bad credit sad face

What Is Considered a Bad Credit Score?

In the popular credit score spectrum of 300 to 850, when does a score start breaking bad? You might read 670 or 630 or 600, but each lender makes its own evaluation of credit scores considered to be risky.

For example, you’ll usually need a credit score of at least 620 to get a conventional mortgage (one not backed by a government agency), but someone with a credit score as low as 500 to 579 may be able to qualify for an FHA or VA loan.

One thing’s for sure: A borrower with a “bad” credit score has limited choices and will likely pay substantially more over a lifetime than one with a higher score, thanks to higher interest rates charged and less favorable terms.

The Highs and Lows of Credit Scores

The most commonly used credit scores are calculated by FICO® and VantageScore®, but the two companies rank scores a little differently.

FICO® 8 VantageScore® 3.0
Exceptional 800-850 Excellent 781-850
Very good 740-799 Good 661-780
Good 670-739 Fair 601-660
Fair 580-669 Poor 500-600
Poor 300-579 Very Poor 300-499

To complicate matters, lenders may choose from multiple scoring models and industry-specific scoring models, which makes it tricky to know which one you’re being evaluated on. And your credit scores vary—-yes, you have multiple scores.

A score in the 600s is typically high enough to qualify for some loans and credit cards. And generally, the best rates go to borrowers with scores in the mid-700s and above.

What’s the nationwide average? “Good.” As of this writing, Americans had an average FICO Score of 711 and VantageScore of 688.

Wait. What Exactly Is a Credit Score?

A credit score is a number that summarizes a bunch of information about your financial history in order to help lenders gauge the risk of extending you credit. The higher your credit score, the more confident they are that you’ll repay your debt, and on time.

Your credit score is based on factors like how often you pay your bills on time, how many loans and credit cards you have, your debt relative to your credit limits, and the average age of your accounts. It also considers negative financial events such as judgments, collections actions, and bankruptcies.

Three major credit reporting agencies, TransUnion, Equifax, and Experian, compile the information on your history of borrowing, and then a company like FICO or VantageScore translates that data into a number.

Your credit score is just one factor that lenders consider when evaluating your application for things like a loan, but it carries a lot of weight.

Why Is a Credit Score a Big Deal?

Your credit score not only affects your odds of approval for loans and credit cards; it plays a big role in determining the interest rate and repayment terms you’re offered.

As noted, your credit report holds information about your credit activity and current credit situation, like loan paying history and the status of your credit accounts: In short, your credit history.

Here are some of the things that take your credit history into consideration:

•  Credit cards

•  Car loans

•  Home loans

•  Personal loans

•  Private student loans

•  Federal PLUS loans

•  Car insurance premiums (in some states)

•  Homeowners insurance

In addition, your credit history may be weighed during a job or rental application.

Nonprime borrowers—generally defined as those with credit scores of 660 or under and who have negative items on their credit report—shouldn’t expect to get the lowest rates or most ideal terms when procuring a home or car loan.

For example, the interest rate on a subprime 30-year mortgage can be double or triple the average rate. A bigger down payment is usually required, and the repayment term may stretch to 40 or even 50 years, so the amount of interest paid over the life of the loan can be extraordinary.

As for auto loans, Business Insider summarized the stark differences in loan rates by credit score for new and used car purchases, according to Experian, which tracks auto finance trends each quarter.

What If I Have a Low Credit Score?

If you fall into the so-called bad credit score range, remember that it isn’t set in stone.

There are steps you can take to help build your credit. It won’t happen overnight—any promise of a quick fix could be a scam.

But with a sustained effort, you may see improvement within six months to a year, according to the Consumer Financial Protection Bureau (CFPB), a government agency. Here are some ideas.

Paying Bills on Time

An effective way to improve your creditworthiness in the eyes of lenders is to pay all your bills by the due date, every single time. If you have been late with any payments, consider getting caught up.

If you tend to forget bills, consider brushing up on how autopay works and set up payments through an app, a checking account, or the entity billing you. Putting reminders on a paper or electronic calendar can help as well.

