Canstar explains the difference between the interest-free periods offered by credit cards and buy-now-pay-later (BNPL) schemes, such as Afterpay.
How do BNPL systems work?
BNPL schemes allow you to pay for an item in instalments over several weeks, interest free. The catch is that if you miss a payment, you are hit with a late fee.
Afterpay has a two-tier system:
- For purchases less than $40, you're charged a one-off fee of up to 25% of your purchase.
- For purchases $40+, there's a $10 fee for the first default, then $7 every seven days if the balance remains unpaid, to a cap of 25% of the purchase price, or $68, whichever is lower.
How does a credit card work?
Credit cards offer a revolving line of credit and an interest-free period, usually 44 or 55 days, which allow you to make multiple purchases against your credit limit.
Each month you receive a bill for the items purchased over the billing period.
If you pay off the total amount owing, you'll not pay any interest. However, if you make only a partial payment, you'll lose your interest-free period and start paying interest on any outstanding balance until you clear your debt.
Credit cards vs BNPL’s interest-free periods: what’s the difference?
While a credit card may offer a 55-day interest free period, that only refers to the maximum number of interest-free days that are available.
The length of the interest-free period on an individual credit card purchase depends on which day of the statement period the purchase is made.
To get the full interest-free 55 days, you need to make a purchase on the first day of the statement period. This could be the first day of the month, or the monthly anniversary of when you first got the credit card (check your credit card statement for these dates). Some credit card issuers will allow you to link your statement cycle to a preferred date.
Crunching the numbers
Let's use buying a $2000 refrigerator as an example, using Afterpay and a credit card.
Afterpay interest-free period
Using Afterpay, you pay for your fridge via four equal instalments. These payments are taken from your chosen account fortnightly. You need to pay 25% of the value of the item or service upfront. If your fridge costs $2000, you need to pay $500 at the time of purchase. You then pay off the remaining $1500 through three remaining fortnightly instalments of $500 each.
You also have an option of changing the date for payments, or settling the balance early through your Afterpay account. As long as your payments are not late, you won't pay any fees. If you miss a payment, you'll pay the penalty fees mentioned above.
Assuming you make all your payments on time, using Afterpay would give you a maximum of six weeks (42 days) to pay off your $2000 purchase.
Credit card interest-free period
As mentioned above, most credit cards only offer interest-free days if you pay your statement's closing account balance in full by its due date.
Your interest-free period begins on the first day of your statement period. So, to take advantage of the full 55-day interest-free period offered on your card, you need to buy your fridge on the first day of your statement period.
In all, the credit card offers an interest-free period 13 days longer (nearly two weeks) than Afterpay's interest-free period.
And, you don't need to pay the up-front 25% of your purchase when using a credit card. The full amount is charged to your card. You just need to manage your repayments, and clear your bill by its due date, to avoid extra charges.
So, if you already have a credit card...
You may not need to use a BNPL service. Why? If you use your credit card to buy something at the beginning of your invoice period, you'll have far longer to pay off your debt that if you used BNPL.
Keep in mind, though, that with a credit card, you do have to time your purchase correctly to gain the maximum amount of interest-free days.
Also, many credit cards come with yearly fees, so if you don't want to pay any charges, you'll need to opt for a fee-free card.
What if Afterpay is linked to your credit card? How to maximise the benefits
However, if you link your Afterpay to your credit card, you can extend your interest-free period even longer.
Continuing with the fridge example: if you time your fridge purchase (Afterpay instalment one) so that the second instalment hits your credit card right at the end of your billing period, you'll then have around 25 days of interest-free credit before you need to settle your bill and pay off the second instalment.
The final two instalments will then occur during your next credit card billing period (roughly 30 days). When that ends, you'll have another 25 days of interest-free credit to pay these last two instalments, which is roughly 69 days after your initial purchase!
