How do BNPL and Credit Cards work?

debt finances money tips spending Sep 05, 2023

By David Berry, COE Way Forward Dept Solutions

In a world of digital money, debt is easier to access than ever before. There are now hundreds of providers and options for credit including credit cards and Buy Now Pay Later (BNPL). 

But are you aware of how credit cards and Buy Now Pay Later (BNPL) really work? 

Credit cards have been around for decades and the pitfalls of living off credit are well and truly tested.  

But even so, they are still one of the most readily used ways to spend money. It’s shocking to consider there has also been growth in credit card spending with APRA (Australian Prudential Regulatory Authority) statistics showing the from June 2023, total debt from personal credit cards in Australia sits at over $29 billion. The number of credit card accounts is also on the increase, with close to 200,000 more accounts now than a year ago. 

Buy Now Pay Later (BNPL) is a much newer product. If you’re using this to survive, it can lead to a problematic debt spiral. Using BNPL to buy essentials like groceries, petrol or basics means that you likely don’t have enough money to survive, or you have too many debts to service.   

80 percent of the people that Way Forward supports, those who are people experiencing long-term financial hardship and are on a debt repayment plan, have used at least one BNPL account in the last 12 months.  

This shows us that people who are in hardship, rely on BNPL to survive. Using debt to get by is never a great place to be.  

Being in a financial position where you don’t need to use either BNPL or credit cards is ideal. Having this knowledge is a great first step in making informed choices on spending money. 

Buy Now Pay Later: Shopping Now, Paying Later  

It can be easy (too easy!) to start using BNPL if you’ve decided you want something or need to access money quickly. Often people start using it when they’re drowning in debt repayments and have run out of cash to buy those things they need – like food or other essentials. The other reasons people use it is to buy something they want but like the idea of smaller installments to be able to make it happen. 

Whilst BNPL does not attract interest, its higher instalment amounts over a shorter period of time can make it really hard to meet those if you’re also juggling other debts repayments.  

Here’s how it works…. 

Each BNPL provider will have varying terms and conditions. For most BNPL, the process of opening an account is straightforward and easier than accessing a new credit card account:  

  • Download the providers app 
  • Provide your name, email address, and phone number and likely confirm your identity 
  • A BNPL account is linked in a debt or credit card to make payments 
  • Once you’ve made a purchase, the BNPL provider describes the payment plan, how much you need to pay and when. 
  • Repayments are made in equal amounts over a set number of weeks or months.   

It’s then the responsibility of the customer to ensure there’s enough money in the linked account to transact when those repayments are automatically deducted.  

Nearly all BNPL providers charge interest or fees for missed payments. Get across the expected repayment timing and amounts that are coming up, especially if you’ve got several BNPL repayments being deducted. Having multiple BNPL repayments for different purchases can start getting confusing. 

For example, Afterpay’s repayment schedule requires making a total of four equal payments. These payments are due every two weeks, resulting in a total of eight weeks to complete the payments for a purchase. 

For example, you’ve had your eye on new set of headphones for weeks, but because you’ve just paid your car registration and electricity bill, you’ve used up your savings. You really want them, so you decide to purchase on Afterpay, costing $150 in 4 installments of $37.50 over eight weeks. It sounds tempting but if you miss a repayment, there are extra costs.  

Afterpay charges late fees for missed payments. For each order below $40, the total late fees that may be applied is capped at 25% of the original order value.  

For purchases $40 or above, Afterpay will change a $10 partial late fee, and a further partial late fee of up to $7 if the payment remains unpaid 7 days after the due date. This continues until the total late fees are up to 25% of the original purchase value or $68, whichever is less.  

Thinking back to the headphones example, if you miss a repayment, they could end up costing an extra $37.50 if the late fees are 25% of the original value order. Those headphones have increased from a $150 price tag to $187.50. 

Another example is Zip Pay: For purchases under $1,000, Zip Pay allows you to make weekly, fortnightly, or monthly payments over a set period. The minimum monthly payment is typically $40, and there is a minimum repayment requirement each month. 

Zip Money: For purchases over $1,000, Zip Money offers longer-term payment plans. You can choose a 3, 6, or 12-month interest-free period, and repayments are usually required monthly. 

There are also late fees with Zip. If your outstanding balance is under $50, the late fee was typically around $5. If your outstanding balance is $50 or more, the late fee was typically around $15. 

At the moment, the BNPL is not regulated by the Australian Government under the Credit Act because they fall under the exemptions available to certain types of credit in Schedule 1 to the Credit Act (the National Credit Code). This will change soon.  

