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A revolving letter of credit is a financial instrument often used in international trade to facilitate transactions between buyers and sellers. It is a type of letter of credit that allows the buyer to make multiple drawdowns (or “draws”) within a specified period, typically a year, up to a certain limit.

If you’re in the business of importing and exporting, or any type of buying and selling, a revolving letter of credit may allow for smoother transactions. Once in place, it can allow both buyers and sellers to be more confident in their business arrangements. It also helps to ensure that goods arrive and that all payments are made on time.

Here, we’ll look at the specifics of revolving letters of credit. We’ll dive into:

•   What is a revolving letter of credit

•   How a revolving letter of credit works

•   The different types of revolving letters of credit

•   Limitations of revolving letters of credit

•   The pros and cons of a revolving letter of credit

What Is a Revolving Letter of Credit?

When you hear the phrase “revolving credit,” it may sound familiar from personal finance tools you’ve used, such as credit cards and home equity lines of credit. These revolving credit accounts have a credit limit, which represents the maximum amount that you can spend. You can draw on the account up to the limit. Then, as you pay back the amount you owe, the amount of credit will increase, returning to its original value.

Like the revolving credit you use in your personal finances, revolving letters of credit help streamline financial transactions. However, they work in a different way.

Revolving letters of credit can offer convenience and added flexibility for buyers and sellers engaged in ongoing trade relationships, as they eliminate the need to establish a new letter of credit for each transaction. More specifically, they are used to facilitate the regular shipments of goods or the delivery of services between buyers and sellers. You often see them in international trade, in which the buyer and seller are operating in two different places and/or regulatory environments.

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How Does a Revolving Letter of Credit Work?

Here’s a step-by-step look at how revolving letters of credit work in the business world:

Opening the letter of credit: The buyer and seller agree to use a revolving letter of credit for their transactions. The buyer applies for the letter of credit from their bank (called the issuing bank) and specifies the terms and conditions, including the amount and validity period.

Issuance: The issuing bank issues the letter of credit, which serves as a guarantee to the seller that they will receive payment for the goods or services as long as they comply with the terms and conditions of the letter of credit.

Shipment and presentation of documents: The seller ships the goods or provides the services to the buyer and prepares the necessary documents as specified in the letter of credit, such as invoices and packing lists.

Drawdown: Upon shipment, the seller presents the required documents to the issuing bank through their own bank (called the advising bank) to request payment. The issuing bank examines the documents and, if they comply with the terms of the letter of credit, makes payment to the seller.

Revolving feature: After the first drawdown, the letter of credit does not expire. The buyer can continue to make additional drawdowns up to the specified limit and within the validity period of the letter of credit without the need for the issuing bank to issue a new letter of credit.

Payment and settlement: The buyer is required to repay the issuing bank for the amount of each drawdown, typically on a predetermined schedule. The buyer can also choose to pay the entire outstanding balance at once.

Renewal: Once the specified period or limit is reached, the letter of credit can be renewed by the buyer and the issuing bank if both parties agree.

Recommended: How to Build Credit Over Time

Types of Revolving Letters of Credit

Revolving letters of credit can generally be subdivided into two main categories, one based on value and the other based on time.

Time-Based Revolving Letter of Credit

Some revolving letters of credit are based on time. This means a specific payment amount can be drawn down over a set period. For example, an importer could have a revolving letter of credit worth $120,000 drawn to cover a 6-month period. During that time, payments of $20,000 could be made to an exporter each month. At the end of the 6-month period, the revolving letter of credit expires.

Cumulative Revolving Letter of Credit

The time-based revolving letter of credit can be divided into two subcategories: cumulative and noncumulative revolving letters of credit. If the revolving letter of credit is cumulative, then previously unused limits can be shifted ahead and used in subsequent time periods. In the example above, if the exporter doesn’t ship any goods in the second month, then it could ship $40,000 worth of goods in the third month.

This type of set-up provides the seller with a certain amount of flexibility. However, it can be riskier for the buyer who isn’t receiving goods regularly.

Recommended: How Many Lines of Credit Should I Have?

Noncumulative Revolving Letter of Credit

The other type of time-based revolving letter of credit is noncumulative. This means that previously unused amounts of credit cannot be rolled over into a subsequent month. So, if the exporter in the example above doesn’t ship any goods in the second month, only $20,000 worth of goods can be shipped in each of the subsequent months.

This set-up is less risky for the buyer, because it locks the seller into shipping goods within a narrower time period and under more specific conditions. If the seller doesn’t supply the promised goods within a certain period, they cannot carry that over into a subsequent period.

