credit card vs debit card graphic

Credit Cards vs. Debit Cards

Credit cards and debit cards are two payment options that allow you to leave physical cash at home. While these two types of cards may look the same, they’re actually quite different. A credit card allows you to borrow money to make purchases and pay it back later, whereas a debit card draws on funds in your connected bank account to cover purchases.

If you’re considering whether to get a debit card vs. credit card, know that you don’t necessarily have to choose. Whether to opt for debit vs. credit — or both — ultimately comes down to your financial situation and if you’re comfortable with each product’s pros and cons.

Credit Cards vs. Debit Cards Key Differences

At a glance, here are the major differences between credit vs. debit to be aware of:

Credit Cards Debit Cards
How they work Borrow money from a line of credit to cover purchases and pay amount back later Draw funds from a connected bank account to cover purchases
Credit building Can help build credit through responsible use Cannot help to build credit
Interest charges Will owe interest if a balance is carried from month to month Interest charges don’t apply, as no borrowing is involved
Fraud protection Limited liability for fraudulent activity Fraud protection is more limited
Rewards Opportunity to earn rewards like cash back and travel miles Unlikely to earn significant rewards

What Is a Credit Card?

A credit card offers access to a line of credit, which means that you are borrowing money that you’ll then need to repay at a later date. With a credit card, you can make purchases, get a cash advance, or do a balance transfer. Credit cards are generally issued by banks, credit unions, or other financial institutions.

Because a credit card represents a loan, it’s necessary to apply and qualify for a credit card. Those with stronger credit will generally have a greater chance of getting approved for a credit card, as well as securing better terms. This can include a lower annual percentage rate (APR) and a higher credit limit, which represents the maximum amount the cardholder can borrow using the card.

Cardholders will owe interest if they carry a balance from month to month. Each month, it’s necessary to make at least the minimum payment in order to avoid late fees and other consequences. However, cardholders who pay off their balance in full each month can avoid interest charges.

There are a number of different types of credit cards to choose from. Some credit cards also offer rewards. A rewards card can offer benefits to the cardholder in the form of cash back, points, or airline miles.

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The Pros and Cons of Credit Cards

Before using a credit card, it’s important to understand they have both advantages and drawbacks. Here are some of the major pros and cons to keep in mind.

Pros

Aside from the fact they allow you to borrow money, here are some of the major pros of credit cards:

•   Robust fraud protections: If your credit card number is stolen online, and you report the theft right away, you’re legally only liable for $50 of any purchases made (or maybe even nothing, if your issuer offers zero liability). Meanwhile, with a debit card, your loss depends on how long it takes you to report the fraud — you could be held completely responsible for the charges on your account. Credit cards also have regulations that protect you from unfair practices. These regulations give you the right to dispute charges if you believe you didn’t make a purchase and allow you to file complaints with your credit card company.

•   Ability to build credit: Another major benefit of using a credit card is that if you use your card responsibly, it’s possible to build your credit history. To do so, you’ll need to take steps like paying your credit card bill on time and keeping your credit card balances low. Having strong credit credit can lead to a number of benefits, such as qualifying for additional loans in the future at more favorable rates.

•   Possible to earn rewards: Some credit cards will even offer rewards for spending money using the card. Cardholders may be able to earn points they can redeem for flights, hotel stays, or gift certificates to popular retailers. Other popular rewards options include cash-back rewards and airline miles.

Cons

Of course there are cons to using credit cards, too. These include:

•   Interest and fees: You only have a select number of days before you have to pay your credit card bill in full, or risk having to pay interest charges. Potential fees vary, but some credit card companies may charge fees if you get a cash advance, make a late payment, or spend more than your credit limit. Some companies or cards may charge annual fees for simply being a cardholder

•   Possible to rack up debt: A big risk of using a credit card is the possibility of racking up a large amount of debt. With a credit card, you’re borrowing money to make purchases rather than relying on funds you already have. If you borrow more than you can afford to pay back, you’ll start to accumulate interest charges, which can quickly snowball into a large amount of debt.

•   Could damage credit: On the flipside, using a credit card also has the potential to wreak havoc on your credit. If you’re not being a responsible cardholder — whether that’s maxing out your card, making your payments late, or skipping out on paying entirely — it can seriously damage your credit score.

What Is a Debit Card?

While a debit card may look identical to credit cards, it functions differently. Unlike a credit card that uses borrowed money to make purchases, debit cards are generally used to spend money that is already in your connected checking account. You can use a debit card to make purchases or to withdraw money from an ATM.

Most banks or credit unions will give you a debit card when you open a checking account.
When you receive your debit card, you’ll get a PIN, which stands for a personal identification number. You’ll typically need to enter your PIN on a keypad when making purchases with a debit card. This is intended to protect against someone else trying to use your debit card.

The Pros and Cons of Debit Cards

Like with credit cards, there are both upsides and downsides to debit cards to be aware of.

Pros

What are the pros of using a debit card? Here are the major benefits to note:

•   Conveniently pay or withdraw funds: Debit cards allow you to spend cash without actually carrying it around. Most stores accept debit cards as a form of payment. You can also use your debit card to withdraw physical cash from an ATM. Depending on the store, you can even ask for cash back when you make a purchase.

