank’s StepPay. There are dozens more, both here in Australia, and overseas.
To give you an idea of the scale of BNPL appeal, just look at Klarna. Founded in Sweden in 2005, Klarna dwarfs Afterpay. Its 90,000,000 active users make 2,000,000 transactions per day, at more than 250,000 merchants in 17 countries.
What is BNPL? As the name suggests, Buy Now Pay Later services allow you to buy now and pay later. Whether you want to buy a new pair of shoes, pay for root canal treatment, or even cover the cost of a round of IVF, you can use a BNPL platform to buy it now and pay later.
How does it work? Each BNPL platform works slightly differently, however most sell themselves on the fact that they allow you to buy something upfront and then spread the cost over a set period of time. Using Afterpay as an example, you split the cost of your purchase into four equal payments, to make the first payment at the time of purchase, then fortnightly thereafter.
What does it offer? Essentially, it allows you to spread the cost of things you don’t want to pay for upfront, often with no interest. Another aspect that appeals to many BNPL users is that many services don’t require a credit check.
What’s the catch? Again, as each platform is different, there are different ‘catches’. You may find yourself paying an establishment fee or ongoing fees using BNPL. You could also end up in over your head if you utilise too many platforms and overextend yourself.
Before we jump into the task of comparing BNPL and 0% purchase offers side by side, it could help to look a little closer at how BNPL services operate here in Australia
Now we understand a little more about how BNPL and 0% purchase offers work, we can compare their pros and cons.
If demand lies elsewhere, say in balance transfer offers or bonus points offers, there may not be as many 0% purchase offers to choose from – and the offers that are there, may have much shorter intro periods.
Generally though, if you want to find a card with a 0% purchase offer, you can. The longest 0% purchase offer we currently have on CreditCard.com.au is the ANZ Platinum Credit Card, which offers 0% p.a. on purchases for 17 months.
You may find the breadth of choice intimidating if you’re not sure what to look for. On the other hand, you could find exactly the right fit for your purchase, as long as you’re willing to compare what’s out there – and read the terms carefully.
That may mean you have to mix and match BNPL services to pay for different types of purchases, which may be difficult to manage. This could lead to problems with debt if you don’t keep on top of your spending and repayments.
And overseas? While you can use a credit card overseas with ease (while typically paying currency conversion fees), you may not be able to use your BNPL provider of choice. Aussie Afterpay users can use Afterpay in the US, UK, New Zealand and Canada, but again, the retailer needs to accept Afterpay payments for this to be an option.
Essentially, this means you should only be provided with a credit limit you can afford to pay back. As long as your credit is good, this should give you the spending power to buy what you need. And if your credit is not great, it should limit your ability to get into trouble.
BNPL services designed to be paid off within four fortnightly instalments typically cap purchases at a lower amount. StepPay, for example caps purchases at $1,000.
Afterpay, on the other hand, says it determines spending limits based on “how you use your account”. This includes whether you make your payments on time, how long you’ve been using Afterpay, and whether you typically avoid declined purchases. Your limit may also be determined by whether you have linked a debit card or credit card to your account.
It’s worth pointing out that some BNPL providers offer much higher spending limits. Humm, for example, offers spending limits on Big Things up to $30,000.
Bear in mind that even during the introductory period, you will still have to pay the minimum repayment on the card each month.
BNPL services that have higher spending limits typically offer longer repayment periods. With a spending limit up to $30,000, Humm offers repayment periods up to 60 months. Openpay caps spending at $17,000, with repayment periods up to 24 months.
While some cards offer low revert rates – such as the Bankwest Breeze Platinum Card, with a revert rate of 9.90% p.a. – others revert to a much higher rate, upwards of 20% p.a. As interest starts to accrue on that unpaid balance, it could make it much harder to pay off.
The Bankwest Breeze card mentioned earlier has no annual fee for the first year, and reverts to a standard annual fee of $69. The St.George No Annual Fee Card is currently offering 0% p.a. on purchases for 12 months, with no annual fee ever.
Aside from annual fees, credit cards can charge a range of other fees, such as cash advance fees, over limit fees, and late fees. But, these can all be avoided when you use your card responsibly.
As you can see, fees can vary widely between BNPL services. If you use a service with no interest and no ongoing fees – and always make your payments on time – this obviously counts as a pro, because you are accessing the service for free.
On the other hand, if you choose a service that charges ongoing fees, or you make payments late, it will increase your outgoing costs.
This is not a great idea, as you really want to clear your balance by the time your intro period ends and your card’s standard purchase rate kicks in. To do this, you need to be fairly disciplined, only spending as much as you can afford to pay back, and making regular repayments so your balance is at zero at the end of your intro period.
Ultimately though, the biggest deterrent to bad behaviour with a credit card is the knock to your credit score if you misbehave. Missed payments and late payments on credit cards are reported on the cardholder’s credit report, lowering their credit score and making credit harder and more expensive to come by in the future.
While this may sound like a con for some, it can prevent potential cardholders from getting in over their head, borrowing money they can’t afford to pay back.
“As part of our approval process… we reserve the right to conduct a pre-authorisation of your Nominated Payment Source. This may involve placing funds in the account linked to your Nominated Payment Source on hold each time you [use Afterpay]. Once purchases are authorised, we immediately instruct your bank to void this pre-authorisation transaction.”
As you can see from the above example with Klarna, you may also find your chances of applying for credit in the future are damaged. Having a large number of credit enquires on your credit report can make potential providers think twice.
In terms of perks, this platinum card also provides two passes to the American Express Lounge each year, plus exclusive benefits at David Jones.
You may also benefit from rewards. Afterpay now offers users access to its Pulse Rewards program, rewarding on-time payments with benefits such as exclusive offers from retailers and no upfront payment. Afterpay also allows users to earn Qantas Points on certain spending.
Over at Klarna, users can join the Klarna rewards club to collect a welcome reward of 5,000 bonus Flybuys points. Ongoing, club members can earn 1 vibe for every $1 spent, which can be redeemed within the program or converted to Flybuys points at a rate of 1 vibe per 3 Flybuys points.
With that being said, certain protections are provided by some BNPL services. As an example, users of PayPal Pay in 4 enjoy the same level of security and buyer protection offered on all other PayPal transactions.
ASIC reported in November 2020 that one in five consumers in the past year had missed or been late paying other bills in order to make their BNPL payments on time. Missed payments included things such as household bills (44%), credit card payments (32%) and home loan repayments (22%).
The report also revealed that some users were experiencing financial hardship in order to make BNPL payments on time, with admissions of cutting back on or going entirely without essentials such as meals, or taking out additional loans.
☑ When you want the freedom of spending wherever, whenever
☑ When you have a larger purchase in mind (credit limit dependent).
☑ When you want to pay no interest or fees over a longer period.
☑ When you want to earn rewards or make use of perks.
☑ When you want to use your card to improve your credit.
☑ When you want to make repeated smaller purchases over a much longer period of time.
☑ When your credit isn’t great.
☑ When you don’t mind putting the work in to find the most appropriate BNPL platform for each purchase.
Want our tips on how to make each option work for you? Here goes.
☛ With a 0% purchase offer:
☛ With BNPL:
Founder of Creditcard.com.au. Roland has extensive knowledge about credit cards in Australia. Known as a credit card expert, he has been featured on tv and in various publications. Some popular offers on our site right now include the ANZ Low Rate. This special offer has no annual fee first year, a low purchase rate and long 0% balance transfer. Have a look also at the huge 0% for 30 months balance transfer from Citi with no balance transfer fees.
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