There are plenty of different forms of credit, all of which aim to help people with a range of different financial needs. Some types of credit are accessible to everyone, and some will only be available to those with a good credit history.
Credit cards are now available to most people, whatever their financial circumstances, so they have become one of the most common, and popular, forms of credit. Almost all banks offer credit cards and there are a lot of financial institutions whose entire business is built on just lending to customers through credit cards.
Because of the popularity of this type of borrowing, there’s quite a range of credit cards on the market. Whether you have a good or bad credit history, whether you need to borrow for purchases or to pay off other credit cards, there are so many options out there it can be difficult to know which one is the best option for you – and more importantly, it can be difficult to know when a credit card might not be the best option for you.
So, what are the alternatives to credit cards? Some alternatives include:
An overdraft is a credit facility that is attached to your normal bank account. Most bank accounts will have the option to apply for an overdraft, but some basic or children’s accounts won’t offer the facility. Your overdraft limit depends on the creditworthiness assessment that the bank will conduct before granting you the overdraft, but in some cases, customer’s may find themselves in an unarranged overdraft which is when you borrow more money than your overdraft limit allows. From April 2020, all overdrafts (including unarranged overdrafts) will charge a single annual interest rate for using the service and there’ll be no more daily or monthly fees for using your overdraft. This will bring overdrafts more in line with most other forms of credit.
Short term loans, also known as payday loans or instalment loans, allow consumers to borrow a small amount of cash for a short period of time. Rather than a revolving credit facility like a credit card, a short term loan will have 1 loan transfer date, and 1 loan repayment date for payday loans, or several repayment dates in the case of an instalment loan. Although anyone can apply for a short term loan, they tend to be most useful to those who have a bad or limited credit history where other lower interest products may be inaccessible.
This is a type of loan that is often applied for by people who don’t have a good enough credit history to be approved for a typical personal loan. Another person, usually a friend or family member will be the guarantor and they will have to pay the loan back if the customer fails to make the agreed repayments.
This type of loan is secured against an asset, for example your mortgage is secured against your house. It is simply a way of lending with a guarantee that the creditor will not lose out if the loan is not repaid. In the case of a mortgage, your house may be repossessed if you fail to keep up with your mortgage repayments. On a smaller scale, pawnbrokers operate in the same way: you give the shop a valuable item which they will pawn, or sell, if you don’t repay the loan back on time or in full to recoup their costs.
This is really just when you borrow your friends or family. It can be strange to consider it a loan as you often won’t pay interest back with the amount you borrowed and there probably won’t be any legal repercussions if you don’t pay back on time, but you have borrowed money and therefore it is a type of credit, albeit less formal than a credit card, for example.
Peer to peer lending platforms are like financial matchmakers. They offer an online service where individual lenders – who have money to lend and are looking for a good return - are matched with individuals or businesses who are looking to borrow at a lower interest rate than a conventional loan. Seems like a win-win for both sides, right? However it can be a risky investment as the borrower may default on the loan and there’s a risk the individual lender won’t get their money back.
Credit lines are a new alternative to credit cards which are slowly becoming more and more popular forms of credit. They are similar to a credit card in that you have a credit limit and you only need make a minimum payment each month, however instead of having a physical card, you just simply withdraw the cash straight into your bank account and interest is only paid on the amount of money drawn out of the credit line, rather than the total credit limit agreed.
Generally, all forms of credit maintain the same life cycle:
The only form of credit which might stray from this is private lending as it’s unlikely that your friends or family will make you sign a contract when you ask to borrow some money, but in some cases it might be sensible to draw up a simple contract in order to avoid later disputes.
Credit cards are popular because most people can get one. If you have a poor credit history, it doesn’t mean a credit card is completely inaccessible, however you might find yourself only being approved for high interest rate credit cards. Usually, you will get a higher credit limit than an overdraft facility, so people can borrow more with a credit card. Additionally, as you only have to make the minimum payment each month, you don’t have to worry about your repayments massively impacting your financial situation as it won’t be a large lump sum repayment. It is important to note however that only paying your minimum payment each month means it will take you longer to repay the whole balance and it will cost you more as you will be paying interest on the amount of credit you have used so it’s always worth repaying as much of your balance as you can – ideally all of it.
The closest alternative to a credit card is a credit line. It functions in much the same way, but you don’t have a plastic card – it’s all online and you can withdraw as much or a little as you need at the time.
Using a Polar Credit Line will mean you will get approved for a credit limit in line with our creditworthiness and affordability assessment and you’ll have flexible repayments so you can repay as much or a little as you want each month – as long as you repay at least the minimum payment.
Polar Credit is environmentally conscious which is one of the reasons we don’t issue plastic cards – small changes can make a big difference and not producing thousands of hard plastic cards each year is a small but mighty step towards a brighter, more sustainable future. Because you don’t have a purchase card, all you need is a bank account and a debit card. You withdraw the funds straight into your bank account to spend however suits you and we will collect your minimum payment from your debit card each month. It’s automatic so you don’t have to worry about manually making the repayment and we will give you plenty of notice for when your payment is due (and if we can’t collect the payment for some reason). If you’re able to make a larger repayment, you can just log in to your account and pay off more of your balance – easy!
We also have a friendly customer service team who care about your financial circumstances and understand that not everything always goes according to plan. They are on hand to help you with any queries – even if it’s just understanding a credit line better!
Because Polar Credit understands that access to cheap credit can be limited in certain circumstances, all of our customer’s will see their interest rates decrease over the term of their credit line. After your first anniversary, we will reduce your interest rate by 10% and then every six months you borrow with us, we will reduce your rate of interest by 5%, until it reaches 29.9%, meaning you’ll get rewarded for your responsible borrowing and for your loyalty – something that is hard to come by these days.
As with any form of credit, it’s important that you understand the risks involved and that you only apply for credit when you need it. Read the terms and conditions before you complete your application and if you have any questions, just ask!
More questions? Check out our FAQs section.