Do you really need a credit card? Most people believe so. I have had a love-hate relationship with credit cards, admittedly using cash and alternatives more often than most people I know. Credit cards can be a valuable tool, allowing you to make purchases with credit from the bank or retailer, as issuers. You must pay these debts back.
For disciplined cardholders, who pay their monthly bills in full, credit cards are a convenient tool. However, Americans carry an average balance of $6,354 at the average 16.28% interest rate. These folks are borrowing to spend money, growing their balances at fast rates while incurring exorbitant interest costs. It is a toxic formula.
Many people believe a credit card is essential. Roughly 83% have at least one credit card in their wallets, and 52% are carrying a balance.
The Benefits of Credit Cards – Can They Be Found Elsewhere?
Credit cards are more convenient than paying with cash or checking accounts. Many retailers do not accept cash, and it is tough to carry a wad of bills in your purse or pocket. With credit cards, you can make fast payments, transfer between accounts, have more shopping options, and track your spending. Some alternatives like debit cards, share this convenience factor.
Building Credit History
More than most alternatives, credit cards can help you establish your credit history and boost your credit score. When you make purchases with a debit card, the funds are deducted from your checking. You can improve your creditworthiness by paying your bills on time with checks like rent, utilities, car loans, or even a loan through the Lending Club. You can set up an Experian Boost for free, linking certain payments like your cell phone and streaming service to lift your credit score a few points.
Credit cards offer many perks to their cardholders, such as cashback, points, discounts, and other rewards. Keep in mind that higher fees may accompany better perks. Charge cards and even debit cards may offer some of these benefits. If you link PayPal to your credit cards, you can still get whatever points, miles, and rewards associated with your specific card.
Savings and checking accounts do not offer these awards, but you can earn some interest income, admittedly at low yields these days.
Credit cardholders may be able to get cash advances by borrowing money using the available credit limit to take out a short-term loan. This double-edged benefit is a more comfortable and quick way to borrow money than getting a personal loan, but it is also more expensive.
Its costs have two components: first, there is a $5-10 flat charge or a percentage of your borrowing, and secondly, your interest rate on the advance will likely be higher than your regular purchase APR.
If you borrow for immediate needs, advances may be faster. However, it is ideal if you have an emergency fund when you need funds in a hurry. You may tap into other alternatives to get various loans reasonably quickly from Peer-to-Peer (P2P) lenders like the Lending Club. Otherwise, you can go to a traditional bank for a personal loan but it may be a slower route.
Credit card protections for holders come from the Fair Credit Billing Act (FCBA). Your card has protections if lost, stolen, used without your permission, and potentially fraudulent transactions. Holder liability for unauthorized use is limited to $50, which may get waived at some banks.
The Electronic Fund Transfer Act (EFTA) covers fraud associated with an ATM or debit card. Liability limits are a bit more complicated for debit cards. If you report your card lost or stolen, your liability is:
- Zero before any unauthorized transactions,
- or $50 within two days; $500 within 60 days; and no protection after 60 days.
- However, there is zero liability if there is evidence of fraud transactions without a stolen or lost card.
For online purchases, PayPal may be an attractive alternative to credit cards as it has an added layer of encryption technology to avoid fraud.
11 Alternatives To Credit Cards
1. Debit Cards
Debit cards provide the convenience of making purchases with a plastic card emboldened with a Visa or MasterCard logo. They are widely accepted at retailers and can give cashback and rewards.
You can withdraw money or transfer funds and make purchases via point of sale (POS) with a PIN. Some people do not like entering the PIN for security purposes, and especially during the COVID pandemic. They can bypass the terminal to complete the transaction by signing for their purchases.
Your debit card purchase amounts are deducted electronically from your checking account in days. Make sure you keep some balance in the checking account to avoid overdraft fees from overdrawing.
Debit cards don’t provide the user with the same temptation or danger of overspending as credit cards. As such, debit cards are useful for those who overspend, aren’t creditworthy, or have little experience using cards like teens. You can get a debit card without a credit history. The first card I carried was a debit card because I didn’t want to have cash.
It Won’t Help Your Credit History
However, debit cards do not appear on your credit history or positively affect your credit score, as you are making payments from your funds. Unlike credit cards, the credit bureaus (Equifax, Experian, and TransUnion) do not receive reports of your debit card activity. Therefore, debit cards won’t help you build up your credit history. There are other ways you can improve your credit history outside of using a debit card.