•   No interest charges: Another major benefit of using a debit card vs a credit card is that you won’t pay any interest. This is due to the fact that you can’t borrow money with a debit card. Rather, you’re using the money you already have in your connected bank account.

•   Less risk of overspending: It can be easier to control your spending with a debit card than it is with a credit card. Since you’re limited to spending only what you already have in your bank, you’ll have less of a chance of racking up debt.

Cons

There are cons of using a debit card as well. Specifically, these include the following:

•   Limited to spending what you have: When you make a purchase with a debit card, the money is usually taken out of your checking account immediately. This means you can’t rely on a debit card to lend you money, such as if you needed coverage in an emergency or wanted to make a larger purchase.

•   Won’t help you build credit: Another con of using debit vs. a credit card is that you won’t build your credit history when making responsible purchases. However, this also means you can’t hurt your credit history when using a debit card, which is a positive attribute to consider.

•   Less robust liability protections: As mentioned earlier, if there are any issues with charges due to a lost or stolen debit card, your personal liability can be a bit higher than it is with a credit card. It’s especially critical to quickly report any fraudulent activity on a debit card to limit your personal liability.

Choosing Between a Credit and Debit Card

You don’t have to choose between having a debit vs. credit card. Rather, you could have both a debit card and a credit card in your wallet, and then utilize the best features of each type of card to your advantage. As you can see, there are benefits of debit cards and credit cards.

Credit cards can be an effective tool to help you build your credit — as long as you’re able to pay off your balance each month. If you know you can make your payments on time and avoid costly interest charges or fees, you can take advantage of the rewards programs offered by credit cards.

Debit cards can be an option if you want to ensure you only spend the money you have in your bank account. While credit cards are likely safer for online purchases, you can use debit cards at ATMs or retailers to get physical cash. Since your debit card is a direct line to your cash, it’s wise to review the security policies offered by your bank, especially since debit cards do tend to have less robust fraud protections.

The Takeaway

When it comes to a credit card vs. debit card, perhaps the biggest difference is where the funds come from. With a credit card, you’re drawing on a line of credit to make a purchase. You’ll then have to pay back that amount later, potentially with interest. A debit card, on the other hand, is linked to a bank account and draws upon the funds already in the account. As such, you won’t pay interest, but you also won’t have the chance to earn rewards.

If the benefits of a credit card seem like the right fit for you, it’s important to compare the o options available to you. With the SoFi credit card, for instance, you can earn generous cash-back rewards and potentially secure a lower APR through on-time payments. For a limited time, new credit card holders who also sign up for a SoFi Checking and Savings with direct deposit can start earning 3% cash back rewards on all eligible credit card purchases for 365 days*. Offer ends 12/31/22.

Find out today if you qualify for a SoFi credit card!


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.
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
website
.

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.
1See Rewards Details at SoFi.com/card/rewards.
†SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS PROSPECTIVELY BASED ON MARKET CONDITIONS AND BORROWER ELIGIBILITY. Your eligibility for a SoFi Credit Card Account or a subsequently offered product or service is subject to the final determination by The Bank of Missouri (“TBOM”) (“Issuer”), as 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. Please allow up to 30 days from the date of submission to process your application. The card offer referenced in this communication is only available to individuals who are at least 18 years of age (or of legal age in your state of residence), and who reside in the United States.

*You will need to maintain a qualifying Direct Deposit every month with SoFi Checking and Savings in order to continue to receive this promotional cash back rate. Qualifying Direct Deposits are defined as deposits from enrolled member’s employer, payroll, or benefits provider via ACH deposit. Deposits that are not from an employer (such as check deposits; P2P transfers such as from PayPal or Venmo, etc.; merchant transactions such as from PayPal, Stripe, Square, etc.; and bank ACH transfers not from employers) do not qualify for this promotion. A maximum of 36,000 rewards points can be earned from this limited-time offer. After the promotional period ends or once you have earned the maximum points offered by this promotion, your cash back earning rate will revert back to 2%. 36,000 rewards points are worth $360 when redeemed into SoFi Checking and Savings, SoFi Money, SoFi Invest, Crypto, SoFi Personal Loan, SoFi Private Student Loan or Student Loan Refinance and are worth $180 when redeemed as a SoFi Credit Card statement credit.

Promotion Period: The Program will be available from 10/1/22 12:01 AM ET to 12/31/22 11:59PM ET

Eligible Participants: All new members who apply and get approved for the SoFi Credit Card, open a SoFi Checking and Savings account, and set up Direct Deposit transactions (“Direct Deposit”) into their SoFi Checking and Savings account during the promotion period are eligible. All existing SoFi Credit Card members who set up Direct Deposit into a SoFi Checking & Savings account during the promotion period are eligible. All existing SoFi members who have already enrolled in Direct Deposit into a SoFi Checking & Savings account prior to the promotion period, and who apply and get approved for a SoFi Credit Card during the promotion period are eligible. Existing SoFi members who already have the SoFi Credit Card and previously set up Direct Deposit through SoFi Money or SoFi Checking & Savings are not eligible for this promotion.

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Getting a $3,000 Personal Loan

Getting a $3,000 Personal Loan

The funds from a personal loan can be used for anything, from paying off high-interest credit card debt to buying a new spinning bike. But how hard is it to qualify for a $3000 personal loan? And what if you have bad credit?

Online lenders tend to cater more to borrowers with bad credit. They will also charge higher interest rates and financing fees because a borrower with bad credit is considered higher risk.

