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Which Credit Card Suits You Best?

With so many credit card options out there, it may be hard to choose a new one.

Are you loyal to a particular airline or hotel chain? Do you want to redeem points as statement credits? Are you a big grocery or gasoline spender? Interested in an innovative use like paying down loan debt or investing? Is the interest rate important, an annual fee a dealbreaker?

If you can responsibly manage more than one credit card—and if you’re like most Americans, you have more than one—you can use different cards to optimize rewards (cash back, points, or miles), annual statement credits, and 0% and low introductory APR offers.

When deciding on a new credit card that is best for you, it boils down to two basic questions: What do you want from a card? And how strong is your financial history?

Here’s a glance at the credit card options available and provisos to consider.

Rewards Credit Cards

If you are good about paying off your card every month and never incur interest, you might consider a rewards card. They may offer sign-up bonuses and give consumers rewards in the form of miles, cash back, or loyalty points.

There are variations on a theme, such as:

•  Bonus offer + 0% period for purchases
•  A set dollar amount in travel or bonus miles if you meet the initial spending requirements
•  Flat-rate cash back
•  Customizable rewards

A few cards offer an eye-opening 5% cash back in rotating categories, up to a limit (such as 5% back on $1,500 spent quarterly, after which all other purchases earn 1% cash back), and you’ll usually have to manually activate the offer each quarter.

But you can often lessen the work involved and earn more in total cashback rewards with a flat-rate cashback credit card, when all purchases earn the same amount.

Frequent travelers lured by premium travel rewards cards will want to weigh the perks against an annual fee of $450 to $550.

New reward offerings have bubbled up, such as allowing cardholders to put cash back toward loan payments, and are brewing, like increasing card acceptance for rent payments and offering cryptocurrency-related rewards.

When choosing a rewards card, think about your spending habits and redemption preferences, be aware of your credit score (these cards usually require a good score), and pay off your balance each month—rewards cards typically have higher APRs than balance transfer cards.

If you fall behind on payments or carry over balances, all the perks and rewards are unlikely to be worth it.

Cards for Those With Limited or Damaged Credit

For college students with little or no credit history, there are student credit cards.

If you don’t have great credit, there are also secured credit cards. Generally, they require a deposit from the user. A secured credit card functions like a normal credit card except that it has a backstop: The user puts up an amount of money that the issuer will then use if the cardholder defaults.

The lender offers a certain amount of credit based on the promise that the user will pay off the balance in full every month.

If your account is upgraded to an unsecured account, thanks to good habits, or is closed in good standing, your deposit is returned.

Both of these options can help someone build credit and could lead to a card with more perks if the holder is diligent about paying off the balance every month.

Then there’s at least one brand of card that considers an applicant’s banking history in lieu of their credit score, has no annual fee, and comes with rewards.

Prepaid Debit Cards

A secured credit card is primarily intended for building credit, whereas a prepaid debit card is good for budgeting and convenience but does not affect your credit.

A prepaid debit card is preloaded with your own money, typically though direct deposit, cash or check deposits, or online transfers from a checking account.

The card is used for transactions until the money runs out. Since there is no line of credit, you cannot run up debt on the card.

This is a great option for a young person who needs to learn how money works or for adults with a bad credit history, though it will not improve their credit scores.

Credit Cards That Save You Money on Interest

If you’re prone to carry a balance month to month, you might want to consider a low-interest card. While these types of credit cards don’t come with bells and whistles like airport lounge access, it is the financially prudent option if you have an irregular income or you carry a balance each month.

It might be best to look for a card that offers an initial APR of 0% and then an ongoing low interest rate.

Keep in mind that low-interest credit cards usually require a good credit score to qualify. Generally, the better your credit score, the lower your interest rate. The lowest advertised APR isn’t always what an applicant gets.

Balance Transfer Credit Cards

If you are in credit card debt, a balance transfer credit card could help you pay off your debt at a lower interest rate.

Interest rates and terms vary widely with balance transfer credit cards. A balance transfer card will often come with a 0% APR introductory period, but once that ends, the interest rate shoots up.

It’s important to pay attention to the fine print if this is an option you’re considering.

The Takeaway

Choosing the most rewarding and suitable new credit card can become a research project. It’s best to think about your spending habits, needs, credit history, APR, any annual fee, and perks.

SoFi cardholders earn 2% unlimited cash back when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back when redeemed for a statement credit.1

And speaking of perks, SoFi members have access to an abundance of them.

