Rising costs pushing you to Afterpay? 5 expert tips on smart Buy Now Pay Later

Buy Now Pay Later services like Afterpay are an attractive solution as inflation drives up prices – but it comes with risks.

With the rising cost of living, Australians are feeling the pinch. In fact, according to Aldi supermarket's 2022 Price Report released this week, 36% of Australian shoppers are planning to cut back on their groceries.

Worryingly, cost pressures are squeezing Aussies so hard that 22% of shoppers have already started cutting back on fresh produce.

While there are certainly some expenses people can reduce to make life a little easier, many people may be tempted to turn to services like Buy Now Pay Later (BNPL), whether to continue living their existing lifestyle or even to pay for the cost of necessities.

BNPL services have become increasingly popular over the years and Australians now have several options to choose from, such as Afterpay, Zip Pay and humm.

People are also more comfortable with having higher limits. In a recent report, RFI figures show a growing gap between credit limits in 2019 and credit limits in 2021. The report found that 36% of people with BNPL in 2021 had a credit limit of more than $1,500 compared to just 8% in 2019, while 24% had no upper limit.

When BNPL first came about, it seemed like a simple alternative to in-store financing. Instead of paying for something in a single lump sum, you could spread the cost over 4 weeks to make it more manageable.

BNPL evolved, though. Soon, consumers could pay for multiple items through their BNPL account and pay it off over weeks or months – and they could even get a virtual card to add to their phone wallet. The difference between BNPL and a credit card is now really down to the level of checks and balances.

Also, unlike a credit card, using your BNPL account is not having a positive impact on your credit score and you won't be building up rewards points. So the risk of using your account far outweighs any benefits.

With BNPL a common way for people to access credit, it is important to understand how to mitigate those risks.

Remember, BNPL should be used as a last resort, not as an extension of your funds. If you are struggling financially, BNPL will only contribute to debt stress. If you are in financial difficulty, you can call the National Debt Helpline on 1800 007 007.

Check offers on essentials

If there's something you desperately need (and not just really, really want), check out provider offers. Providers like Afterpay and Zip have partnerships with retailers and provide deals, discounts and cashback on many purchases.

You might find that paying through your BNPL account can actually save you money, as long as you are able to pay it back before the interest-fee or other-fee period expires.

Use it to budget

We all know it can work out much cheaper to buy items in bulk. If it's something you really need and will repeatedly use, BNPL can help you spread the cost.

For example, if buying 4 weeks' worth of baby formula means you save money compared to buying it as you go, spreading the cost over those weeks will allow you to save money but continue to budget as though you were paying week by week.

Take it out of your wallet

BNPL services like Zip Pay offer you the ability to add a virtual card to your phone wallet. This allows you to tap in-store for purchases, which might seem like a convenient facility, but is in fact extremely dangerous.

You might tell yourself you will only use it in emergencies. You might tell yourself that you will repay your account immediately. You might tell yourself it's a one-off payment.

No matter what you tell yourself, adding a BNPL card to your phone wallet will likely end in overspending. It will be all too easy to tap for smaller everyday purchases, or allow yourself to be convinced that you can pay for an item you can't afford while in-store.

Make repayments

BNPL boasts interest free payments that you can spread out, but that only works if you repay the minimum amount due. At the very least, make sure you do this. Note that whether this is weekly, fortnightly or monthly depends on which provider you're with and the arrangement you have.

If you miss repayments or pay too little, you may find you need to start paying account-keeping fees.

Setting up a direct debit is an easy way to make sure you pay, but you also need to remember to have the right funds in your account.

Don't accept higher credit limits

BNPL services won't necessarily offer you a high credit limit from the get-go, but will offer you lower introductory limits. Zip Pay, for instance, will start you off with $350.

If you spend and continue to make your monthly repayments, they will very likely start offering you higher limits. Avoid accepting any higher limits and keep yourself below a certain amount. If you have the credit there to use, it is all the more tempting to keep sticking purchases you don't really need on there.