We recently participated in consultation with the Australian Government’s Department of Treasury to help them design laws to regulate the BNPL industry. 


Credit Cards: Still the biggest player in town  

Although there are many types of credit cards, most tend to fall into two categories: 

  • Category 1 - charges a lower interest rate but accrues interest from the moment you make a purchase.  
  • Category 2 – You make a purchase and have 14 days from the time your statement is issued to clear the balance in full without being charged any interest.  

But buyer beware, there are traps associated with both categories of cards.  

Concerning Category 1, those cards with lower interest rate are risky because:  

  • Lenders like to encourage these types of cards as an alternative to a small personal loan because a personal loan can’t be redrawn back up to its full limit. The trap here is, once you’ve paid it off you can keep using it. Or even worse you might have paid off some but then use it again to keep it close to its limit. 12 months later your balance hasn’t reduced. 
  • You can get caught out paying off something after its lost is usefulness or you don’t own it anymore. For example, you buy a phone on credit and are still paying it off long after you’d already upgraded to a newer model. 

Looking to Category 2, these are cards that don’t change interest immediately but need you to clear the balance before the statement is issued, be aware that: 

  • If you utilise this type of card for a cash advance, this will attract a higher rate of interest, which will be charged from the moment the moment you withdraw money. 
  • Clear your balance in full before the due date. If you miss this deadline, it means you’ll be charged interest on the whole balance for the full month, not just for the days you missed. 
  • Those cards with a loyalty program attached, such Qantas or Velocity points, will always have terms and conditions so make sure you check the fine print. Some lenders will limit the maximum number of points you can earn in a month. The interest rate on loyalty cards is also typically higher. For example, the average credit card interest is 14.7% and 19% on loyalty cards 

However, all types of credit cards have the following traps that can cost you significantly:  

  • When using a credit card, your repayment history is recorded and contributes to your credit score. Missing or late payments will have a negative impact on your score. 
  • Bigger is not better when it comes to credit limits. No one needs a large credit limit. The ideal is asking for limit that you can clear within a month. 
  • Strongly resist having multiple credit cards. Its too easy to fall on them when times are tough but each card is another debt that will need to be paid off. 
  • Don’t be tempted to increase your credit limit. If this is accepted, it’ll be too easy fall into the trap of spending more money. Think about this, it’s much harder to clear a balance of $15,000 than $5,000. 
  • If you are consistently only able to make the minimum payments, this is going to be an issue. However, earlier you deal with it, the sooner it can be resolved and the faster the stress can be appeased. People you can talk to include your credit card provider, Way Forward, a financial counsellor or the National Debt Helpline.  


Here’s and example of what can happen:  

Josephine has a credit card with a $5,000 limit, an interest rate of 15% and is making only the minimum payments. Let's assume that the minimum payment is calculated as a percentage of the outstanding balance. In this case, we'll assume it’s 2% of the balance.  

Using the MoneySmart calculator, if this credit card debt was only paid off using minimum repayments of around $100 per month, it would take 25 years and 5 months and cost $12,246 to pay off. However, if you made larger repayments of $247 per month, the card would cost $5,747 over the lifetime of the debt and take 2 years to pay off. 

This is why it’s strongly advisable to pay off credit card debt in as larger increments as possible, as quickly as possible.  

Credit cards may come with annual fees, late payment fees, over-limit fees, and cash advance fees, among others. It's important to read the card's terms and conditions to understand the fees associated with it. 

Knowledge is always power when it comes to money matters  

In a world filled with products tailored specifically to our needs and wants, the number of choices for where to spending your money is infinite. Added to this the ease of spending. Most of the time, all it takes is tapping your phone or using your pre-filled card details into an online shopping portal to get what you want. It’s as easily as clicking a button.   

Make interventions early so you know where your money is going. By making deliberate spending choices and keeping to a budget, it’s unlikely you’ll need credit cards or BNPL. 
It’s our aim to assure those Australians who are struggling with debt that they are not alone. It’s natural to feel stress and anxiety over money in those circumstances. Help is out there and having a realistic repayment plan to end the cycle of debt can make all the difference.  

Our team of well-trained financial hardship advocates offers free support so more Australians can find a path toward financial freedom.  


Get in touch with Way Forwardor give them a call on 1300 045 502. Their office hours are 9:00AM-7:00PM AEST Monday to Friday.   

For other services such as mental health support, please visit their page listing support services available in Australia.  

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