Afterpay vs Credit Card

American Express or Afterpay? Zero interest or Zip? Both credit cards and buy now pay later services give you a way to shop for what you want, then pay off your purchases over time. But there are a lot of differences between these two options.

For starters, most credit cards charge interest when you have a balance (unless you have a no interest monthly fee card). And most buy now pay later services have fixed payment instalments, with late fees if you can't make them on time. These examples are really just the tip of the iceberg, so let's take a closer look at how credit cards and buy now pay later stack up.

Compare payment options

How do you sign up?

With most buy now pay later plans, you can set up your account online in a few minutes. Some plans are also available when you're shopping in a store. Usually, you need to be at least 18 years old, have an Australian bank account or debit/credit card and contact details.

A lot of these plans – including Afterpay – don't require credit checks, unlike credit cards.

With credit cards, you need to fill in an online application that asks for a lot more details than most buy now pay later plans. This is because all credit card applications require a credit check (where the bank or provider looks at your credit history). As well as needing to be 18 years of age, common credit card requirements include:

• Being an Australian citizen or permanent resident
• Earning a regular income
• Providing details of income, assets, debts and regular expenses (this helps show you'll be able to meet payment requirements)

How much does it cost?

Most buy now pay later plans don't cost anything when you sign up and are free to use if you make payments on time over a short period of time (i.e. within 2 months). Some buy now pay later plans do charge a small monthly fee of around $4-$8, but popular options including Afterpay don't.

Most plans also charge late payment fees if your payments aren't made on time. These usually cost between $4.99 and $20 if you miss one payment, but could be higher if you leave the account unpaid.

Traditional credit cards have annual fees that range from $0 to $400 or more. Interest rates are the other major cost to watch out for, with ongoing rates that range from 8.99% p.a. to 24.99% p.a. You can also get cards that offer introductory 0% interest periods.

If you get a no interest monthly fee card, you won't pay any interest on purchases. But when you use the card, you'll pay a monthly fee that is typically between $10 and $22, depending on your credit limit.

Credit cards typically offer more consistent details of costs because the interest rate stays the same no matter what you buy or when you pay (meaning you can calculate charges and repayments). They also have to provide a key facts sheet with details of all the main rates and fees. Considering these differences between buy now pay later and credit cards, we'll call this one a tie.

Where can you use them?

You can only use buy now pay later with businesses that offer it. While some, including Afterpay and Klarna, are available with lots of major retailers, they are still less widely accepted than cards. What's more, if you shop at lots of different places, you could end up juggling a handful of buy now pay later accounts.

With credit cards, you can use them at any business that accepts payment by card, including with overseas retailers. In Australia, most places accept Visa and Mastercard and a lot of places also accept American Express.

How much can you spend?

This varies a lot between buy now pay later plans. Some will give you a spending range or let you apply for a set amount, such as Klarna and Zip, which both offer up to $1,000. Others offer an estimated amount you can spend, such as Afterpay. If you're making smaller purchases or know exactly how much you're going to spend, this type of limit is probably fine. If not, it could become trickier to use buy now pay later.

With credit cards, you are issued a credit limit when you open the account. Minimum limits for traditional credit cards range from $500 to $20,000 and are based on the bank or provider's assessment of your application. If you get a no interest monthly fee credit card, your limit will be between $1,000 and $3,000 – once again, this is subject to assessment and approval. As credit cards are regulated products, it's a requirement that providers only assign you with a maximum limit that you could reasonably afford to pay off (with interest) over a 3-year period.

How do repayments work?

Buy now pay later plans typically offer instalment repayments, where you pay the same amount over a few weeks or months – for example, 4 equal repayments over 8 weeks.

Some buy now pay later services offer a set interest-free period before fees and charges apply. For example, Zip offers up to 60 days interest-free, then a $6 monthly fee, and Humm offers a $0 monthly fee for purchases under $2,000 if you pay them off over 2.5 months or less, with a fee of $8 per month for longer terms and larger purchases.