Read on to find out how to get a personal loan, what credit score you need for a personal loan, and where to go to get a loan if you have bad credit.

Can I Get a $3,000 Personal Loan with Bad Credit?

A personal loan is money borrowed from a bank, credit union, or online lender. Loan amounts range from $1,000 to $50,000, and the principal is paid back with interest in fixed monthly payments, typically over two to seven years. Personal loans are flexible, meaning they can be used for any purpose, from a cross-country move to home improvements.

Getting approved for a personal loanthat is $3,000 with bad credit may mean you have to jump through a few hoops to qualify. What is bad credit? According to FICO, someone with a score of 580 or below is considered a credit risk.

When calculating an individual’s credit score, FICO and other rating agencies will look at whether you pay bills on time, how long you have held credit lines or loans, your debt profile, how often you use credit, how often lenders have pulled your credit report, and your history of bankruptcy or foreclosure.

A low credit score indicates that you could be at a higher risk of defaulting on a loan. To compensate for that risk, a lender may charge you a higher interest rate for a loan or credit card, or you may have to put down a deposit.

What Is the Typical Credit Score Required for a $3,000 Personal Loan?

Since $3,000 is not a large loan amount, a credit score between 610 and 640 should suffice for an “unsecured” personal loan (a loan with no collateral). The higher your credit score, the less interest you will pay.

Benefits of a $3,000 Personal Loan

The benefits of a $3,000 personal loan include flexibility and predictability. The loan can be used for anything you need, and the payments will be the same each month until the loan is paid off.

Interest Rates and Flexible Terms

The interest rate for a personal loan will be fixed for the term of the loan, and the repayment terms are flexible, ranging between one and 10 years. Personal loans typically have a lower interest rate than a credit card, and the rates are even better if you have excellent credit. You might also be able to borrow more using a personal loan versus a credit card.

No Collateral Required

An unsecured personal loan does not require any collateral. Some loans require the borrower to use their car or home as an asset to guarantee the loan. The interest rate may be a little higher for an unsecured loan than it would be for a secured loan because the lender assumes more risk, but you won’t risk your car or home if you default.

Recommended: Secured vs. Unsecured Personal Loans

Fixed Monthly Payments

A personal loan will have fixed monthly payments for the life of the loan, which makes budgeting for bills easier.

Cons of a $3,000 Personal Loan

A personal loan might not be the best option depending on your situation and the loan’s purpose. Here are some of the downsides to a personal loan.

Debt Accumulation

Many people use personal loans to pay off credit card debt because the interest paid on a credit card is generally more than the interest paid on a loan. However, this can be a double-edged sword if they end up with a higher credit limit and the ability to rack up even more debt.

Origination Fees and Penalties

Personal loans may come with significant fees and penalties that can drive up the cost of borrowing. An origination fee of up to 6% of the loan amount is not uncommon. If you decide to pay off the balance before the term ends, you may have to pay a penalty.

Interest Rates May Be Higher Than Other Options

This is particularly true for people who have a low credit score. In that case, a credit card might charge a lower rate than a personal loan.

If you have equity in your home, another option is a home equity line of credit (HELOC). Alternatively, a credit card balance transfer might charge a lower interest rate.

Where Can I Get a $3,000 Personal Loan?

You can get a personal loan from online lenders, commercial banks, and credit unions. Online lenders are super-convenient and fast. Loans are often funded within two days. You can also get pre-qualified and see your loan terms before you apply. An online lender might do a soft credit check before you accept the loan, but your credit rating will not be affected.

Credit unions may offer lower interest rates and more flexible terms for members. Federally chartered credit unions cap APRs at 18%, so borrowers with imperfect credit may receive lower rates than they would elsewhere. A history with a credit union might boost your eligibility.

A bank will typically require good credit to qualify for a personal loan. You may also need an account with the bank. Account holders are likely to qualify for the lowest interest rates and bigger loans. You may have to visit a branch and complete the application in person.

How to Apply for a $3,000 Personal Loan

1.   Check your credit score. You may find errors on your credit report that you can fix to boost your eligibility for lower-rate loans.

2.   Compare the terms and conditions offered by lenders. A personal loan calculator can help you determine what your payments will be.

3.   Pre-qualify if you can, because it won’t affect your credit score and will help you with your comparison.

4.   Consider using your car or other collateral to get a better rate with a secured loan.

5.   Use a co-signee (with good credit) to get a better rate. The co-signee’s credit rating is considered along with your own, but they must agree to pay the loan if you cannot.

6.   Gather the documents you need and apply to the best lender. Examples of documents you may be asked to provide are W-2s, paystubs, and financial statements.

$5,000 Personal Loan

Here’s an example of typical loan terms for a $5,000 personal loan. Rates are accurate at the time of writing for a loan through SoFi for someone earning around $50,000 with good credit.

•  The monthly payment on a two-year loan with an interest rate of 6.99% would be around $224.

•  The monthly payment on a three-year loan with an interest rate of 7.66% would be around $156.

•  The monthly payment on a six-year loan with an interest rate of 11.38% would be around $96.

$10,000 Personal Loan

The monthly payment on a personal loan of $10,000 at a 5.5% interest rate over a one-year term would be $858, with $300 in total interest paid over the life of the loan.

