Is funding a Buy Now Pay Later account with a credit card a good idea?

• Credit cards are one of the repayment methods offered by BNPL services like Afterpay and ZipPay.
• Find out how BNPL repayments work, and how much they could potentially cost.
• Understand the pros and cons of using your credit card for BNPL repayments.

The ‘Buy Now Pay Later’ (BNPL) concept is so attractive that human beings invented it at least 4,000 years ago, when they left behind the first records of credit transactions in the agricultural economy. 

The idea was further developed in 12th century England with the advent of property mortgages, with more 19th and 20th century refinements in the shape of the first hire purchase agreements (also known as ‘instalment plans’) followed by the development of credit cards. In the 21st century we are all well and truly hooked on the idea of getting our hands on things we can’t afford right now, instead of waiting to make the purchase until we can pay 100% of the cost upfront.

And, in a world where the pace of change is always accelerating, the latest disruption comes in the form of the BNPL services of companies like Afterpay and ZipPay.

How BNPL services like Afterpay and Zip Pay work

Afterpay has attracted more than 1.5 million customers since its 2018 launch, and there can be no doubt that Zip Pay has similar aspirations. The demand has been so strong that a large number of retailers now accept one or both of these payment methods.

There are lots of BNPL features that consumers are obviously finding attractive, such as the easy and virtually instant sign-up process with little or no creditworthiness checking, the absence of interest charges, and, in the case of Afterpay, a clear repayment plan that is cost-free provided you stick to it faithfully.

The basic procedure is that the purchaser signs up to the BNPL service online or in-store (unless they are already a member) and links their BNPL account to a bank account, debit card or credit card. The BNPL service advances to the retailer the entire sum required to complete the purchase (the retailer pays a fee for this transaction) and repayment instalments are deducted from the purchaser’s bank, debit or credit card account. No interest is charged to the purchaser, but Afterpay charges hefty late payment fees, while Zip Pay has a smaller late payment fee but levies a monthly account-keeping fee until the entire balance is repaid.

‘Interest free’ perhaps, but not ‘free’ unless you’re very careful

Although you won’t pay any interest charges to either Afterpay or Zip Pay, you will need to be quite vigilant if you want to avoid paying late payment or account-keeping fees. Certainly, the fees are avoidable, but you need to be financially savvy in order to dodge them.

Afterpay requires repayments in four equal fortnightly instalments. Miss a payment due date and you’ll be charged $10. Still haven’t paid seven days later? You’ll be charged a further $7. Late fees are capped at $10 for purchases under $40, and at 25% of the purchase amount for purchases over $40, with an absolute cap of $68 (4 x $17) regardless of the purchase amount. You may not be paying interest, but if you miss one $8 payment due date on a $32 purchase, the $10 late payment fee equates to paying interest at over 200% p.a. Paying $25 in fees on a $100 purchase is still the equivalent of over 160% p.a. in interest.

Zip Pay does not specify repayment dates and amounts, beyond insisting that you repay at least $40 per month. Miss that and you’ll pay a $5 fee. Fail to pay off the full amount by the end of the month following the month in which you made the purchase, and you’ll pay a $6 monthly account-keeping fee. This means that for a $100 purchase, even if you pay on time in three monthly instalments ($40 + $40 + $20), you would pay fees totalling $12, an effective interest rate of more than 50% p.a.

These are, of course, worst-case scenarios, since the effective interest rates will decline as the purchase amount increases. Afterpay fees can be avoided altogether by the simple precaution of setting up automated repayments, and Zip Pay fees can be avoided by not prolonging repayments beyond the end of the month following the month in which the purchase occurred.

In 2018 Afterpay earned about one quarter of its revenue from late payment fees, so it appears that its business model depends on its customers being careless about the timing of their strictly-scheduled repayments. Zip Pay, on the other hand thrives on letting customers stretch out their repayments, incurring account-keeping fees as a result.

Pros and cons for linking a credit card to a BNPL service

If you already have a credit card, or are thinking of getting one, it can seem like a no-brainer to use the credit card as the source of BNPL repayments. But under certain circumstances, it could be a bad idea. There are certainly valid arguments for both sides.

