Credit v Debit v Afterpay – which is better?

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As you start earning money, you may decide you no longer want to rely on using cash or your parents card every time you make a purchase. You might consider getting a debit card or if you’re over 18, you might consider getting a credit card.

Young adults often use debit cards more, but it is important for you to consider which one is the right fit for you!

After you get a debit or credit card, Afterpay comes to play. It may seem great at first, but it could be doing more harm than good!

Find out what is involved in getting a credit and debit card, what credit score is and the effects of Afterpay below.

What is a debit card?

A debit card only lets you spend the money you have available in your everyday transaction account. The purchase you make with your debit card will be taken away from your available funds. Most Australian banks allow you to get a debit card at 14 years or above (but this may vary).

What is involved?

Debit cards are often the better option for young adults as you cannot accumulate debt. When you start a bank account with your chosen bank, they will often ask if you would like to get a debit card as it is easy to set up and there are minimal eligibility requirements.

If you have a casual or part time job, you can give your employer the details to your everyday transaction account so that your pay goes straight into the account linked to your debit card.

Debit cards are easier and more cost effective to maintain, especially for younger people who may not need a credit card yet. They come with no annual fees, and you won’t pay any interest because you’re only using the money you physically have.

However, if you choose to overdraft your account, where you can spend more than the available funds, fees may occur.  

When you use your debit card, it is very important to keep safety and security in mind, including:

  • Signing the back of your card when you get it
  • Avoiding the use of obvious number combinations for your PIN, such as your birthday
  • Never writing down your PIN
  • Covering the ATM or EFTPOS machine when entering your pin
  • Regularly checking your bank account to make sure all purchases are correct and recognisable

Note: If you lose your card, it gets stolen or there are strange payments in your account, you must cancel your card ASAP. It is easy to do this through your banking app or directly through your bank.

What is a credit card?

A credit card allows you to make purchases, large or small without having the funds to do so. Ultimately, you’re borrowing money from the bank (unless you have the right funds available) and will have to pay the bank back within a certain time frame. If you don’t, you will face fees and high interest rates. There will be an agreed spending limit with your credit card that you cannot go over.

Australians can only apply to get a credit card once they turn 18.

What is involved?

Credit cards can come with lots of fees such as annual fees, cash advance fees and interest rates that occur when you can’t meet repayments in the interest free period. If you’re not careful with your spending, it is very easy to incur debt when using a credit card.

Unlike debit cards, credit cards are a bit harder to get as you need to fill out application forms and provide details about your employment, income, and spending. Also, there may be a minimum income requirement with your credit card so that the bank knows you can pay them back the borrowed money.

Credit cards come with some great benefits such as rewards programs, frequent flyer points and insurance for travel and cheaper deals when pre-booking accommodation. But remember, you shouldn’t just buy things to get frequent flyer points or rewards as it might be costing you more.

Credit cards can be good to increase your credit score.

Note: If you cannot pay off your credit card, you can ask your bank for a low interest rate credit card.  

Credit score – what does it mean?

In Australia, your credit score is a number between 0 and 1200 that is used by lenders when considering whether to give you a credit or a loan (if you’ve requested one).

Your credit score is built based off factors such as:

  • Credit history
  • Repayment history on loans and cards
  • Borrowing history
  • Whether you pay bills on time
  • Bankruptcies or defaults in your name

The higher your credit score, the more likely you’ll get approved to borrow money such as a loan. If you have a low rate, you may not get approved or be given higher rates.

Note: Your credit card history will affect your score the most, however some payments you make on your debit card such as missing due dates for bills can affect it too.

Afterpay – does it do more harm than good?

Afterpay is a ‘buy now, pay later’ platform, allowing consumers to buy now, receive their goods/services and then pay the purchase off in fortnightly instalments.

If you decide to use Afterpay, you will need to make equal payments in four instalments over an eight-week period.

Using Afterpay is like using a credit card as you can make a purchase without having the available funds and then pay that purchase off. However, using Afterpay comes with its consequences, so solely using a debit card is always the safer option.

If you cannot meet your fortnightly payments, you will incur Afterpay fees. You will be charged a $10 fee for missing a payment, and then an extra $7 fee will be charged if you don’t pay that instalment within a week. For orders under $40, only a $10 fee will apply. For purchases between $40 and $272, fees will not go over 25% of the purchase price. Afterpay have introduced a cap on late fees, so for orders over $272, you won’t pay more than $68.

As consumers can ‘buy now, pay later’, their purchases can easily add up and they may not be able to pay off their repayments. In turn, they will incur more debt as the temptation to overspend is high.

Both debit and credit cards come with their pros and cons, and it is up to you to decide which one is right for you.

Although you can get a credit card when you’re 18, we recommend you utilise a debit card first as a young adult and consider whether you really need a credit card, can take on the responsibility of managing a credit card among other financial obligations and can afford to pay the extra fees and costs.

It is so important to learn how to properly manage your money at a young age with low-risk purchases to avoid problems later in life. 

For more on this series, click here!