How is Afterpay different to a credit card?

Whether you’re struggling financially, or just running a financial health check for the new financial year, you may be considering whether your credit card is still the best financial tool to make payments, or if you should switch to other methods like Afterpay.

Afterpay has surged in popularity since the company was founded in 2014. Its functionality and accessibility, particularly compared to credit cards, has made it a commonly used financial tool amongst Gen Z and Millennials.

Meanwhile, the number of credit card accounts in Australia have continued to fall throughout 2020, including the total balances accruing interest. Australians have become more serious about paying off their debts and cutting up their cards for good.

Afterpay is different to credit cards in a number of ways, particularly in its fees and costs, rewards and perks, and application process. When it comes to deciding between Afterpay and credit cards, it’s important you explore these differences to see which comes out on top.

Fees and costs: credit cards versus Afterpay

Afterpay Fees and costs:
  • Initial $10 late fee, and further $7 if payment remains unpaid 7 days after due date.
  • Purchases below $40: maximum one $10 late fee applied per order.
  • Purchases $40+: late fees capped at 25% of original order value, or $68, whichever is less.
Credit cards Fees and costs:
  • Purchase rate – 7.49% - 24.99%
  • Cash advance rate – 8.20% - 25.99%
  • Annual fees - $25 - $1,200
  • Foreign transaction fees – 1.50% - 3.65%
  • ATM cash advance fees – $1.50 - $5
  • Late payment fees - $5 - $35
  • Foreign ATM withdrawal fee - $2 - $6
  • Over the credit limit fee - $10 - $40
  • Dishonour fee – Upwards of $2.50

Note: Data accurate as at 4.08.2020.

  • Winner – Afterpay, but there are low-fee, low-rate credit cards available

Afterpay breaks down a purchase into four equal instalments paid fortnightly. You are not charged interest on these repayments but will be charged a late fee for any missed payments.

When comparing fees and interest rates between Afterpay and credit cards, it’s easy to assume that the former is the only option you have to keep costs down. After all, we typically associate credit cards with eye-watering, high interest rates and fees. However, a little research can still find you low-fee, low-rate credit card options.

Purchase rates can run as high as nearly 25 per cent on some credit cards. However, there are a multitude of credit cards with interest rates of 10 per cent or below. In fact, the lowest on the RateCity database sits under 8 per cent.

The biggest fee associated with a credit card is typically its annual fee, which can range from $0 to $1,200, depending on the type of credit card. But there are a range of credit cards that don’t charge annual fees – even some rewards cards.

Keep in mind that there is a chance you may be able to keep costs nearly as low as you would through Afterpay, if you’re the type of person who:

  • always pays their bills on time,
  • never accrues interest on their balance,
  • avoids cards with annual fees, and
  • never makes late payments.

It’s all about how you choose to use your card.

Rewards and perks: credit cards versus Afterpay

Afterpay Rewards and perks:
  • Pulse loyalty program rolling out in 2020 for users who pay on time and spend responsibly. Increased payment flexibility, no upfront payments, exclusive discounts and promotions.
Credit cards Rewards and perks:
  • Rewards programs, including frequent flyer and store rewards
  • Airport Lounge access
  • Concierge
  • Discounted annual fee
  • Free supplementary cards
  • Partner brand discounts
  • Access to special Events   
  • VIP Seating
  • Fraud protection
  • Free domestic or international travel insurance
  • Extended warranty
  • Purchase protection insurance
  • Rental car excess insurance
  • Transit accident insurance
  • Guaranteed pricing scheme
  • Winner = credit cards

Afterpay is a one-size-fits-all style payment platform compared to the variety of credit cards available in Australia. Its purpose is to aid you in paying off your purchases in smaller, planned payment increments. If this is all you are looking for, then Afterpay may be a better suit for your finances. Afterpay is rolling out its loyalty program in 2020, which will offer customers smaller-scale perks and rewards like a credit card. However, if you’re looking for greater flexibility, perks and rewards, you may want to consider a credit card.

Keep in mind that these perks and rewards may come from rewards or premium credit cards that typically carry higher interest rates or annual fees, as these costs help to fund these programs. It’s generally accepted that you’ll pay a little more for the bigger perks, but the perks themselves should ideally outweigh the card costs.

Applications: credit cards versus Afterpay

Afterpay Eligibility criteria:
  • Be over 18
  • Have a debit or credit card to link to

Application process:

  • Download the app or join on website
Credit cards

Eligibility criteria:

  • Credit score. A hard credit check will be performed on a card application, and you generally need to have a good credit score to be approved.
  • Minimum income. Can start at $15,000p.a. and go as high as $100,000p.a.
  • Employment status. Some cards may prefer you be employed full-time and can also favour applicants who have been employed full-time for over 12-months.
  • Residential status. Typically requires you to be a permanent Australian resident or have an applicable visa.
  • Age. Be over 18.

