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Borrowing money from family members (or lending it to them) can be risky. Though all debt is chancy, family loans pose different risks.

While family lenders don’t have to worry about pulling (or affecting) anyone’s credit score, private loans may put a strain on otherwise strong relationships. Depending on the loan amount, there may also be tax implications to consider.

That said, there are ways to thoughtfully issue and receive family loans. Here are our best tips for lending with family and keeping your relationships intact.

What Are Family Loans?

Family loans are those given and received within a family group, rather than in a typical lending situation, such as a bank or credit union, or even a payday lender.

Someone who may not qualify for a traditional loan might be inclined to ask a family member for a loan. A family loan can be in both parties’ interests. For example, the borrower might receive a better interest rate than they would from a bank, and the lender might realize a higher interest rate than they would from a savings account.

Reasons someone might ask a family member for a loan are similar to those for considering a personal loan: They might need cash for emergency medical expenses, unexpected home repairs, or adoption or fertility treatment costs.

💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.

How Do Family Loans Work?

At a basic level, family loans work similarly to traditional loans: One person requests a loan, and another approves it. While that’s an oversimplification, the concept is the same. There is usually less paperwork involved in a family loan, with no application or credit check necessary, although experts recommend a formal contract detailing each party’s rights and responsibilities.

Terms for the Lender to Include in a Family Loan

•   Amount loaned

•   Interest rate, if the lender charges interest

•   Payment amount (often monthly)

•   Penalties for non-payment

Terms for the Borrower to Include in a Family Loan

•   Amortization schedule, with principal and interest amounts clearly stated

•   Ability to pay the loan off early without penalty

•   Periods of payment suspension in cases of hardship

Risks and Benefits of Family Loans

There are risks and benefits to family loans, no matter which role you’re assuming. However, while both the borrower and lender may put a strain on the family relationship involved, the lender is likely to bear the greater financial risk — after all, it can be difficult to recoup your losses when you have no official financial authority.

Risks of Family Loans

One of the biggest dangers of family loan arrangements is the potential for conflict within the relationship. People tend to have strong emotions tied to money. However, some risks lie solely with the borrower or lender.

Risks for the Borrower

•   The relationship may be endangered if the loan repayment plan falls through.

•   Although avoiding a credit check — and possible negative credit consequences — is a plus, family loans also fail to help borrowers build their credit history since they’re not reported to credit bureaus.

Risks for the Lender

•   The relationship may be in jeopardy if the loan repayment plan falls through, which puts the lender into a particularly tricky situation if they need the cash back for their own finances.

•   It’s easy for family lenders to lose their money outright if the borrower constantly defers to an IOU.

•   It can be difficult to recoup losses or enforce any substantial consequences for borrowers who go into default since family lenders don’t have any financial authority or backing.

•   If the loan is interest-free and for an amount in excess of the IRS gift tax exclusion, it may trigger the need to file a gift tax return (and potentially pay taxes on the gift).

Benefits of Family Loans

Despite the risks, family loans do have some attractive qualities.

Benefits for the Borrower

•   Family loans present a potentially low-cost alternative to traditional credit options. Family lenders usually don’t assess fees and may not charge interest.

•   Family loans can carry much easier approval standards than their traditional counterparts. At a financial institution, borrowers are subject to credit checks, employment history verification, income verification, and more. A family member is unlikely to run those checks.

•   Family loans often employ more flexible repayment standards than traditional loans do, and family lenders may be more lenient if the borrower faces extenuating circumstances that make it difficult to make payments.

•   Failure to pay private family loans promptly — or at all — won’t impact the borrower’s credit score the way such behavior would with a traditional loan.

Benefits for the Lender

•   It can be rewarding to help out a family member in need, particularly if they’re putting the money toward a major life goal such as home ownership.

•   If the lender chooses to charge interest on the loan, they can earn interest as the borrower repays the loan.

Tax Implications of Family Loans

It may be surprising to learn that loaning money to a family member could be consequential enough to land on the IRS’s radar.

Fortunately, most family loans fall outside the IRS’s purview. It’s only when they exceed IRS-defined amounts and are interest-free that lenders must report them on their tax returns.

If a family lender offers an interest-free loan to a family borrower, the IRS still treats the transaction as a loan and assumes the interest that should have been charged counts as a gift to the recipient. The government publishes minimum interest rates every month.

That’s no big deal if the loan is for, say, $300. But if the unpaid interest — or unpaid loan balance — exceeds the annual gift-giving exclusion (which is $19,000 ($38,000 for married couples) for 2026), the lender might be responsible for filing a gift tax return and potentially paying taxes on the gift.

The IRS might also count the should-be (imputed) interest toward the lender’s gross income, even if they don’t charge or receive interest. Again, this isn’t a big deal on loans of just a few hundred dollars, but a large enough loan could impact the lender’s finances.

Making a Family Loan Legitimate for Tax Purposes

The main thing that makes a family loan legitimate to the IRS is a family loan agreement that specifies repayment terms. If an agreement is not in place, the agency may treat it as a gift rather than a loan.

The federal government sets minimum interest rates (as noted above) that lenders can charge on private loans, such as family loans. If the lender charges less than the minimum interest rate, the IRS may assess taxes on any unpaid interest that is deemed payable.

Keeping records of payments made will also show the IRS that the lender was tracking the debt and that there is an expectation of repayment.

