“No interest? Never, ever…?” Really?
Businesses like AfterPay, Zip Pay, Humm etc. are profitable, very profitable in fact. You only need do a quick Google search to see stories about astronomical growth and extraordinary profits. Money like they are making must come from somewhere and if you’re using their services… you can be pretty sure some of it is coming from you.
Statistics from Findex1 suggest that less than twenty percent of 16 – 25-year-old Australians have a credit card. Some of them fear credit cards because they heard scary stories about spending sprees and ignored debts impacting their future ability to get a car or home loan. Many of them just avoid using credit by spending from savings and borrowing from their parents instead of banks. Or by using ‘pay later’ services.
‘Buy Now Pay Later’ services2 may well be promoted as interest-free, but they are not often fee-free. Account-keeping fees, payment processing fees, establishment fees, late payment fees. They may be small but they can add up fast. A forgotten monthly repayment can incur payment fees plus penalty fees and if you have accounts with several ‘pay later’ providers, you could find yourself charged penalty fees from both plus an overdrawn account fee from your bank. Importantly, banks consider ‘pay later’ programs as credit spending so if you do miss repayments this can impact on your credit history.
Credit is useful, it facilitates buying what you need and it can help you build your credit rating so that when you want to apply for a loan, you have a proven history of effectively managing your money. Credit is not good or evil, it is a tool, and it can be a very good tool when you use it well. At the checkout of an online retailer’s e-store you might be offered deferred payment options and in the moment that is an attractive option; it seems free and instant and easy. But sometimes the best tool is not the instant or easy option.
With a good credit card you can buy what you want now and pay for it later, up to 45 days later, without paying a cent of interest. I have had credit cards for over twenty years (even longer than I’ve been an accountant) and I don’t think I’ve ever paid a dollar of interest to any financial institution for using them because I pay off the balance before the due date. With a low-fee (or ‘no-fee’) credit card you can minimise annual, monthly and account fees so that credit effectively becomes ‘free money’ for you to use every month.
The important thing to remember is to keep your credit sources in sight. Where people come undone with credit is when they hide it from themselves, buying something unplanned using a new ‘pay later’ provider. Man/girl-up! Ignoring problems does not make them go away and in this instance it makes them worse because your credit provider can keep applying fees for every late or missed payment, and charge you interest on the compounded amount you owe.
- Remember where you spend on credit. If you use ‘pay later’ services, keep the number of providers to one or two so you do not lose track of them and if you get yourself into trouble.
- Always have a rough idea in your head of your bank account balance.
- Know when payments are scheduled to come out so you do not miss repayments, that is when the extra fees and interest rates can kick in.
- Limit your number of credit sources so you are in a better position if you need to ask them for help managing your debt.
The best thing you can do if you get into trouble is to reach out for help. Talk to your family, talk to a sensible friend, consult a professional adviser3 and get some good advice. Then go to your credit provider with a plan – tell them you are struggling to repay your loan and ask for their help with setting a payment plan. This can essentially freeze some fees and interest charges and give you a structure for paying it off successfully.
Finally, make your own plan. In financial terms that plan is called a budget4 and building a simple, sensible budget is a great set of guide rails to managing your money. As a very rough guide, you should budget to spend 33% of your income on accommodation, 33% on essentials like food and bills, put 10% away into savings and spend the rest on enjoying your life, however you choose to pay.
Dr Steven Enticott from CIA Tax is a chartered tax advisor and financial author recommended by First Option Bank.
- Insights, Announcements and Thought Leadership | Findex
- Buy now pay later services – Moneysmart.gov.au
- CIA Tax
- How to do a budget – Moneysmart.gov.au