Diana Clement: The truth about buy now pay later

Spending on credit cards has plummeted in part thanks to Kiwis' love of BNPL. Photo / Sylvie Whinray

Opinion

OPINION:

Buy now pay later (BNPL) or credit card? The younger you are the more likely you'll choose the Afterpay, Layby or other BNPL provider where you pay the item off with four equal payments, with no interest. It sounds good, but isn't always cheaper than using a credit card.

Spending on credit cards has plummeted in part thanks to Kiwis' love of BNPL.

"The surge in popularity is remarkable," says Jose George, general manager at Canstar NZ.

Figures from NZ Post show an astonishing spend growth in BNPL, up 105 per cent year-on-year in the latest report with a 49 per cent increase in customers. "(BNPL) is the credit of choice for the young," the report notes, "with 40 per cent of customers under 30, and 77 per cent under 45."

Banks might even start offering it, says George. BNPL isn't shackled by the regulators so banks will be watching on with envy and are likely to start providing hybrid credit card/BNPL-type offerings.

It has become the norm to buy all manner of goods and services from mag wheels to dentistry on BNPL and spread the payments out. That's enticing for younger people, who increasingly see credit card debt as a bad thing.

BNPL is cost-free if you pay on time. On the other hand, a credit card allows you to consolidate your spending, get an interest-free period and earn some rewards on the side, says George.

The big fishhook with BNPL for consumers is that the providers make their money by pinging customers with late fees. I'm talking A LOT of late fees for customers who lack discipline, especially those who lose track of multiple purchases.

Canstar's analysts did some figures for me on a $1500 purchase paid off over four payments. If you made all your payments on time on the BNPL or used the 55-day interest-free periods on a credit card you'd pay nothing on both.

Drilling down into the numbers, if you missed two payments and the outstanding payments remained unpaid seven days after due date, you'd pay $34 in fees on BNPL or $16.56 on a credit card at 15.43 per cent interest. But if you missed those payments within the 55-day interest free period you'd pay the $34 on BNPL, but zero on the credit card. These figures don't take into account annual credit card fees.

I do have to say that using the interest-free period on a credit card requires a lot more thought than BNPL. And if you're a "revolver" who constantly carries a balance each month or buys multiple purchases, neither is a very good deal.

Some people, says George, make their BNPL repayments with a credit card to avoid fees. Then you just have one payment to keep track of. If you don't pay your credit card off in full, you're just hiding the costs of BNPL from yourself.

George recommends:

• If you're in debt, it's worth considering the lowest-rate credit card or one that offers the longest interest-free period. The pandemic did prompt banks to lower rates, and low-rate cards are often charging less than 10 per cent interest.

• If you're the type to repay the balance each month, find the best rewards system - which likely won't be travel incentives in 2020. Consider cashbacks, partner deals or incentives that work for your lifestyle.

• Be a credit card freeloader: Treat your credit card like a debit card, ensuring you remain within your financial means. Pay off your balance each billing period

My final comment is that being clever with BNPL and credit cards often requires a lot of thought and administration. I do know Millennials and Gen Zers who save for what they want to buy and avoid any chance of being charged fees and interest. Radical, but it can be done.