Interest rates are low overall, frustrating savers and pleasing most borrowers, but credit card interest rates are not following suite. Credit card interest rates are at a 25-year high and are up 3.4 percent since 2015, the Federal Reserve says.
While it is illegal for credit card companies to raise interest on existing balances, their stated rates are higher than ever, a turn-off for new borrowers.
Younger generations are also more credit conscious. It’s easier than ever to check credit scores, and research shows between 80 and 90% of millennials know their credit score and check regularly.
There are still misconceptions (like that checking your credit can harm your score), and even millennials still have growing credit card debt – an average of nearly $5,000. Various studies show half to nearly 2/3 of the millennial cohort have credit card debt, but as many as a third have never had a credit card at all.
More people are turning to alternate types of financing, Traditional department store layaway, which is essentially taking out a micro-loan, often interest free within a certain period, is finding new life in online retail.
For example, more people are opening and using store-based credit cards and paying them off quickly. While they typically have even higher interest rates, they often offer quick discounts for opening and using them and introductory zero interest periods. Unlike traditional layaway, shoppers can take home their items right away, and still pay gradually over time.
For a more flexible option, PayPal, accepted by many online retailers, offers loans to cover purchases of $99 or more interest free for six months.
And an Australian app that has gained enormous popularity with more than 16,000 retail partners there is making its way to the US.
Afterpay works with online retailers to offer buy now, pay later options to online shoppers with small orders, mostly $35 to $200. Shoppers then pay off the purchase in four installments every two weeks, with no fees or interest. Fees for late payments are relatively low ($8 to $10).
While finance apps like Afterpay are easy to use, there are downsides. Afterpay can check credit scores and report to credit ratings agencies, meaning potential hits to credit for delinquent borrowers. The app’s approval process is case-by-case according to an algorithm, so buyers may be surprised when they go to check out and find they’re not able to use the app.
Installment payments are automatically deducted from the shopper’s linked credit or debit card, so borrowers need to be aware of the potential to overdraft their debit cards or incur interest if using a credit card.
Consumer reporters can ask further questions about alternative credit options' pros and cons. What happens to delinquent borrowers? How might easily available credit spur impulse buying? What retailers currently offer options like these, and what if any fine print should consumers be aware of?