Alternatives to Traditional Credit Cards

With an economy in turmoil, a large percentage of people are no longer qualifying for traditional credit cards. Even those who can qualify are trying to stay away from more traditional credit cards to reduce their personal expenses and debts. Rather than throw your hands up in the air and say there’s nothing you can do, here’s a look at a few alternatives to credit cards that may help you get back on your feet financially.

Credit Union Credit Cards

Studies have shown that credit cards issued through credit unions are far less likely to charge high fees and penalties often charged by banks. They have lower annual fees and longer grace periods to pay your monthly bill than a regular credit card, too.

Not everyone can qualify for a credit union membership or for a credit union issued credit card, but it’s definitely something to consider before signing on the dotted line of a regular credit card.

To find a credit union near you, go to creditunion.coop. The Credit Union National Association can help you find a credit union by calling (800) 358-5710.

Prepaid Credit Cards

On a prepaid card, you deposit the money onto the card and use it until you’ve run out. It’s much like a debit card. There are no interest charges on purchases since you’ve pre-paid for them and you won’t receive any billing statements in the mail.

Prepaid credit cards are not without fees, however. When you first set up the card, you may pay about $10 to open the account. Some prepaid cards charge monthly maintenance fees, transaction fees and then fees each time you put additional money on the card. Most prepaid cards do not report use to the credit reporting agencies, so it’s not even going to help rebuild your credit score.

Prepaid cards are a decent option for someone who needs a card with a Visa or Mastercard logo on it to make a purchase online, by phone, or to rent a car for example – but they’re probably not your best financial option for an all-the-time card.

Secured Credit Cards

To get a secured credit card, you make a deposit to the bank issuing the card – typically between $500 and $1000. Secured cards offer limited credit lines, but they do report your payments to credit reporting agencies which means they will help you re-establish your credit score.

Credit Card Spending is Spent

If you can’t pull money from your home equity, and you can’t get it from the stock market - what’s left?

Credit cards, of course.

Consumers have always relied on credit cards to keep themselves afloat during difficult times and right now, the times are showing that this consumer spending resource is pretty much spent.

Risky customers and in some cases, even prime borrowers, have had their credit limits slashed.  Many customers are unable to open new lines of credit. The credit card companies are even reducing their marketing efforts - have you noticed less credit card offers in the mail? According to CBS News, HSBC  sent out 54% less direct mail advertisements and Citibank has sent out 45% less.

For years (decades, even) credit card issuers were never overly consumed with risk.  It didn’t seem they limited the amount of money they would lend or who they would lend too with any strict rules.  But now, as reports come in that the private sector is not willing to invest or lend money to the credit card issuers, it appears our love-hate relationship with credit cards is about to just be “hate”.

From Seeking Alpha: “For the first time in 14 years, no one has been willing to buy bonds backed by credit card loans….You see, credit card issuers like Bank of America (NYSE:BAC), JP Morgan Chase (NYSE:JPM), and American Express (NYSE:AXP) lend money on credit cards. Then they bundle those loans up and sell them off to institutional investors like insurance companies, hedge funds, and mutual funds looking for income. That way they can lend more and more without taking on much of the consumer debt or the risk themselves.”

Now that investors are no longer willing to take on the risk of financing credit cards, and credit card issuers aren’t willing to take on more risk - it seems consumers are about to experience even less access to credit.