Looking for cashback rewards? Look into a SoFi credit card.*



*See Pricing, Terms & Conditions at SoFi.com/card/terms
1See Rewards Details at SoFi.com/card/rewards.
The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
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.

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What is a cashback credit card?

What is a Cashback Credit Card?

Some things in life sound too good to be true, and getting cash back for purchases may seem like one of those deals. But an increasing number of credit cards, called cashback cards, offer clients money back when they charge what they buy.

Many people are familiar with the concept of credit card rewards, when lenders give clients a little something back—points, airline miles—as an incentive for using their card.

In the case of cashback cards, that reward is, well, cash.

How Does Cash Back Work?

Cashback credit cards reward clients based on their spending, providing a credit that is a small percentage of the total purchase.

If a cashback card provides 1% back, for instance, the cardholder would generally earn 1 cent on every dollar spent, or $1 for every $100 they charge to their card. If, over the course of the year, a person charges $10,000 in purchases to their cashback credit card, they’d earn $100 in cash back for that time period.

Unlike sale items, when an item is discounted at the time of purchase—meaning, of course, the shopper pays a cheaper price—cashback cards work more like a rebate. The customer buys something at the posted rate and gets money back at a later date.

The average American had a credit card balance of $5,315 in 2020, according to Experian. Assuming that full balance is eligible for cash back, it would earn $53.15 with a credit card providing 1% cash back and $106.30 for one giving 2% cash back.

Do All Cashback Credit Cards Work the Same Way?

Yes and no. While all cashback cards typically use the same model—money back based on a percentage of total purchases—the differences are typically in the details.

Things like the rate of cashback earnings, interest rate, the process for redeeming cash back, and so on vary by card and lender. Some lenders may even offer several cashback credit card products with different rates and benefits.

As such, before signing up for a cashback credit card, it’s smart to spend some time researching and comparing cashback cards to find the one that best suits your needs.

What to Look for in a Cashback Card

There are a number of considerations when choosing a cashback credit card that will determine just how profitable the card will be for a specific person.

Because people have different spending habits and financial preferences, the best type of credit card will ultimately depend on the individual. Here are some things to consider.

Rate of Cash Back

Not all cashback credit cards offer the same rate of return, so it’s best to comparison-shop. Though differences in percentages may sound negligible, getting 2% instead of 1% means double the cash back—and those small amounts can add up over time.

Some credit cards also provide different rates of cash back depending on the spending category or how much money the cardholder charges in a year. For example, some credit cards may provide a higher percentage on expenditures such as gas, travel, or groceries and a different rate for other types of purchases.

Tiered cashback cards may provide a higher (or even lower) rate when annual purchases exceed various thresholds.

Some credit cards also offer higher introductory cashback rates.

How a person chooses to redeem cash back may also determine the final payout. A travel rewards card, for example, may provide a higher rate of return for cardholders who redeem the money they earn on flights, and a lesser amount for those who redeem their rewards on statement credits or other purchases.

It can be difficult to tell at a glance how much the cashback percentage rate may actually net an individual, especially when considering categorized and tiered rewards. But when comparison-shopping for a cashback credit card, it is worth crunching some numbers to get an idea.

One way to estimate how much in cashback rewards a card will actually end up earning is to apply the posted cashback rates to previous credit card statements or to the spending allocations within an individual’s annual budget.

Annual Fees

Though some cashback credit cards have no annual fee, others do. It’s a good idea to factor in any annual fee when estimating the cashback rewards based on your spending habits. Calculating the returns on fee vs. no-fee cards can help to assess whether it’s worth shelling out extra.

If a bank charges $99 for a cashback card earning 2%, the bank fees would essentially cancel out the $100 in cash back earned on the first $5,000 in annual spending.

Someone who charged $7,500 annually would net $51 with the 2% cashback card, and $75 with a no-fee 1% cashback card. But if they charged $20,000 annually, the $99/2% cashback credit card would net $301, while the no-fee card would only earn $200 in cash back.

APR

The nearly half of Americans who carry a balance on their credit cards each month will want to pay close attention to a credit card’s annual percentage rate. This is the amount of interest cardholders will have to pay if they do not pay off their credit card balance in full each month.

The average credit card APR was 14.65% in late 2020, according to the Federal Reserve—a rate that can quickly cancel out any cashback benefits.

Recommended: What is a Good APR?

Redemption Terms

A good question to ask a lender before signing up for a cashback credit card is “Where can I get cash back?” The terms of redemption can vary across credit card products.