Paying Attention to Revolving Debt

Part of your credit score depends on the amount of credit you have relative to the amount you’re using. This is known as your credit utilization ratio. (The ratio is derived by dividing your total credit card balances by your credit limits.)

It’s generally a good idea to use no more than 30% of your total available credit.

The CFPB says that paying off credit card balances in full each month helps to keep the ratio low and strengthen a credit score.

Credit utilization involves credit card and other revolving debts, not installment loans like mortgages or student loans.

Checking Credit Reports and Scores

Between identity theft on the rise and the possibility of human error, it may be worth reviewing your credit report for any unfamiliar charges or records, since the information in your credit report is used to generate your credit scores.

You can order a copy of your credit report from each of the three major reporting agencies for free at AnnualCreditReport.com. Look for mistakes in your contact details, accounts that don’t belong to you, incorrect reports of late payments, or accounts you closed being shown as open.

Credit reports do not show credit scores. How to get credit score updates then? A few options:

•  Buy your FICO Score from myfico.com.

•  Get your FICO Score for free from Experian.

•  Look for your scores on a loan or credit card statement.

•  Sign up for SoFi Relay, which provides weekly credit score updates and tracks all of your money in one place at no charge.

Many factors affect your credit score.
Check yours in the SoFi app.


Closing and Opening Credit Cards Carefully

The average age of your accounts plays a role in your credit score, so you may want to keep some of your oldest cards open, even if you don’t use them often. Remember that closing cards also reduces your available credit, affecting your credit utilization ratio.

Opening cards affects your credit score as well. Every time you apply, the credit card company runs a hard inquiry on your credit, and your score takes a slight hit. Applying for a bunch of cards in quick succession can make it look like your financial situation has taken a turn for the worse.

Building on a Limited Credit History

Millions of Americans have no credit score because they don’t have enough of a history to calculate one. If this is your situation, you have at least two options.

You may want to consider taking out a secured credit card that will allow you to access a modest line of credit by putting down a deposit.

Making on-time payments is one way to potentially build credit over time that eventually may help you qualify for unsecured credit cards or loans with more favorable terms.

Another option is a credit-builder loan, offered by some smaller financial institutions. The lender loans you a particular amount of money, which it deposits into an account it controls. You make payments on the loan, and the lender reports them to the three main credit bureaus. When the loan is paid off, the lender gives you the money.

You could also ask a friend or family member to add you as an authorized user to their credit card account. An authorized user can use the account but does not have any liability for the debt.

The Takeaway

What is a bad credit score? That can mean a fair or poor credit score, as defined by FICO or VantageScore, which is south of the American average. It can mean loan denials and high interest rates, but with dedication the tide can be turned.

If you’re struggling to reduce high-interest credit card balances or other debt, an unsecured personal loan may come in handy. SoFi fixed-rate personal loans can be used for almost any purpose.

Looking for ways to improve your credit score? A SoFi Personal Loan can help you reduce credit card balances quicker or avoid racking up high-interest debt.


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

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

SOPL19060

Read more
pink credit cards on orange background

10 Credit Card Rules You Should Know

If you’re like the 40% of credit card holders the American Bankers Association refers to as “revolvers,” you probably carry at least some debt from month to month. And if you’re a typical American, according to Experian, you have an average balance of $5,897 , with an additional $2,044 on a couple of retail credit cards.

Unfortunately, many consumers are uninformed and unprepared for the responsibility of paying with plastic. Nobody makes you take a class before they hand you that first card—or the next one, or the next. But the consequences of getting in over your head can be troublesome.

What else should you know about credit cards? Here are some do’s and don’ts to keep in mind:

Just Because You Can Get Another Credit Card Doesn’t Mean You Should

Once you prove your credit-worthiness, you’ll likely receive other credit card offers in the mail. Retail stores you shop in often ask if you’d like to apply for their card, offering things like special discounts, partnerships, and card-holder shopping days to draw you in.

But unless the rewards are high and the annual percentage rate (APR) is low, you may choose to pass. Especially if you’re in a store and won’t have time to focus on the terms and fees in the agreement.