The Takeaway

A personal loan is a way to get flexible financing quickly. These loans can be used for any purpose, and the term of the loan can range from 12 months to 10 years. Banks, credit unions, and online lenders offer these loans at varying interest rates.

Personal loans are popular for people who want to consolidate their debt or pay off credit cards that charge a higher interest rate. The requirements for a loan depend on the lender, but a good credit score will give you a better rate. Alternatives to a personal loan are a HELOC, or a credit card balance transfer as long as the card charges a lower interest rate.

SoFi’s personal loans can help you consolidate credit card debt. The fixed interest rate is significantly lower than that on most credit cards.

Looking for a personal loan? With SoFi’s Personal Loans, there are no fees and no collateral required. Check out

SoFi’s personal loans—get your rate in just 1 minute!

FAQ

What credit score is needed for a $3,000 personal loan?

According to FICO, someone with a score of 580 or below is considered a credit risk. A score of between 610 and 640 is typically required for an unsecured personal loan.

Is it possible to get a $3,000 loan with bad credit?

Some lenders, particularly online lenders, will extend personal loans to people with bad credit. However, the terms may include high interest rates. Many online lenders specifically target borrowers with bad credit.

What’s the monthly payment on a $3,000 personal loan?

The monthly payment on a $3,000 loan will depend on the lender, the loan term, and the interest rate. For example, the monthly payment on a two-year loan with an interest rate of 6.99% would be around $224.The monthly payment on a six-year loan with an interest rate of 11.38% would be around $96.

Photo credit: iStock/nortonrsx

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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How Much Does Your Credit Score Increase After Paying Off a Debt

Does Paying Off a Debt Increase Your Credit Score?

Whether you’re thinking about paying off a debt or mulling over how to increase your credit score — or both — it’s reasonable to ask if paying off debt helps your credit rating. The answer, though, is more complex than a simple yes or no.

We’ll delve into it all here, showing how paying off a debt can either raise or reduce your credit score, depending on the circumstances. We’ll also explain a bit about how credit scores are calculated, and especially how managing your credit utilization can give you some control over your credit score.

How Paying Off a Debt Is Connected to Your Credit Score

What affects your credit score is on a lot of people’s mind. Your credit score is determined by five factors, some of which are weighted more than others. Paying off a debt can affect each of these factors in different ways, causing your score to rise or dip. Sometimes changes in two factors can even cancel each other out, leaving your score unchanged. This is why it’s hard to predict how paying off a debt will affect your credit.

Before we continue, you may want to take a moment to find out your credit score for free.

Recommended: What is The Difference Between Transunion and Equifax

Check your score with SoFi Relay

Track your credit score for free. Sign up and get $10.*


Recommended: Does Net Worth Include Home Equity

Credit Score Calculation Factors

According to FICO® Score, a credit rating company, these are the five factors commonly used to calculate your score:

•   Payment history (timely payments): 35%

•   Amounts owed (credit utilization): 30%

•   Length of credit history: 15%

•   New credit requests: 10%

•   Credit mix (installment versus revolving): 10%

Once FICO’s algorithm calculates your score, a credit score rating scale assigns it a category ranging from Poor to Exceptional. A higher number indicates to lenders that a person is a lower risk for default:

•   Exceptional: 800 to 850

•   Very Good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Poor: 300 to 579

As you can see, a Fair credit score falls between 580 and 669. A Poor or bad credit score falls between 300 and 579. The minimum credit score required to qualify for a loan is around 610 to 640, depending on the lender — meaning not everyone with a Fair score would qualify.

Recommended: Do Personal Loans Build Credit?

Why a Credit Score Can Go Down After Paying Off a Debt

Because paying off debt feels good and improves your financial situation, people can be surprised when their credit score actually drops. This negative impact can be due to changes in one or more factors:

•   credit utilization

•   credit mix

•   overall credit age

When you pay off a credit card and then close the account, you reduce your available credit and increase your credit utilization. Similarly, if you pay off your only car loan and close that account, you have one fewer type of account in your credit mix. Finally, paying off and closing an older account may reduce the average age of your overall credit history. (We’ll explore these scenarios in more detail below.)

While none of these things is “bad” in financial terms, it temporarily counts against you in the world of credit scores.

What Is Credit Utilization?

Now for a little more background on credit utilization. Credit utilization is a factor with revolving forms of credit, such as credit cards and lines of credit, where you can reuse the account up to your limit.

Your credit utilization rate, or ratio, is determined by dividing the sum of your credit limits by the sum of your current balances. So if someone has a $5,000 limit and is using $2,500, that’s a 50% credit utilization rate. Your rate should be kept below 30% to avoid a negative affect on your credit score.

What Is a Credit Mix?

Lenders like to see that an applicant can successfully handle different kinds of credit. This includes installment loans like mortgages, car loans, and personal loans, as well as revolving credit such as credit cards and lines of credit. If a person can manage both types of credit well, a lender will likely consider them less of a risk.

Recommended: Should I Sell My House Now or Wait

How Credit Age Factors In

The length of your credit history demonstrates your experience in using credit. To lenders, the longer the better. When payments are on time, this combo reassures lenders that you will likely continue to make on-time payments going forward.

New credit accounts can also lower your credit age. More important, opening or even applying for many new accounts is a red flag to lenders that you may be in financial trouble. The application process also involves a hard credit inquiry, which can lower your credit score.

