To Pay Your Bills: Which is Better – Credit Cards or Payday Loans?

When I was younger, my parents used to line up at an office in the next town to pay our electricity bills—in cash. Today, fifteen or so years later, I pay my own bills by clicking “Pay Now” on my online account, which is linked to my phone, electricity, and internet subscriptions. There’s no shortage of options for today’s bill-payers—unless, of course, it’s one of those lean months. In this case, there are usually two solutions: put it on your card or get a payday loan.

What’s the difference?

Many Australians already use their credit cards to pay their bills. BPay, Australia’s national online payment system, lets you associate your accounts with your credit or debit card so you can make your payments directly. Provided you don’t exceed your credit limit, you can even automate your payments so you don’t miss a deadline. The main advantage to this is that all your obligations can be routed to your credit card, so you only have to pay one bill at the end of the month.

Payday loans are short-term loans, usually lasting two to four weeks, that you pay back with your next pay cheque. Amounts typically range from $100 to $1,000, more than enough to cover the average person’s bills. Payments are made either with a post-dated cheque or a direct debit from your account, which you will have to authorize. Their strongest suit is speed: you can get the cash in as little as one day.

These loans can be useful when you’re short for one particular pay period, but aren’t advisable on a regular basis. The Australian Securities and Investments Commission recommends checking other options first, and leaving payday loans as a last resort (e.g. when a credit card payment won’t go through).

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Costs of borrowing

Both options are a form of credit, so there’s an inherent risk in every payment. However, under BPay, bills paid by credit card are considered regular purchases rather than cash advances. This means you pay your regular interest rate, or if you use your interest-free days wisely, no interest at all. With a bit of discipline, there’s virtually no difference between paying by credit card or direct debit.

Payday loans sometimes charge a fixed fee instead of an interest rate. In New South Wales and Queensland, the total costs are capped at 48%. Even so, payday loans are among the most expensive types of credit available: interest often hovers around 40%, and the total cost for fixed fees ends up about the same. Various fees also apply: an application or brokerage fee at the start and a large default fee if you miss the due date, for instance.

What if you can’t use your card?

If paying with your credit card or even a cash advance isn’t an option, there are lots of cheaper alternatives to payday loan. Often, for amounts lower than $5,000, you can qualify for a small personal loan with most banks, according to the government website Money Smart. The rate can be as low as 5% if you have good credit, or up to 16%.

Few people are aware of it, but low-income individuals can qualify for low-interest or even interest-free loans. The No Interest Loans Scheme (NILS) offers loans of up to $1,200 to people on welfare or whose income isn’t enough for basic needs. These loans can be used to buy furniture, computers, health aids, or consumables. If you’re in an area with little or limited access to transport, you can also take one our for car repairs.

You don’t even have to borrow to pay your bills. Most utility providers have hardship programs that will let you work out a payment scheme you’re more comfortable with if you fall into financial difficulty. If they don’t, says the Corporations and Markets Advisory Committee, you can bring the matter up with your local ombudsman. Centrelink also has a Crisis Payment scheme, which helps you make ends meet in the event of extreme hardship such as natural disasters or domestic violence. The Australian Government Disaster Recovery Payment is also another option, although you can’t have both at the same time.

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