Credit card companies are raising interest rates on just about everybody these days, fueling many people’s passionate disdain for using any credit card for any reason. Once upon a time, there was only one alternative to spending with credit cards: cold hard cash. But then came debit cards—accepted everywhere just like credit cards, but without annual fees, finance charges, and the looming risk of lifelong indebtedness. Today, credit card alternatives are growing steadily and are looking even more attractive. That said, some alternatives to mainstream, unsecured credit cards are total rip offs—like many prepaid debit cards and even many secured credit cards.
Good Credit Card Alternatives
There’s nothing wrong with cash and traditional debit cards, but a couple of new products provide some credit card perks (cash rewards or the ability to borrow for a big purchase) without credit card trickery (minimum payments and creeping interest rates).
Rewards Debit Cards
Debit cards are becoming Americans’ plastic of choice. In 2009, debit card transactions surpassed credit card purchases for the first time in history thanks, in part, to debit cards’ popularity among younger spenders. That’s great, because it shows that more Americans are becoming debt-averse. As I’ve written before, however, some debit cards have a ways to go to match benefits credit cards offer like cash rewards and fraud protection. But now, there are rewards debit cards.
PerkStreet Financial offers a debit card tied to a free checking account that pays users one percent cash back on all non-pin purchases. So you can get cash back for your spending without giving business to a credit card company!
I am a huge fan of peer-to-peer lending sites like Prosper and Lending Club; they let individual investors make loans directly to borrowers. With no bank in the middle, investors get higher returns and borrowers enjoy lower rates on personal loans.
Case-in-point, three years ago I took out a Prosper loan to consolidate debts at a savings of about four percent. Now that my loan is paid off, I’m starting to lend money and an earn eight or nine percent annual return; far better than the paltry one or two percent banks are paying these days.
Although I don’t advocate going into debt, if you absolutely need to borrow money for a big expense, consider getting a 36-month peer-to-peer loan at a fixed interest rate instead of borrowing on credit cards.
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Not so Good Credit Card Alternatives
I dig rewards debit cards like PerkStreet and the peer-to-peer lending model. But if I were you, I’d stay away from these products that disguise themselves as alternatives to credit cards but will actually end up costing.
Prepaid cards, sometimes called prepaid or re-loadable debit cards, seem like a good alternative to credit cards: You transfer money onto a the card and use it like a debit card; you can only spend what you have. Problem is, these re-loadable cards are loaded with fees.
Each card has a different fee structure, but these are some of the fees I’ve seen on prepaid cards:
- Account opening fee
- Per transaction fee ($1 or $2 every time you use the card)
- Re-load fee
- Monthly fee
- Inactivity fee
- Customer service fee (every time you call them)
Although these cards are often marketed to individuals without bank accounts, I have seen some marketed to college students and otherwise savvy but credit-averse folks.
If you know of a fair prepaid card, let me know in a comment. Otherwise, do your homework before you sign up for one of these cards!
Secured Credit Cards
Although secured credit cards are, in fact, credit cards; I consider them an alternative to regular, unsecured credit cards because you can’t exactly go into debt with a secured credit card.
On the surface, secured credit cards look like prepaid cards. You deposit money into a savings account and that deposit becomes your credit limit. You can make charges on the secured credit card up to your credit limit, and you pay back the charges monthly (either in-full or over time).
The big difference is that secured credit cards report your payment history to the credit bureaus, so you’re building credit history. You can’t go into debt, because you haven’t actually spend money you don’t have. For these reasons, secured credit cards can be a good tool for anybody having trouble building or reestablishing credit. Just be careful, as the majority of secured credit cards are marketed to people with major credit problems and, as such, contain outrageous fees up to several hundred dollars a year.
You’re much better off calling your existing bank and asking if they offer a secured credit card product. Expect to pay an annual fee for a secured credit card, but if you’re looking at a fee over $100, you’re probably being taken.
What do you think? Do you use a credit card alternative that I didn’t mention here? Let me know in a comment!
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