Sample Scenarios

Here are two examples of someone paying off a credit card. In one case, the credit score goes up. In another, it goes down.

Credit Utilization Goes Down / Credit Score Goes Up

Let’s say that someone has a credit utilization rate of 40%, which is negatively impacting their credit score. (Remember, below 30% is best.) When they make enough payments to bring their utilization rate down to 25%, this can boost their credit score.

Recommended: What Credit Score is Needed to Buy a Car

Credit Mix & Age Go Down / Credit Score Goes Down

Now, let’s imagine that someone pays off the balance of their first and only credit card. This should help their utilization score! But wait: Then they close the account, and their average credit age drops. And since this is their only form of revolving credit, their credit mix has lost out too.

Counterintuitively, paying off the card may make their credit score go down — at least in the short term.

Paying Off a Loan Early vs Paying It on Schedule

People often wonder if it’s better to pay off a loan early, if you can. In the case of a personal loan, early payoff can lower the average age of someone’s credit history, possibly lowering their credit score.

In reality, the effect will depend upon their overall credit situation. Paying the loan off according to the schedule will keep it open longer, which can help with their credit age. On the other hand, they’ll pay more in interest because the loan is still open.

If you’re in this situation, weigh the pros and cons before making the decision that’s best for you.

How Long Can It Take To See Your Credit Score Change?

According to the credit report agency TransUnion, credit reports are updated when lenders send them new information. In general, this happens every 30-45 days, though some lenders update more frequently.

If you’re concerned about your credit score, consider signing up for a credit monitoring service. What qualifies as credit monitoring varies from company to company. Look for a one that sends alerts whenever your score changes for better or worse.

Recommended: What Is a Tri-Merge Credit Report?

The Takeaway

How paying off a debt affects someone’s credit score depends on the person’s overall credit profile. Paying off a credit card typically helps your credit score because the account remains open, lowering your credit utilization. Paying off a loan can hurt your score because the loan is then closed, potentially reducing your credit mix and age. Generally, though, borrowers shouldn’t let credit score concerns prevent them from taking actions that are in their financial interest.

To benefit from free credit monitoring and gain a bird’s eye view of your financial picture, try the SoFi Relay app. You can connect all of your accounts into one convenient mobile dashboard, set multiple financial goals, track your spending, and more — all in one place.

Track your money like a champion with SoFi Relay.

FAQ

How fast does your credit score increase after paying off a debt?

In fact, your credit score may dip for a short period after a debt is paid off. Lenders report new information to credit reporting agencies every 30-45 days, though some lenders update more frequently. Generally, you shouldn’t let concerns about your credit score prevent you from taking action that is in your best financial interest.

Is it best to pay off all debt before buying a house?

Credit report agency Experian says it generally makes sense to pay off credit card debt before buying a home. Just know that in some circumstances, paying off a debt may temporarily reduce your credit score — which can affect the loan terms you qualify for. If you do pay off a credit card, keep the account open until after you qualify for a loan.

How do you get an 800 credit score?

Pay bills on time, maintain a credit utilization rate under 30%, and effectively manage your credit history length, new credit requests, and credit mix. Although this won’t guarantee a score of 800, it will help you maximize yours.


Photo credit: iStock/Patcharapong Sriwichai

SoFi’s Relay tool offers users the ability to connect both in-house 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. 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 provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
*Terms and conditions apply. (Must click on the link to be eligible.) 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 into SoFi accounts such as cash in SoFi Checking and Savings or loan balances, Stock Bits, fractional shares and cryptocurrency 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.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
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
website
.

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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Does a Background Check Include a Credit Check from a Potential Employer

Does a Background Check for Employment Include a Credit Check?

Sometimes. Employers approach background checks in different ways. In some cases, credit reports are included. A job background check may include a credit check in certain industries, such as banking and security. The size of the company can be a factor, too: Large corporations are more likely to conduct a credit check than a small family business.

We’ll walk through the specifics of when an employment background check may include a credit check, why potential employers want this information, and what financial data they have access to.

What Are Credit Checks?

A credit check is a request to see your financial data as collected by one of the three major credit reporting bureaus. Credit reports contain information about past and existing credit accounts, payment patterns, and how much debt you’re carrying.

According to the Fair Credit Reporting Act (FCRA), only certain individuals and organizations have the right to check credit histories, such as lenders, insurance agents, and landlords. Potential employers can also conduct a credit check for employment purposes, with your permission.

Sometimes credit checks are conducted to confirm a consumer’s identity — and head off identity fraud — rather than to investigate your financial history. For instance, banks may run a limited credit check on customers looking to open a checking account.

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Credit Check vs Background Check

A background check contains identification verification information along with data from criminal records, educational and employment backgrounds, civil records, driving history, and more. In some instances, a background check may also contain a credit check.

The Importance of Good Credit

A good credit history primarily makes it easier to get approved for a loan, and to qualify for better interest rates and loan terms. The higher the score, the less someone will pay in interest over their lifetime, potentially saving them thousands of dollars.

Good credit can also help renters qualify for an apartment. In some cities, renters routinely provide a credit reference with their rental application. While there’s no minimum credit score needed to rent an apartment, a strong credit history shows landlords that you’re someone who pays their bills on time.

