Credit card use in the UK has become ubiquitous. Once the preserve of only the wealthy, easy credit is now available to millions. Whilst being extremely convenient and sometimes necessary, it is important to be aware of the risks involved as well as potential benefits. A recent survey into people’s credit card behaviour revealed that only 1 in 4 spenders knew their existing balance and only 1 in 10 was able to accurately estimate how long it would take them to repay their credit card debt.
With that in mind, I have gathered together, a number of alternative options and ideas for those who wish not to go down the credit card route. This article does not constitute financial advice and is only for information. If you need a financial adviser, you can visit www.unbiased.co.uk where you will find details of local financial advisers.
Debit card
A debit card is linked to your current account and lets you spend up to the limit of the money you have available in your account. They are cheaper than standard credit cards as there is no interest charge applied for purchases. But they do not offer any of the additional benefits such as protection against fraud or future purchase price protection. And whilst on the face of it, a debit card is ‘safer than a credit card in terms of building up debts, bear in mind that if you go over your overdraft limit on your current account, which can happen easily, you are liable for ALL charges incurred, including interest on the original amount borrowed.
Overdraft
An overdraft is an agreed limit that allows you to withdraw more money or make additional purchases up to a predetermined amount. This type of credit card alternative allows you to borrow a certain amount of money against the funds held in your current account. They can be helpful if you need temporary additional funding, but should not be used as a regular means of income as the interest rates can be very high and if you fail to keep up with repayments it can result in damage to your credit rating.
Personal Loans
Another type of credit card alternative, personal loans allow you to borrow a larger sum of money for between 1 and 7 years. They can be used for things like debt consolidation or to pay off existing credit card debts and help improve your credit rating by reducing the total debt on that one loan. They are also commonly used for medium-sized purchases such as holidays and home improvements. The amount of the loan and the terms can both affect the interest term you could be offered. These types of loans can be an alternative way to manage your borrowing and there are a number of different providers offering them including the major banks, building societies and specialist lenders.
Secured Loans
A secured loan is where you borrow money from a lender in order to secure the funds against property such as your home or car which acts as security, for instance, a mortgage is a type of secured loan in that if you stopped paying your mortgage, you could be at risk of losing your home. They are generally offered at a cheaper rate of interest than unsecured loans, but you will have to be prepared for negative equity if the property in question were to lose value. A borrower must pay back the loan plus interest over a set period of time.
Guarantor loans
Guarantor loans work by asking a friend or family member to act as guarantor over the loan. The lender will contact that person and ask them to confirm their willingness to repay the debt if the borrower defaults. A guarantor is usually a family member, such as a parent or sibling, but could also be a friend.
Peer to peer lending
This type of credit card alternative is becoming increasingly popular with the rise of online lenders such as Zopa and RateSetter. These companies match borrowers with appropriate lenders and offer a way to get around traditional banking restrictions. Repayments are made on a monthly basis and the interest rates start off typically at about 10% but can be higher or lower depending on your personal circumstances.
Peer to peer lending may not be suitable for everyone, but it does offer an alternative way to obtain funding without having to go through the usual channels.
PayPal Credit
PayPal, asides from being an online payment channel, also offers its own credit service called PayPal Credit. This service allows customers to borrow money to pay for online purchases up to a certain amount. It can be an instant way of buying things without having to wait until you have the funds in your bank account. But bear in mind that as with credit cards, there are standard interest rates associated with this type of borrowing which could prove expensive if not repaid promptly. I have used PayPal Credit myself for a number of purchases. The advantage over a credit card is that all your purchases are itemised so you know exactly when you will pay them off. As opposed to a credit card, where your balance is not itemised.
Klarna
You may have seen the name Klarna pop up recently on your shopping baskets. Klarna is a relatively new service offering customers the ability to pay for products online in 3 instalments. The option to pay within 30 days of the purchase is also on offer. Klarna was founded in Sweden and is now a significant player in the online shopping industry, with 9 million users across Europe. It has become one of the standard payment options on many e-commerce websites such as ASOS and Boohoo.
Credit Card Alternatives In Summary
So which one to choose? Well, it’s up to you to do your thorough research before making a purchase. There are also some great adages that you can ask yourself before buying anything such as “do I really need this right now? Can I afford it? Do I have the money to pay for it today?”
It can also be a great idea to delay the purchase and wait and see how you feel the next day. Impulse buying can be extremely expensive and using easy credit can make your debts pile up in no time.