No matter where you stand in the credit card debate, “to use” or “not to use”, one thing is for certain and that is that the true cost of using credit cards and carrying a balance is very high. Many proponents of credit cards point to certain credit card benefits like rewards, convenience, fraud protection, etc. which everyone on both sides of the debate can agree are desirable things BUT is there maybe a way to have our cake and eat it too? While the goal of this article is certainly not to re-hash any of the pros and cons of credit cards let’s take a look at 3 credit card alternatives to see if we might be able to have some or all of the benefits of credit cards without the potential downsides.
#1 Rewards Debit Cards
Rewards like cash back, airline miles, and other perks seem to be one of the first things that many in the pro credit card camp will point to as the primary benefit to using a credit card. However, credit cards certainly do not have a monopoly on earning rewards. Rewards debit cards like the Perkstreet debit card offer cash back rewards just like a credit card BUT since the card is a debit card that is linked to a checking account there is no chance that the cardholder will overextend themselves on credit because there is no line of credit!
PROS
- Cash back rewards
- No line of credit (no chance for misusing credit)
- Just as convenient to use as a credit card
CONS
- Reduced fraud protection (as compared to credit cards with federal regulation protection)
#2 High Yield Checking Accounts
High yield checking accounts are a great way to not only have all of the convenience of a credit card (assuming that the high yield checking account you choose offers debit card access) while at the same time avoiding any potential misuse of credit, forcing one to save money and live within their means, and earning a relatively high rate of interest on money in the account at the same time! High yield checking accounts often have more onerous restrictions than typical checking accounts (i.e. balance requirements, spending requirements, etc.) but have interest rates that are currently averaging anywhere from 1% all the way up to close to 5%!
PROS
- High interest rate on deposited funds
- No line of credit (no chance for misusing credit)
- Just as convenient to use as a credit card (assuming debit card access)
CONS
- Reduced fraud protection (as compared to credit cards with federal regulation protection)
- Restrictions and requirements for earning maximum interest rates
#3 Secured Credit Cards
Wait! I thought we were looking at credit card alternatives… Isn’t a secured credit card still a credit card? Well, kind of. There is no line of credit associated with a secured credit card as a secured credit card functions much like a debit card in that you can only use the card to spend money that you have first deposited into your account.
OK… so if a secured credit card works essentially the same as a debit card then why not just get a debit card? One major benefit to using a secured credit card is that most secured credit cards report to the 3 major credit reporting bureaus which will in turn help to improve your credit score over time.
If you already have great credit and are out for rewards, rewards, and more rewards then stick with a reward debit card or a high yield checking account because a secured credit card is not for you. However, if your credit score could use a little work then utilizing a secured credit card might just be a smart way to give your credit score a boost and help you to quality for lower mortgage rates, lower auto loan rates, better insurance rates, etc.
PROS
- Ability to improve credit score over time
- No line of credit (no chance for misusing credit)
- All of the convenience of a credit card (and a secured credit card is still viewed as a credit card and not a debit card so much easier when trying to buy a cell phone, get a rental car, etc).
CONS
- Little to no rewards
- Some cards have high fees
- Money deposited into account does not earn interest (similar to a regular checking account but unlike a high yield checking account)
So… What Should I Choose?
Well, there is no one choice that is best for everyone but it is always good advice to do your homework, research all of your options thoroughly, weigh the pros and cons of each type of financial product that you have available to you and then make an educated decision. Be an educated consumer and even (gasp) read the fine print for any type of financial product that you are considering before making the leap.
What do YOU Think?
What do YOU think is the best credit card alternative?
What are some of the most important features for you to have in a method of payment?
Do you have any other alternatives to using a credit card besides the 3 mentioned above?
Author Bio: Joel Ohman is a Certified Financial Planner™ and a serial entrepreneur. Some of his current projects include a website for anyone that wants to compare car insurance and a website with some nifty online calculators. Joel is new to CreditScoreQuick.com and would encourage you to check out the credit resources section of the site.