Employers may also check your credit if you’ve applied for a job. Having good credit without any red flags can make the hiring process go more smoothly. However, some cities and many states have banned this protocol or put limits on it.

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Why Employers Look at Your Credit Score

An employer may run a credit check on a job applicant whom they’re seriously considering hiring. Employer credit checks are more common in industries where employees handle money or have access to customers’ financial data.

By conducting credit checks, businesses hope to confirm that an applicant demonstrates financial responsibility and doesn’t pose a security risk to the company, other employees, or customers.

Responsibility

A credit report shows how responsibly an applicant has handled their own money. If there are any red flags, the employer may not want to hire that person to handle company funds or take on other important responsibilities.

Security

A credit report can be used to verify your identity along with other pieces of background information. If there are discrepancies that can’t be easily cleared up, that’s a red flag.

What a Credit Report May Tell an Employer

The information in a credit report can include employment history as well as red flags such as late payments, debts sent to collections, foreclosures, liens, lawsuits, and judgments.

Employment History

Your complete employment history is not included in a credit report. Past and current employers may appear on your credit report, but only if you listed them on a loan or credit card application. Typically, if a lender wants your employment history, they will ask you for it directly.

Late Payments

Credit reports contain information about current and historical credit accounts, including installment loans (mortgages, car loans, personal loans) and revolving credit (credit cards and lines of credit). The reports typically contain information from the past seven to ten years, including a person’s payment history and whether credit accounts are paid up to date or are past due.

Recommended: What Credit Score is Needed to Buy a Car

Debt Collection

Once someone is behind on payments — at least 120 days — the lender may send the account to a collections agency. These agencies attempt to collect on the bill. This can have a significant impact on your credit score, since making payments on time is the biggest factor in the algorithm that determines your credit score.

Debt Charge-Off

If a company you owe money decides they can’t collect the funds, they can “charge off” the amount as uncollectible. This may stay on your credit report for seven years, starting with the delinquency date that ultimately led to the charge-off. A debt charge-off typically lowers the person’s credit score even more than going to collections.

Foreclosures

When a homeowner misses multiple mortgage payments, the lender may take possession of the home, or “foreclose” upon it. This remains on a credit report for seven years, starting with the first missed payment that ultimately led to the foreclosure. This can significantly reduce someone’s credit score — although the impact may diminish over time — and can be a red flag for employers.

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Liens

A tax lien is a claim that you owe money for taxes, usually federal, state, or property tax. Tax liens no longer appear on credit reports by the three major credit bureaus, and they can’t affect your credit. They are, however, available on public records. If an employer conducts a full background check, they can still receive this information.

Lawsuits and Judgments

Just like tax liens, judgments from lawsuits are not included in credit reports or factored into a credit score. An employer that conducts a background check, though, will likely receive this information because it’s part of public records.

Recommended: What is The Difference Between Transunion and Equifax

How to Prepare for an Employer Credit Check

Every consumer should be aware of what information is available on their credit report. You can request your credit report and find out your credit score for free at AnnualCreditReport.com.

Review your report for errors. Even small typos — like misspelling your name — could present problems down the line. Report them to the relevant credit bureaus via their online dispute process to have them corrected or removed.

You may also consider signing up for a credit monitoring service. What qualifies as credit monitoring varies from company to company. Look for a service that sends customers alerts whenever their credit score changes, accounts are opened or closed, and red flags appear on their credit history.

If you’ve had financial problems in the past but have turned things around, be prepared to explain to your potential employer how you’ve accomplished that.

Recommended: What Is a Tri-Merge Credit Report?

Credit Check Limitations

Credit reports contain a lot of private financial information. However, you can feel secure knowing that there are strict limits to what can be included. The following information cannot appear on your credit report:

•   Account balances for checking, savings, and investments

•   Records of purchases made

•   Income information

•   Judgments and tax liens

•   Medical information (physical and mental), although money owed to a doctor or hospital can appear

•   Marital status

•   Disabilities

•   Race and ethnicity

•   Religious affiliations

•   Political affiliations

Does an Employer Credit Check Hurt Your Credit Score?

No. Employers conduct what is known as a “soft credit inquiry” or soft pull. Because the credit check isn’t the result of applying for a new loan or credit card, the request probably won’t appear on your credit report and it won’t affect your score.

What Are Your Legal Rights as a Job Applicant?

According to federal law, job applicants have the right to:

•   know what is in their file

•   ask for a credit score

•   dispute incorrect or incomplete information

•   be told if information in the file is used against them

An employer or potential employer must get written consent before they can request credit report information (the trucking industry is an exception). Some cities and many states have banned or put limits on an employer’s ability to check your credit report.

The Takeaway

Employers may run credit checks on applicants as part of the hiring process. By conducting credit checks, businesses hope to confirm that an applicant demonstrates financial responsibility and doesn’t pose a security risk to the company, other employees, and customers. Credit checks are more common at large corporations and in industries where employees handle money or have access to customers’ financial data. You can prepare for an employer credit check by requesting your report and correcting any errors.

SoFi Relay is a mobile money tracker app that monitors all of your money, all in one place. Plus, you’ll receive free credit monitoring, spending breakdowns, and financial insights. Because SoFi credit monitoring involves only a soft pull, it won’t affect your credit score.

Track your money, and your credit, like a champion.

FAQ

Why do background checks include credit reports?