Remember: When you apply for a credit card, it can create a credit inquiry on your report because of the hard pull on your credit report. Unless your credit inquiry qualifies as rate shopping , too many inquiries in a short time period could cause a drop to your credit score.

A Credit Card Can Be Convenient—If You Keep Your Balance In Check

The clock starts ticking whenever you make a purchase using your credit card. Many credit card companies will give you a period of interest-free grace, but if you don’t pay off the balance within the grace period, you’ll start racking up interest.

Of course, using cash instead of credit for purchases is an option, especially for purchases made in person.

Thinking Twice Before Just Paying The Minimum

It’s easy to get into the mindset that you’re on track for the month because you paid the minimum payment due on your credit card statement. But that amount is typically based on a small percentage of your balance, typically between 1% and 3%, or a fixed dollar amount.

Unless you have a 0% credit card rate, letting your balance carry over can rack up additional interest.

Checking Your Statements Every Month

A thorough monthly review of credit card statements makes it possible to find billing mistakes and be sure your purchases and returns are accurately reflected.

It’s worth reviewing your statement for any subscription services you might be making automatic payments or renewals for. You could be paying for a service or app you don’t want anymore.

Reviewing your charges can also help you determine if you’ve been the victim of identity fraud . The faster you move to report any problems , the better off you typically are. The Fair Credit Billing Act (FCBA) instructs consumers to report unauthorized charges within 60 days after the statement was mailed, so making it a habit to check your statements as they come in—or reviewing them online at least once a month—can help you be aware of any issues and report them quickly.

If you’ve made late payments or missed a payment, your interest rate may have gone up—and you could be paying a much higher rate than you thought. Keeping track of this information will give you a more complete picture of the amount you owe.

Credit card statements also include information about how long it will take to pay off the bill if you send only the minimum payment each month, as well as how much you’ll pay in interest. Think of this information like nutrition facts on food packaging—it could be an encouragement to be financially healthier.

Reporting Misplaced, Lost, or Stolen Cards

Under the FCBA , a consumer’s liability for unauthorized use of their credit card is limited to $50. However, the FCBA also says if you report the loss before your credit card is used to make unauthorized purchases, you aren’t responsible for any charges you didn’t authorize.

If your credit card account number is stolen, but not the card, the FCBA also says you won’t be liable for unauthorized use. Credit card companies are generally quick to provide customers with new account numbers, passwords, and cards.

Using a Credit Card To Get Cash

Another piece of information available on a credit card statement is the APR charged for cash advances. Most likely, the interest rate charged for cash advances is several points higher than the rate charged for purchases.

If a credit card is used at an ATM, there may also be an additional fee charged by the machine’s owner.

So unless it’s an unavoidable emergency, it’s probably much better for your wallet to stick to your debit card or go old-school and cash a check.

Using a Credit Card For Purchases Just To Get the Rewards Points

Cash back and other perks make some cards more appealing than others. But that probably shouldn’t be an excuse to use a credit card if you’re not in a solid financial position. The trade-off probably isn’t worth it if you carry a balance.

Balance Transfer Cards Can Be Appealing, But…

Again, if you have solid credit, you may be getting offers for 0% balance transfer cards. And they may potentially save you hundreds, even thousands of dollars, if you can realistically pay off that balance in the designated period.

If not, the interest rate will increase after the introductory 0% interest period ends. And moving the remaining amount to yet another balance transfer card could ding your credit record, as every time you apply for a credit card a hard inquiry is pulled.

Negotiating Rates and Fees

Even the most attentive person might sometimes miss a credit card due date. This oversight, however, means a late fee and interest may be added to the account balance. If this happens more than once, you might incur a higher late fee than the first one and the account’s interest rate might increase.

It may be possible, however, to negotiate credit card interest rates and fees. If you’ve only had one late payment, it’s worth a call to customer service asking for the late fee to be waived. If there have been multiple late payments and you’re faced with an increased interest rate, it might take up to six months on-time payments before a credit card issuer is willing to consider lowering the interest rate.