Recommended: Paying Taxes on Personal Loans

Tips to Successfully Borrow From or Lend Money to Family

If you’re considering lending money to or borrowing money from a family member, adding some structure to your loan can help minimize risks while still allowing everyone involved to reap the benefits.

Planning Your Family Loan-Out

A family loan frequently takes place in a single, impromptu transaction: The borrower asks for some money, and the lender gives it.

A better idea is to make a concrete plan together that specifies all the loan’s terms, such as repayment installments and timing. Lenders might want to consider charging interest, especially on large loans, due to the tax implications outlined above. Even a low family loan interest rate can motivate a borrower to take repayment seriously.

Recommended: What Happens If You Default on a Personal Loan?

Making a Family Loan Official

Clear communication and boundary-setting skills make pulling off a family loan a positive experience for all involved, and oftentimes, the best way to achieve those goals is to write things down.

Drafting a formal money-lending contract also makes your loan official in the eyes of the IRS, which can help prevent it from being classified as a gift for tax purposes.

Terms to incorporate in your family loan agreement include:

•   The amount loaned

•   The loan’s repayment terms, such as frequency and amount, as well as a due date for when the borrower must repay the loan in full

•   The loan’s interest rate and fees, if any (for instance, the lender may decide to charge late fees if the loan repayment terms are not honored)

•   Clauses concerning what happens if the loan is repaid early, such as a prepayment penalty, or what happens if the borrower goes into default for any reason.

Family Loans vs Gifts

If a family lender has the financial ability and willingness to make a monetary gift rather than a loan, they can do so without tax implications for amounts of up to $19,000 in 2026.

There are various reasons someone might choose to give a gift rather than make a loan, or vice versa.

Alternatives to Family Loans

If all these caveats and warnings make family loans sound like a less-than-prudent idea, consider alternatives before asking family members for a loan. Remember, if a family member asks you to borrow money, you’re allowed to say no and steer them in a different direction.

Obviously, the ideal financial strategy for making a big purchase is to save money so you don’t have to go into debt. Although this isn’t always possible or realistic, it might be worth taking a second look at your budget, working on a promotion, or starting a side hustle to generate cash.

Unsecured personal loans are available from certain banks and financial institutions, and you can use them to fund a wide variety of expenses upfront. Of course, these may come with higher interest rates and more stringent qualification requirements than family loans.

You might also consider asking a family member to cosign on a loan with you instead of loaning you the money. They would be responsible for making the loan payments if you, the primary borrower, default, but they wouldn’t have to immediately withdraw money from their own bank account to help you.

If you need to borrow money for business purposes, a small business loan may be an option. The Small Business Administration is an excellent resource for business loans. The agency works with lenders to help small business owners find funding for a wide range of amounts and terms, with competitive interest rates.

💡 Quick Tip: Generally, the larger the personal loan, the greater the lender’s risk and the higher the interest rate. As a result, one way to lower your interest rate is to try downsizing your loan amount.

The Takeaway

While borrowing or lending money to a family member can be tempting, it can have long-lasting effects on interpersonal relationships and the lender’s finances. Drafting a structured family loan agreement can help, but you may also want to explore a traditional personal loan from a bank, credit union, or online lender.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is a loan from a family member called?

A loan from a family member is often called a family loan, an intra-family loan, or a friends-and-family loan.

Can family loans help your credit?

Since a family member is not likely to formally check your credit report or provide payment information to the credit bureaus, a family loan probably won’t help (or hurt) your credit.

Are family loans considered debt?

Yes, a loan from a family member is considered debt, but it’s unlikely to be reflected on your credit report. For tax purposes, a family loan is treated as debt if it meets certain criteria.

Photo credit: iStock/Ridofranz

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q126-028

What a person does with their money is their business, right? Not always. Lenders are indeed interested in how borrowers plan to use the funds they’re loaned — in fact, the reason for a loan is one of the application questions.

But does loan purpose really matter? Yes. In some cases, your loan purpose can impact whether you receive the loan, as well as your loan terms.

Here’s what you need to know when it comes to different types of personal loans and their uses, and the best reasons to give for the purpose of your loan.

What Is the Purpose of a Loan?

At its most basic, the purpose of a loan is the reason the applicant wants to borrow money. Even though there are many acceptable uses of personal loan funds, including consolidating debt, paying for a large purchase, or covering the cost of a home renovation, the loan application will likely include a section asking why the applicant is requesting the loan.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.

Why Does the Purpose of a Loan Matter?

Banks consider a number of factors when evaluating an applicant for a loan, such as the amount requested and the applicant’s credit and employment history, to assess the potential risk of lending money to that individual.

The borrower’s reason for needing a loan can be a significant factor, too. One reason is that many financial institutions have certain limitations on how the money they lend can be used. For example, a lender may not allow the proceeds of a personal loan to be used to pay for college tuition, repay another student loan, purchase a home, or start a business. As a result, the best reason to give when applying for a personal loan is one that the lender allows.

The purpose of the loan you’re seeking can also impact the size of the loan the lender will grant, the interest rate, and the term of the loan.

Recommended: What Are the Common Uses for Personal Loans?

How Does Loan Purpose Affect Your Loan?

Your reason for getting a personal loan not only helps determine whether you’ll be approved but can have an influence on the type of loan you can get, as well as the loan amount and even the interest rate.

Some lenders focus on loans for certain purposes, such as credit card consolidation, while others offer an array of personal loan products that are each tailored to specific uses, such as home improvement loans, medical loans, wedding loans, or IVF loans. Each loan type will have loan amounts and terms designed to fit that particular need.

