Alternatives to Credit Cards
Planning on making a relatively pricey purchase? Simply want the convenience of being able to spend without carrying cash?
Credit cards are just one of the ways you can buy things when you don’t have the money up front.
But credit cards aren’t for everyone and there might be a better way to deal with your financial need. So before you start applying for new plastic, consider whether one of these alternatives to credit cards might be a better fit for your circumstances….
Best alternatives to credit cards: a summary
- Debit cards
- Prepaid cards
- Arranged overdraft
- Personal loans
- Peer to peer lending
Perhaps the most obvious alternative to a credit card is a debit card. If you’re spending online, over the phone or in-store and don’t want to use cash, a debit card offers convenience and some consumer protection. However, it won’t allow you to spend money you don’t have, unless you have an arranged overdraft.
When you’re unhappy with goods purchased or have bought something that wasn’t as described, you may be able to get a refund too via Chargeback, which can provide extra peace of mind. This is a process whereby your bank reverses the transaction, though there is a time limit on when this can be performed and it isn’t necessarily a quick process.
Avoid additional fees
You can sometimes avoid additional fees charged for paying for things by credit card if you opt to use a debit card instead (though surcharges will soon be a thing of the past thanks to new legislation). And of course, when paying in full with existing cash, you avoid any interest too, though you won’t have the ‘superpower’ protection of Section 75.
See our guide to the difference between credit cards and debit cards here.
If you want a card that you can use abroad or give to the kids instead of cash, a prepaid credit card can be a sensible option. These cards don’t allow you to spend past the amount you’ve loaded onto your account, so it’s not possible to build debt.
Some prepaid card providers offer perks such as cash back or discounts to make their products more attractive. You may be charged a fee for opening a prepaid card though and there can also be fees for withdrawing cash from an ATM. Some charges may be applied to store transactions or if your card is dormant and unused. The key to using such a card wisely is knowing what you’re signing up for by reading all the terms and conditions.
Consumer protection for prepaid cards
Prepaid cards don’t offer the same consumer protection as credit cards under Section 75 of the Consumer Credit Act, though you may be eligible to some protection under voluntary Chargeback schemes run by some but not all providers (as above). If you’re worried about losing your card while on holiday or having it stolen, a prepaid card can provide peace of mind as you can block the card without risking the loss of your bank balance.
When it comes to borrowing money, your bank often knows you best. So, if you need a little extra cash on a short-term basis, you could consider applying for an arranged overdraft. This will allow you to withdraw money up to an agreed limit when your balance goes into negative figures.
Some bank accounts provide this facility interest-free up to a certain amount or for an agreed period, depending on individual circumstances. If you do choose to use an overdraft that you’ll be charged interest on, along with a plan of how you’ll clear the debt, you should be aware in advance how much it will cost you to borrow in this way.
It’s common for arranged overdraft interest rates to be fairly high, so although this can be a convenient way to borrow, it’s rarely the most cost-effective unless you have a 0% deal in place.
Arranging an overdraft with your bank is not often thought of as an alternative to credit cards, but it might be all you need to help you navigate a sticky patch.
Planning some home improvements or the holiday of a lifetime? Can’t access the best credit card deals with 0% periods or low-interest rates? It may actually work out cheaper for you to take out a personal loan if you can secure a more attractive interest rate.
Again, how much you can borrow and at what rate will depend on your circumstances. Along with knowing just how you’ll pay the loan back, and being confident that you can afford the repayments, you’ll need to look out for things like early repayment or late fees that have the potential to bump up the cost of your borrowing. Check what your eligibility is for a loan here, using our moneymatcher tool.
Make sure you’re crystal clear on whether you are taking a fixed rate or variable rate product too as this could have a real impact on your ability to service the loan and budget for other things. Check out which personal loan is best for me to demystify personal loan lending.
Peer to peer lending
Peer to peer lending is growing as an alternative to credit cards. This type of borrowing is a form of personal loan but instead of borrowing from a bank or building society you lend from individuals who would like to make more money on their savings than traditional savings’ accounts offer.
You’re matched with lenders through an online service that vets borrowers for suitability. This means you’ll still need to make an application and be risk assessed as you would for any other personal loan.
As with other loans, if you fail to make payments on time or default on the loan you could damage your credit score and be liable for additional charges and fees. It’s therefore critical you check out the terms and conditions as well as interest rates.
No longer reserved for making payments on online auction sites, PayPal can now be used to send money to friends and family, issue invoices for business and even pay for goods in shops and restaurants.
PayPal offers some consumer protection through its disputes’ resolution service. As it’s accepted by lots of online retailers, it’s pretty convenient too. Unfortunately, depending on what you are buying and where, you may not have the option to pay by PayPal, though the ability to use it in the majority of everyday transactions may not be far off. Even some bus companies now accept PayPal on their services!
Linking PayPal with a credit card
PayPal operates as another payment method – rather than a way of borrowing – unless you associate your PayPal account with a credit card or use PayPal’s own PayPal credit.
However, if you use a credit card from a different provider attached to your PayPal account, you won’t be protected under Section 75 of the Consumer Credit Act. This is because you’re conducting business through a third party.