A 2018 poll for CreditCards.com , the latest data on the topic, found that 56% of those who asked got a lower interest rate/APR, and 70% had an annual fee waived or lowered. So it may not hurt to call customer service and ask.

Knowing How Much Credit Is Being Utilized

The amount of debt owed is the second largest factor that makes up a person’s credit score. It accounts for 30% of the total score, and revolving credit accounts like credit cards are important in the calculation of a credit score. Someone who is using a high percentage of their credit card limit might be seen as potentially risky by lenders. But someone who uses a lower percentage of their credit card limit may be considered to be in a favorable financial position.

Credit card companies sometimes raise the credit limit of financially responsible customers. By keeping your account balance low, it can improve the credit utilization rate used to calculate your credit score.

The Takeaway

Credit card debt can feel overwhelming quickly, but a personal loan may help you get things under control.

You can’t just sweep away the debt and forget it, of course. But if your financial history is solid, getting approved for a personal loan interest rate that’s lower than your credit card rates could make your outstanding debt easier to deal with. Using a debt consolidation loan to consolidate multiple credit cards would also mean just one bill to pay each month instead of keeping track of multiple payments and due dates.

A consolidation loan with a respected lender can be part of a smart overall money management plan. SoFi loans offer competitive rates, as well as membership benefits other lenders don’t necessarily offer.

If you’re serious about getting and staying on track, a SoFi personal loan might be helpful. Check out a SoFi personal loan if you need help with consolidating credit card debt.



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

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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.

SOPL18116

Read more

What to Know about Credit Card Cash Advances

There are a lot of reasons a person might desperately need some fast cash. Unexpected expenses can be an unfortunate fact of life. And they don’t usually wait until payday comes or until there’s an emergency fund large enough to cover them.

A particularly expensive (or unlucky) month might make a credit card cash advance seem appealing.

Can You Get Cash Back from a Credit Card?

Just because you can do something doesn’t always mean you should.

A credit card cash advance is a stopgap for a financial emergency that can come with high costs to a person’s immediate financial situation and, if not paid back quickly, may also affect their credit history in the long term.

A cash advance is certainly easy, but there are better and more affordable options for most financial needs.

A credit card cash advance is used to get actual cash against a credit card account’s cash limit, which might be different from the credit limit. It’s essentially a loan from the credit card issuer.

Getting a credit card cash advance can be as easy as following the cash advance instructions on an ATM: Insert the credit card, enter the card’s PIN, and choose an amount to withdraw.

If you don’t know the card’s PIN, a cash advance can be completed by going into a bank or credit union with the credit card and a government-issued photo identification.

A cash advance check directly from the credit card company—sometimes included with mailed monthly billing statements—can also be used to get a cash advance.

Why Do People Use Cash Advances?

The bottom line: convenience and speed. ATMs are plentiful in most towns and it takes just a few minutes to complete the process of getting a cash advance at an ATM.

Some people may assume they don’t have enough time to access other kinds of credit. This isn’t always true, however. For instance, funds obtained through an unsecured personal loan are sometimes available in just a few days after approval of the loan.

People who may not have learned financial skills as they entered adulthood may not be aware of all the options they might have. A 2020 financial literacy survey commissioned by SoFi found that 68% of respondents “want to learn more about their finances, but don’t know where to go.”

SoFi is committed to increasing financial literacy that will help people avoid high-cost debt. Test your own financial literacy with a quick quiz that SoFi offers.

Cost of Withdrawing Cash from a Credit Card

A cash advance is an expensive way to borrow money. To put it in perspective, they’re just a step up from payday loans , (which typically have much higher interest rates than credit card cash advances, extra fees, and short repayment terms.

The cost of getting a cash advance from a credit card can be quite high, because they are treated differently than regular credit card purchases.

Cash Advance Fee

It’s typical for credit cards to have a fee specifically for cash advances. This fee can be anywhere from 3% to 5% of the total amount of the cash advance, or $10, whichever is higher. This fee is added to the account balance immediately—there is no grace period.

Higher APR

The average APR, or annual percentage rate, a credit card issuer typically charges for a cash advance is quite a bit higher than normal purchase charges.