Does the Purpose of a Loan Influence Interest Rates?

It can. Some lenders may set interest rates based solely on the loan amount, the loan term, and the creditworthiness of the applicant. Other lenders might use those factors, plus have interest rate ranges for different loan purposes. For example, a lender might offer better rates (and longer terms) for home improvement loans than they do for debt consolidation loans.

To make sure you’re getting the best deal, you’ll want to shop around and compare interest rates, terms, and fees from lenders that are offering personal loans that match your needs. It’s also a good idea to review credit requirements, such as your credit score, credit history, and income qualifications, to ensure you meet the lender’s minimums.

Common Reasons for Getting a Loan

People typically have something particular in mind when they decide to borrow money. And while every person sees themselves and their individual needs as unique, the reasons for taking out a personal loan tend to fall into some fairly common buckets. Here is a closer look at some of the most common reasons for getting a personal loan.

Debt Consolidation

The goal of debt consolidation is to save money on interest payments by consolidating high-interest credit card debt with a personal loan with a lower interest rate. If you have strong credit, you may be able to get a debt consolidation loan for a significantly lower rate than you are paying on your credit card balances.

Medical Bills

While health insurance can help pay for expected and unexpected medical bills, it usually doesn’t cover everything. And even when a medical expense is covered, insurance can still leave you with a significant portion of the bill to pay on your own. If that’s money you don’t have on hand right now, a medical loan can help ease the strain on your personal finances.

If you already have several medical debts, a low-interest personal loan could be a good way to consolidate those payments.

Home Improvements

While you may first consider a home equity loan or line of credit to cover a home repair or improvement, in some cases, a personal loan might be a better choice. This could be the case if you only need a smaller amount, or you need cash quickly (say your air conditioning or heating system goes out), since you can often get the funds from a personal loan within a few days.

Home improvement loans are also unsecured, making them less risky than home equity loans or credit lines, which use your home as collateral.

💡 Quick Tip: With home renovations, surprises are inevitable. Not so with SoFi home improvement loans. There are no hidden fees required, and no surprises.

Something Else

There are many other reasons for taking out a personal loan, such as helping a family member, funding a move, or paying for a wedding or funeral.

Planned vs Unexpected Expenses

Some expenses can be expected and planned for accordingly, while others come out of nowhere and require a sudden influx of cash. Either way, a personal loan can be a convenient way to finance these expenses without disrupting your savings or relying on high-interest credit cards.

What to Consider

Planned expenses, such as home renovations, weddings, or vacations, can benefit from a personal loan’s predictable repayment schedule. You can budget for the monthly payments and avoid dipping into your savings or using high-interest credit cards. However, you’ll want to factor the cost of the loan into the total cost of your purchase or project to see if it makes sense to finance it now or wait until you have enough savings.

Unexpected expenses, on the other hand, by nature arise suddenly and without warning. Medical emergencies, car repairs, or home repairs are examples of unexpected expenses that may require immediate financial assistance. Personal loans can provide a quick source of funds to cover these expenses, but it’s essential to carefully review the terms and conditions of the loan.

Smaller vs Larger Expenses

How much money you can borrow with a personal loan will depend on the lender, your credit score, income, debt-to-income ratio, and other factors, but the max amount you can typically borrow ranges from $500 to $100,000. This wide range can make a personal loan a viable source of financing for both small and large expenses.

What to Consider

When using a personal loan for smaller expenses, it’s important to borrow only what you need and can afford to repay. You generally want to avoid taking out any more than needed, as this can lead to unnecessary debt. It’s also a good idea to compare loan offers to find the most competitive interest rates and terms.

For larger expenses, such as home renovations or debt consolidation, personal loans can provide a lump sum of money with a fixed interest rate and repayment term. This can help you budget for the expense and avoid the pitfalls of high-interest credit card debt. Always be sure to compare loan offers and choose the one that best suits your needs.

Recommended: 11 Types of Personal Loans and Their Differences

One-time vs Ongoing Expenses

Personal loans can be used to cover one-time expenses, such as a major purchase. They can also be used to cover ongoing expenses, like a wedding, medical bills, or home renovation. However, for ongoing expenses, you might want to consider a personal line of credit as opposed to a personal loan.

What to Consider

Funds from a personal loan are disbursed in one lump sum, and interest is paid on that sum according to a fixed repayment schedule.

If the loan purpose is an expense that is ongoing or variable, a personal line of credit might make sense financially, since interest is only charged on the amount drawn at any one time, and money borrowed can be repaid on a more flexible basis. Lines of credit tend to come with variable instead of fixed interest rates, however, so the overall amount due may be hard to predict.

Loans to Pay Off Other Loans

A common use for personal loans is to consolidate high-interest debt. By taking out a personal loan to pay off other loans or credit card debt, you can potentially lower your overall interest rate and simplify your monthly payments.

What to Consider

When using a personal loan to pay off other loans, consider any origination fees or prepayment penalties associated with the new loan. It’s also important to calculate the total cost of the new loan, including interest rates and fees, to ensure that it offers a better financial solution than your existing debt. Additionally, consider your repayment ability to ensure that you can comfortably afford the new loan payments.

Personal Loan Approval

The length of time from application to personal loan approval varies by lender. Online lenders can typically provide same-day approval, while banks and credit unions can generally take up to three business days to approve your personal loan application.

