January 2022 data reveals that more than 13 million Australians are credit card holders, netting a national debt accruing interest of $18.5 billion (finder.com.au). 

But this figure is not the peak – before COVID-19, the number stood at 15 million. 

Aside from the impact of the pandemic, the rise of alternative payment options such as Buy Now Pay Later (BNPL) Services is posing a big challenge for the credit card industry. 

So, what is BNPL? 

Similar to credit card financing, a BNPL service will allow you to purchase products and services without paying the total upfront cost. You can repay via instalments weekly or monthly. 

According to the “Future of credit cards” report by Finder.com, the eruption of BNPL services has changed the credit landscape. 

“On average, consumers used BNPL twice per month, with millennials and generation Z much more likely to use than their parents,” the report cited. 

Estimates from investment bank UBS reveals that the BNPL sector now accounts for around $7 billion of retail expenditures in the country (excluding food), with forecast suggesting the figure will double in the next two years. 

And it seems women like BNPL compared to men. Based on the report ‘BNPL 2019: More Shoppers, More Players and More Options’ from Power Retail, 42% of women said they had used BNPL compared to 32% of men. 

How does BNPL work?

Zip Pay and Afterpay are Australia’s biggest BNPL service providers because of the sheer number of merchants accepting them. However, there are other options such as Humm, Klarna, LatitudePay, Openpay, and Brighte. 

While the concept of BNPL revolves around instalments, the processes are slightly different for each service provider. 

For example, in Afterpay, you just need to download the app and signup for an account. When you are shopping in-store, all you need to do is scan the barcode at the checkout and complete your purchase. 

You need to repay the total amount for every purchase you make using Afterpay. There is usually no interest to pay, but you have to pay a late fee if you miss repayments. 

On the other hand, the BNPL process for Zip is a bit different. Once you sign up for an account, you will be assigned a spending limit. For each purchase, Zip will deduct the amount from your limit. 

At the start of the month, Zip will send you a statement of account. You may choose to pay it all back or pay in instalment. There’s no interest in paying in Zip, but you will be charged a monthly fee from your balance. 

What’s the advantage of BNPL over traditional credit cards?

The most significant advantage of BNPL over the plastic is that you will not be charged interest on your purchases (at least for now). Late payment fees are the highest cost you will incur. 

Another advantage is the ease of application. BNPL services are innovative in smoothing out the process. You can register for an account and become eligible for the service by just downloading an app. And some BNPL services do not require any form of credit check. 

What’s the advantage of credit cards over BNPL?

BNPL services don’t have the perks and rewards that credit cards can offer. 

“Reports of the death of credit cards are premature,” personal Finance Expert Taylor Blackburn said in the Finder report. “While younger people are keen on BNPL services now, when travel reopens, the allure of reward points, free lounge passes, travel insurance and being able to actually pay for things overseas will put the shine back on credit cards.”

But on top of shiny rewards, using a credit card responsibly can help you build your credit history. 

If you pay your credit card balance in full every statement period, this could help you build a good credit score. And this simple method can help you avoid paying interest charges, similar to BNPL services. 

Should you ditch the plastic? 

While BNPL is an exciting and innovative way to buy items on flexible terms, it’s too early for a complete takeover. 

You can use BNPL as an additional or alternative payment option. But if you want to build an excellent credit history or take advantage of rewards and perks, it can still be worthwhile to keep your credit cards. 

And because of the changing business landscape, credit card companies are now enhancing their offerings to attract holders to stay. Some companies are now offering lower interest payments, waived annual fees, freebies, etc. 

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