According to the 2020 CreditCards.com Annual Credit Card Fee Survey , the average cash advance APR is nearly 25%. This is almost 9% higher than the average credit card APR (on regular purchases) of 16.15%, as of May 2021.

Unlike interest charged on regular purchases, there is no grace period for the interest to start accruing on a cash advance. It starts accruing immediately and increases the account balance daily.

ATM Fee

Getting a credit card cash advance from an ATM typically means incurring an extra fee charged by the ATM owner. Average ATM fees are currently more than $4.50 per transaction, on average. This amount is also added to the credit card account balance and starts accruing interest immediately.

Payment Allocation Rules

The cash advance can be paid off first, and then the interest rate will revert to the lower rate charged on regular purchases, right? No, that’s not how it works. While federal law dictates that any amount more than the minimum payment made must go toward the highest interest rate debt, the minimum payment amount is typically applied at the credit card issuer’s discretion.

A Hypothetical Scenario

A person is carrying a credit card balance of $1,000 with an APR of 20%. They take out a $1,000 cash advance with a 25% APR. When they receive the billing statement, they pay $1,000 toward their credit card balance.

The minimum payment due amount of $35 is applied to the regular purchases that are accruing interest at a rate of 20%. The remainder, $965, is applied to the cash advance balance that’s getting charged a 25% interest rate.

In order to completely get rid of that 25% APR, they would have to pay the full $2,000 balance.

The cash advance will only be paid off when the entire credit card balance is paid in full, which means they could be setting themselves up with higher interest charges for a long time to come.

The $35 that did not get applied to the cash advance balance will continue to accrue interest, so to make sure the cash advance gets paid off in full, it’s important to think short-term when it comes to making another payment.

Waiting until the next monthly statement is available will just increase the amount due because every day the $1000 cash advance accrues interest, costing more money. The faster the balance is paid off, the less interest will accrue.

Personal Loans vs. Cash Advances

So what are the alternatives to a cash advance? Ask friends or family for a loan? Start a side gig?

While those options are certainly acceptable, an unsecured personal loan might also be an option for some people.

An application for a personal loan online can typically be completed in minutes and, if approved, the borrower may possibly get the funds within a couple of days. Personal loans can be used for a variety of reasons.

Some common uses for personal loan funds are debt consolidation, wedding expenses, unexpected medical expenses, and moving expenses, to name a few. It’s even possible to use a personal loan to pay off that credit card cash advance, which may cost you a lot less in the long run.

Personal loans are likely to offer a more manageable interest rate on the money borrowed than the typical interest rate on a credit card cash advance.

Of course, the personal loan’s interest rate will depend on the borrower’s creditworthiness, but it’s likely to be lower than the one tied to a credit card cash advance.

And with a single personal loan, there is only one interest rate to keep track of, as opposed to juggling two high interest rates: one for the cash advance and one for regular purchases charged to the credit card.

Credit card debt is revolving debt, which means that the borrower’s credit limit can be used, repaid, then used again, as long as the borrower is in good standing with the lender.

In contrast, a personal loan is installment debt, and has fixed payments and a fixed end date. Unlike the revolving debt of a credit card, the funds from a personal loan can only be used once, and then they have to be repaid.

One potential benefit of choosing a personal loan over a credit card cash advance is that responsibly managing a personal loan might positively impact the borrower’s credit score.

One factor that goes into calculating a FICO® Score is the percentage of available credit being used, the credit utilization ratio, and it accounts for 30% of a person’s total score.

In the hypothetical scenario above, if the borrower had a $3,000 credit limit on their credit card, by using $2,000 of their total available credit, their credit utilization rate would be a whopping 66% (if that one credit card was the only account appearing on their credit report).

It’s fairly typical that credit card users continue to make charges on their accounts, which is likely to keep their credit utilization ratio high.

Installment debt, such as a personal loan, is looked at in a slightly different way in credit score calculations. Making regular payments on an installment loan may carry slightly greater weight than might someone’s credit utilization rate in calculating their credit score. Thus, making regular payments on a personal loan is likely to demonstrate responsible borrowing as the balance is paid down.

