Key takeaways
- Anyone with a low credit score knows that it can be tough to get a credit card. Luckily there are alternatives that can also help build credit.
- Secured credit cards, retail store cards, and subprime credit cards are all easy to qualify for, and accept low credit scores, but usually have higher costs.
- Certain buy now, pay later apps, co-signed credit cards, and becoming an authorized user on someone else’s credit card can help you build credit when used responsibly.
It’s not always easy to get a traditional credit card. If you have a limited credit history, low credit score, or limited income it can be especially challenging. When credit card application after application is turned down you may be discouraged, but don’t worry too much.
There are alternatives to conventional credit cards that you are likely eligible for. They can help you manage your finances and even build or rebuild your credit.
Let’s explore eight credit alternatives and see if one is a match for you.
1. Secured credit card
A secured credit card is an excellent option for those with no credit history or poor credit who want to build or rebuild their credit. Unlike unsecured credit cards, a secured card requires a cash deposit that acts as collateral and generally sets the credit limit. For instance, if you deposit $500, your credit limit will be $500. This deposit protects the card issuer; if you fail to make a payment, the issuer can use the deposit to cover your balance.
Secured credit cards pose less risk to issuers and so are much easier to qualify for. There are even issuers who don’t check your credit at all before approving your application. Secured cards offer a valuable opportunity for users to improve their credit scores through consistent on-time payments and responsible use. Simply make sure that your issuer reports payments to all three major credit bureaus or else your score won’t be effected.
By demonstrating financial responsibility with a secured credit card, you can gradually enhance your credit profile, eventually qualifying for unsecured cards and other credit products with better terms and higher limits.
2. Arranged overdraft
Many banks offer overdraft services that can be extremely helpful if you find yourself in a financial pinch. An overdraft allows you to spend more money than you currently have in your account, up to a pre-arranged limit, providing you with quick and convenient access to additional funds when needed. This can be particularly useful in situations where an unexpected expense arises, or when timing issues with deposits and withdrawals create a temporary shortfall in your account.
However, it is important to keep in mind that using an overdraft service often comes with associated fees and interest charges. These costs can add up quickly if the overdraft is not repaid promptly, turning a temporary solution into a more expensive financial burden. Therefore, it is crucial to use overdraft services judiciously and ensure you have a plan to bring your account back into a positive balance as soon as possible.
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3. Subprime credit card
Subprime credit cards are specifically designed for individuals with poor credit scores or limited credit histories. These cards can be a valuable tool for rebuilding credit, but they come with several drawbacks. Typically, subprime credit cards have high-interest rates, which can make carrying a balance very expensive. In addition to high-interest rates, these cards often come with additional fees such as annual fees, application fees, and monthly maintenance fees, which can further increase the cost of using the card. Moreover, subprime credit cards usually have lower credit limits, which means you will have less spending power and need to be more diligent about keeping your balance low relative to your credit limit to maintain a good credit utilization ratio.
Always read the fine print carefully before applying for any credit card. Understanding all the terms and conditions will help you avoid any unexpected costs.
Responsible use of these cards is essential to building or rebuilding your credit. This includes making on-time payments and keeping your balance low. Additionally, ensure that the card issuer reports your credit usage to at least one of the major credit bureaus. This reporting is vital because it ensures that your positive payment history and responsible credit use are reflected in your credit report, ultimately helping to improve your credit score over time.
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4. Retail store card
Retail store cards are a practical option for individuals with poor or limited credit, as they often have more lenient credit requirements compared to traditional credit cards. They allow you to shop at a certain retailer on credit. Retail cards often come with benefits and discounts for the issuing store. These cards can also help you build credit, if the retailer reports your usage and payment history to all three credit bureaus.
While these cards are easier to get, they do come with a few potential downsides. Retail store cards typically have high-interest rates, which can make carrying a balance expensive. Additionally, these cards are usually limited in their use to the issuing store or its affiliates, which may not be as versatile as other credit cards. Despite these limitations, retail store cards can give you access to credit when you really need it.
5. Credit card authorized user
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Becoming an authorized user on someone else’s credit card account can be a strategic way to access credit and improve your credit score. As an authorized user, the primary cardholder extends their credit line to you, allowing you to make purchases and benefit from their established credit history. This arrangement can be particularly advantageous if the primary cardholder has a strong credit history and a record of responsible credit use, as their positive behavior can reflect positively on your credit report.