Pros

• Extended credit: Depending on the timing of the BNPL repayments in your credit card’s billing cycle, you could extend your interest-free credit period even further. (E.g., if Afterpay’s fortnightly repayment falls at the beginning of the billing cycle of a card with up to 55 interest-free days, you could potentially increase the 14 days free credit you are already receiving to as much as 69 days.)
• Rewards points potential: If you have a rewards or frequent flyer credit card, your BNPL repayments will earn points.
• Automated payments: You can set up automatic deductions from your credit card to cover your BNPL debt, so that you don’t need to remember to make the repayments on the due date in order to avoid late fees.

Cons

• Passing the buck: You’re basically just using one form of debt to pay off another form of debt. The debt isn’t being cleared, just postponed, and if you don’t repay your credit card balance in full when due, you will be charged interest.
• Increases spending temptation: Both BNPL and credit cards can encourage impulse buying. Put them together and there’s a chance that you may be even more tempted to buy things you don’t need and can’t actually afford, once again incurring credit card interest that could have been avoided.
• Encourages long-term debt: Among the benefits of BNPL credit are the fact that the repayment period is fixed (Afterpay) or the minimum monthly repayment is quite high (Zip Pay). But once you transfer your repayments to a credit card, this enforced discipline is gone. You may be tempted to make only 2% monthly minimum repayments (or this may in fact be all you can actually afford), leading to a debt that could take decades to repay.
• Credit limit restriction: Your BNPL repayments will add to your card balance, and possibly max out your credit limit. Repayment debits may be declined by your credit card as a result, meaning you’ll incur late fees.

BNPLs put only negative information in your credit history file

There’s not a lot of positive interaction between BNPL and credit reporting. Afterpay does not even enquire into users’ credit history when they sign up, although Zip Pay says it does. In Afterpay’s case this means that they do not really know whether the purchaser can afford the repayments they are committing to.

But the main difference between BNPL and credit cards is in the effect they have on your credit history and credit score. Following recent legislation, some types of financial institutions are now obliged to report positive as well as negative credit information about their customers. This means that if you conduct your credit card account well, making repayments on or before the due dates (even if you don’t repay the full amount owing), this positive information will be recorded in your credit history and will help to improve your credit score. Missing repayments, on the other hand, or defaulting on your debt, will also go into your credit history and will have a downward impact on your credit score.

BNPLs are not covered by the positive reporting obligations, so your good management of an Afterpay or Zip Pay debt will not appear in the file held on you by Australian credit bureaux. However, BNPLs will report negative information such as debt defaults – debts of $150 or more that are more than 60 days overdue. The default notice will stay on your credit history for five years, even after you’ve repaid the debt. So your credit score can only be impacted negatively by using Afterpay and Zip Pay. Credit cards can impact your history and score both positively and negatively.

The bottom line

When it comes down to it, how much benefit do you really get from combining a credit card and a BNPL service, as opposed to just using a credit card on its own? We compared using a credit card with purchasing via a BNPL service in our article Afterpay or credit cards?, but the idea of linking a BNPL service to your credit card introduces further variables for consideration.

If you’re good at looking after your finances, only buying what you can afford so that you can always pay off your credit card balance at the end of the month, the only advantage of introducing a BNPL into the mix would be the possibility of getting a few extra interest-free days, and even that is not a certainty. Afterpay, for example, gives you 14 interest-free days on 100% of your purchase amount, 28 interest-free days on 75% and 42 interest-free days on 50%, while the 56 interest-free days (eight weeks) apply only to the final 25% of your purchase amount. Choose a credit card granting up to 55 interest free days on 100% of your purchase amount, don’t bother with BNPL, and you’ll probably come out ahead.

For holders of rewards points credit cards, linking to Afterpay or Zip Pay won’t earn you any more rewards points than making an outright purchase with your card. Meanwhile, you will have introduced another debt that you need to keep on top of, with the possibility of incurring late payment fees if you let your vigilance slip.

And if you’re not good with money and repayments, linking a BNPL service to your credit card could be the start of a slippery slope to long-term debt. Afterpay and Zip Pay will get their money on time, because the repayments will be charged to your card. But there’s no guarantee that you will clear the debt once it’s on your credit card, with the alluring possibility of paying it off in 2% monthly instalments – year after year after year. If you want to use BNPL, link it with your debit card or bank account so that you are subjected to the enforced discipline of regular and substantial repayments made with money you actually have.