Application process:

  • Apply through website or in branch.
  • Identification. You will need a form of ID, such as your passport or drivers’ licence.
  • Employment and income. Anything from payslips and proof of employment to Centrelink or pension payment details or dividends earned from investment information.
  • Personal finances. Will need to provide information around current assets and existing debts, such as home loans or personal loans etc.
  • Winner = Afterpay for simplicity but credit cards for building credit history.

In terms of simplicity in the application process, Afterpay comes out on top. Card providers ask customers to jump through a lot more hoops to be approved for credit, however this is for good reason.

Cards have become more heavily regulated and therefore stricter about which customers they approve in the last few years. This has been in an effort to reduce the number of Aussies falling into debt through the easy-access of credit cards, particularly ones with higher-than-needed credit limits. Meanwhile, getting approval for Afterpay can be as simple as downloading the app or signing up on the website if you’re over 18 and have a bank account.

Credit card providers will also perform hard credit checks on applicants. If your application is rejected, this can hurt your credit score. A poor credit score may limit your ability to access other financial products in the future.

Keep in mind that credit cards can help you to build a credit history and potentially boost your score if you use it responsibly. Customers who always pay their balance in full each statement period would typically have this positive information reflected on their credit history. Building a good credit history may help with your approval chances for financial products in the future. You’re also more likely to receive more competitive interest rates from lenders and banks, as you are seen as a lower-risk customer.

The verdict: Afterpay versus credit cards

Deciding between using Afterpay or sticking to a credit card is really all up to your own budget and finances.

If you’re the type of person who knows they won’t pay their card balance in full each month and can see themselves growing debt, Afterpay may be a better fit for you. After all, a significant part of its appeal to the younger generations is that it can help you to avoid the hefty credit card debts their parents warned them about.

But if you’re diligent about paying your bills on time and are responsible with your finances, credit cards can be a helpful tool for not only making purchases but earning rewards and perks and growing your credit history.

If you’re still unsure, it’s worth looking into your own spending habits, and figuring out your spending profile. Impulse/occasional spenders may be better off using Afterpay to scratch their shopping itches while avoiding fees and interest cost. But points chasers, like the everyday and big spenders may potentially want to consider sticking with a credit card.

At the end of the day, you want to assess the level of risk any financial product will have on your finances. If you believe you can manage the risks associated with credit cards (interest rates and fees) then cards may still better serve you. If you’re looking to simplify your spending or keep yourself out of trouble, Afterpay may be able to help you do this a little better than a credit card.

 

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Learn more about credit cards

Can a pensioner get a credit card?

It is possible to get a credit card as a pensioner. There are some factors to keep in mind, including:

  • Annual income. Look for credit cards with minimum annual income requirements you can meet. 
  • Annual fees. If high fees are a concern for you, opt for a card with a low or $0 annual fee. 
  • Interest rate. Make sure you won’t have any nasty surprises on your credit card bill. Compare cards with a low interest rates to minimise risk.

How easy is it to get a credit card?

For most Australians, there are no great barriers to applying for and getting approved for a credit card. Here are some points that a lender will consider when assessing your credit card application.

Credit score: A bad credit score is not the be all and end all of your application, but it may stop you being approved for a higher credit limit. If your credit score is less than perfect, apply for the credit limit that you need, rather than the one you want.

Annual income: Most credit cards have minimum annual income requirements. Make sure you’re applying for a card where you meet the minimum.

Age & residency: You need to be at least 18 years old to apply for a credit card in Australia, and most require that you are an Australian citizen or permanent resident. However, there are some credit cards available to temporary residents.

Do you need a credit card to get a loan?

You do not need a credit card to get a loan, but you usually need to have a credit history. Without a credit history, a financial institution cannot assess your ‘credit worthiness’, or your capacity to pay off the loan.

If you don’t have a credit card, your credit history can reflect any record of paying off an asset. Without any credit credit history, you’re limited in the type of loans you can apply for. But you may be able to obtain a secured loan against an asset. For more information on improving your credit score, go here

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.

What should you do if your credit card is compromised?

Credit card fraud is a serious problem. If your credit card is compromised and you’re wondering what to do, here are a few precautionary steps to take.

Contact you credit provider – Get in touch will your credit card provider. If you feel your card has been compromised, you should be able to lock or block it.

