Younger Australians looking to get through the toughest financial time of the year should be wary of relying on credit cards, experts say.
New research by financial services firm Canstar found a majority of Aussies aged under 25 are steering clear of credit — only 10 per cent have a credit card.
MORE: Why credit cards are harder to get in 2019
But despite this, Reserve Bank of Australia figures show Aussies are still addicted to plastic — $51.5 billion is owed and more than $31.7 billion is accruing interest.
Financial comparison website Mozo’s spokesman, Tom Godfrey, said instead of using credit, Millennials might sign up to ‘buy now pay later’ schemes such as Afterpay and Zippay instead.
This is because they do not require credit history checks.
“It’s unsurprising that credit cards are not the only payment option young people are turning to,” Mr Godfrey said.
“With the rise of buy now, pay later apps, a credit card is not necessarily the must-have it once was.”
Canstar spokeswoman Belinda Williamson cautioned young Aussies to avoid racking up mountains of credit card debt that could impact their credit rating later.
“Getting your first credit card is a big financial commitment and responsibility,” she said.
“A good rule of thumb is to only put on credit what you can comfortably afford to repay in your next pay cycle.”
Buy now pay later schemes attract fees and charges, but unlike credit cards they do not charge users interest.
Luke Vandager, 20, ran into trouble shortly after getting a credit card on his 18th birthday.
Mr Vandager’s parents warned him of the potential dangers.
“My dad thought getting a credit card was a terrible idea,” he said.
“He said, ‘you’ll see’ and I guess I did.”
Mr Vandager believed a credit card would free up more money for him to invest in the share market. “I had a plan to invest, I thought I was smarter,” he said.
He has been battling small amounts of credit card debt on and off for almost two years, putting him under financial stress.
“A credit card does separate you from how much money you actually have. It was easy to over-estimate my next pay cheque.”
Mr Vandager quickly racked up over $2000 in card debt in the first few months.
He initially used it as a stopgap to pay for small expenses such as dinners and drinks out.
“My friends said, ‘I can’t afford to go out tonight’,” he said. “With the credit card, I didn’t have that problem.”
While Mr Vandager still has a credit card he said he was managing his use of it better. He has since lowered his card’s limit to $1000.
BUY NOW, PAY LATER SCHEMES
· Avoid lengthy approval times and application fees.
· Don’t have to pay any interest on your repayments.
· Some providers have spending limits and late payment fees.
· There’s no credit check to ensure you’re capable of making payments.
· Gives you fast access to finance, convenient transactions and might
offer you rewards for spending.
· Provides an emergency fund and comes with fraud protection.
· Comes at a cost with the provider charging interest and possibly fees.
· Increases the temptation to spend and can destroy your credit score.