Information found in a credit report can give the employer a sense of the job applicant’s financial stability. This may be especially important if the job involves handling money, financial data, or pharmaceuticals. Some industries that routinely pull credit checks on applicants include banking, retail, insurance, public safety, and security.

Does a background check include a hard credit check?

No. A background check with credit check involves a soft inquiry, so it won’t affect your credit score.

What causes a red flag on a background check?

Criminal records, suspicious credit histories, inconsistencies in information provided, and gaps in employment history can be considered red flags.


Photo credit: iStock/serggn

SoFi’s Relay tool offers users the ability to connect both in-house 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. 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 provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
*Terms and conditions apply. (Must click on the link to be eligible.) 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 into SoFi accounts such as cash in SoFi Checking and Savings or loan balances, Stock Bits, fractional shares and cryptocurrency 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.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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
website
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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. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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 Does Unlimited Cash Back Mean? Is It Worth It?

What Does Unlimited Cash Back Mean? Is It Worth It?

There are lots of different credit card types to choose from, especially if you have a high credit score. In an attempt to earn your business, many card issuers offer rewards every time you use their card, including unlimited cash back for qualifying purchases.

What unlimited cash-back means is you can earn uncapped rewards using the card — in other words, your earning potential isn’t limited to a certain amount. While this might sound too good to pass up, there are both pros and cons to consider to determine whether unlimited cash back is worth it for you.

What Is Cash Back?

Cash back is a type of reward that a credit card issuer may offer through its rewards credit cards. Depending on the terms, cardholders can earn a certain percentage back on qualifying purchases (cash advances typically don’t qualify). For instance, you may be able to earn 2% cash back on purchases at gas stations, or 3% back at grocery stores.

Some cards may put caps on how much cash back you can earn. As an example, a card may limit cardholders to 2% cash back for up to $5,000 in purchases in a calendar year. While cardholders may still be able to earn cash back after they’ve hit their certain earnings threshold, they may earn rewards at a lower rate thereafter.

Recommended: Can You Buy Crypto With a Credit Card

Cash in on up to $300–and 3% cash back for 365 days.¹

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What Is Unlimited Cash Back?

Unlimited cash back means that your credit card offers cash-back rewards with no caps or limits on how much you can earn. In most cases, you can earn cash back on all of your purchases, though some cards may only offer unlimited cash back on certain spending categories.

For most credit cards, your cash-back rewards don’t expire as long as you keep your card open. This means that if you continue racking up rewards, you may be able to redeem your accumulated cash-back rewards for a sizable statement credit or other perk.

How Unlimited Cash Back Credit Cards Work

How credit cards work that offer unlimited cash back is that they allow cardholders to earn cash back on their purchases with no earning cap. In other words, there is no limit as to how much you can earn on qualifying purchases with these types of credit cards.

As you earn these rewards, you can redeem them in several ways. This includes as a statement credit or actual cash via a check or bank transfer.

In general, you’ll need good or excellent credit (meaning a score of 670 or above) to qualify for an unlimited cash back card. That being said, there are also cash back credit cards with less stringent credit card requirements, meaning you may be able to qualify even if you have a fair credit score or limited credit history. In general, however, the higher your score, the better the rewards tend to be.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

Pros and Cons of Unlimited Cash Back

Before signing up for an unlimited cash back credit card, consider the advantages and disadvantages first.

Pros

Cons

Can earn money back on purchases, with no caps on earnable rewards Generally need at least good credit to qualify for top rewards programs
Don’t have to worry about hitting spending thresholds or other caps May need to pay an annual fee
Simple and straightforward to earn and redeem rewards Like other rewards credit cards, may have a higher APR than standard credit cards
Can help to build credit with responsible usage Not as lucrative of a rewards option for frequent travelers

Is Unlimited Cash Back Worth It?

Getting an unlimited cash back credit card might be worth it if you’re confident you can maximize its rewards. For instance, if you continually make purchases in higher rewards categories, you can save some serious cash due to the rewards earnings. Ideally, you’d be able to earn enough rewards to entirely offset the annual fee, if your card has one.

An unlimited cash back card may not be a great fit if you continually carry a balance on your credit card, given what a credit card is and how you’ll accrue interest. Your interest rate will likely be higher than the cash back rate you’ll earn, which means carrying a balance could cancel out rewards earnings.

Another reason to think twice about an unlimited cash back card is if you’re a frequent traveler. A travel rewards program may be a better choice since you can earn free flights, hotel rooms, and even cash back. Plus, you might earn more lucrative rewards on travel-related spending than a cash back card would offer.

Recommended: How to Avoid Interest On a Credit Card

Categories of Unlimited Cash Back Credit Cards You Can Choose From

There are several ways credit cards give you cash back, including flat rate and through different spending categories.

Flat Rate

Flat-rate rewards allow you to earn the same cash-back rate across all purchases made using a credit card. For instance, you might earn 3% cash back on all purchases made with the card. Some may issue you a certain percentage cash back when you make a purchase, and then another amount you pay off your credit card bill. Regardless, your specific spending category won’t matter for earning with a flat-rate rewards card.

Rotating Categories

Your credit card may offer several spending categories each quarter that you can select from to earn cash back. For instance, you might be able to choose to get 5% cash back on purchases at gas stations or office supply stores for the first quarter. After the quarter is over, you can choose a different spending category.