In some cases, cardholders may see an annual one-time credit for the full amount earned. Other cards allow cardholders to redeem their cash back at any time.

Tips for Getting the Most Out of a Cashback Card

While signing up for—and using—a cashback credit card is the first step to getting money back on everyday purchases, there are some ways to optimize the returns.

Pay Off Your (Whole) Credit Card Bill on Time

With few exceptions, credit card charges are not subject to interest until after the statement payment due date. But after that payment becomes due, extra interest and fees can quickly add up—erasing any cashback benefits.

Optimize Redemptions

When it comes to redeeming cash back, it’s worth seeking the biggest bang for your buck.

If a card offers different rates of cash back depending on how rewards are redeemed, being strategic when cashing out can result in a greater windfall.

Consider Extra Fees

Though a cashback credit card can make it tempting to charge everything you buy, that’s not always the most cost-effective strategy.

Though it’s generally an exception, some merchants impose surcharges for using a credit card or may provide discounts for paying in cash. In such cases, it’s a good idea to crunch the numbers to ensure the extra fees don’t actually cost more than the cashback reward.

The Takeaway

Free money may be hard to come by—but not if you use a cashback credit card. When choosing a card, It’s best to look at the rate of cash back, any annual fee a card may charge, and the APR if you carry a balance.

SoFi cardholders earn 2% unlimited cash back when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back when redeemed for a statement credit.1

Look into the cashback rewards of a SoFi credit card* today.


1See Rewards Details at SoFi.com/card/rewards.
*See Pricing, Terms & Conditions at SoFi.com/card/terms
The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
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.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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How to Build Credit Over Time_780x440

How to Build Credit Over Time

Making every payment on time is the ideal way to build credit successfully. The basic strategy for good credit is actually quite straightforward and intuitive: Be the kind of borrower you would want to lend to.

Acquiring Credit

Turning to a spouse or parent for a joint account or co-signer can be a valuable way to build credit (think joint credit cards or parents co-signing on student loans) for someone who does not have a credit history of their own. In the long run, however, a person will be in a much stronger position if they borrow in their name alone.

Credit cards don’t require a co-signer in most cases, so they can be a great place for someone to start building a credit history on their own. Eventually, this has the potential to make it easier to borrow in the future for such things as an auto loan, a personal loan or even a mortgage.

Paying Bills Consistently and on Time

Payment history makes a bigger impact on a person’s credit score than anything else. A borrower’s credit score summarizes their health and strength as a borrower, and payment history makes up 35% of that score. So the most important rule of credit is this: Don’t miss payments. Timely payments are crucial, and making at least the minimum payment on a revolving credit line can make a positive impact on a person’s credit score.

However, missing the occasional due date is not the end of the world. Especially over time, a borrower’s credit history will be long and deep enough to withstand an occasional late payment. Many lenders will actually allow customization of due dates to line them up with pay dates. Most allow automatic payments from a checking or savings account. Take the time to find the mix that works and keeps accounts up-to-date.

Monitoring the Ratio

The further away a person is from hitting their credit limit, the healthier their credit score will be, in most circumstances. A borrower’s debt-to-credit ratio, also known as the credit utilization rate, should ideally be no more than 30%. Higher utilization rates can negatively affect a person’s credit score. Paying revolving credit lines in full each month can have a positive impact on a person’s credit score because doing so essentially lowers the credit utilization rate.

Keeping Unused Credit Cards Open

Lenders want to see accounts maintained in good standing for a long time. When debt accounts are closed, though, that history ends, and eventually closed accounts drop off the credit report entirely. A credit history looks better when it has a solid number of accounts in good standing that have been open for a long time.

One way to achieve this is to keep old credit cards open, even those not being used much anymore. Keeping these cards open, perhaps using them to automate a few bills like car insurance or a monthly subscription account, will signal that they are still very much in use. Paying them off on time and in full is still important to the health of a person’s credit. It might be wise to consider closing a card not being used regularly if the annual fees are so high that it isn’t worth it to keep the card open.

Boosting the Credit Mix

A diverse mix of credit products can also have a positive impact on a person’s credit. Opening at least one credit card is a good step for most borrowers. There are a wide variety of cards aimed at people with different interests, spending habits, and credit history. Although a mix of credit helps a person’s standing as a borrower, it’s not a good idea to open a line of credit that’s not needed just to have a mix of credit types.