Some things that can make this a quicker process are making sure your credit report is free of errors and having the required documents ready when the lender requests them. Loan applications that don’t have unusual circumstances, e.g., self-employment income verification or a high debt-to-income ratio, are more likely to be approved faster than those that do.

Once a personal loan application has been approved by the lender, the funds may be made available to the borrower in just a few days or up to a week, depending on the type of lender. Some online lenders may disburse funds the same day as approval.

The Takeaway

There are, indeed, different types of loans for different purposes. Applicants may have their own reasons for wanting a loan, but lenders will want to know what the funds will be used for. There may be certain loans better suited to certain funding needs than others, and a lender will likely want to make sure the loan suits the purpose.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Why is it important to know the purpose of a loan?

Lenders may want to know the purpose of a loan so they can assess the risk of lending. Also, some lenders have limitations on how the money can be used. Borrowers will also want to consider the purpose of a loan to make sure they apply for the right type of loan for their needs.

What are examples of the purpose of a loan?

There are many reasons why people apply for personal loans. These include debt consolidation, medical and dental expenses, IVF treatment, home repairs/improvements, weddings, large purchases (like appliances or furniture), car repairs, and more.

What happens if I use my loan for a different purpose?

Some loans are meant to be used for a certain purpose, such as auto loans or mortgages. Personal loans, however, can be used for many purposes, and a lender may not check to see if the funds are being used as intended on the loan application. It’s a good idea to review the loan application to understand any restrictions on the use of the funds.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q126-027

At some point, there may come a time when you need to ask the question: Does filing for unemployment benefits affect your credit score? The answer is no, fortunately.

Losing your job can be like a kick in the stomach. It can deflate you and leave you scrambling to figure out what to do next. The last thing that many people need, in addition to firing up a job search, is a hit to their credit score, too. If you do lose your job, many financial professionals will tell you that the first thing you should do, if you qualify, is to file for unemployment so that you still have some income as you revise your resume and start interviewing.

The good news, again, is that you don’t need to worry about a potential ding to your credit. More information below!

Why Your Credit Score Matters

Your credit score is, in a sense, your financial reputation. It can give lenders or creditors a quick and easy summary of your creditworthiness — or, how likely it is you will pay back a loan on time and in full. Everyone has a credit report, and you can think of your credit score as a truncated version of your credit report.

Your credit score matters because it’s used by lenders to gauge how risky you are as a borrower. It’s used to measure not only whether a lender would be willing to give you a loan, but how much they’d charge you for the privilege — or what the effective interest rate would be for borrowing.

When it comes to some of life’s bigger purchases, such as a car or a home, that can be very important. A couple of percentage points can mean that a borrower ends up paying tens or even hundreds of thousands of dollars more in interest over the years. As such, when a lender sizes up your credit application and takes a look at your credit score, the higher your credit score is, the better.

But what factors affect your credit score? It’s a mixture of things: your payment history, total debt balances, credit utilization, credit history (how long you’ve had accounts), credit mix, and inquiries from lenders.

Recommended: Should I Sell My House Now or Wait?

Unemployment Won’t Appear on Your Credit Report

You may be concerned that if you lose your job, filing for unemployment may affect your credit score. But there’s no cause for concern. Not only will filing for unemployment not affect your credit score, it also won’t appear on your credit report. Your credit report contains information relating to your past borrowing activity, not your employment status.

Unless there’s been a change in your credit history — say, you apply for a new line of credit or close an old credit card — your credit report won’t change. That said, your credit report may contain information relating to past employers, but the only things that should have an effect on your credit score are items relating to financial accounts.

That may become an issue if, for example, you were issued a company credit card at a previous job. But for most people, your employment status, or past employers, aren’t likely to have an impact on your credit report or credit score.

Remember: Your credit score is a snapshot of your financial reputation, not your employment status!

How Unemployment Can Affect Credit Scores Indirectly

With all of that in mind, your employment status — or filing for unemployment — may have an effect on your credit score in an indirect way.

As mentioned, your employment status isn’t a part of your credit score’s calculation, and neither is whether or not you received unemployment assistance. It’s really all about paying back, or down, your debts on time and on schedule. However, if you do lose your job and file for unemployment, you may find yourself in an income crunch. Your unemployment check is most likely going to be smaller than the paycheck you’re accustomed to receiving, and that may make it difficult to keep up with your payments.

You may also be tempted to start using your lines of credit more while unemployed as a way of making ends meet. For example, you might start using your credit card at the grocery store as a way of keeping money in your bank account, with the thought that you’ll pay off your balance once you get another job and a regular paycheck again. Some individuals may also look into personal loans for unemployed persons, too.

One of these options may suit your situation. However, they may also increase your credit utilization and overall debt, which can lower your credit score.

Finally, if you find that you can’t keep up with your minimum payments due to the resulting cash crunch of losing your job, that, too, will ding your credit score. That’s why it’s important to maintain a line of communication with lenders. If you can’t make your payment, let them know, and they may be willing to work with you. Tools like a money tracker app may be helpful as well.

Remember, if you do have a company credit card or some other type of financial account with an employer and you lose your job, that credit line could be severed. That, too, could affect your credit score, as it ultimately lowers your total available credit.

Recommended: What Is the Difference Between Transunion and Equifax?

How to Protect Your Credit Score When Unemployed

To protect your credit score while unemployed, the most important things you can do are to try to keep your debt balances low and to keep an open line of communication with your creditors. Of course, a loss in income will probably spur you to change your spending habits by cutting back in certain areas. But in terms of maintaining your credit score, the best course of action is to keep doing what you’re doing: making your payments.