While rotating categories can allow you to maximize your rewards-earning potential, this setup does require some strategizing. You’ll need to stay on top of choosing a new category each quarter. Plus, you’ll then have to make sure you adequately take advantage of spending within that category.

Fixed Spending Categories

Instead of choosing different categories every quarter, some credit cards offer fixed cash-back earnings for various spending categories. For instance, a card may allow you to earn 3% cash back for purchases at grocery stores, and 1% cash back on all other purchases.

While fixed spending categories require much less planning ahead for, you will want to ensure the card you sign up for rewards you in a category you regularly spend in. Otherwise, you could end up forgoing valuable rewards.

Maximizing Unlimited Cash Back Earnings

If you want to make the most of earning unlimited cash back, here are some general credit card rules to keep in mind:

Select the Right Card

It’s a good idea to do your research and find a card that matches your spending habits. For example, if you use your credit card a lot at gas stations, it might not be the best choice to sign up for a card that doesn’t offer cash back rewards for this category.

Time Your Spending

If you sign up for a credit card with a sign up bonus, consider timing your card opening with a major purchase you’d been planning. Doing so will help ensure that you meet the minimum spend requirements in order to earn the bonus.

Or, if your credit card is about to have extra earnings for a rotating category, you might think about waiting until that time to make a planned purchase.

Note Spending Categories

After signing up for a card, pay attention to how much cash back you’ll earn in different categories if it’s not a flat rate card. That way, you can be sure to use that card exclusively for certain spending categories, or make sure you sign up for rotating categories well within the deadline.

Review Credit Card Terms

Looking over your credit card terms can help to ensure that you know what does and doesn’t count toward earnings. You might also discover through your card’s terms that you can earn enhanced rewards by taking certain actions, such as holding a certain amount of money in an associated bank account.

The Takeaway

A cash-back credit card is a great way to earn rewards that doesn’t necessarily require a complicated redemption process. Even better is when the card doesn’t place limits on the amount of cash-back rewards you can earn, which is the meaning of unlimited cash back.

Still, you’ll need to make sure you avoid carrying a balance and take steps to maximize your rewards to ensure you don’t negate your cash-back rewards earnings.

Looking for an easy way to earn cash back? Check out the SoFi credit card. For a limited time, new credit card holders† who also sign up for a SoFi Checking and Savings with direct deposit can start earning 3% cash back rewards on all eligible credit card purchases for 365 days*. Offer ends 12/31/22.

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

How does unlimited cash back work?

If you have a credit card with unlimited cash back, that means there are no limits on the amount of rewards you can earn through qualifying purchases.

Is unlimited cash back better than points?

Whether cash back or points is better really depends on your preferences. Cash back is straightforward to track and redeem. Meanwhile, points may translate to a greater range of redemption opportunities, including for travel-related purchases. However, the value of points can vary depending on the card and the way the points are redeemed.


Photo credit: iStock/AsiaVision

SoFi cardholders earn 2% unlimited cash back rewards when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back rewards when redeemed for a statement credit.1
1See Rewards Details at SoFi.com/card/rewards.
†SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS PROSPECTIVELY BASED ON MARKET CONDITIONS AND BORROWER ELIGIBILITY. Your eligibility for a SoFi Credit Card Account or a subsequently offered product or service is subject to the final determination by The Bank of Missouri (“TBOM”) (“Issuer”), as 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. Please allow up to 30 days from the date of submission to process your application. The card offer referenced in this communication is only available to individuals who are at least 18 years of age (or of legal age in your state of residence), and who reside in the United States.

*You will need to maintain a qualifying Direct Deposit every month with SoFi Checking and Savings in order to continue to receive this promotional cash back rate. Qualifying Direct Deposits are defined as deposits from enrolled member’s employer, payroll, or benefits provider via ACH deposit. Deposits that are not from an employer (such as check deposits; P2P transfers such as from PayPal or Venmo, etc.; merchant transactions such as from PayPal, Stripe, Square, etc.; and bank ACH transfers not from employers) do not qualify for this promotion. A maximum of 36,000 rewards points can be earned from this limited-time offer. After the promotional period ends or once you have earned the maximum points offered by this promotion, your cash back earning rate will revert back to 2%. 36,000 rewards points are worth $360 when redeemed into SoFi Checking and Savings, SoFi Money, SoFi Invest, Crypto, SoFi Personal Loan, SoFi Private Student Loan or Student Loan Refinance and are worth $180 when redeemed as a SoFi Credit Card statement credit.

Promotion Period: The Program will be available from 10/1/22 12:01 AM ET to 12/31/22 11:59PM ET

Eligible Participants: All new members who apply and get approved for the SoFi Credit Card, open a SoFi Checking and Savings account, and set up Direct Deposit transactions (“Direct Deposit”) into their SoFi Checking and Savings account during the promotion period are eligible. All existing SoFi Credit Card members who set up Direct Deposit into a SoFi Checking & Savings account during the promotion period are eligible. All existing SoFi members who have already enrolled in Direct Deposit into a SoFi Checking & Savings account prior to the promotion period, and who apply and get approved for a SoFi Credit Card during the promotion period are eligible. Existing SoFi members who already have the SoFi Credit Card and previously set up Direct Deposit through SoFi Money or SoFi Checking & Savings are not eligible for this promotion.

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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