Using a personal loan to finance a large purchase (home renovation, hospital bill, or similar expense) with a relatively low interest rate, and paying off that personal loan on time typically will have a positive impact on a person’s credit. Student loan refinancing can be another way to diversify your credit mix, while potentially lowering the interest rate being paid.

Checking the Credit Report

It’s recommended that a credit report be checked yearly from the three major credit bureaus. Reviewing them on a yearly basis is a good way to understand and monitor overall credit health. As a response to the Covid-19 pandemic, free weekly access to credit reports has been extended until April 20, 2022.

Consumers can request a free credit report any time adverse action has been taken against them. This might include being turned down for a loan or line of credit, or being denied an application for insurance or employment. Checking a credit report to make sure that all the credit listed there is accurate may uncover errors or fraudulent accounts that can be reported, keeping the credit score in good shape.

Limiting Credit Applications

When making major life changes, like starting a job, getting married, or having children, sometimes multiple lines of credit might be helpful to get through it all. Financial institutions understand that, but they also know that, historically, people who borrow a lot of money at once from multiple sources tend to have more difficulty paying them back. Spreading out credit applications over time whenever possible typically has a lower impact on an overall credit score, but it’s still a factor to keep in mind.

The Takeaway

Once good credit has been established, using it wisely and responsibly can offer flexibility and freedom. Installment loans like mortgages, car loans, and student loans might make it easier to reach major life goals, while credit cards for smaller purchases can help build credit and possibly qualify for lower interest rates on those big purchases. SoFi unsecured personal loans have no fees and low fixed rates. Checking your rate takes just two minutes. Taking control of your financial future is possible by making conscious choices about credit now.

Trying to build your credit? Check your rates on a personal loan from SoFi.



SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. SoFi Lending Corp. and its lending products are not endorsed by or directly affiliated with any college or university unless otherwise disclosed.

SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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What Are Credit Card Rewards? How to Take Advantage of Them

Credit Card Rewards 101: Getting the Most Out of Your Credit Card

Groceries, streaming services, transportation—everyday spending can add up, as most people’s monthly credit card statements can attest. And while paying bills is no fun, using a rewards credit card can help make some of those expenditures pay off.

Rewards credit cards pay cardholders back based on a small percentage of what they spend. The credits earned for making purchases come in the form of cash back, points, or airline miles.

Differences in the types of rewards cardholders can earn, how such rewards may be redeemed, and so on means it may take a little research to find the best rewards card for your own circumstances.

How Much Cash Back Can You Earn on a Credit Card?

The amount of money people can earn using a rewards credit card depends on a few things.

Rewards are based on a percentage of the total amount of charges, so how much an individual spends during a given earning period is obviously a key factor. But the rate at which a cardholder is rewarded also plays a big role in the total value they’ll get back.

For cash-back rewards cards, earnings are based on a percentage of how much money is charged to the card. The rate of earnings can typically range from 1% to 6%.

Some rewards credit cards offer tiered earnings, meaning the percentage back will vary based on the total amount spent during the year. For such cards, you would earn cash or rewards at one rate until you hit the tier threshold, and then start accruing based on the rate for your next spending tier.

Depending on the type of credit card, tiered rates may increase as cardholders spend more, or can decrease after a cardholder hits a cap.

Calculating what the rewards rate actually amounts to in the form of money back can be simple for cash rewards: Just apply the cash-back percentage to total spending on the card.

But for credit cards that reward customers with points or miles, figuring out the value a cardholder will earn can be more complicated.

How to Calculate the Value of Rewards Points and Miles

While the idea of earning thousands of points in a given year may look attractive, it’s harder to tell at a glance exactly how much value you may earn using this type of rewards credit card.

Rewards credit cards typically accrue a set number of points or miles for each dollar spent—for example, one point for every dollar charged. It’s fairly easy to use this earnings formula to check how many points one might rack up in a year: Just multiply the total estimated spending for the year by the earnings rate. But it’s trickier to tell what those rewards might actually be worth.

For some cards, earned rewards points may have a set redemption value—for example, every 10,000 points might be worth $100 in flight or merchandise redemptions.

Such formulas make it fairly straightforward to calculate what your annual points haul would be worth. Say a card earns one point for every dollar spent. It would then take $10,000 in spending to earn $100 in rewards—a rate of return of 1%.

Other rewards credit cards allow cardholders to make purchases directly using points, without having to convert their rewards into cash. To calculate the value of these, there’s some extra legwork and number crunching involved.

