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Should you replace your credit card with buy now, pay later providers?

For decades the credit card has been a highly utilised financial tool, but should you replace it with the offerings from buy now, pay later providers like Afterpay Touch Group Ltd (ASX: APT)?

Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) would hate it if credit cards lost their appeal.

But that’s exactly what’s happening. Younger westerners are listening to the advice of personal finance experts and ditching (or never getting) credit cards. But instead of sticking to (electronic) cash payments, people are going crazy for buy now, pay later.

In FY19 Afterpay grew its active customer base by 130% to 4.6 million people. It had 5.2 million active customers at the end of August 2019. Zip Co Ltd (ASX: Z1P) grew its customer numbers by 80% to over 1.3 million in FY19.

What’s the appeal? Well, credit cards come with a high fee or a high interest rate (or both). Whereas there are offerings like Afterpay that can be free to customers if they pay on time.

It also helps that shops run Afterpay sales and it just generally seems ‘cooler’ than a credit card.

The key question is if they end up costing you more. You can pay off both a credit card and Afterpay in a way that results in zero fees or interest. But as a Mozo survey found out, 60% of buy now pay later users said they purchased things they normally wouldn’t normally because of payment instalments. Perhaps that says that Afterpay is a great way to help with cashflow. But a quarter of Buy Now Pay Later users said they hide their purchases from friends, family and partners according to Mozo.

That same Mozo survey said that almost half of BNPL users said they have stopped using their credit card to spend. The trend is heading one way. 

Foolish takeaway

As long as both are paid on time it doesn’t seem like much of a difference to me. Buy now, pay later feels new and cool, but it can lead to overspending just as easily as a credit card.

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and ZIPCOLTD FPO. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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