Historically, Aussies have only had two main payment options: credit, or cash.
However, buy now, pay later platforms have now infiltrated the market, which means Aussies no longer have to jump through hoops to be approved for credit-like spending accounts.
In turn, that means Afterpay doesn’t really need to know if you can pay them back or not.
Financial advisor James Gerrard told Yahoo Finance that while most credit lenders have to do credit checks of their customers under the National Credit Act, Afterpay found a loophole: it requires repayments in just 60 (rather than 62) days.
And, according to financial adviser and host of the My Millennial Money podcast, Glen James, it encourages some pretty bad spending behaviour.
But, it also means payments can be made interest-free, which can mean its more affordable and easier to maintain for Aussies.
So what’s the verdict: Afterpay, or credit cards?
“I don’t think you need any, but if I had to choose between the two, it’s Afterpay,” James told Yahoo Finance.
Afterpay wins, for three reasons James said.
Afterpay is a rort for businesses, not the consumer
“The credit card was set up to make money off the consumer,” James said. “Where Afterpay was structurally set up to make money off the businesses and the vendors.”
According to James, where retailers pay a fee of 0.6 or 0.8 per cent to allow credit cards to be used at their outlets, in some instances, Afterpay charges retailers up to 6 per cent.
And where credit cards make a profit off the consumer with interest payments and annual fees, Afterpay doesn’t charge interest.
Instead, where a customer defaults on a payment, Afterpay will charge consumers a $10 fee and then a $7 fee if you fail to make payment within seven days. For orders $40 and above, you can be charged a late fee of 25 per cent of the original order, or a maximum of $68.
Credit cards affect your credit score
Credit cards will show up in your credit history, which in turn affects you when you apply for a home loan with a bank.
“At this moment, buy-now-pay-later doesn’t put a credit inquiry on your credit file,” James said.
But that doesn’t mean it’s not considered at all - in fact, Afterpay does reserve the right to contact credit reporting agencies if you default on payments.
“It is under the radar, however lenders will factor it into a lending profile - but that’s more at the lender’s discretion, as opposed to credit cards being a ‘yes or no’ type thing.”
Afterpay will cut you off
If your payment method is a debit card, Afterpay will ‘loan’ you up to $500. If it’s a credit card, that amount jumps to $1,000.
In a sense, you’re cut off from spending any more.
On top of that, according to Mozo, some customers have been rejected from using the platform, seemingly for defaulting often.
They found the more customers used the platform and worked up a good repayment history, the more likely it was that they would be approved, linking a bad repayment history with a rejection.
What about the inquiry into Afterpay?
There’s been speculation that the Reserve Bank of Australia will investigate whether any new laws or rules need to be implemented on buy now, pay later business that don’t allow merchants to pass on surcharges, like Afterpay.
Afterpay brushed off concerns, advising that it wasn’t currently subject to an RBA inquiry or review process, and defended its business model.
The company released a statement saying it believed its “business model provides a highly customer centric service that is based on trust, loyalty and responsible spending habits. This approach is developing a high-quality and frequently returning customer base, with low outstanding balances and industry leading loss rates.
“Contrary to traditional credit models, Afterpay is a free service for customers who pay on time. Afterpay generates the majority of its revenue from merchants who choose to provide Afterpay as a service, rather than merely a form of payment.”
But James said unless the regulators step in and put Afterpay in the same consumer credit category as credit cards, we could start to see installments change.
“It’s already started to happen with Latitude’s [a lender] products. Instead of four easy payments, Latitudes is now 10 easy payments. It will go out to 52 easy payments, so they’re basically just being lenders outside of the consumer credit world.”
Make your money work with Yahoo Finance’s daily newsletter. Sign up here and stay on top of the latest money, news and tech news.