Understanding the Value of Travel Points

Let’s say a rewards credit card redemption website charges 25,000 points for a domestic airplane ticket or 40,000 points for a coffee maker. To determine the value of earning, you first might look up airfares or prices of coffee makers. With that price in hand, an individual could then determine the value of their points:

•  If a domestic flight is 25,000 points, at one point earned per dollar, it would take $25,000 in spending to buy a ticket. If that ticket is worth $395, then each point is worth 1.58 cents (395 divided by 25,000), or a rate of return of 1.58%. However, if you used those rewards to book a $200 ticket, the rate of return would only be 0.8%.
•  If a coffee maker costs $138 retail or 40,000 in points, the rate of return would be 0.3% (138 divided by 40,000).

To complicate matters further, redemption rates may depend on the type of reward you choose, with different points requirements for things like flights, car rentals, gift certificates, or merchandise.

As these examples show, there can be a great deal of variability in what cardholders get back from rewards credit cards that pay out in points or miles. That’s not to say that such rewards are less valuable than cash back, but cardholders may have to be more strategic—considering the type of reward they select and the actual cost of their selections—to get the best bang for their buck.

How to Optimize Credit Card Rewards

It’s clear that the returns you can earn when using a rewards credit card can vary tremendously. But in addition to choosing a rewards card with the best earnings rate, there are other ways to take maximum advantage of credit card rewards.

Find the Best Card Based on Individual Spending Habits

While some rewards cards accrue points on a flat-rate basis—meaning points or miles are awarded at the same rate regardless of what an individual charges to their credit card—others offer higher levels of earning for different spending categories.

Some cards may offer more points per dollar spent on groceries or gas. Other rewards credit cards may provide more miles back when an individual spends on flights or hotels. For people who tend to concentrate spending on specific categories, some cards may offer added value back.

Max Out Available Promotions

Some rewards credit cards offer higher introductory earning rates—meaning you will earn more points than usual for a set amount of time or up to a specific spending threshold—or other promotions, such as greater earnings during a specified time period.

In such cases, you may want to time big-ticket items and other purchases to take advantage of those greater returns. (One important caveat: While offers to earn more rewards certainly seem attractive, it’s wise to ensure that spending is within your budget, as carrying a credit card balance may incur interest and/or penalties that can cancel out the value of any increased earnings.)

Recommended: How to Avoid Paying Interest on Credit Cards

Be Strategic About Redemptions

Given the variability in the value of rewards points, it’s a good idea to crunch the numbers before redeeming—especially because fluctuating prices and redemption promotions can help to stretch earned rewards further.

For example, although a $200 short-haul flight may not optimize the value of points, booking that same route at the last minute may be considerably more expensive. In such a case, points may yield considerably more value.

Similarly, taking advantage of redemption promotions or redeeming for the highest-value choices can yield greater returns.

The Takeaway

Getting rewards—whether in the form of cash back, points, or travel miles—when you spend money is an attractive proposition. Finding one or more rewards credit cards that fit your particular needs may take a little research.

The SoFi rewards credit card offers 2% cash back on all eligible purchases when you redeem points to save, invest, or pay down an eligible SoFi loan. Earn 1% cash back as a statement credit to your SoFi credit card.1

Look into the perks of a SoFi credit card today.


1See Rewards Details at SoFi.com/card/rewards
The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
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.

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How Do Credit Card Payments Work?

How Do Credit Card Payments Work?

If you’re not a seasoned credit card user, you might have questions about credit card payments and their impact on your credit.

Used smartly, a credit card can be a great financial tool, but the key is not charging more than you can afford to pay back and making payments on time each month.

The Benefits of Using a Credit Card

A credit card is convenient if you don’t have cash on hand to make a purchase. As long as you know you can pay back what you charge, either in full or over a few months, a credit card can be a useful tool.

There may also be situations like renting a car or booking a hotel room when you are required to have a credit card to avoid a deposit. The hotel or rental company will place a hold on your card so that in the event of damage or other expenses you need to cover, the company knows you can pay them. With a debit card, you may have that same hold of several hundred dollars tying up your funds for several days.

Another benefit of credit cards is the ability to earn rewards. Many cards give you points for purchases that you can redeem for travel, cash back, or other perks, and if you pay your balance before accruing interest, it can be like the card is paying you to use it.

Potential Downsides of Using a Credit Card

On the other hand, credit cards can cause issues if you don’t exercise good behavior in terms of your credit card payments. Each month, you are charged interest on your purchases. The interest is calculated by dividing your card’s annual percentage rate by 365 to get the daily rate, and then multiplying your current balance by the daily rate.