That means continuing to make your payments (at least the minimum) as scheduled. And, since it bears repeating, if you’re going to struggle to make those minimum payments, call your lender and let them know. Some will be willing to make accommodations, such as offering forbearance, extensions, or deferred payments, although there’s no guarantee.

If you feel that you need more help, you can also work with a credit counselor to help you evaluate your options and even negotiate with your lenders. You may also want to set up free credit monitoring, too, so that you can see any changes to your score.

The Takeaway

If you lose your job and file for unemployment, there shouldn’t be a direct effect on your credit score. That said, there may be indirect factors that could lower your score. The most important thing you can do to maintain a strong credit score is to keep making your payments and try to keep your debt balances to a reasonable level.

And remember that if you’re really struggling, it may be worth it to reach out to a professional for personalized advice.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

Can I apply for a credit card while I’m unemployed?

It’s possible to get a credit card while unemployed, but keep in mind that a creditor’s main concern is whether or not you can make your payments. As such, your approval for a credit card may hinge on your income and other debts or financial obligations.

What if my credit score goes down?

Credit scores go up and down all the time, but if you do experience a fall in your credit score while unemployed, you’ll likely know why — and it’s probably because you missed payments or saw your credit utilization go up. The good news is that you can always work on increasing it again.

What personal information does your credit report include?

The short answer? A lot of it. That includes your name, aliases, birth date, Social Security number, address (and former addresses), phone number, and possibly your employment history, among other things.

Photo credit: iStock/sorrapong

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SORL-Q126-021

While you may think of your credit card as what tends to break a budget, it’s actually possible to budget with a credit card to spend smarter. In fact, there are a number of advantages of budgeting with a credit card. If you spend only what you can afford to pay off each month, you can enjoy earning rewards, building your credit profile, and accessing other perks without accruing interest.

It isn’t always easy to set — and then stick to — a budget though, and a credit card budget is no different. Read on for tips on budgeting with a credit card.

Why Use Credit Cards?

Although credit cards can have downsides — especially when someone tends to overspend — they also offer benefits that you can’t get when you pay with other methods. This includes:

•   Fraud protection: It can be easier to dispute charges and fraudulent activity on a credit card as opposed to a debit card or cash.

•   Opportunity to build credit. Using a credit card responsibly can help you build or rebuild your credit profile.

•   Credit card rewards: Credit cards often come with perks like travel points or cash back.

•   Travel insurance: Some credit cards offer specialty protection benefits like travel insurance.

If you spend only what you can afford to pay off each month, you can enjoy earning rewards, building your credit, and accessing other perks without accruing interest.

Why Is Budgeting Important?

Whether using a bank account or credit card, a monthly budget is an essential part of financial wellness. Budgeting can:

•   Help you reach financial goals, such as establishing an emergency fund or saving for a downpayment for a home.

•   Alleviate financial anxiety that can come from uncertainties around finance.

•   Build a positive credit history through a record of on-time payments and responsible spending.

At first glance, budgeting may seem like a limiting factor, but it actually allows you to spend guilt-free. When you know how much you can spend on certain categories each month and adhere to those guidelines, you don’t have to worry about overspending.

Recommended: How to Avoid Interest On a Credit Card

Specific Budgeting Methods You Can Work With

There’s no one-size-fits-all budgeting method. However, here are some popular methods that you might consider trying if you’re interested in creating a personal budget.

The Zero-Sum Budget

In a zero-sum budget, every dollar has a job. However, that doesn’t mean an account should be $0 at the end of the month. Instead, it means that every dollar earned should be allocated to a general category, including necessities, discretionary spending, savings, and debt repayment, with no money left unassigned by the end of the month.

Each time an after-tax paycheck comes in, a zero-dollar budget will assign those funds to different categories, starting with necessities like rent, food, student loan payments, and insurance. The rest goes toward discretionary spending and saving.

The Spreadsheet Budget

A spreadsheet or line-item budget is a detailed financial plan that lists every individual income source and expense as “line item” for a specific period, typically monthly. Instead of broad categories, this method breaks down costs into specific items — for example, instead of “utilities,” it lists “electricity,” “water,” and “gas”). Expenses are typically listed in rows, with columns for the budgeted amount, actual spending, and variance (difference between budgeted and actual).

The Online Budget

Apps and other digital tools make budgeting as easy as creating a log-in and connecting existing bank and credit card accounts to track spending. The platform will automatically categorize your spending, help you set spending and saving targets, and track your progress.

An online tool can be helpful for those who feel intimidated by budgeting prep or prefer a clear, automated overview of their finances.

10 Tips for Budgeting With a Credit Card

Using a credit card to budget isn’t so different from a traditional budget. Keep these 11 tips in mind when building a credit card budget.

1. Determine Your Monthly Income

To figure out your monthly take-home pay, look at your bank account or paystubs from your employer (typically through an online portal). If your income varies each month, calculate your average monthly income over the past year to get a ballpark figure.

2. Pick a Budgeting Method

You can’t budget with a credit card if you don’t have a budgeting method in mind. Consider one of the aforementioned methods or an alternative like the 50/30/20 budget, where you allocate 50% of your budget to needs, 30% to wants, and the remaining 20% to savings and debt repayment.

3. Categorize Your Spending

When it comes to how to budget credit card payments, it helps to look back at your spending first. Gather statements from your credit cards and bank accounts for the past several months and create a list of your typical spending categories and how much you spend on each.