If you make all your payments on time, you'll avoid the late payment fees charged by most plans.

With credit cards, you need to make a minimum repayment each month. This is often 2-3% of your balance but could be a fixed amount if you have a no interest monthly fee card or if you've set up an instalment plan. With those options, your repayments could be anywhere from $35 to $110 or more, depending on the card, your credit limit and the balance you're paying off. You also have the option of paying more some months, or making repayments more often (every payday, for example).

If you only pay the minimum amount on a credit card, it could take years to pay off your purchases.

Most credit cards offer up to 44 or 55 days interest-free in each statement period (the time from when your last statement was issued to when your next payment is due). Usually, you need to pay off your balance in full by the due date to take advantage of interest-free days.

As a point of comparison, with Afterpay, you technically get 56 days to pay off your purchase (4 payments over 8 weeks). So there are scenarios where either option would give you a similar outcome.

Watch: Afterpay vs Credit cards: Which is better?

Other key differences between BNPL plans and credit cards

These details might not be your first priority, but they are worth weighing up when you're trying to decide if a credit card or buy now pay later is the better option.

🔎 Credit check

When you apply for a credit card, the bank or provider will check your credit history. This check is listed on your credit report whether you're approved or not. That's why it's not ideal to apply for too many credit cards in a short amount of time.

In comparison, there is no credit check when you sign up for Afterpay. Other buy now pay later plans do run credit checks or say that they "may" in some cases – so it's worth finding out before you sign up for one. Keep in mind that a credit check isn't necessarily good or bad – but having a lot of checks and not much else usually won't be seen in a positive light.

🗂 Building credit history

If you want to buy a home in the future or think you'll want a loan for something else, your credit history will affect your chance of approval.

Most buy now pay later plans don't add to your credit history or your credit score at all, which means they do nothing for your future borrowing power. All credit cards add to your credit history and credit score. So if you get a credit card and meet the repayment requirements, these details will be recorded on your credit report and can help improve your credit score – as well as your potential to get other loans and accounts in the future.

The flipside is that if you don't meet the card's repayment requirements, it could hurt your credit score. This won't happen with, say, Afterpay (although you may need to include details of buy now pay later in the financial section of a loan anyway).

If you want to know where you stand right now, get a free copy of your credit report and credit score through Finder.

✈️ Rewards

If you want to get something back for your spending, keep in mind that most buy now pay later plans don't offer their own rewards programs. An exception is Klarna, which has a rewards club that offers 1 vibe point per $1 spent, which you can redeem for Flybuys points, gift cards or other rewards. But at the moment, the main way you could get points or other perks when you use BNPL is to stick with stores that have their own loyalty programs (such as Myer or David Jones).

Credit cards offer much more variety (and competition), with cards that earn points for travel and shopping, as well as cashback or gift cards.

🛍 Purchase value and number of accounts

There are around 13.3 million credit cards in Australia, with Finder analysis showing that there was a total purchase spend of $296.7 billion in 2020.

According to the Reserve Bank of Australia, publicly available data for buy now pay later services showed that there were around 6.14 million "active" accounts and $11.26 billion of transactions made in 2020.

🔏 Regulation

Regulation helps protect you from unfair and unreasonable costs or situations, giving you a clear way to make complaints and get support if something goes wrong. Overall, buy now pay later has less industry or government regulation than credit cards. The BNPL code of practice only came into effect on 1 March 2021, and it is currently self-regulated.

In comparison, you get the protection of Australian consumer credit laws when you have a credit card.

Verdict: is it better to use buy now pay later or a credit card?

Let's be real: there isn't a one-size-fits-all solution to this comparison. It really comes down to how you're shopping and making payments. So, here are some situations where one could work better than the other.

It's easier to sign up to most buy now pay later plans than it is to get a new credit card – and there are usually fewer costs. But credit cards give you more spending and repayment options – including some that are pretty similar to buy now pay later plans.