Value-Based Revolving Letter of Credit

The other main type of revolving letter of credit is the value-based revolving letter of credit. It’s much like its time-based counterpart. The biggest difference is that payment from the buyer is only released when they receive goods worth a certain value.

Say, for example, a revolving letter of credit is issued for $120,000 over six months for goods worth $20,000 each month. The exporter can only ship and receive payment for goods worth $20,000 each month. If, for example, they are only able to produce $15,000 worth of goods in one month, they cannot ship the goods to the seller, and the seller won’t provide payment. In this case, the value is very specific, and it really matters.

When a buyer and seller enter into a large contract, they may enter into a standby letter of credit, especially if the buyer and seller don’t know one another. The buyer might create one to help secure a contract, or the seller might ask the buyer to obtain a letter.

Recommended: Personal Loan vs Personal Line of Credit

Advantages of Revolving Letters of Credit

So why issue a revolving letter of credit? Here’s a look at some of the benefits that this financial instrument offers:

•   It can save time and money.

•   Because it is revolving, the letter of credit does not need to be reissued for each transaction during a set period.

•   It helps facilitate regular trade between a buyer and a seller.

•   It can help build trust between buyers and sellers.

•   It can incentivize sellers to manufacture a consistent level of goods, especially for noncumulative and value-based letters.

•   It can provide flexibility in terms of the types of agreements buyers and sellers can enter into.

Disadvantages of a Revolving Letter of Credit

Despite the advantages listed above, there are some limitations and drawbacks to consider:

•   Letters of credit tend to be limited to one supplier only.

•   They don’t apply to one-time transactions.

•   Changes, such as changes to tax law, customs rules, or product design, may require amendments to the agreement.

•   Bank fees may make revolving letters of credit costly, especially for applicants.

The Takeaway

If you run an importing business and you’re buying goods from overseas, especially from an exporter that represents a new business relationship, a revolving letter of credit can simplify things. It can remove some of the risk of the transactions as you build trust with this new supplier. Of course, if you’re an exporter, the same applies.

That said, it’s important to consider the limitations of using a letter of credit, in particular the cost, and weigh that against the benefits. Before agreeing to a revolving letter of credit, it’s important to explore how this financial instrument fits into your company’s overall needs and goals.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

When should a revolving letter of credit be used?

Generally, a revolving letter of credit should be used when there is an ongoing business relationship between a buyer and a seller and the buyer needs to make multiple transactions over a period of time. It can be particularly useful for businesses that have regular import or export requirements and want to streamline the payment process.

Who issues the revolving letter of credit?

The revolving letter of credit is issued by the buyer’s bank. The seller’s bank may also be involved as the advising bank, but the issuing bank is the buyer’s bank.

What is an irrevocable revolving letter of credit?

An irrevocable revolving letter of credit is a type of revolving letter of credit that cannot be changed unless all parties involved agree to the modifications of the contract. This provides a high level of assurance to the seller that they will receive payment as long as they meet the terms and conditions of the letter of credit.

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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2026 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 5/28/26. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

We do not charge any account, service, or maintenance fees for SoFi Checking and Savings. We do charge transaction fees for outgoing wire transfers, Instant Transfers, and global remittance transfers. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
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.

*Awards or rankings from Forbes are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

SOBNK-Q126-083

An ACH credit is an electronic transfer that takes money from an account at one bank and credits it to an account at a different bank. All banks and credit unions in the U.S. are connected electronically via a system known as the Automated Clearing House (ACH). This allows for easier movement of money between accounts at different financial institutions.

One of the most popular forms of ACH credit is the direct deposit of your paycheck from your employer. However, there are other times when you may receive or send an ACH credit.

Here’s what you need to know about ACH credits, including their meaning and how these transactions work.

What Are ACH Credit Payments?

Automated Clearing House (ACH) credit payments occur when someone instructs the ACH network to send or push money from an account they own at one bank to an account at a different bank, either owned by them or someone else. One common reason why you might get ACH credits to your bank account balance is if you signed up for direct deposit at work. In this case, your employer pushes money from their bank account (usually via a processing partner) to your checking or savings account each time you get paid.

You may also see an ACH credit if you receive a payment from a government agency or if a friend sends you money using a peer-to-peer transfer service such as Venmo or CashApp.

You’ve likely also sent many ACH credits, perhaps without realizing it. When you set up payment through your bank or credit union to make a one-time bill payment or send money to a friend through a payment app, this would be processed as an ACH credit. In both cases, you are pushing money out of your account and into the other party’s account.

