I recently got send some articles to read on personal finance (my inbox is full with them, I love it). And they all seemed very positive: “Australians are paying down debt on As I’ve written a previous article on savings seemingly having gone up during the pandemic, I thought this was simply another part of this trend. And quite frankly, I was pleased. People are learning, through extreme adversity, that there is a limit to money, it doesn’t always come in, and living without your means might be a genuinely desirable thing to do. But as soon as I read a bit more through these articles, my enthusiasm disappeared like a cornetto on a summer’s day.
This article, for example, starts of great: Australians are paying down their credit cards. Excellent! But do you know why they are (spoilers for the article ahead)? Because they’re switching to things like Klarna (“buy now, pay later”). If you want to read my opinions on Klarna, this is the article for you. But to summarize, I think it’s a soft payday loan scheme in disguise. It’s genuinely as bad as the credit card, because it’s very similar, it just doesn’t have the equally bad rep. yet. Why is it equally bad? Well, imagine not paying on time. Klarna will hit you with late fees. The interest on a “Klarna loan” is not great either, you know, like that of a credit card when the 0% interest period is over that got you to buy the credit card in the first place… Btw, it’s not just Klarna, there’s other apps out there, like AfterPay, Zip Co and even some bank backed initiatives. It’s just an easier example.
The article that I referred to earlier (on the reduced debt), actually flags up these late fees as well. They quote an avid AfterPay user who got into trouble during the pandemic (I mean, who didn’t?), as work became even less stable than normal. And work instability comes wage instability. She fell behind on payments and got hit with $10 late fees twice. Luckily, there does seem to be some accountability and good will on the side of AfterPay as well. After one missed payment it blocked the account from spending more. At least that’s not nearly as evil as we’ve seen with credit cards so far. If you’re wondering why that’s a relief to me, well, this “pay later” sector isn’t that well regulated yet, in most places at least. The Financial watchdogs are still figuring out what’s good, what’s terrible, and what’s a grey area that should be left up to individual’s themselves to figure out. So if there was ever a time to make a quick buck at someone else’s expense, this would be it. But maybe I’m wrong. Maybe they’re in it for the long game. That just means the worst is still to come.
To get back to credit cards, there has been a general downward trend in their usage. Both the earlier mentioned article, or any related graph on Statista will show you that. Both the number of credit cards owned, and the transactions made with credit cards are decreasing. The main driving force for this seems to be that millennials aren’t using them. They are moving away from this type of credit, and moving towards different forms, such as the “pay later” apps. And not all is bad there either. As long as you pay on time, you won’t be charged with interest. But if you do this often enough, or you simply had a rough week, these repayments aren’t on the top of your cognitive priority list, and you might feel to make the payment, resulting in late fees and interest payments. So, my advice is to use this service wisely. And try to automate as much as possible.
There’s other advice as well, this time from our avid AfterPay user. She doesn’t recommend anyone putting big ticket items on “pay later” apps. I can see the rationale behind that: once you are being charged interest because you weren’t able to make an initial payment over a large purchase, the payments go up by QUITE a lot. And if you didn’t have the initial payment, you’re definitely not going to have this one… Sound familiar? Well, it’s just like a payday loan. Hopefully Klarna doesn’t send out people to break your legs…
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