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How is Afterpay different to a credit card?

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

AfterpayFees 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 cardsFees 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

AfterpayRewards 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 cardsRewards 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

AfterpayEligibility 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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This article was reviewed by Finance Writer Alison Cheung before it was published as part of RateCity's Fact Check process.



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