Explore the financial implications of choosing between credit cards and Buy Now, Pay Later options as consumers face increasing financial pressure.
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As South African consumers are under financial pressure, a number of them may be turning to credit to pay for items.
Credit cards have been the traditional payment method for many consumers, but how does it compare to the new payment method of Buy Now, Pay Later (BNPL).
Here is a closer look at Buy Now, Pay Later (BNPL) and credit cards as a way of making payments.
According to Wikus Olivier, managing director at CreditSmart Financial Services, Buy Now, Pay Later (BNPL) is type of credit agreement that has a beginning and an end when you purchase items on credit.
The retailer where you purchase the items will finance it through this BNPL agreement, and you do not have to pay for the items up front. Basically, you finance it and pay it off for the duration of the credit agreement.
Credit cards are also a type of credit agreement or a revolving credit facility.
"So, you don’t pay it off and it closes the account once the balance has been settled, instead it is a facility that remains open as long as you make use of it. So, you pay in money there, then you have that money available again to spend but that keeps you in a cycle of debt," he said.
A credit card you can use at any retailer or any place that accepts card or Visa card payments and you can, mostly, buy anything with a card, anywhere, anytime.
But with a BNPL agreement it is usually linked to a specific retailer or a specific credit provider that is in partnership with that retailer to give you the required goods and then allow you to pay at a later stage.
Olivier said that the retailer will usually have a partnership with a finance house who underwrites the BNPL credit agreement and if you buy an item for a specific amount, the retailer will then load additional fees onto that agreement.
"So, you’ll end up paying more for your item, especially if you buy consumer-related items like televisions or those sorts of items," Olivier said.
"You can end up paying thousands of rands more for the item than you would have paid for it in cash. Also, what you need to consider regarding a BNPL payment is that there are initiation fees, service fees, admin fees, and interest being paid, it can get expensive to buy an item like that."
On the other hand, credit cards are not a cheap facility but in comparison to a BNPL where you have an opening balance and you pay it off over a certain time period until the balance is settled in full, a credit card remains open.
Olivier said that when you apply for a credit card, you get a credit facility based on your affordability which means that the amount that you can spend on your credit card, is based on your affordability and credit score.
With credit cards, there are also interest rates, service fees, admin fees applicable depending on your credit score, your credit card applicable interest rate can be lower than what you would have gotten otherwise.
"But both mentioned facilities are not the ideal way to purchase consumer goods," Olivier said.
If you need something urgently and there is a BNPL option, depending on your financial situation, it can be beneficial for you not to have to fork out cash at this exact moment, and instead delay the payments a bit.
Olivier said: "As mentioned, it can be more expensive but cashflow wise in the immediate time, it can hold benefits in terms of your cashflow for now."
The same goes for a credit card, if you buy something with cash then you would need to pay the total cash amount, but if you buy it on a credit card you can spread it over 24 months or whatever your facility might entail, so you can spread the financial burden over a few months.
"But again, as mentioned, it can be more expensive when you look at what you actually pay over time per item and consumers usually spend on a credit card even before the first purchase has been paid off.
Paying for multiple purchases on the same facility is where most consumers go wrong.
They do not pay off the credit card in full first before making any new purchases. Therefore, they drag old purchases on the credit card for months and months on end.
A credit card can also be a lifesaver in a financial crisis, if you do not have an emergency fund in place, according to Olivier.
For example, you drive through a pothole, and you need to get your tyre fixed immediately but you need the cash, and you need it quickly, that is a scenario where a credit card might be "beneficial".
You need to keep in mind the affordability aspect of it, if you buy items on your credit card or a BNPL facility, it is important to keep affordability in mind.
Always ensure that you are able to make repayments for these credit agreements.
Olivier does not think that BNPL could replace credit cards as it is a highly specific type of credit agreement which differs completely.
"A credit card can be used anywhere, anytime usually for fuel, consumables, travelling - anything that you can think of you can basically pay with a credit card, but a BNPL facility usually is connected to consumer items through retailers, and it won’t replace a credit card facility as such," Olivier said.
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