4. Create a Plan

Armed with a structure and an understanding of your past spending, now comes the time to plan for the future. When creating a plan, consider:

•   Recurring expenses

•   Savings goals

•   Debt repayment goals

•   Annual subscription costs

•   Emergency savings needs

5. Pay Yourself First

It’s wise to make paying yourself first a top priority when budgeting with a credit card. That means that when your paycheck hits your bank account, you’ll want to put some of it immediately towards your personal savings goals, such as building an emergency fund or paying down high-interest debts.

Many budgeters pay themselves last — only setting aside what’s left over at the end of the month. However, this approach can lead to falling short on savings goals.

6. Calculate Your Expenses

After setting aside money for savings, it’s time to break down the remaining income into monthly expenses. This includes necessities like rent or mortgage payments and wants like dining out or entertainment.

If your monthly income can’t cover all of the anticipated expenses, it may be time to cut back on spending. Is there slack in the budget from underused subscriptions? Or can grocery spending go down?

Figuring this out before you swipe can help you to avoid carrying a balance on your credit cards.

7. Plan for Debts

The difference between credit card budgeting and traditional budgeting comes when the credit card bill is due. If you have been primarily spending on a credit card, it’s unlikely you’ll see your bank account change most of the month. However, that changes when the bill comes due.

With each transaction on the card, you’ll want to make sure you have enough money in your checking or savings to cover the cost. Planning for this debt means avoiding the scramble that sometimes comes with a credit card due date.

8. Simplify Your Billing Schedule

To avoid coming up short when it’s time to pay your credit card bills, consider reaching out to your issuers and asking if you can change your payment due dates to shortly after you receive your paycheck. This ensures funds are available, reducing stress and missed payments. Automating your credit card payments can also help you avoid late fees and interest charges.

9. Use Rewards as a Bonus

The benefit of budgeting with a credit card comes from the various credit card rewards you can earn. Remember to cash in on cash back perks every few months for a discounted bill or redeem the travel miles you’ve earned for an upcoming trip.

10. Avoid Carrying a Balance

Carrying a balance on a credit card can indicate an imbalanced budget. When you don’t pay your statement balance in full by the due date, you’ll start accruing interest. This can lead to a ballooning balance that becomes harder to pay off.

That’s why upfront planning is essential to budgeting with a credit card. Without a plan in place, there’s a bigger risk of overspending, which can snowball into credit card debt. If you’re using a credit card, it’s important to stick to one of the most important credit card rules of always trying to pay off your balance in full.

Pros and Cons of Budgeting With a Credit Card

There are benefits and drawbacks to credit card budgeting, including:

The Takeaway

There are advantages of budgeting with a credit card, such as earning rewards, gaining access to credit card perks like travel insurance, and building your credit if you use your card responsibly. By setting up a credit card budget, you can enjoy the benefits of having a credit card without getting hit with interest charges and fees.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

How can I manage my budget with credit cards?

One way to manage your budget with credit cards is to treat the card like a debit card. Only spend money you know you already have in your bank account to pay the bill in full when it’s due. This lets you earn rewards and build credit without incurring interest charges. Choose a budgeting method (like the zero-sum or 50/30/20 budget), categorize your spending, and always plan to cover your expenses and savings goals before you swipe.

Should I budget with a credit card?

Yes, if you’re able to use your card responsibly. Budgeting with a credit card allows you to take advantage of benefits like earning rewards and building a positive credit history without incurring interest charges. The key is to treat your credit card like a debit card: only charge what you can afford to pay off in full each month. If you are prone to overspending, however, a credit card may pose a greater challenge to maintaining your budget.

How do credit cards affect my personal budget?

Credit cards affect your personal budget by requiring you to plan for a deferred payment. Unlike a debit card, where the money is immediately deducted, credit card spending represents a temporary debt that must be paid in full by the due date to avoid interest. To budget successfully, you need to treat your credit card like cash — only charge what you can immediately afford to pay off, and budget for that full payment before the bill is due. This allows you to earn rewards and build credit responsibly without incurring debt.

Photo credit: iStock/Mirel Kipioro

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If you’re often surprised (and not in a good way) when you open up your credit card and bank statements and see how much money you spent, you’re not alone. In this scenario, there could be a simple solution: a personal cash flow statement.

Creating a personal cash flow statement can give you a clear picture of your monthly cash inflow (money you earn) and your monthly cash outflow (money you spend). Armed with that intel, you can determine if you have a positive or negative net cash flow.

The process is relatively simple. It involves doing some basic math calculations with a month or two worth of bank statements and bills. Once you have your personal financial statement, you’ll know where you stand and likely be better able to budget your money.

What Is a Personal Cash Flow Statement?

“Cash flow” is a term commonly used by businesses to detail the amount of money flowing in and out of a company. Companies often use cash flow statements to determine how well the business is generating income to pay its debts and operating expenses.

As in the corporate world, tracking your personal cash flow — all money entering and leaving your bank accounts each month — can provide you with a snapshot of your financial condition. You might learn, for example, that you have less leftover at the end of each month than you thought or that you are indeed operating at a shortfall.

Once you have the numbers down in black and white, you can then make any needed changes, such as cutting your expenses, increasing income, and making sure that your spending is in line with your goals.

So, how do you set up one of these cash flow statements? You may find a personal cash flow statement template or a personal cash flow statement example online, but what follows will explain how to create one.

