The growth of buy now pay later (BNPL) programs seems to be increasingly impacting on credit card usage – in May alone, Australia’s collective credit card debt balance went down by a record $1.9 billion, according to Reserve Bank of Australia data.
However, it appears consumers may simply be changing how they access credit, rather than cutting it out completely. For example, leading BNPL provider Afterpay recently reported its best-ever quarter as the COVID-19 pandemic gave rise to a period of lockdown and panic buying, with around $2 billion coming into its coffers from Australian shoppers alone.
In response, American Express is introducing a feature that it says is a combination of both the credit card and BNPL worlds, with a structured repayment schedule for paying off a credit card balance.
The new tool, integrated into the existing Amex system, is called Plan It Instalments, and Amex says it will allow some customers to pay off a portion of their credit card balance across three, six, nine or 12 monthly instalments.
Customers with eligible personal credit cards can now see the tool in their American Express banking app or online. Business customers, charge card holders or personal customers with a David Jones-affiliated card have so far not got access to the tool.
American Express said the key differences between Plan It Instalments and most other big BNPL players like Afterpay or Zip were that customers would have much longer payment terms available to repay the debt and far larger balances, with the maximum instalment caps dependent on a customer’s credit card limit.
That said, there are already BNPL providers in Australia offering interest-free plans of up to $30,000 paid off over five years, for instance.
There are also already credit card providers, including American Express, that offer fixed-interest monthly instalment plans or other different types of repayment options, rather than paying all, or a portion, of your credit card balance at the end of the statement period.
Looking at other debt repayment options, some credit cards also come with 0% balance transfer offers, meaning that if you transferred the balance of your existing credit card to one of these products, you would pay no interest on that balance for a period of time. The aim is to pay off the balance during that period and to avoid new spending using the card. However, up-front and annual fees typically apply to these cards.
It’s important to consider the fees before costs stack up
BNPL platforms have attracted a lot of negative attention from consumer groups and regulators in recent times, over mounting concerns that people using these platforms often juggle numerous other debts such as payday loans, credit cards and utility bills, and may be spending outside of their means.
Credit cards are regulated by the National Credit Code, and as such issuers are required to adhere to responsible lending obligations, such as by checking that you could afford to make the repayments. BNPL products, on the other hand, aren’t covered by the Code, meaning providers aren’t necessarily required to conduct these checks.
This means it’s important to do your own calculations for your budget and consider your financial position, regardless of whether you’re using a credit card or a BNPL platform to pay off debt in instalments, because the costs can quickly stack up.
Canstar money expert Effie Zahos said while there is no interest rate on Plan It Instalments, there are fees to consider.
“Even though the cost associated with this product may be less than the effective interest rate on a credit card in some cases, it’s still a cost,” Ms Zahos said.
“Consumers need to work out what the effective overall cost is for them to be carrying a balance.
She suggested that new ways of structuring repayments may ultimately encourage consumers to go back to “spending up big on plastic”, at a time when RBA figures indicate many Aussies have been successfully paying down their credit card debts, with as many as 102,000 cards being closed off in the month of May.
Key facts about American Express’ Plan It Instalments
Before hitting go and signing up to Plan It Instalments, here are some of the key things to know about the instalment plan, according to information provided to Canstar by American Express:
- 0% interest on the plan balance
- Fixed monthly fee of between 0.42%-1.04% of the starting plan balance, depending on the type of credit card a customer holds. Until 30 September, the fee will be 0.73% for all card types except the Low Rate and Essential cards, which will have monthly fees of 0.42%.
- Minimum balance on the plan of $150
- Maximum balance on the plan can go up to 85% of the balance on the customer’s credit card statement
- The remaining credit card balance that is paid on time does not accrue interest once a plan is set up
- No impact on a customer’s credit score, as long as instalments are paid on time
- Plans are considered part of your approved credit card limit and the limit is not extended
- The same late payment fees and interest that would apply to missing credit card payments also apply to missed plan payments
- No penalty to pay off the balance early, and the customer can cancel their plan at any time
- No impact on the customer’s ability to earn rewards
Here’s what the real cost of using the Plan It Instalments tool could be
Canstar Research analysts crunched the numbers to help demonstrate how the costs could add up on a credit card instalment plan.
We created a hypothetical scenario* where a credit card customer uses Plan It Instalments to pay off $10,000 over 12 months, on the general monthly fee of 0.73% (of the starting instalment balance).
The findings show the total fees paid in this scenario could be $876 ($73 per month) with a monthly repayment of $906. The effective interest rate would be 15.79%. Remember, though, that the % fee charged as part of Plan It Instalments could end up being higher for some customers than those used in the example above after 30 September.
The average Amex personal credit card has a purchase rate of 19.15%, according to Canstar’s database, and would have a $922 monthly repayment, plus total interest of $1,067 to pay off $10,000 in twelve months**.
It’s a good idea for consumers to do their own sums before signing up to any kind of payment plan or credit service. If you are struggling with debt, free financial counselling is available, such as from the National Debt Helpline on 1800 007 007.
→ Related story: Keen to get out of debt? Your 11-point plan
*Source: www.canstar.com.au, 9 July 2020. Calculations for this hypothetical scenario assume the monthly fee is calculated based on the total starting balance and then fixed at that amount. Total Fees refers only to Plan It monthly fees – annual credit card and other fees may apply. Effective Interest Rate provides an indication of the purchase rate that would lead to total interest charges equal to the Total Fees Paid. General Monthly Fee applies to plans created from now until 30 September 2020 for all products except Low Rate and Essential.
**Annual credit card and other fees not considered. Check with American Express to confirm what these may be in your situation.