Credit Card Alternatives
Credit cards are a great tool to help you build credit, and can often be your only option for online purchases. However, if not used responsibly, credit cards can also come with a few drawbacks. For starters, they can tempt you into high interest debt. If you can’t make your minimum payment each month, or if you go over your limit, they can also damage your credit history. And there’s always a chance your credit card number could be stolen
For those reasons, we understand why some people don’t feel comfortable using credit cards to make their everyday purchases. And if you have no credit history or a bad credit history, you may not qualify for a credit card at all. Whatever the case may be, here’s a list of credit card alternatives you can choose from that allow you to make purchases or access credit.
There’s a good chance you already have a chequing account; in fact, it’s probably where your paycheques are deposited. Chequing accounts don’t help you build up your credit score, but they are a good tool for tracking your spending, staying on budget and not spending more money than you have. If you’re not comfortable carrying cash, the debit card that comes with your chequing account might be the safest piece of plastic to keep in your wallet. Depending on which bank and account you choose, there may or may not be monthly fees attached to your chequing account. Before simply choosing one, you should consider how many transactions you make each month and find the best chequing account for your needs.
A prepaid card is essentially a gift card with a credit card company’s logo on it. With a prepaid card, you simply load the card with any amount of money, up to the predetermined limit (e.g. you can buy a $50 card, $100 card, $500 card, etc.) and use it to make purchases. Like the chequing account, prepaid cards don’t help you build credit, but they can teach you how to use a credit limit responsibly and help you make online purchases. Because you can’t carry a balance on a prepaid card, there are no interest charges involved, but you may have to pay purchasing fees and/or a monthly fee; for this reason, prepaid cards can be a very expensive way to spend money that is already yours.
Secured Credit Cards
If you can’t get a regular credit card because your credit score is too low, a secured credit card is one tool that can help you rebuild your credit. With a secured credit card, you have to pay a deposit to the credit card company, in order to open your account. The deposit is typically 100-200% of the credit limit you want. For example, if you want a $500 secured credit card, you would have to provide a deposit of between $500-1,000. (Note: There will be a monthly fee on top of that.) If you can’t make a payment on your secured credit card one month, the credit card company then has the option of pulling funds from your deposit in order to make it for you. The payment history of your secured credit card is reported to credit agencies, so it’s important to be responsible with your card and know that it’s helping you build up your credit score.
Charge cards aren’t nearly as popular as they used to be; in fact, American Express is one of the last companies to still offer them. If you have an excellent credit history, a charge card is essentially a credit card with no limit – but it comes with the expectation that you will pay your balance in full each month. For a hefty annual fee (anywhere from $100-600), your charge card may also be a rewards card that can help you rack up even more points than a credit card with a low limit. But you have to be careful: if you can’t afford to pay the balance in full, interest rates on charge cards are extremely high – usually in the 30% range – so you wouldn’t want to use your charge card unless you were absolutely sure you could pay it off.
Personal Loan or Line of Credit
Finally, if you were thinking of getting a credit card so you could have access a lump sum of money to make a purchase or use in case of an emergency, there are two other options you can consider: a personal loan or a line of credit.
A personal loan would be appropriate if you already had a purchase in mind. You would have to get approved for the amount of money you need to make the purchase, and the interest rate on your loan would be a reflection of your credit score – the higher your score is, the lower your rate can be. With a personal loan, the total amount you borrow plus interest costs over how many years you want to repay it are added up and divided by the number of months the bank wants you to repay the loan; that amount must be paid each month.
A line of credit may be a better option, if you just want access to money in case of an emergency. Your line of credit is seen as another bank account on your online banking, so you can transfer funds to a chequing account, as you need them. Similar to a home equity line of credit, the interest rate on your personal line of credit will be variable, attached to Prime (i.e. Prime +/- 1.00%) – and the only payment you need to make each month is the interest on whatever amount you’ve borrowed.
If you are a responsible borrower and always make at least your minimum monthly payments, both a personal loan and loan of credit can help you build your credit.