How to Build a Personal Cash Flow Statement

Creating a personal finance cash flow statement isn’t hard. But for starters you’ll want to understand the two sides of the cash-flow seesaw.

Key Components of a Personal Cash Flow Statement

A cash flow statement has two main components: inflows and outflows. Your cash inflow is any after-tax earnings that are available for use. That would include your net salary, if you are a salaried employee, income from any side hustle you may have, dividend income if you have investments in non-retirement accounts and aren’t reinvesting your dividends, etc. Your outflow is all the ways you spend money, such as housing, transportation, food and dining out, debt payments, insurance premiums, clothing and grooming, and entertainment.

Listing All Your Sources of Income

A good first step when creating a personal cash flow statement is to get out all of your pay stubs, bank statements, credit card statements, and bills or review them online.

Next, list any and all sources of income — the inflow, such as salaries, anything you make from side hustles, interest from savings accounts, income from a rental property, dividends from investments, and capital gains from the sale of financial securities like stocks and bonds.

You might want to exclude money in accounts that aren’t available for spending. For example, you may not want to list dividends and capital gains from investment accounts if they are being automatically reinvested or those that are part of a retirement account from which you aren’t actively taking withdrawals.

Since income can vary from one month to the next, you might choose to tally inflow for the last three or six months in order to come up with an average.

Once you’ve collected and listed all of your income for the month, you can then calculate the total inflow.

Listing All of Your Expenses

Now that you know how much money is coming in each month, you’ll want to use those same statements and bills, as well as any for debts (such as mortgage, auto loan, or student loans) to list how much was spent during the month.

Again, if your spending tends to fluctuate quite a bit from month to month you may want to track it for several months and come up with an average.

To create a complete picture of how much of your money is flowing out each month, you’ll want to include necessities like food and gas, and also discretionary expenses, such as trips to the nail salon or your monthly streaming services. Remember to include infrequent expenses such as birthday gifts for loved ones, annual insurance premiums, and the like.

Once you’ve compiled all of your expenses, you can calculate the total and come up with your total outflow for the month.

Determining Your Net Cash Flow

To calculate your cash flow, all you need to do is subtract your monthly outflow from your monthly inflow. The result is your net cash flow.

A positive number means you have a surplus, while a negative means you have a deficit in your budget.

A positive cash flow is desirable, of course, since it can provide more flexibility. You can decide how to best use the surplus. There are a variety of options. You could choose to save for an upcoming expense, make additional contributions to your retirement fund, create or add to an emergency fund, or, if your savings are in good shape, consider splurging on something fun. “An integral part of financial wellness is having a cash reserve. Research shows that having cash to cover the unexpected has a big impact on financial stress, anxiety, and satisfaction,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi.

A negative cash flow can signal that you are living a more expensive life than your income can support. Some people refer to this as not living within your means. In the future, maintaining this habit could lead to additional debt.

When creating personal cash flow statements, it’s also possible to have net neutral cash flow (all money coming in and going out is fairly equal). In this case, you may still want to jigger things around if you are not already putting the annual maximum into your retirement fund and/or you don’t have a comfortable emergency cash cushion.

Examining Cash Inflows vs. Cash Outflows

Having established a personal finance cash flow statement, you may begin to see some patterns. There may be a particular month in which you receive three paychecks instead of two, enhancing your cash flow. Or there may be a month when some big bills hit all at once — a property tax bill and a winter heating bill, for example. Knowing your inflow and outflow can help you know how much cash to have on hand and do some personal cash flow planning in advance.

The Difference Between a Personal Cash Flow Statement and a Budget

A personal cash flow statement provides a comprehensive look at what is currently coming in and going out of your bank accounts each month. You might think of a cash flow statement telling you where you are, financially speaking.

Whichever budget method you use, on the other hand, helps you to reach your short-term personal financial goals — as well as longer-term goals — by giving you a spending plan that is based on your income and expenses. A budget can provide you with some general spending guidelines, such as how much you should spend on groceries, entertainment, and clothing each month so that you don’t exceed your income — and end up with a negative net flow.

Creating a budget can also be a good opportunity to check in with your financial goals.

•   Are you on track for saving for retirement?

•   Are you tackling the credit card debt that has been spiraling due to high interest rates?

•   Do you want to amp up your emergency fund? How can you make your money work for you by being strategic about saving?

•   How are you progressing on paying off your student loan, car payment, or mortgage (or all of the above)?

How Cash Flow and Budget Work Together

Whatever your goal, a well-crafted budget could serve as a roadmap for personal cash flow planning, helping to ensure that you keep your spending in line. And a good record of cash flow can help you understand when money will come into your account so that you can pay the bills you’ve budgeted for.

When to Focus on Cash Flow vs. Budgeting

Some people love to track their finances and will thoroughly enjoy checking in with their cash flow and budget monthly, if not more often. But for others, there are times when it’s especially helpful to be looking at cash flow. Let’s say you’d like to be paying your credit card bill in full each month, but are carrying a balance. Examining an established year-long cash-flow record can help you determine in what month you’ll likely have extra money to put toward paying off that balance.

Using a cash flow statement can also be helpful if your income fluctuates from month to month: You can budget money toward savings in the higher-income months so that you’ll be able to cover your expenses without a negative cash flow in the leaner times. And you can aim to budget lower expenses in the low-cash-flow months — for example, perhaps you plan to avoid eating out in January and set your entertainment budget accordingly.