How Does ACH Credit Work?

One way to think about an ACH credit is that it is the digital equivalent of someone writing a paper check. Instead of filling out a check, however, the sender instructs their bank to send money directly into the recipient’s account via the ACH system. To send money via ACH credit, you simply need the recipient’s name, bank account number, routing number, and basic transaction details. The process can take anywhere from a few hours to two business days.

Behind the scenes, your bank batches all of its ACH transfer requests together and sends them out at regular times throughout the day to a clearinghouse that verifies the transfers. The clearinghouse then sends each transfer to the recipient’s financial institution. The National Automated Clearing House Association (NACHA) oversees the ACH network.

What Is an ACH Credit Refund?

An ACH refund (or return) is an electronic transaction that’s sent back to the original sender by the recipient’s bank. This could happen if the recipient’s bank can’t process the transaction due to insufficient funds, an invalid account number, or a closed account, among other reasons.

Once the transaction’s been returned, the sender’s bank will notify the original payer and may charge a fee for the return. The sender’s bank may also try to resend the payment or contact the payee directly in order to resolve the issue.

Recommended: How to Stop or Reverse ACH Payments

What’s the Difference Between an ACH Credit and an ACH Debit?

An ACH credit and an ACH debit are two different types of transactions that are processed through the ACH network. The only difference between them is who initiates the transaction.

In an ACH credit transaction, the originator requests to transfer money from their account to the recipient’s account. This is often referred to as a push payment.

In an ACH debit transaction, the originator requests to withdraw money from another party’s account and have it transferred to their own account. This is typically called a pull payment.

If you have a service provider you make regular payments to, they might ask you to set up ACH debits to make processing the payment easier on both ends. With a recurring ACH debit, you don’t need to remember to make a payment each month, and the receiver doesn’t need to process manual payments. They automatically pull the money from your account each month.

With ACH credits vs. debits, there is also a difference in transfer speed. A bank can choose to have ACH credits processed and delivered within the same day or in one to two business days. ACH debit transactions, on the other hand, must be processed by the next business day.

Recommended: What “Do Not Covert to ACH” Means on a Check

Fees Associated With ACH Credit Transactions

There are fees associated with ACH transactions that are paid to NACHA by the banks involved in the transaction. Banks generally pay both an annual fee to participate in the ACH network as well as a tiny fee per transaction. There may be an additional fee required for faster or same-day ACH transactions.

These ACH fees may or may not be passed down from the bank to the actual account holder. Check with your bank to see if they charge a fee for sending or receiving an ACH debit or ACH credit transaction.

Future of ACH Credit

The ACH network has grown in popularity since it was officially established in the mid-1970s and shows no signs of slowing down. NACHA, its participating banks, and the government continue to work together to make sure that the ACH network remains safe and stable. Other fintech companies are also working to innovate concerning the future of electronic payments.

The Takeaway

The Automated Clearing House (ACH) is a network of banks that allow electronic transactions to be sent to and from accounts. An ACH credit allows you to push money online from an account you own at one bank to an account at another bank, either owned by you or someone else.

ACH credits are push transactions. This means the person making the payment originates the transaction. An ACH debit, by contrast, is a pull transaction and is initiated by the party receiving the money.

There are a variety of reasons why you might see an ACH credit on your account, but one of the most common is a direct deposit or payroll entry from your employer.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is an ACH credit and how does it work?

An Automated Clearing House (ACH) credit transaction is when someone instructs the ACH network to send money from their account to someone else’s.

A common example of an ACH credit is direct deposit of your paycheck. In this case, your employer pushes money out of their bank account and into your bank account using the ACH network. ACH credits are also used for bill payments and peer-to-peer payments.

What does the future look like for ACH credits?

The National Automated Clearing House Association (NACHA), the organization that oversees the ACH network, is working with the government and other stakeholders to ensure that the ACH network remains safe, secure, and stable. While some of the behind-the-scenes details may change, it’s likely that interbank credits and debits will continue well into the future.

Is an ACH credit the stimulus check?

An Automated Clearing House (ACH) credit transaction occurs when an individual or organization instructs the ACH network to send money from their account to someone else’s. There are a variety of reasons why you might see an ACH credit transaction on your account, including direct deposit of your paycheck and direct payments from the government, such as a stimulus check.

Photo credit: iStock/Nastasic

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2026 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 5/28/26. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
We do not charge any account, service, or maintenance fees for SoFi Checking and Savings. We do charge transaction fees for outgoing wire transfers, Instant Transfers, and global remittance transfers. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

*Awards or rankings from Forbes are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.