The Takeaway

Life can certainly toss in some unexpected financial challenges now and then. But by stepping back and considering our options instead of merely reacting to those challenges, we can be better equipped to make smart financial decisions.

Using a credit card interest calculator can be enlightening when figuring out how much those purchases or cash advances will really cost with interest applied and how much time it might take to pay them off.

SoFi personal loans may be an option for the funding you need for unexpected expenses, without the financial strain of a high-interest credit card cash advance.

Learn more in just two minutes.


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

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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.
PL18190

Read more
Understanding Statement Credits_780x440

Understanding Statement Credits

Credit cards are one of the most accessible credit-building tools in your arsenal, but rewards are also part of the appeal. A statement credit is one way to redeem rewards you’ve earned.

If you look through your statement balance and find that money was put back into your account, that’s a statement credit.

Knowing how you earned that money can help you take advantage of your credit card’s rewards system in the future.

What Is a Statement Credit?

Credit card companies use a statement credit to issue a credit to your accounts, such as cash back or other reward you have earned. Essentially, you receive money from your card issuer for a specific reason.

Finding documentation of your statement credit varies among credit card companies. Generally, though, you will see it on your monthly statement under transactions or account activity.

If you check your statements online, you’ll probably see the credit appear in green text.

Regardless of the format, a statement credit has a minus sign in front of the cash amount, thus decreasing your revolving balance.

How to Receive Statement Credits

There are a few ways a statement credit might apply to your account. A common reason is through a return.

If you have ever returned an item you bought using your credit card, the retailer will probably refund the money borrowed from your card issuer. You’ll receive a statement credit that matches the price of the returned item.

Other than returns, ways you may receive a statement credit include:

•   Shopping benefits. Some card providers offer discounts or statement credits for shopping with specific merchants.

•   Travel credits. Card providers may offer annual statement credits to pay for eligible travel expenses like a luggage fee or plane tickets.

•   Rewards. Card providers that offer cash back, points, or miles may let you redeem them in the form of a statement credit.

Statement Credits vs. Cash Back

Your credit card company gives you options when you sign up for a rewards credit card. One choice may be cash back or statement credits.

Cash back sounds simple enough, but it doesn’t always mean you’ll get direct money. Instead, your issuer may offer a cash reward in the form of a credit put on your account. Occasionally, they may send you a physical check or deposit the money in your checking account.

You earn cash back as a reward for using the credit card. It is a percentage of the money spent on purchases using the card.

In comparison, a statement credit reduces your credit card balance. Carrying a high balance between periods could lead to a high credit utilization ratio, which shows the amount of available credit a person has. That can result in a lower credit score over time.

Are Statement Credits Taxable?

The type of credit or reward you receive determines whether it’s taxable. If the credit card holder spent money to earn the reward, they usually don’t have to pay taxes on it. If they receive the credit without any spending, the reward may be taxable.

For example, an individual receives money back on her account after returning a chair she purchased online. That credited amount would not be taxable.

Cashback earners who engage in programs for points, like travel rewards, also generally avoid taxation.

The primary instance where cardholders face a taxable reward is with sign-up bonuses.

If they did not have to purchase anything to earn the bonus, it’s probably taxable. The taxation may apply regardless of how the credit card company issues the bonus, whether it’s in cash or airline miles.

Using Your Rewards Wisely

Credit cards come with responsibilities, but they have their perks.

Consider using statement credits put on your account to lessen your balance. Or look into the various rewards your card issuer offers.

You may even be among the 31% of Americans who didn’t redeem any of your stockpiled rewards in 2020. So, you might be missing out on rewards that you could use for some of your favorite services.

When shopping for a new card, you may want to look closely at the points, cash back, or miles involved. How are the rewards offered, how are they redeemed, is it better for you to get a card with consistent points across all purchases or increased rewards in certain areas?

Think through which rewards best fit your lifestyle and interests. If you want to see the world, you may want to get a card that optimizes travel benefits. If you’re an investor or someone interested in student loan refinancing, at least one card is geared toward those preferences.