2. Prepaid Debit Cards
To avoid overdraft fees that may mount up from debit cards, some people prefer prepaid debit cards. It has all of the benefits (and drawbacks) the debit card has, but it has an increased limitation. You can only spend up to the amount on a card. Like debit cards, it is safer and more convenient than cash or checks. Prepaid debit cards are a good option for parents who have children in high school or college-age. These cards can help students learn how to use a card with spending limits.
3. Charge Cards
A charge card (e.g., American Express, gas companies) requires you to pay your balance in full each billing cycle. Typically, to be eligible for a charge card, you need to have a good to excellent credit score of roughly 700 or higher. Unlike credit cards, you have uncapped spending abilities and do not pay interest.
High annual fees range from $100 to $550, and these costs go up quickly. The higher the fee, the more significant and tailored are the features.
The American Express Platinum card is top of the line, is metal instead of plastic, and a status symbol for many. I have this card for years which I originally used for my traveling work schedule. It has tremendous benefits and flexibility, some of which I don’t fully use, and I think a change is in order.
Plastic or metal aside, it is your responsibility to manage this significant charging power well. You will incur a steep late fee if you missed the payment date, and it will be reported to the credit bureaus, impacting your score. You can easily overspend, so it is up to the user to recognize that you have to pay your balance down to zero during the cycle.
Paypal is a payment app, has the convenience of a credit card when shopping in stores, online, or as a mobile application. You can use this Instant Transfer service to send money to anyone, make fast payments, and refund faulty goods options. While PayPal may not be yet as widely accepted as credit cards, that gap will likely narrow over the next few years.
Essentially, PayPal connects to your bank checking account, debiting each amount instantly. You can link PayPal to credit cards and continue to get points, miles, and any rewards available from your card. You can get cash from PayPal if you participate in surveys.
5. Secured Credit Cards
A secured credit card is usually the best card for those who have already had financial challenges such as bankruptcy or managing a traditional credit card. It can also help those with limited or no credit history. Unlike debit cards, secured cards can help you build or rebuild your credit history.
They are easier cards to qualify for than credit cards, but they will look at your credit background and employment situation. Also known as a collateralized credit card, it requires you to deposit money in a bank account equal to its credit limit. The security deposit is your collateral.
You are usually setting the credit limit by your deposit amount. Start with a small deposit, say $300, manage your spending, and pay your bills on time so that you can build up a positive history. Typically, the issuer reports your purchases to the credit bureaus. There may be fees to pay to apply for the card and its processing.
6. Become An Authorized User
If you don’t have a card for various reasons–too young, limited, or poor credit history–, you can become an authorized user of another credit cardholder such as a parent, a sibling, or a close friend. If you go this route, make sure that you become an authorized user of someone with a good-to-excellent credit score and manages their bills well.
You are piggybacking on their credit profile (for which you should be immensely appreciative), but, as an authorized user of someone with poor credit, your score will reflect that person’s score on your credit. In other words, you will not be doing yourself any favors in that situation.
Authorizing your child as a user on your card is a good option for creditworthy parents. They can teach their children how to handle credit cards responsibly, set limits, keep track of spending, and take away authorization if the cards are misused. It may be a more challenging situation to set boundaries for an older adult as an authorized user.
7. Store Credit Cards
I am not a fan of retail (or store) credit cards, nor have I ever been. It’s the sales pitch at the point of sale where you are most vulnerable to getting a credit card you don’t need. It’s the retailer, not the clerk at the checkout, who I fault for the technique that turns many people (myself included) into silly putty.
Typically, the sales clerk will often talk to their customers at the point of sale, asking if you have their branded store card. Your arms may be holding a significant load of purchases and a credit card, but before you answer their question, they are offering a 10% discount on your purchases. Oh, and it will only take ten minutes more. It takes longer than that as the clerk tells you to look around since you are getting money back into your pocket.
The discount and future discounts in a store you tend to visit us often can be worthwhile. However, I don’t recall receiving any deals that were greater than 15%.
The negatives of having a store credit card far outweigh any positives, at least in my experience. Store cards carry higher interest rates than traditional credit cards, which are high enough. Applying for the card will impact your score slightly.
My personal experience years ago (the late 1990s) with a store credit card, which I used probably twice, lingers with me still. I signed up for the card. After getting the 10% discount on a warm coat, raincoat, and a few other garments, I did get their card. It was a higher bill than usual as I was shopping in a hurry, leaving my office to get these items for an overseas work trip. As is my practice, I paid the bill before its due date so I wouldn’t forget.