¹SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $3M through participation in the program. See full terms at SoFi.com/banking/fdic/sidpterms. See list of participating banks at SoFi.com/banking/fdic/participatingbanks.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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, 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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOBNK-Q226-073

If you’ve used your credit card outside of the U.S. — or simply made a purchase online through a merchant that wasn’t U.S.-based — you may have noticed an extra cost added to your purchase. Called a foreign transaction fee, these charges can add up quickly.

Luckily, it’s possible to steer clear of credit card fees for international transactions. Read on to discover what a foreign transaction fee on a credit card is, how much they typically run, and how you can avoid them.

What Is a Credit Card Foreign Transaction Fee?

A credit card foreign transaction fee is a surcharge, or an additional charge, that some credit cards add to transactions that are processed outside of the U.S. Put another way, it’s a cost that applies to credit card processing when certain conditions are met.

Credit card foreign transaction fees may apply when you make an online purchase from a merchant that’s located outside of the U.S. Additionally, they may apply when you’re using a credit card in another country.

While broadly referred to as a foreign transaction fee, this fee is actually composed of two different charges. One part comes from the credit card issuers and the other is from the credit card network (think Visa or Mastercard, for example).

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How Are Credit Card Foreign Transaction Fees Calculated?

To find out how international credit card fees are calculated for your particular credit card, check your card’s terms and conditions. You’ll likely find information on foreign transaction fees in a section titled “Rates and Fees” or “Pricing and Terms.”

In general, however, the amount of your credit card’s international fees is calculated based on a set percentage of the transaction amount.

For example, say your credit card charges a 3% foreign transaction fee, and you’re paying about $50 for souvenirs you bought at a merchant abroad. In this instance, the credit card network may take 1.5% of the transaction, while the credit card issuer would deduct 1.5%. That would result in a total foreign transaction fee of $1.50 for that particular purchase.

Recommended: How to Avoid Interest on a Credit Card

How Much Do Credit Card Foreign Transaction Fees Cost?

Some cards don’t come with credit card international fees, meaning you don’t have to worry about this credit card cost. For cards that do charge foreign transaction fees, this fee can range from 1% to 3% per transaction, with 3% being the average rate.

When this credit card fee for international transactions is charged once, it may not seem like a big deal. But if you make a lot of overseas purchases, it can really add up. If you have a 3% foreign fee credit card, for example, that will tack on $3 for every $100 you put on the card.

Recommended: Tips for Using a Credit Card Responsibly

Foreign Transaction Fees vs Currency Conversion Fees

A foreign transaction fee isn’t the same thing as a currency conversion fee. A currency conversion fee is generally one portion of the overall foreign transaction fee you may be charged.

A currency conversion fee is the cost charged by the credit card network to cover the cost of converting funds into the currency of the merchant. So if you were making a purchase in Spain, the currency would get converted from U.S. dollars to euros.

Visa and Mastercard charge a 1% currency conversion fee to card issuers. It’s up to the card issuer to decide whether to pass that fee along to the cardholder as part of the overall foreign transaction fee charged — an example of how credit card companies make money.

Spotting Credit Card Foreign Transaction Fees

Aside from looking at the terms and conditions you were provided when you received your credit card, you can look at your card issuer’s website to learn more about their foreign transaction fees. Information is typically listed in the “fees” section. You could also use the search function on that webpage to find any mentions of foreign transaction fees.

Another option is to look at your credit card statement, as issuers must list fees separately on your monthly bill. By reviewing this section of your statement, you’ll see what you’re actually being charged for purchases you’ve made that trigger this fee. Besides, routinely reviewing your credit card statement is a good credit card rule to follow anyway, as it can help you track your spending and notice any potentially fraudulent activity.

When Are Credit Card Foreign Transaction Fees Charged?

Just like not every credit card comes with a credit card annual fee, not all credit cards charge a foreign transaction fee. If yours does, then the credit card issuer will charge these fees when you’re using your card for purchases made outside the U.S. This can be when you’re traveling in a foreign country and buying goods and services or if you’re shopping online with a merchant located abroad.

Tips for Avoiding Credit Card Foreign Transaction Fees

Hoping to steer clear of a foreign fee on credit cards? Here are some ways you may be able to do so.

Find a Card With No Foreign Transaction Fees

The most straightforward way to avoid foreign transaction fees is to simply choose a credit card that doesn’t charge them. Some travel reward cards, for example, list zero foreign transaction fees as a benefit for cardholders.

This isn’t limited to travel reward cards, however, and it doesn’t apply to all of them. In other words, you’ll want to shop around before committing to a card.

