Beware credit card and buy now pay later penalties and interest

A spend up on your credit card or with a buy now pay later company can feel like a blissfully free shopping experience.

Those cute clothes for the kids, the dinner out with friends and the stylish new toaster can all be bought with easy credit but if you are not careful – they could cost you big time.

It can also be tempting to use a credit card to generate your credit score but this strategy can turn bad and there are lots of other less costly ways to do this.

How do credit card and buy now pay later companies make money?

When we feel like splashing out on an easy credit shopping spree, we should ask ourselves: “How is the credit provider making their money?”

They don’t give you easy credit just because they like you.

They are in it for the money and there are hooks and catches.

If you are determined to have a credit card account, Debtfix recommends you shop around for the best deal, investigating the fees and interest rates.

You can keep up-to-date with current interest rates and fees at Interest.

In New Zealand, many credit cards charge establishment and/or annual fees, ranging from about $10 up to a whopping $1,250.

It can be tempting to only pay off the monthly minimum still to pay but this is a trap for inexperienced players.

The minimum payment is generally only about two per cent of the total balance owed and if you only pay this amount – you’ll quickly be racking up interest and owing more money.

When using a credit card for shopping you can get about 44 to 180 days interest free, but if you don’t pay off that purchase in full within that time, you can pay anywhere from 9.95 to 29.95% interest.

If you use your credit card for a cash loan, most companies charge about two to nine per cent more than their interest rates for shopping purchases.

Some credit cards charge a fee for every cash loan, on top of the interest.

If you miss a minimum payment, you’ll be hit with a late payment fee which will be from about $2 to $10.

Most credit cards have limits and if you exceed your credit limit the transaction is likely to be approved while you are shopping but you will be hit with a penalty.

If you use your credit card to shop overseas you will be charged a foreign currency fee and suddenly those cheap kicks could cost you more than you would have paid at a local shop.

Isn’t buy now pay later free to me?

Buy now pay later companies give you the convenience and buzz of immediately taking ownership of the goods when you can’t pay for them but beware – they are also in business for the money.

Some buy now pay later companies require you to pay an establishment fees to open your account and there can be on-going admin fees.

In New Zealand, you have from five to nine weeks to pay off your debt and if you are late making payments you’ll be charged penalties.   

The buy now pay later companies may not check your credit score and consequently, they have little understanding of your ability to repay a debt.

The relaxed lending approach might appeal to you but adding to your mounting debt could be worse for you than not being able to buy a new outfit or latest smartphone.

But wait – there’s more costs

The businesses where you use your credit card or buy now pay later deals pay a percentage of that purchase to the company lending you the money.

As the saying goes, there is no such thing as a free lunch and retailers add the cost of financing your loan onto the total price of goods you buy.

Establishment and annual fees, interest payments and penalties for late payments all add to the cost of the items you buy with a credit card or buy now pay later scheme.

Therefore, an item you couldn’t resist that was on sale – may well cost you more than the regular retail price if you don’t pay it off before interest and fees are charged.

Help – I have too many credit cards

How do you protect yourself from all those ads and letters inviting you to get a credit card and transform your worried frown into a smiley shopping face?

We have all been tempted by a new credit card or an offer to extend a credit limit, but to avoid a debt storm requires planning – backed up with the willpower to stick to your plan.

If you have numerous credit cards it may be an option to transfer the balance of all cards to just one, which sometimes gives cardholders an interest free transfer period.

Then put a no junk mail sign on your letterbox, unsubscribe from shopping emails and request to decrease your credit limit on your card to prevent over-spending.

Do I need a credit card to get a credit score?

No.

Your credit score can be determined by other bills that you pay, such as a power account, phone account, rent, mortgage and rates.

If you are using a credit card to improve your credit score you should pay off the full amount owing on time, every time.

Clearing the balance every month means you don’t pay any late fees or interest and if you have a rewards scheme attached to your credit card – the bonuses are more valuable.

Never max out your credit card for the rewards.

Credit card fees and interest make the rewards scheme an expensive way of shopping.

Watch out for payWave

Covid-19 created high demand for contactless payment systems but if you struggle to keep your credit card spending under control, payWave can be trouble.

Any system that makes it faster and easier for us to spend money eliminates some of our ability to hesitate and stop the purchase, and we can quickly lose track of our budget.

Back in the day when we paid cash for everything – we generally stopped spending when our pockets were empty.

Before you wave your phone or credit card over an eftpos machine you may prefer to plan your purchases and decide if this purchase fits with your overall financial goals.

If you have debit card and credit card capabilities on one card, payWave transactions may default to your credit card.

As well as mucking up your plans to get your debts under control, the retailer may charge you an extra two per cent to cover their costs of operating payWave.

You are not alone with credit card woes

Throughout the world people love shopping with credit cards and in the 2020 Money Week many New Zealanders asked questions about credit card debt.

At the end of 2019, New Zealanders owed more than $7,500 million on their credit cards.

With Covid-19 halting much of our spending this dropped to $5,800 million that we owed at the end of April 2020 but with less lockdown restrictions our credit card spending is climbing again.

If your drowning in credit card debt or have a buy now pay later dilemma, give Debtfix a call and launch your own plan to become debt free, right now.