Warning issued for buy now, pay later' services

Warning issued for buy now, pay later' services

Afterpay is fast becoming one of the most popular ways for shoppers to buy now and pay later, but new research from RateCity warns the payment method can leave a nasty sting in the tail if you don’t make your repayments. 

Consumers who used Afterpay to buy Christmas presents or in the Boxing Day sales will now be starting to make their first payments. 

There are three main ways Afterpay can leave a nasty sting in the tail: 

  • Afterpay fees: up to $68 per item.
  • Overdraft bank fees: up to $30 every time your balance falls below zero.
  • Credit card interest of up to 24.99%. 

RateCity money editor Sally Tindall said despite Afterpay’s popularity shoppers need to be cautious. 

“Afterpay is it encourages impulse buying. It gives you instant gratification, even when you don’t have enough money in your bank account,” she said. 

How Afterpay works 

Afterpay lets you buy an item in store or online and pay it back in four installments over eight weeks, automatically deducted from your nominated transaction account or credit card. 

Already ,1.1 million Australians have signed up to the service with this number set to increase significantly as the popularity of the service builds. 

One of the key selling points for Afterpay is that there’s no additional costs if you pay on time, however there are late payment fees if you don’t make the repayments. 

Afterpay fees: 

If a payment bounces, you’re immediately charged a $10 fee, followed by a $7 late payment fee if you haven’t paid the installment within seven days. 

If you miss all four repayments it will cost $68 in fees however Afterpay documents show the number of people who miss all four repayments is very low. 

Overdraft bank fees and credit card interest 

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Eighty-five per cent of people use their debit card to make Afterpay instalments. The key is to make sure you have enough money in your account to cover the repayments. 

Afterpay will send you reminders via text message to make sure you have enough money in your account, so make sure you check your bank balance as soon as you receive a reminder. 

If your balance falls below zero, the majority of debit card providers will let you go into overdraft on your account. The good news is you will still make your Afterpay instalment and avoid their fees outlined above. The bad news is 65 per cent of transaction accounts slug you with a fee of up to $30 every time you do. 

Using your credit card for Afterpay 

Fifteen per cent of people use their credit card to cover Afterpay instalments. Putting your Afterpay repayments on credit can buy you some more time. It is, however, financially dangerous because you could end up paying up to 24.99 per cent interest on something that was meant to be interest free. 

People who put their Afterpay purchases on their credit card must remember to pay their card off in full every month, otherwise they’ll be hit with interest charges as soon as the repayments are taken out. 

TIPS FOR USING AFTERPAY 

  1. Before signing up to Afterpay, understand how it works and think about the consequences if you don’t have funds in your nominated account to clear it.
  2. Find out from your bank to see if they will let you go into overdraft or in the case of your credit card, over the limit and what the penalties are for doing so.
  3. Before making an Afterpay purchase, think carefully about how you will save enough money to make all four repayments.
  4. Don’t impulse buy – delay any large purchases for at least 24 hours. If you still think it’s worth buying the next day then work out a way to pay for it.

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Learn more about credit cards

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 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.

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 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 cancel a credit card?

It’s important to cancel your old cards to avoid any additional fees. Unless you’re doing a balance transfer, you’ll need to pay the outstanding balance before you cancel your credit card. If you’ve opted for a card with reward points, make sure you redeem or transfer the points before you close your account. To avoid any bounced payments and save yourself an admin headache, redirect all your direct debits to a new card or account. Once you’ve done all the preparation, call your bank or credit card provider to get the cancellation underway. Once you receive a confirmation letter, destroy your card and make sure the numbers aren’t legible.

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.

How does credit card interest work?

Generally, when we talk about credit card interest, we mean the purchase interest rate, which is the interest charged on purchases you make with your credit card.

If you don’t pay your full balance each month (or even if you pay the minimum amount), you are charged interest on all the outstanding transactions and the remaining balance. However, interest is also charged on cash advances, balance transfers, special rate offers and, in some cases, even the fees charged by the company.

The interest rate can vary, depending on the credit card. Some have an interest-free period, otherwise you start paying interest from the day you make a purchase or from the day your monthly statement is issued. So avoid interest by paying the full amount promptly.

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.

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 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.

How to get a free credit card

There's no such thing as a free lunch. All credit cards come with associated costs when used to make purchases, even if it’s simply the cost of making repayments.

However, many lenders offer incentives for customers such as a $0 annual fee or 0 per cent interest on purchases during an introductory period. Additionally, paying off your balance in full during an interest-free period means you could only have to pay back the cost of purchases without interest. You could also be eligible for additional rewards such as cashback during that time, saving you more money.

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. 

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.