Recommended: Does Applying for a Credit Card Hurt Your Credit Score?

Consider an International Credit Card

If you’re a frequent traveler or have a big trip coming up, you may decide to get an international credit card. This will allow you to make purchases and use ATMs in many (but not all) countries around the world. An international credit card can also be helpful if you don’t want to convert U.S. dollars to that country’s currency or use traveler’s checks for your expenditures.

However, some international credit cards do have foreign transaction fees, so check carefully before signing up for one.

Exchange Your Money Before Traveling

You can also avoid foreign transaction fees by exchanging U.S. currency into the native currency for the place(s) you plan to travel. Then you can simply pay cash for purchases.

Most major banks in the U.S. will exchange U.S. dollars for the appropriate foreign currency before you travel. They may not have less commonly used currencies available, though, so double-check before you head to the bank.

You may be able to directly exchange cash at a local bank, or you may need to place an order with a bank online or over the phone. Exchanges may occur the same day, or they may take a couple of days to complete.

If you run out of time, airports will likely have currency exchange services available, either in-person or through a kiosk. Although convenient, the exchange rates are usually less favorable to you than what your bank can offer.

Also, keep in mind that carrying cash while traveling can involve risk of loss or theft.

Open a Bank Account With No Foreign Transaction Fees

Another possibility is to open a bank account that allows you to use ATMs without charging foreign transaction fees or out-of-network fees. Or, you might check to see if your local bank offers this feature. Some banks have partnerships with financial institutions abroad, allowing you to withdraw funds without paying fees, while others simply reimburse any incurred costs.

Before taking out too much cash, however, keep in mind the potential safety risks of carrying around a large amount of money.

Recommended: When Are Credit Card Payments Due?

The Takeaway

Once you know what a foreign transaction fee on a credit card is, you can figure out how to avoid them. At its simplest, a foreign transaction fee is an expense charged by many credit card companies when transactions are made with a merchant outside of the U.S. Not all credit cards charge this fee, so it can make sense to shop around for one that doesn’t if you know you’ll be making these kinds of purchases.

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

FAQ

Are credit card foreign transaction fees tax-deductible?

In general, businesses (but not individuals) can deduct credit card fees as long as the business can demonstrate that the card was used for business expenses. Check with your accountant for any specific questions.

Do foreign transaction fees apply to online purchases?

Yes, they may. If you’re using a credit card that charges foreign transaction fees, then those fees will apply to online purchases if the merchant is not located in the United States.

Do all credit cards have foreign transaction fees?

No, they don’t. A number of travel cards don’t charge foreign transaction fees, though they’re not necessarily the only type of credit card that doesn’t levy this fee.

Are foreign transaction fees affected by exchange rates?

Typically, foreign transaction fees are based on a predetermined percentage of each transaction. That percentage doesn’t fluctuate when the exchange rate changes.

Photo credit: iStock/Vera Shestak

SOCC-Q226-013

Closing a credit card can hurt your credit in some situations. If you already have good to excellent credit, closing one credit card generally won’t have a huge impact on your credit score. However, there are a few scenarios where closing a credit card can hurt your credit score, such as when doing so might shorten the length of your credit history or send your credit utilization rate soaring.

Learn more about the potential consequences of closing a credit card as well as alternatives to explore to avoid possible impacts on your credit score.

Ways Closing Your Credit Card Can Affect Your Credit Score

If you’re worried about whether it hurts your credit to close a credit card, you should know that there are two main ways that canceling a credit card can indeed affect your credit score.

Through Credit Card Utilization Ratio

The first way that canceling a credit card affects your credit score is by raising your credit card utilization ratio. Your utilization ratio (sometimes called your utilization percentage) is the total amount of available credit that you’re actually using. If you have a credit card with a $10,000 limit and you regularly spend $5,000 on that card each month, you’d have a utilization ratio of 50% ($5,000 is half of $10,000).

Having a low utilization ratio is generally considered a positive factor in determining your credit score. Lenders prefer when you’re not using all of your available credit, since doing so can be an indicator of financial distress. Typically, you should be using no more than 30% of your credit limit across all your lines of credit, and ideally no more than 10%.

When you cancel a credit card, you lower the total amount of your available credit line, which will generally raise your credit card utilization ratio.

Example: Say you have two credit cards.

•   On credit card A, you have a balance of $5,000 and a credit limit of $10,000.

•   On credit card B, you have no balance and a credit limit of $10,000, too.

