Millennial Money

21th April 2021

Credit Cards, Debit Cards and BNPL

Welcome back to another Millennial Money article where we demystify key concepts in personal finance affecting university students. Today we talk about Credit Cards, Debit Cards and Buy Now Pay Later. By the end of this article, hopefully you understand the differences between these three payment methods and thus are able to make more informed decisions.

Credit Cards vs Debit Cards

While debit cards and credit cards look practically identical – they are both plastic cards with expiration dates, card numbers and chips – they serve very different purposes. Debit cards are used to withdraw money that you already have, whereas credit cards allow you to borrow money from the issuer, up to a pre-specified limit. In accounting terms, using a debit card decreases your assets (cash), whereas using a credit card increases your liabilities.

While it may seem advantageous to pay for things without first having the money, there are some downsides. A credit card attracts interest, meaning the money that you must pay back is greater than what you spent. For some credit cards, there is an interest-free period, but after this, interest is accrued on any balance which has been unpaid, and this can significantly add up over time. Based on historical data, the average interest rate on credit cards is 20%. Credit cards also attract fees for specific types of transactions and bank transfers, as well as for late payments. It is important to be aware of these fees and how they affect your finances. There may still be some fees associated with debit cards, but the scope of these fees is much narrower.

Credit Cards vs BNPL

If you have decided to use credit instead of your own money, there is also another option which has emerged within the last decade: Buy Now, Pay Later (BNPL). BNPL plans are exactly what they sound like, consumers can borrow money to purchase products now and pay back this money later in instalments. This sounds pretty much like credit cards, but there are a few differences between these two modes of payment. While it is standard for credit cards to charge interest (as discussed above), BNPL plans pride themselves on offering no interest and fees, if people pay back in time. Furthermore, BNPL services attempt to provide greater access to credit services, as most offer approval without a hard credit check, in contrast to credit card companies. This potentially offers an avenue of access to credit for young people who haven’t had the opportunity to establish a credit history.

Despite these advantages, BNPL also has its downsides. Because there is more flexibility and easier approval, this can also encourage impulse spending, leading people towards a debt trap. Consumers do not have the same protections as they would when borrowing from a bank. Also, the belief that BNPL does not affect a person’s credit score is untrue. If an individual is struggling to make BNPL payments, then it will be much more difficult for them to apply for a loan or mortgage. Particularly as these services enter the mainstream, more and more credit companies will be considering these histories. Finally, BNPL services still charge late fees, and given that this is their main source of revenue, they tend to be more substantial than those charged on credit cards and can make up a significant portion of the amount spent, particularly for small purchases.

Conclusion and More Information

We hope you now understand a little bit more about the distinction between debit cards, credit cards and BNPL. The interested reader should have a look at the following sources for more information:

Next week we will be continuing our discussion of debt and credit, but this time focusing on mortgages.

The Finance Student's Association is not a financial adviser, the views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.