That may only amount to a few extra dollars a month, but if you don’t pay your balance in full for several months, that amount can snowball, and what you initially charged can easily cost you a lot more.

Another thing to be aware of is the fact that credit card companies charge fees in addition to interest. Some charge an annual fee (usually for cards with rewards programs).

Cash advances come with a fee and a higher interest rate than for purchases.

There are also late credit card payment fees to watch out for. Not only will you be charged a fee if you don’t pay the minimum due by the payment due date, but it may appear on your credit report as a negative mark. This may hurt your credit scores and your ability to take out other financing later.

How Credit Cards Help Your Credit Scores

While a late payment can negatively affect your credit scores, credit card payments made on time can actually help your credit scores.

Each time you make a payment on time, it is reported to credit bureaus like Experian, Equifax, and TransUnion. Over time, on-time payments may factor into the algorithms the credit bureaus use to determine your credit scores, and may raise your number a few points.

Each bureau has its own formula for how scores are determined, and not every credit card company reports to each bureau, so there’s no easy way to know how your payments directly affect your score. But in general, paying on time is behavior that will benefit you over time.

Understanding Credit Utilization

Another factor that goes into your credit scores is credit utilization. This is a calculation of how much credit you have available to access compared with how much you are actually using.

Let’s say you have three credit cards and a total available credit of $15,000. You have a balance of $2,000 across all of them. By dividing the balance by the total credit available, you get 0.133, or 13% credit utilization.

When applying for new credit cards or loans, lenders will look at your credit utilization. If it’s too high—most look for a rate of under 30%—you may not be approved for the card or loan. That’s why it’s important to stay on top of how much of your total credit you’re using and pay down your debt so you don’t have a high credit utilization rate.

How to Build Your Credit With a Credit Card

Once you understand how credit card payments work, you may use credit cards to build your credit, even if you have low scores to begin with. These habits may help you build your credit and improve your credit scores over time.

1. Pay Your Bill on Time Each Month

We’ve covered the importance of making your credit card payments on time. For some people, it can be helpful to put the credit card due date on a calendar (leaving a few days for the payment to get to the company and be processed) to ensure they don’t have late payments.

Many people find autopay, used wisely, a great tool.

If you’ve just received your first credit card, find out how to make credit card payments long before your first one is due, as you might need to set up your bank account information to send an electronic payment, and you want to allow time for that process to be finalized before the due date.

2. Pay More Than the Minimum

If you only charge what you can afford, you should be able to pay off your balance each month, but there may come a time when you have an emergency that requires a larger charge you can’t pay off all at once.

In that case, you may be tempted to pay the minimum amount due, but realize that in doing so, you will pay more in the long run, as those interest charges will snowball. Even if you pay just $5 a month more than the minimum due, you can cut down on interest and pay off your balance faster.

This will also reduce your credit utilization rate and may improve your credit scores.

3. Review Your Credit Report Regularly

Working on your credit involves more than just making credit card payments on time. Access your credit report from Equifax, Experian, and TransUnion (it’s free to do so once a year) and review it for accuracy. Make sure the payments you’ve made are reported as on-time, and look at your list of trade accounts to make sure there are no errors.

For example, maybe you closed a credit card six months ago, but it still appears on your credit report. This is a discrepancy that you can report to the bureau (each bureau’s website has information on how to report a discrepancy). Check again after you report it (allowing for time to process your request) to ensure it has been removed.

Regularly reviewing your credit report will also alert you to any fraudulent activity that might occur. It’s rare, but identity theft does happen, and you’ll want to know if someone is using your identity to open credit cards or take out loans.

4. Only Charge What You Can Afford

Credit cards can be tempting. Without discipline, you might feel like taking a shopping spree, ignoring the financial consequences.

As mentioned as a credit card tip, only charge what you can afford to pay back in a reasonable time frame. A credit card isn’t meant to be free money, and overspending with one can cost you much more than you initially spent.

The Takeaway

Using credit cards responsibly and making credit card payments on time (and in full, when you can) can set you on the path to financial success. The key is to be aware of your spending and your credit utilization so you can help your credit scores grow over time.

SoFi cardholders earn 2% unlimited cash back when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back when redeemed for a statement credit.1

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1See Rewards Details at SoFi.com/card/rewards.
*See Pricing, Terms & Conditions at SoFi.com/card/terms
The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
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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.
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