Buy now pay later usage drops off during COVID-19

Fewer Australians are using buy now pay later services during the pandemic, while credit cards remain to be the most preferred non-cash payment method, new research showed. 

Nearly one in eight shoppers said they used buy now pay later platforms in the six months to June 2020, a ME Bank survey of 1,500 indicated. This is a decline from about one in six consumers in the six months prior.

Most people opted for the more traditional form of credit during the pandemic, as credit card usage remained stable in the past year. Forty-six per cent of Australians used their plastic to make payment in the first half of 2020, the same level as the previous half year.

This is despite a report from Power Retail suggesting earlier this year that buy now pay later consumers had surged by 12 percentage points to 39 per cent in 2019, while credit card users had dipped by six percentage points to 29 per cent. 

The proportion of people buying with lay-by at retail stores dropped off to 5 per cent from 8 per cent, while the level of unsecured personal loans accessed remained unchanged at 4 per cent. Usage of pay day loans halved, with only 1 per cent of those surveyed relying on short-term credit for funds.

Australians tread carefully with credit

The findings come as data from the Reserve Bank of Australia, released today, showed the number of personal credit card accounts has fallen by 9 per cent, or about 1.3 million.

ME general manager of personal banking, Claudio Mazzarella, said Australians are becoming more cautious with how they access credit, thanks to COVID-19 and the economic downturn.

“It doesn’t matter how innovative the lending method is, most Australians are wary of getting into more unsecured debt in the midst of a global and domestic economic crisis,” he said.

“Buy now pay later certainly hasn’t replaced the credit card yet. Credit card usage is holding steady while buy now pay later is dropping.”

Mr Mazzarella said Australians are taking a wait-and-see approach to borrowing during the coronavirus-induced recession.

“Most Australians are financially savvy. They know spending is spending, and debt is debt. Many households have taken a severe financial hit to incomes and been forced to cut back on spending, or they’re prudently waiting to see how this pandemic plays out before borrowing more.”

He noted that shoppers who use buy now pay later tend to be typically “younger and less financially comfortable”.

“They may be wary of credit cards in general or unable to qualify for a credit card,” he said.

According to ME research, the average buy now pay later user is probably:

  • Female.
  • Gen Z (18-24) or Gen Y (25-34).
    A single parent (if they have children).
  • Holding less than $1,000 in savings.
  • A student, part-time employed, home duties or unemployed.
  • Receiving some form of government assistance.
  • Renting.
  • If they own or are paying off a home, the property is valued at $300,000 or less.

Should you use a credit card or buy now pay later?

Different consumers will prefer to use different payment methods, depending on your spending level, lifestyle and intentions. If you’re tossing up between your plastic or newer buy now pay later services, one of the first things to compare is the cost of using either. For credit cards, this would be the purchase or interest rate and any annual fees, and for buy now pay later, this could be potential late payment fees or other charges. Some credit cards can charge an eye-watering 20 per cent purchase rate, so it’s best to find out the details before committing.

Something else to weigh up is a credit card’s interest-free period, versus a buy now pay later platform’s instalment period. While each provider will have a different policy, you may expect to have more time to pay off your purchases with a longer interest-free period or instalment period.

For a more detailed breakdown, check out RateCity’s comparison of credit cards and buy now pay later platforms

How Aussies accessed credit in the past six months

Lending Type June 2020 December 2019 Change (% points)
Credit cards 46% 46% --
Buy now, pay later 13% 16% -3
Lay-by at retail stores 5% 8% -3
Unsecured personal loans 4% 4% --
Pay day loans 1% 2% -1
None of these 40% 38% +2

Source: ME Bank.

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Learn more about credit cards

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.

What is a credit card?

A credit card is a payment method which lets you pay for goods and services without using your own money. It’s essentially a short-term loan which lets you borrow the bank’s money to pay for things which you can pay back – potentially with interest – at a later date. Credit cards can also be used to withdraw money from an ATM, which is known as a cash advance. Because you’re borrowing money from a bank, credit cards charge you interest on the money you use (unless you repay the entire debt during the interest-free period). When you apply for a credit card, the bank gives you a credit limit which sets the maximum amount you can borrow using your card. Credit cards are one of the most popular methods of payments and can be a convenient way of paying for goods and services in store, online and all around the globe.

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.

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.

How to pay a credit card

There are a few ways to pay a credit card bill. These include:

  • BPAY - allows you to safely make credit card payments online.
  • Direct debits - set up an automatic payment from your bank account to pay your credit card bill each month. You can choose how much you want to pay of your credit card bill when you set up the auto payments.
  • In a branch.
  • Via your credit card provider's app.

How to pay a credit card from another bank

Paying or transferring debt from one lender to the other is called a balance transfer. This involves transferring part or all of the debt from a credit card with one lender to a credit card with another. As part of the process, your new lender will pay out the old lender, so that you now owe the same amount of money but to a new institution.

Many credit card providers offer an interest-free period on balance transfers to help new applicants better handle their debt. During this period, cardholders are not required to pay interest on the debt they brought over from the other card. This can be a great opportunity for consumers to pay off credit card debt with no interest. There are often fees associated with balance transfers; normally, these are a percentage of the amount transferred.

So make sure you read the terms and conditions of the card before transferring any debt across.

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.

How do you pay off credit cards?

The best way to pay off a credit card bill is to set a realistic spending budget and stick to it. Each month, you’ll get a credit card statement detailing how much you owe and how long it will take to pay off the balance by making minimum repayments. If you only make the minimum repayments, it will take you years to pay off your outstanding balance and add extra costs in interest charges. To avoid any extra charges, you should pay the entire bill. 

What is a balance transfer credit card?

A balance transfer credit card lets you transfer your debt balance from one credit card to another. A balance transfer credit card generally has a 0 per cent interest rate for a set period of time. When you roll your debt balance over to a new credit card, you’ll be able to take advantage of the interest-free period to pay your credit card debt off faster without accruing additional interest charges. If your application is approved, the provider will pay out your old credit card and transfer your debt balance over to the new card. 

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 is credit card interest charged?

Your credit card will be charged interest when you don’t pay off the balance on your credit card. Your card provider or bank charges you the individual interest rate that is associated with your card, which is usually between 10 and 20 per cent. 

The interest will be added onto your bill each month or billing period if you don’t pay off the balance, unless you are in an interest-free period.

You will be charged interest on anything that hasn’t been paid for inside the interest-free period. Usually you will receive a notice on your bill or statement saying you will be charged interest so you have some form of notice before you’re charged.

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.

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 to calculate credit card interest

Credit card interest can quickly turn a manageable balance into unmovable debt. So being able to understand how interest rates translate into dollars is an important skill to acquire.

The common mistake people make is focusing on the credit card’s annual percentage rate (APR), which often sits between 15 and 20 per cent. While the APR does provide a rough idea of how much interest you’ll pay, it’s not entirely accurate.

This is because you actually accrue interest on your balance daily, not annually. So, you need to work out your daily periodic rate (DPR). To do this, divide your card’s APR by the number of days in a year (e.g. 16.9 per cent divided by 365, or 0.05 per cent). You can then apply this figure to the daily balance on your credit card.