By John Collett
Many people are using credit cards to pay off their buy now, pay later (BNPL) debt, stoking fears of a cascading “debt trap” as cost of living pressures continue to bite.
Of those who have a BNPL account, about half told a survey of almost 1300 people conducted on behalf of rate comparison site Mozo that they have accounts with more than one BNPL provider, such as Afterpay or Zip.
More consumers are at risk of getting caught in cascading debt Credit: Istock
More than two-thirds of those users who also have a credit card told the survey that they have used their credit card to pay off their BNPL debt. BNPL users with a credit card say they have an outstanding debt of $1059, on average, compared to an outstanding BNPL debt of $725 for those without a credit card.
BNPL platforms allow purchases to be made immediately, with the money repaid to the provider, in most cases, in four equal instalments. Most earn their revenue from fees paid to providers by merchants and from the fees paid by purchasers who miss a repayment.
Rachel Wastell, spokeswoman for Mozo, says it is dangerous to pay off BNPL debt with a credit card, as you risk incurring interest on the credit card debt if the card debt is not paid off by the due date.
“That means what could have been an interest-free BNPL purchase can end up costing a lot in credit card interest, especially as half of the credit cards on our database charge an interest rate of 19 per cent a year or higher,” Wastell says.
‘If you have multiple debts, using one to pay off the other can be dangerous, especially if you end up taking on more debt.’
Rachel Wastell from comparison site Mozo
When those surveyed were asked how much debt, other than mortgage debt, they accrued during 2023, BNPL users who had never used their credit card to pay off their BNPL debt had taken on just over $6000 of debt.
That jumped to almost $9400 for those who said they used their credit card to pay off BNPL debt.
Wastell says the risk of getting caught in “cascading” debt has increased with the advent of pay advance, or wage advance apps. These are where you can access your pay ahead of time, with the advance repaid, along with a flat fee or a percentage fee, when you are paid by your employer.
“If you have multiple debts, using one to pay off the other can be dangerous, especially if you end up taking on more debt by applying for pay advances just to cover what you owe,” Wastell says.
A separate survey by Finder reveals that 45 per cent of respondents say they have savings of $1000 or less. “Even something as trivial as a flat tyre would be too much for many households right now,” says Graham Cooke, head of consumer research at Finder.
“Those lower levels of savings means people are much more likely to have to turn to credit cards, loans and buy-now-pay-later products to get by. While these products can be great if used properly, they can quickly get out of hand if relied on for everyday expenses,” Cooke says.
Credit bureau illion expects credit card and home loan delinquencies to continue to rise in coming months.
There was a large increase in the number of credit card applications a year ago and many of those with new credit cards are falling behind on repayments, the credit bureau says.
- Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.