Using Your Personal Financial Statement to Create a Simple Budget

Because a cash flow statement provides a comprehensive look at your overall spending habits, it can be a great jumping off point to set up a simple budget.

When you’re ready to create a budget, there are a variety of resources:

•   Break out a pencil and paper or buy a journal for this purpose

•   Use an app that’s part of your bank’s suite of tools

•   Download an app that isn’t connected to your financial institution but offers budgeting services

•   Try out spreadsheet templates and printable worksheets you find online.

A good first step in creating a budget is to organize all of your monthly expenses into categories.

Spending categories typically include necessities, such as rent or mortgage, transportation (like car expenses or public transportation costs), food, cell phone, healthcare/insurance, life insurance, childcare, and any debts (credit cards/loans).

You’ll also need to list non-essential spending, such as travel, streaming services, concert and movie tickets, restaurants, clothing, etc.

You may also want to include monthly contributions to a retirement plan and personal savings into the expense category as well.

And if you don’t have emergency savings in place, put that on the spending list as well, so you can start saving toward that every month. How big an emergency fund do you need? Use an emergency fund calculator, and aim to cover at least three to six months’ of living expenses.

Once you have a sense of your monthly earnings and spending, you may want to see how your numbers line up with general budgeting guidelines. Financial counselors sometimes recommend the 50/30/20 budget rule, which looks like this:

•   50% of money goes toward necessities such as a home, car, cell phone, or utility bills.

•   30% goes toward your wants, such as entertainment and dining out.

•   20% goes toward your savings goals, such as a retirement plan, a downpayment on a home, emergency fund, or investments, and extra payments on debt.

Recommended: What Are Cash Flow Loans?

Improving Your Net Cash Flow

If your net cash flow is not where you want it to be or, worse, dipping into negative territory, a budget can help bring these numbers into balance. The key is to look closely at each one of your spending categories and see if you can find some ways to trim back.

Reducing Discretionary Expenses

One of the easiest ways to change your spending habits can be to cut some nonessential expenditures. If you’re paying for cable but mostly watch streaming services, for example, you could score some real savings by getting rid of that service and its bill.

Not taking as many weekend getaways and cooking more often instead of getting takeout could add up to a big difference. If you tend to be a compulsive or impulsive shopper, you might take steps to understand your triggers, change your behavior, and rein in the outflow of money.

Increasing Income and Optimizing Bills

You may also look into ways you may be able to change the other side of the equation — the inflow of funds.

•   One option could be asking for a raise.

•   Another could be training for a higher-paying field.

•   Or you might find an additional income stream (making more money is a key benefit of a side hustle).

Living on a budget may also require looking at the bigger picture and finding places for more significant savings. For example, maybe rent eats up 50% of your income, and it’d be better to move to a less costly apartment. Or you might want to consider trading in an expensive car lease for a less pricey or pre-owned model. There may also be opportunities to lower some of your recurring expenses by finding a better deal or negotiating with your service providers.

Avoiding Common Cash Flow Mistakes

As with any data reporting, a cash flow statement is only as accurate as the information you put into it. If your cash flow records don’t reflect your actual expenses because you’ve failed to make a category for a particular type of expense, then your record isn’t going to reflect reality. Some expenses are easy to categorize. Others are harder to fit into “transportation” or “housing” so you may have to create a “miscellaneous” line to capture these expenses.

Cash-flow trackers can make it very easy to see where the money is going, but a common cash flow mistake is the “set it and forget it” approach. If you pay for your streaming services, car insurance, or other service for a year without even thinking about it, take time to assess these outflows every six months or so and ask yourself if you could find a cheaper option by shopping around.

The Takeaway

One of the most important steps toward achieving financial wellness is cash flow management — making sure that your cash outflow is not exceeding your cash inflow. Creating a simple cash flow statement can show you exactly where you and your money stand. It can also help you create a budget that can give you greater control over your finances and achieving your goals.

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FAQ

How do you create a personal cash flow statement?

To create a personal cash flow statement, gather information on how much you typically take in (income) after taxes per month and how much your outflow (spending and saving) is. That captures the amount you spend on necessities, like housing and food, as well as wants and debt payments. When you subtract the outflow from the income, you’ll see where your cash flow stands.

What is the importance of a personal cash flow statement?

A personal cash flow statement is an important way to track your personal spending and see where pain points may be. It will also reveal if you are going into debt or if you have surplus funds you can put toward future goals. Also, a personal cash flow statement can be an important factor in establishing your budget.

What is the difference between a personal balance sheet and a cash flow statement?

A personal balance sheet captures your assets (money in the bank and real estate, for instance) and liabilities (your credit card balance and any loans), which allows you to determine your net worth. A cash flow statement, on the other hand, tracks your spending versus your income, to see whether you are operating with a deficit, a surplus, or if you are breaking even.

How often should you update a personal cash flow statement?

At the very least, updating your personal cash flow record annually is a good idea. But once you have established a spreadsheet and tracked cash flow retroactively for a few months, it’s not a bad idea to keep going and track the entire year — particularly if your income ebbs and flows. This will enable you to see whether big expenses such as property taxes or an annual life insurance premium hit during a month when your income tends to be lower. You can then be prepared for this in the future by setting aside money in advance.

What tools or apps can help you track personal cash flow?

You can track cash inflow and outflow using a simple spreadsheet that you create yourself. Or you can use a tool such as Monarch or Tiller which can pull data from your accounts if you give permission.

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