•   So, on these two cards, your combined limit is $20,000. The fact that you have a $5,000 balance means your credit utilization is $5,000 out of $20,000, or 25%.

•   If you close credit card B, you now have a balance of $5,000 with a $10,000 limit. Your utilization ratio rises to 50%.

If you close credit card B, your credit utilization could rise, and your credit score could be lowered.

Recommended: What Is the Average Credit Card Limit?

Impact on the Length of Credit History

Another way that canceling a credit card can affect your credit score is by impacting the average length of your credit history. The average age of your credit accounts is another factor in determining your credit score, with an older average being better. You’ll especially see an impact on your score if you close a card that you’ve had for a very long time, and the impacts of a bad credit score are myriad. Credit can be harder to secure and more expensive.

When Canceling a Credit Card Might Make Sense

There are several scenarios when canceling a credit card might be the right financial move, such as when:

•   Your card has a steep annual fee that isn’t worth it. One of the most common reasons for when to cancel your credit card is if you have a card with an annual fee and you’re no longer getting enough benefits to justify paying that cost. It doesn’t make sense to pay an annual fee of $100 or more a year if you’re not getting much benefit from having the card, and there are plenty of credit cards that come with no annual fee.

•   You have multiple credit cards and want to streamline your finances. Another scenario is if you have multiple credit cards and want to simplify your finances. With how credit cards work, missing a payment can have a big negative impact on your credit score. So, if you’re in a situation where you have too many credit cards and are having trouble keeping payments straight, it may be a good idea to simplify your life and cancel some of your credit cards.

•   You have a high interest rate on a card. Particularly if you need to carry a balance for whatever reason, ditching a card with a high interest rate might be in your best interest. That will save you from paying more than necessary in interest charges.

•   You want to replace a basic or secured credit card. Another reason you might consider canceling your card is if you have a very basic starter credit card. Or, perhaps you have a secured credit card and want to upgrade to an unsecured card. Especially if your credit score has changed for the better since you opened that card, you could secure better terms and potentially the opportunity to earn rewards as well.

Recommended: When Are Credit Card Payments Due?

When It Might Make Sense to Keep the Credit Card Account Open

On the other hand, there can be good reasons to keep your credit card accounts open as well. This includes if:

•   Your card doesn’t have an annual fee. If the card has no annual fee, you could always keep the card open and not use it, rather than closing the account. When you close an account, the next time the credit bureaus are updating your credit score, your score may decrease. Keeping your credit card open instead could prevent that.

•   You don’t have many accounts open. One of the factors that’s used to determine your credit score is your mix of accounts. If you don’t have many accounts open, closing one of your few accounts could ding you in this area, possibly dragging down your credit score. Plus, it could cause your available credit to take a big hit, which would increase your credit utilization.

•   Your only reason for canceling is not using your card very often. Given the potential impacts to your credit, if you don’t have much reason to cancel a credit card, you’re likely better off keeping it open due to the importance of good credit. That way, you won’t risk driving up your credit utilization or lowering the average age of your accounts, both of which can cause your score to drop. Plus, there aren’t any penalties for not using a credit card frequently.

Recommended: What Is a Charge Card?

Guide to Closing a Credit Card Safely

To close a credit card safely, there are a few things that you’ll want to keep in mind before canceling your card.

Automatic Payments

If you have any automatic payments being charged to the card, you’ll want to contact the vendors and change them to another card if you own multiple credit cards. Once you close your credit card account, if a vendor attempts to charge your account, the charge will likely be denied. This could lead to interruptions in other areas of your life, especially if it’s for something crucial, such as rent or utilities.

Paying Your Balances in Full

Simply closing your credit card account doesn’t eliminate your responsibility for any charges already on the account. You’re still just as responsible and liable for the total balance on your account, so you should pay off your balance in full. If you don’t pay the full balance when you close the account, your card issuer will still issue you monthly statements, and interest will continue to accrue.

Redeeming Your Rewards

If you have a credit card that allows you to earn cash back, travel, or other rewards, you’ll want to redeem those rewards before you close your account. Once you close your account, you may not be able to access them, and it’s possible that you will lose some of your hard-earned rewards. To avoid that possibility, you should redeem your rewards before canceling your credit card account.

Recommended: Tips for Using a Credit Card Responsibly

Alternatives to Canceling a Credit Card

If you’re worried about how closing a credit card can hurt your credit, there are alternatives to explore.

Downgrade to a No-Fee Card

If one of the reasons you’re considering canceling your credit card is to avoid paying an annual fee, you may be able to downgrade the card instead. Many credit card issuers offer a variety of different cards, and only some of them come with annual fees. Downgrading to a no-fee card will keep your account open without you having to pay the annual fee.

