Time to read : 3 Minutes
The idea of being in debt sounds worrying but the reality is many Australians need to use some form of credit so they have flexibility with their cash flow.
Buy now pay later (BNPL) has been growing in Australia, while credit cards are falling out of fashion with Gen Z. Then there's the humble, trusty debit card.
Is there a best option? Let's put them to the test.
Credit Cards: The pros
Credit cards are generally accepted everywhere, are easy to use and allow you access to larger sums of money that can help with big purchases, such as white goods.
Credit cards tend to offer more flexibility around repayments than BNPL.
Credit cards can help improve your credit score if you keep up to date with your payments.
Many cards offer rewards, including frequent flyer points and even travel insurance.
Savvy shoppers use balance transfers to 'flip' the debt on one card to a new piece of plastic that comes with a period of interest free repayments.
Many credit cards come with interest free periods.
Credit Cards: The cons
Like all credit, if you fall behind on payments there is a cost to be paid.
Introductory offers sometimes are too good to be true, especially if the interest rate jumps once your low or 0% offer expires.
You'll need to keep on top of when any offer or balance transfer periods expire - don't rely on the card provider to tell you.
You'll need to stay on top of your repayments. Interest charges soon rack up.
Not all reward programmes are equal, especially if you're paying a hefty fee for a perk you'll never use.
One word: fraud. While consumer law provides some protection, it's still a long and stressful process if your details are stolen.
Overspending can also be a little too easy, especially if you've got a high credit limit.
It's very easy to set and forget when it comes to saving your card details. Especially if it's on an app that your kids also use and can make purchases from...
The average repayment rate is 19.75%, which means if you have a $1000 worth of debt you’ll have an extra $197 to pay if you don’t clear your debt.
Buy Now Pay Later: The pros
There's a reason BNPL is so popular. You can spread the cost of purchases over a period of time, usually four weeks, which can help with cash flow.
BNPL accounts like Afterpay, Klarna and Zip are quick and easy to set up and are widely accepted with most online and offline retailers, and even places like the dentist.
There are usually no interest or fees to consider, providing you don’t fall behind on your payments.
Unlike credit cards, payments are automatically deducted from your bank account.
Buy Now Pay Later: The cons
BNPL is marketed as an easy way to afford smaller purchases but those purchases can still add up and, like credit cards, it's easy to let the spiral out of control quite quickly.
Charges for missing a BNPL payment can be pretty hefty and most companies don't offer any flexibility for repayments.
Opening a BNPL account is easy. So is getting in over your head as multiple small purchases across multiple lenders can punch a very big hole in your pay packet.
The onus is on you to keep track of in BNPL payments and it's easy to overspend.
The BNPL sector isn't currently regulated or covered by the National Consumer Credit Code, so they don’t have to check if you can afford the payments.
Lenders will take your BNPL credit limit into consideration when you apply for other credit, including home loans.
Debit Cards: The pros
Debit cards are linked to your bank account, which makes it a lot harder to build up debt if you don't have an overdraft facility.
Many lenders now let you see when you're getting close to zero in your account through their app, so it's a bit easier to check if you have the cash.
There's usually no annual fees.
It's very easy to open an account and get a card.
Some banks will refund you international transaction and ATM fees.
You can only spend the money you actually have.
Debit Cards: The cons
Strange as it may sound, debit cards won't improve your credit score. There's a few other drawbacks.
Overdraft fees, if you don't have an agreement in place with your bank.
Big purchases, such as white goods or a new TV, require you to have the money in your account. Which can be a problem if your washing machine breaks and you've no money spare.
A lot of banks will charge international transaction fees if you use your card abroad or on international websites.
Fraud. Credit cards fraud can take your card up to its limit but a fraudster who gets access to your bank details can quickly drain your account.
Contactless payments means a dishonest person can quickly rack up several small purchases with your card.
The bottom line
There's no one best solution as everybody's needs and finances are different when it comes to debt.
Each option can help with cash flow when used sensibly.
Credit cards and especially BNPL place a lot of emphasis on the account holder keeping on top of their repayments.
If you're worried about the amount you currently have owing on your credit card or BNPL account, speak to a financial professional or a debt counsellor.
Get informed
Financial Disclaimer:
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions.
