Afterpay vs credit cards

Which is better – Afterpay or a credit card? Buy now, pay later or credit?

Afterpay, Zip, Openpay, LatitudePay and other buy now, pay later schemes let users take home goods or services now, and pay for them later, without interest, in instalments.

Afterpay and other buy now, pay later apps, is free for users, if they make all their payments on time. Afterpay, Zip, Openpay and others make money by charging fees to the merchant or retailer and by charging late fees to consumers who fail to make their payments on time.

Credit cards also let you take home goods or services now and pay later. Credit cards offer you up to 55 days interest-free then charge interest on the purchases you make until they are completely repaid.

Credit cards also charge late fees and fees on purchases you make overseas. When using a credit card you are likely to be asked to pay a merchant surcharge as well, often 2 per cent of the total purchase for Visa and Mastercard transactions. Eftpos transactions can also be surcharged by retailers and other merchants.

How does buy now, pay later work?

Afterpay, Zip, Openpay, LatitudePay, Humm and other buy now, pay later apps offer shoppers the ability to purchase goods and services and pay later, in instalments.

How does Afterpay work?

four fortnightly instalments, starting two weeks form date of purchase.

Late fees = start at $10, then capped at 25% of total purchase or $68 (whichever is less).

Responsible spending policy

How does Zip pay and Zip money work?

Zip pay has a limit of $1,000 and minimum monthly repayments of $40 plus a $6 monthly fee

Zip money has an establishment fee of up to $99, limits set over $1,000 according to a credit check.

How does Openpay work?

Openpay is targeted at more affluent customers making home improvement and larger purchases. Openpay may conduct credit checks and charge late fees.

Is Afterpay and other buy now, pay later apps cheaper than a credit card?

Afterpay is potentially a free service always if payments are made on-time, every time. If payments are late, Afterpay is not free. An individual purchase could cost you up to $68 in Afterpay late fees.

Credit cards can also be free for users, if you repay all purchases within the interest-free period and have a card with no annual fees and no monthly account-keeping fees.

If purchases are not fully repaid within the interest-free period, interest can be charged and that can make repaying the debt harder.

A credit card with no annual fee could be an alternative to buy now, pay later apps for consumers who commit to repaying their purchases in full each month.

For example, the Virgin Money No Annual Fee Visa credit card has up to 44 days interest-free, a purchase interest rate of 18.99 per cent pa and no annual fee.

ME’s Frank Mastercard credit card has up to 55 days interest-free, a purchase interest rate of 11.99 per cent pa and no annual fee.

There are even platinum level credit cards with no annual fee, like the Bankwest Zero Platinum Mastercard credit card with up to 55 days interest-free and purchase rate of 17.99 per cent pa.

Compare credit cards with no annual fee at InfoChoice.

Why is Afterpay in the news?

Afterpay is successful Australian “fintech start-up” listed on the ASX. Afterpay has grown strongly very quickly and disrupted the credit card market, leading to other buy now, pay later services entering the market as demand for credit cards drops.

Last week the Reserve Bank of Australia announced an investigation into the ban on merchant surcharging imposed by Afterpay and other buy now, pay later apps on shops and other retailers. The Afterpay share price fell 22 per cent after the announcement.

What is the Afterpay share price?

Afterpay shares (ASX:APT) were trading above $36 one week ago and are now below $29 on heavy trading and falling. This chart shows the Afterpay APT share price in October 2019. [charts from ASX.com.au]

Afterpay is regularly described as a darling of the ASX. An Australian fintech success story now expanding globally. Afterpay has tapped into an unmet need in the community – interest free credit for retail purchases. Once this demand was met through lay-buy schemes run by retailers themselves.

Credit cards disrupted the Australian lay-buy culture by giving shoppers the item now, not later. Now Afterpay has disrupted the credit market, by giving shoppers the item they want now, with no interest later.

This chart shows Afterpay’s share price over the last two years, since October 2017, when it was trading about $5, to October 2019’s price above $36.