Monitor your accounts – Keep an eye on your credit card accounts. Any unauthorised transactions could be a sign your credit card has been compromised.

Check your credit rating – It’s also important to check your credit rating, to ensure you’re not a victim of identity theft or some other financial mischief.

How do you use a credit card?

Credit cards are a quick and convenient way to pay for items in store, online or over the phone. You can use a credit card as a cashless way to pay for goods or services, both locally and overseas. You can also use a credit card to make a cash advance, which gives you the flexibility to withdraw cash from your credit card account. Because a credit card uses the bank’s funds instead of your own, you will be charged interest on the money you spend – unless you pay off the entire debt within the interest-free period. If you pay the minimum monthly repayment, you will be charged interest. There are many different credit card options on the market, all offering different interest rates and reward options.

What's the best credit card for rewards?

There is no one-size-fits-all best rewards credit card. It's best you research what type of rewards program you'd like, as well as the fees, interest rate and conditions associated with those types of cards before making a choice. 

Rewards credit cards can also come with high annual fees that may end up nullifying the rewards, so think how often you use the card to decide whether the benefits outweigh the extra cost for you. A card with a lower annual fee might require a lot of spending to get any useful rewards, while another card with a higher annual fee might need fewer purchases to get a reward. 

How do you apply for a credit card?

You can apply for a credit card online, over the phone or in person at the bank. Once you’ve compared the current credit card offers, the application process is quick and easy. Before you get your application started, you’ll need to gather your personal information like proof of ID, payslips and bank statements, proof of employment and details of your income, assets and liabilities. To be eligible for a credit card, you’ll need to be an Australian citizen over 18 and earn a minimum of $15,000 each year. Once you’ve applied for a credit card, you should get a response fairly instantly. If your credit card application has been approved, you should receive a welcome pack with your new credit card within 10-15 days.

How to make a credit card online

If you’re wondering about how to make a credit card online application, here are some steps to follow:

  • Test the market. Many credit card options are available online. Compare providers by fees, interest and perks to ensure you’re getting the best deal.
  • Complete the application. Once you’ve selected a card, head to the provider’s website and complete the online credit card application form. Forms vary by providers.
  • Provide details. Most cards require you to meet age, residency, income and credit status condition, and you need to provide details like a bank account statement to prove this.
  • Review details. Ensure the information you’ve entered is correct.

Should I get a credit card?

Once you've compared credit card interest rates and deals and found the right card for you, the actual process of getting a credit card is quite straightforward. You can apply for a credit card online, over the phone or in person at a bank branch. 

How to get a credit card for the first time

A credit card can be a useful financial tool, provided you understand the risks and can meet repayment obligations.

If you’re a credit card first-timer, review your options. Think about what kind of credit card would suit your lifestyle, and compare providers by fees, perks and repayments.

Once you’ve selected a card, it’s time to apply. Credit card applications can generally be completed in store, online or over the phone.

When you apply for a credit card for the first time, you must meet age, residency and income requirements. As proof, you must also provide documentation such as bank account statements.

What should you do when you lose your credit card?

Losing your credit card is a serious situation, and could land you in financial trouble. Here is a simple guide detailing what to do when you lose your credit card.

Lock you card – Contact your provider and inform them about your lost credit card. From here lock, block or cancel your card.

Keep track of transactions – Look out for unauthorised credit card transactions. Most banks protect against fraudulent transactions.

Address recurring charges – If your card is linked to recurring charges (gym membership, rent, utilities), contact those businesses.

Check credit rate – To ensure you’re not the victim of identity theft, check your credit rating a month or two after you lose your credit card.

Where can I get a credit card?

Looking to get your first credit card? You might be confused as to exactly where to go to apply for one. Here’s where to go when you are ready to put in that application.

The bank: Your bank is a great place to start, provided that you have a good banking history. Since you already have a financial history, you have more chance of your application being approved.

Credit card provider: Another option is to apply for a credit card directly from the issuer, such as Visa, Mastercard or Amex. This will most likely be an online application, so do your research and apply for a suitable card for your circumstances.

Major retailers: Coles, Woolworths, Myer and David Jones all have credit cards available. But watch out for the interest rate and annual fees – these cards are designed to help you spend more in store.

How do credit cards work?

Think of credit cards as a short-term loan where you use the bank’s money to buy something up front and then pay for it later. Unlike a debit card which uses your own money to pay, a credit card essentially borrows the bank’s money to fund the purchase. When you apply for a credit card, the bank assesses your income and assigns you a credit limit based on what you can afford to pay back. At the end of each billing cycle, which is usually monthly, the bank will send you a statement showing the minimum amount you have to pay back, including any interest payable on the balance.