However, it’s crucial to choose the primary cardholder wisely. Ensure that the person has a good credit score and consistently makes on-time payments. Their financial habits will directly impact your credit profile. If they miss a payment or carry high balances, it could negatively affect your credit score.
Communication and trust are key in this arrangement; both parties should be clear about expectations and responsibilities.
Lastly, ensure that the issuer reports usage and authorized users. Most financial institutions do this, but not all. If the credit card company does not report, this arrangement won’t help your score. It will still give you access to credit though.
6. Buy now, pay later
‘Buy now, pay later’ (BNPL) services have seen a significant rise in popularity, providing consumers with a convenient and flexible method to spread out payments for purchases over time. These services often appeal to those seeking an alternative to traditional credit cards because they can be interest-free if payments are made on time. This feature makes BNPL an attractive option for budget-conscious shoppers looking to avoid interest charges.
Additionally, BNPL services typically do not require a credit check, making them more accessible to individuals who might not qualify for credit cards due to a lack of credit history or poor credit scores.
While BNPL services offer many benefits, it’s essential to use them responsibly. Missed payments can lead to fees and interest charges, which can quickly accumulate and become costly. Furthermore, failing to make timely payments can negatively impact your credit score, potentially affecting your ability to obtain credit in the future. Also, they can lead to overspending.
Therefore, while BNPL services can be a helpful credit alternative, always read the terms and conditions carefully. Be sure that you can meet the repayment schedule and don’t buy more than you can afford. When used wisely, BNPL can be a helpful financial tool, but it requires careful management to avoid potential pitfalls.
Interested in buy now pay later apps?
Check out how Sezzle lets you make purchases and pay over time.
7. Short-term loan
For immediate financial needs, a short-term loan can offer a viable solution. These loans typically involve smaller amounts of money that must be repaid within a few months, providing quick access to funds for urgent expenses. However, due to their high-interest rates and associated fees, short-term loans should be considered only as a last resort and used sparingly. They are best reserved for true emergencies, such as unexpected medical bills, urgent car repairs, or other unforeseen expenses that cannot be postponed.
Before taking out a short-term loan, it is essential to have a solid repayment plan in place. Carefully assess your financial situation to ensure that you can meet the repayment terms without falling into a cycle of debt. Failure to repay the loan on time can lead to additional fees and higher interest rates, compounding the original debt and making it increasingly difficult to manage. Additionally, repeatedly relying on short-term loans can negatively impact your credit score and financial health.
8. Cosigned credit card
If you cannot qualify for a credit card on your own, enlisting a cosigner can be a beneficial strategy. A cosigner with a strong credit history can significantly increase your chances of approval. Their good credit standing reassures the lender of your creditworthiness. This arrangement allows you to access credit, build your credit history, and demonstrate your ability to manage credit responsibly.
There are important considerations to keep in mind. The cosigner is equally responsible for the debt on the account, meaning that if you miss a payment or default, it will negatively impact their credit score as well as yours. This shared responsibility can strain personal relationships, especially if there are misunderstandings or financial missteps. Therefore, it is crucial to have clear communication and mutual understanding with your cosigner about payment expectations and responsibilities.
Also, a lot of credit card issuers do not allow for cosigners. Do your research and find one who does offer this perk.
Responsible spending and timely payments are essential to maintaining a positive relationship with your cosigner and ensuring the arrangement benefits both parties. Regularly monitor the account to avoid any issues and make sure payments are made on time. By managing the account responsibly, you can improve your credit score and eventually qualify for credit independently, reducing the need for a cosigner in the future.
Bottom lineLack of access to a traditional credit card doesn’t mean you’re out of options. There are several alternative ways to get the extra cash or credit you need. One option is to consider taking out a loan, which can provide you with the funds you require, albeit often with specific terms and interest rates. Another approach is to buy items on credit through joint applications, where you apply for credit jointly with another person who has a good credit history. This can increase your chances of approval and help you build your own credit over time.
Additionally, the rise of buy now, pay later (BNPL) apps offers a modern alternative to traditional credit. These services allow you to purchase items immediately and pay for them in installments over a period, often without the need for a credit check. This makes them accessible to individuals who might not qualify for a conventional credit card.
Whether through loans, joint credit applications, or BNPL apps, there are various credit options available to suit different needs and circumstances. It’s all about finding the right fit for you. By exploring these alternatives, you can manage your finances effectively and work towards building a solid credit history.
