Noel Whittaker – Afterpay – Are they good for you?

Noel Whittaker writes exclusive weekly blog updates for the Ban Tacs Group, with IN8 Business Advisory, a member of that group. Here, he talks about money spending and cons of availing Buy Now, Pay Later services, or having your own credit cards.

When I wrote Making Money Made Simple over 30 years ago, I pointed out that becoming financially secure is not difficult. All you have to do is keep improving your income (by improving your skills), spend less than you earn, and then invest the surplus wisely. The emails that keep arriving telling me how that book has changed people’s lives is proof that those principles still work. But the whole financial system is designed to encourage us to live beyond our means.

The latest craze is buy now, pay later (BNPL) services, dominated by Afterpay – though the number of copycat products is growing rapidly. At first glance, they seem better than credit cards, because the maximum debt you are allowed is $2000, and as long as you pay the balance in full within the contracted times, there are no charges whatsoever.

But the reality is that spending money before you earn it becomes addictive. The latest research from RateCity reveals that over 30%  of people who have used BNPL found themselves in money troubles as result. Furthermore, almost 70% of Australians aged between 18 and 34 have reported that these products encourage impulse buying.

Of course, the banks have jumped on the bandwagon, attempting to compete with Afterpay and the like by offering interest-free credit cards. No, it’s not a misprint, they are interest-free – the catch is that you pay a flat monthly fee based on your credit limit.

For example, the Commonwealth Bank offers a choice of three credit limits – $1000, $2000 or $3000 – with flat monthly fees of $12, $18 or $22 respectively. NAB has similar limits, with monthly fees of $10, $15, and $20.

You don’t need to be a genius to run the numbers. If I had a credit card with a $1000 limit, and I was being charged a $12 monthly fee, the fee for 12 months would be $144. That’s equivalent to an interest rate of 14.4%. So this is not a gift from the banks at all – it’s just a way of replacing the interest a cardholder would normally pay on their credit card with a fee. You could probably call it a fee for no service.

There is no doubt that credit cards encourage people to overspend, but it’s hard to book accommodation or travel without one. One way around it is to use a Visa or MasterCard debit card, which has no fees and can’t get you into debt because all the card does is facilitate withdrawal from funds you already have.

However, if your cashflow is not up to that, there are some credit cards available with no annual fee. But check carefully, because when you do you will find the majority of them have “no fee for the first 12 months” after which, an annual fee kicks in. However, there are cards, such as Latitude, that do offer a genuine no-annual-fee card – surely a much better option than any of the new offerings from the banks.

When the banks launched their interest-free cards, I received the usual blurbs from their media departments asking if I would like to write a story on them. My response was, “We don’t need these kinds of cards – what we do need is credit cards for retirees with substantial assets but who are unable to qualify for a credit card after they retire because of a lack of taxable income.” That plea fell on deaf ears – I suppose the last thing the banks want is credit card owners who pay their credit card on time without fail.

Whatever you use, make sure you stay in charge of your spending. Don’t let the banks tell you what you can afford. It is in their interest to keep you trapped in debt.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au 

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