Negotiate With Your Credit Card Company

Another option is to negotiate with your credit card company. Most credit card issuers don’t want you to cancel your card, so you may be able to negotiate for better terms. This might include waiving the annual fee, lowering the interest rate, or getting additional rewards. It never hurts to call your credit card company to ask what they might be willing to do.

Put Your Card Away

If you’re considering canceling your credit card because you’re worried about overspending on the card, you also have the option to just take it out of your wallet. Depending on your situation, simply placing the card in your sock drawer, for instance, might prevent you from overspending without you having to actually close the account.

Recommended: How to Avoid Interest on a Credit Card

Check Your Credit Report Before Closing an Account

If you’ve decided to close your credit card account, it can be a wise move to check your credit report both before and after canceling your card. If you’re concerned about how checking your credit score affects your rating, remember that it won’t impact it.

Also, keep in mind that you have different credit scores, so take some time to check each one before and after closing your account. That way, you’ll have an accurate idea of how closing your credit card impacted your credit score.

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

The Takeaway

While closing a credit card likely won’t have a huge impact on your credit score, it can lower it, especially in certain situations. Unless you have a good reason for closing your account, you may want to consider keeping your credit card open. Instead, you could consider downgrading to a no-fee card, negotiating with your credit card company, or just taking your card out of your wallet.

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

FAQ

Is closing a credit card bad?

Closing a credit card isn’t usually bad, but it may lower your credit score in some situations. Instead, consider alternatives to closing your credit card, such as downgrading your card or negotiating with your card issuer.

Is it better to cancel unused credit cards or keep them?

In many scenarios, it’s preferable to just keep your credit card accounts open, even if you don’t regularly use them. This allows the average age of your accounts to increase and also lowers your utilization ratio as you have access to a higher total of available credit. Both of these factors can help build credit.

Does closing a credit card with a zero balance affect your credit score?

When you close a credit card, even if you have a $0 balance, your credit score might drop. This is because closing your card could lower the average age of your accounts and/or increase your credit utilization ratio. Instead of canceling your credit card, consider negotiating with your card issuer for a lower interest rate or lower fees.

How much does your credit score drop if you close a credit card?

If you already have good or excellent credit, closing a credit card generally won’t have a huge impact. If you have a low credit score, however, it’s possible that closing a credit card can hurt your score even more. This is especially true if the card you close is one you’ve had for a long time or one with a high credit limit.

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The lower your credit utilization — meaning the less of your total available credit you’re using — the higher your credit score could be. Typically, the rule of thumb is to use no more than 30% of your credit limit on your credit cards, and using only 10% or less is considered even better.

Here’s a closer look at how credit utilization affects credit score, from how much lowering your credit utilization will affect your score to how long credit utilization affects your score.

What Is Credit Utilization and Why Does It Matter?

Credit utilization is the percentage of your overall credit limit that you use on your revolving credit accounts, most commonly, credit cards. In other words, it’s how much of your available credit you’re using.

Credit utilization is one of the most important factors that scoring models look at when calculating your credit score, since it suggests the risk you could pose as a borrower. The lower your credit utilization, the more it will appear that you can handle debt or use a credit card responsibly. Thus, a lower utilization rate can contribute to a higher credit score.

To calculate your credit utilization, add up all of your credit card balances and then divide that amount by your overall credit limit across your credit cards. You would then multiply by 100 to express the ratio as a percentage.

Here’s an example:

•   Say you have three credit cards, with an overall credit limit of $15,000.

•   Next, imagine you’re carrying a balance of $4,000 across all of those cards.

•   Using the previously explained equation, you divide your total balance of $4,000 by $15,000, and then multiply by 100.

•   Your credit utilization would be around 26.7%.

Factors That Affect Your Credit Score

Aside from your credit utilization, there are other factors that affect your credit score. These include:

•   Payment history: Another major factor aside from credit utilization is whether you pay your credit and debt accounts on time, meaning by the payment due date. If you consistently make on-time payments, you’ll appear more creditworthy, and this will reflect on your score.

•   Credit history length: Credit scoring models typically take into account how long your current accounts have been open. They may even consider how long it’s been since you’ve used certain kinds of accounts. Generally, a longer credit history is a positive thing for your credit score.

•   Credit mix: Having different types of accounts may demonstrate to lenders how you handle different kinds of debt and can have a positive impact on your score if you manage your debts well.

