When you buy something online or in-store you may have also seen an option to use a buy now pay later service. These services let you pay for your purchase in instalments instead of paying the full amount upfront.
While you can’t use these options until you’re 18, it’s important to know how they work and what it means for you before you use them.
This will also help you to avoid ending up in out-of-control debt.
Buy now pay later services
The amount of time and number of repayments you have to make can vary by service provider. Buy now pay later services don't charge you interest like a credit card, but they might charge fees. You may have to pay a fee to set up an account, a monthly fee to keep the account open or a fee if you are late with a payment.
These fees can add up quickly, so it’s a good idea to compare fees across different providers.
The Australian Government website Moneysmart explains more about what to look for before you use buy now pay later services:
Credit cards are a way of borrowing from a bank, just like a loan. The bank or card company gives you a credit limit, which is the maximum amount you’re allowed to borrow, for example $10,000. When you pay for things using the credit card, you build up debt.
You have to pay that money back. For example, if you spend $1,000 of a $10,000 limit, you will have a debt of $1,000. Most credit cards will also have a fee you have to pay every year, as well as fees you have to pay if you pay your bill late.
Every month you get a credit card bill it will have 2 options:
- pay the minimum repayment (usually a very small percentage of what you owe, like 2%)
- pay the full amount you owe.
The way credit card companies make most of their money is through charging interest on the money you owe. If you always pay the full amount (and not just the minimum payment amount) in your monthly bill, then you generally will not have to pay interest.
But if you only ever pay the minimum repayment, you'll pay interest on the rest of the money you owe. That could be 20% a year of what you owe. That will keep building up if you only ever pay the minimum and you’ll end up with a bill that may take years to pay back.
The Australian Government website Moneysmart has a calculator that shows you how much extra money a credit card will cost you if you only pay the minimum:
A loan lets people borrow money to help them buy what they want when they don't have enough savings. The money you owe on a loan is debt. Banks and other credit providers offer many different types of loans.
Houses are expensive and it would take most people a really long time to save up to buy one. Banks offer special types of loans called mortgages, which allow people to buy a house when they have only saved a small portion of the total cost of the house. This gives them around 30 years to pay the bank back in regular repayments based on an interest rate.
Personal loans can help people get other things they need when they need them, like cars or furniture.
Before you borrow money, you should make sure the loan repayments, interest and fees will fit in your budget. It’s also a good idea to shop around first to find the best loan that suits you. Choosing the right loan could save you a lot of money in interest and fees.
The Australian Government website Moneysmart explains more about the different types of loans and tips for borrowing money:
Tips for teens/adults
The smartest thing you can do is only spend the money you have. Learn how to save and spend wisely, and to set a budget. Read about saving and spending money.
The more credit cards or accounts you have, the easier it is to forget a payment. Having one account or card makes it easier to keep track of what you owe.
Think about how you will make sure you make payments in full and on time to avoid late payment fees or interest.
If you ever find yourself in money trouble, you can ask for help. Read about how to ask for help when you’re in money trouble.
If you use a credit card or buy now pay later service, talk to your teen about when and why you use it and how you make sure you make payments on time.
Share with your teen a time when you forgot to make a payment or only paid the minimum amount, and how much extra that cost you.
Remind your teen that even if you’re not paying for something upfront, it isn’t free. You may be paying for something for weeks or months after you’ve received your purchase.