Months later, we applied for a mortgage refinancing but, I found an error on my credit report. It indicated that I had an outstanding bill from the retailer, where I had my one and only store credit card. Without identifying the retailer (it’s a Fifth Avenue behemoth), I called and wrote letters, receiving no answer. I visited their credit department, but no one would reverse the notation.
Ultimately, as we ran out of time for our refinancing application, I paid the bill twice! The second mistake I made regarding the store card, I closed the card. Later on, I realized you never close any credit card, just put it in a drawer.
8. Gift Cards
A gift card is a stored-value card containing a specific dollar amount for future discretionary spending. There is usually an expiration date that can be short term. Once the card’s sum is spent down or has expired, the card no longer has any value. Gift cards represent a retailer and potentially its affiliated businesses.
You can buy the gift card with cash or a credit card. Gift cards are on display on checkout lines, sold physically or online as an eGift such as an Amazon card. It is an easy way to give someone a present, especially during holiday times. We gave and received many gift cards through the years, especially for countless children’s parties, ours and their friends.
Besides the impersonal nature of gift cards, they are easy to lose, forget, and expire, so that it may be a waste of money ultimately. When these cards expire, the money you spent on the card is gone for the person you were gifting. On the other hand, the retailers do well from the gift cards as the unused dollar amount goes straight to their bottom line.
People spend roughly $100 billion on gift cards, with about $3 billion going to waste. National Retail Federation reported more than 59% of people surveyed in 2019 preferred a gift card for their holiday present. Another survey said that 80% of the gift card funds are spent within a year, leaving 20% on cards. Looking back, I regret giving cards, preferring more memorable gifts.
9. Apple Pay
There has been a significant rise in mobile commerce, ushered with new technology in recent years. Electronic mobile wallets like Apple Pay and Google Pay are widely accepted digital cards linked to your credit and debit cards. They are a mobile payment service that works off your smartphone device, allowing you to make contactless, secure services in retail stores, in apps, and online.
It is convenient having a card on your phone, limiting the need to carry a lot of cards or cash in your physical wallet. You can track your spending like traditional credit cards.
If you lost your physical wallet or someone stole it, you would lose cash and need to contact each of your credit and debit card issuers. Your stored information is with a third-party provider. Each transaction must be approved by the user using a PIN or a fingerprint as a security measure. It may offer rewards or discounts but in exchange for fees.
Among its disadvantages, there are spending limits, and it may be even easier to pay, and your phone is readily available. At least with credit cards, you can leave them behind and window shop. Your phone needs charging, which may temper some of its convenience. As far as security goes, it may depend on how you manage your phone security.
10 Cash And Checking Accounts
They say cash is king, and for many, it remains an essential alternative to credit cards. It doesn’t provide points, miles, or rewards and may not be accepted everywhere. Cash is not convenient to carry and is easily lost and stolen. When cash is gone, it is gone like a home run over a New York Yankees’ fence or wall.
Its significant benefit is in serving as a limit to spending and as an emergency fund. Cash has a tangible feel, and you can put it into your savings and checking accounts, which will not generate much interest in this low-interest-rate environment, but you may pay fees if you don’t maintain the bank’s minimum.
You can invest your money from assets you can convert to cash in your retirement investment accounts to watch your cash grow through compounding. You can use your checking account to pay your bills, at some retailers, and to everyone who will accept a check as payment.
I use cash and checking accounts for discretionary spending where possible.
Overdraft protection is a personal line of credit you can get from the bank to cover your checking account. This credit works when you spend more than you have on deposit in your checking account. By arranging this, your check will not fail for insufficient funds. A bounced check is embarrassing and a red flag. You can’t withdraw money from an empty checking account depending on overdrafts.
You should not rely on this protection except in an emergency. If you are prone to a miscalculation of what is in your account, you need to remedy it by handling money with care.
The bank will either charge an annual fee or $25-$30 for each overdraft. That can add up. How much coverage you have from your bank depends on you and your creditworthiness. You should not rely on overdrafts except as an emergency, such as when your car broke down, and you only had a check with you but not much in that account.
Credit cards are a valuable tool if you pay your balance in full, avoiding debt accumulation. Used the wrong way, credit cards can be toxic. For those who need more discipline, there are alternatives that can limit your spending but still provide the convenience you don’t get from carrying cash around. There is a range of credit card alternatives that provide benefits and serve various purposes that can reduce your reliance on credit cards.
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With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.