•   New credit: Opening multiple credit accounts or having a series of hard inquiries could signal to lenders that you pose a greater risk as a borrower. As such, it may negatively impact your credit score.

How Credit Utilization Affects Your Credit Score

Your credit card utilization accounts for 30% of your FICO® credit score, which is the scoring model used by the majority of lenders.

Since lenders look at your credit score to assess your creditworthiness, having a low credit utilization is key. That’s because if you’re using most of your available credit, it suggests to lenders that you could be a greater risk. A high utilization rate could signal to lenders that you may be stretched too thin financially and need to rely too much on credit. You might, therefore, have a hard time paying back what you borrow.

Your credit score is also dependent on other factors, such as the number of credit cards you have. For example, if you have one credit card with a low limit, having a high credit utilization may affect your score more compared to someone with multiple credit cards, all of which have high credit limits. The same goes for someone with a lengthy credit history that’s been mostly excellent, compared to someone who has no or a limited credit history.

In other words, credit utilization is an important factor in determining your credit score, but there are other aspects as well, such as your payment history.

Tips for Managing Your Credit Utilization and Credit Score

By managing your credit utilization, you can positively impact or maintain a better credit score. The following are a few effective tactics to do so.

Keeping Your Credit Utilization Rate Under 10%

Though keeping your credit utilization under 30% can help to positively impact or maintain your credit score, the lower it is, the better.

While you may be tempted to keep it at zero, that may not be as helpful as you think. A 0% credit utilization could signal that you’re not using your credit regularly. Since lenders want to see how you currently manage accounts, it will be hard to approve you for a loan if they see you’re not using any.

Instead, consider charging smaller amounts on your credit card and try to keep your utilization rate under 10%, which is a benchmark for achieving a high score. That way, you should be able to afford to pay the balance and show creditors you’re using credit regularly.

In addition to keeping your overall utilization below 10%, you’ll want to make sure that your utilization on each of your credit cards is also below that percentage. In many cases, credit utilization may refer to your per-card utilization.

Your best bet would be to look at your current limit for your cards and then aim to keep each credit card balance to no more than 10% of that amount. So if you have two credit cards with limits of $3,000 and $5,000, respectively, you wouldn’t want to charge more than $300 to the first card and $500 to the second.

Recommended: What Is a Charge Card?

Asking for a Higher Credit Limit

Getting a higher credit limit can lower your credit utilization even if you maintain the same balance on your cards. It also gives you more wiggle room. If you need to carry a balance on a credit card, you won’t have to worry as much about a big increase in your credit utilization.

When it comes to asking for a credit limit increase, issuers tend to look more favorably on those who have maintained a good credit history, whose income has increased, and even those who have less debt. If you do make a request, some credit card companies may conduct a hard credit inquiry, which could temporarily (and slightly) lower your credit score.

Making Payments Twice in a Month

By paying your credit card twice a month, your balance will remain lower. It will also increase the chances of your credit card issuer reporting that lower amount to the credit bureaus. You may hear this method referred to as the 15/3 credit card payment method.

This could mean that your calculated credit utilization is lower, which could help build your credit score. Plus, it will help you avoid racking up excessive credit card debt, which can have a negative impact on your score.

Recommended: How to Avoid Interest on a Credit Card

Keeping Your Credit Cards Active

It may be tempting to close a credit card that you don’t use anymore. However, if you do so, or if you don’t use a credit card for a while and the card is closed automatically, your credit utilization will automatically go up. This is true even if your balance is still the same, as your overall credit limit is now lower. In addition, your credit history could be shortened, which may lower your credit score.

Instead, consider keeping that card open, even if you make a small purchase on it every few months.

The Takeaway

Credit cards are useful tools, helping you make purchases, earn rewards, and possibly build your credit. In order to reap these benefits, make sure to use your credit cards responsibly — including keeping your credit utilization low. Given how significantly credit utilization affects your credit score, it may be worth exploring ways to manage your current utilization in order to lower it.

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

FAQ

What is a good credit utilization ratio?

A good credit utilization ratio is 30% or lower. Ideally, you should aim to maintain a credit utilization ratio of around 10% to show lenders you’re responsible with credit.

How long does credit utilization affect credit score?

Your credit utilization is a key contributing factor to your credit score. However, a high utilization rate won’t affect your credit score forever. As long as you take the steps to lower it, you can see positive effects within a short amount of time, say, a couple of update cycles after you bring it down.

How much will lowering my credit utilization affect my credit score?

Lowering your credit utilization can have a significant impact on your credit score. That’s because credit utilization makes up around 30% of your credit score calculation with most scoring models.

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