The Takeaway

What is a statement credit? It’s a reduction in a credit card balance. Many credit cards offer statement credits as one way to redeem travel, cashback, or other rewards.

Wouldn’t it be convenient to have all of your finances under one umbrella—your credit card, money management, investing, and borrowing? You can, with SoFi.

SoFi offers a credit card that lets you earn cashback reward points for eligible purchases and then redeem your points into certain SoFi accounts or for a statement credit.

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

The SoFi credit card could be a rewarding addition.



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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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.

SOCC0421013

Read more
man on couch using credit card

Tips for Using a Credit Card Responsibly

It’s hard to imagine a world without credit cards. They make it easy to reserve a hotel room, flight, or rental car—and to conveniently purchase gas, groceries, gifts, and more.

Credit cards can help people build credit —and potentially earn cash reward points, among other benefits. With a credit card, you don’t have to carry cash, debit cards, or checks if you don’t want to, plus you can order items with your card and, if they don’t arrive in satisfactory condition, you have some leverage to get your money back (limitations apply).

Credit cards are used by some as short-term loans and, if you pay your balance in full each month by the due date, it’s essentially a no-interest short-term loan (though keep in mind that some credit cards charge an annual fee).

The challenge comes in, of course, when you can’t pay your balance in full in a relatively short time. The average credit card interest rate for existing accounts is a whopping 14.4% , and interest charges add up very quickly.

In this post, we’ll share some very high-level tips that may help you use your accounts responsibly and may help you get your credit card balances under control.

Before we get started, though, we want to point out that none of this should be taken as financial advice. And we know this goes without saying, but always consult a qualified and licensed professional if you feel you need help with your finances.

1. Avoiding Making Too Many Impulse Purchases

How many is “too many” depends upon how much your impulse purchases cost and how easily they fit into your budget.

If you know you can pay off your credit card balances and otherwise meet your monthly expenses and savings goals, then that’s an entirely different situation from one where your impulse purchases are too large to be paid off each month and/or keep you from meeting other financial responsibilities or goals.

If you enjoy making spontaneous buys, then you may consider including this as a line item in your monthly budget and then sticking to it. This could add enjoyment to your life without causing financial problems.

2. Using the Right Credit Card

There are a variety of different types of credit cards and depending on how you plan to use it, one option may make more sense than another. Some credit cards charge an annual fee, while others may offer rewards for certain purchases or cashback, which can be helpful benefits for consumers.

For example, if it will take a few months to pay off a purchase, then it makes sense to use one with the lowest interest rate available. That way, when you do have interest charges, they’ll be as low as possible.

Here’s another scenario. Let’s say you’ve just made a major purchase that you’ve budgeted to pay off in six months. It might make sense to transfer the balance to a zero-interest credit card.

These credit cards typically offer a no-interest introductory period before reverting to the card’s regular interest rate and annual percentage rate (APR) which could be quite high.

So long as the balance is paid in full during the introductory period, this can be a useful strategy. If not, you might end up owing at a higher interest rate than you would have before you’d transferred the balance.

And here’s another catch. Sometimes, if you have a remaining balance when the introductory period ends, the company collects interest on your original principal, not just the remaining balance. So, in that situation, nothing was really free.

It may also be a good idea to consider annual fees (if any), as well as cash back options and other perks, when choosing the best card for you.

3. Taking Advantage of Benefits Offered

Signing up for eligible rewards programs can help credit card holders make the most of their card. Each type of credit card may have slightly different reward programs.

See what perks are being offered—if you’re not sure, check the card’s website or ask the credit card company for specifics. Once you know what they are, you can choose the ones you like and use them as strategically as you can.

You may discover that the card(s) you have don’t have the best benefits match for you. For example, perhaps you’re a frequent flyer. If so, some cards have better air-travel benefits than others. If you drive around the country instead, you could find one that offers the best cash-back deals on gas.

When switching credit cards, you might want to avoid closing the old one—that’s because canceling it might ding your credit rating. (If there’s a fee on the old card, though, it may make sense to cancel.)

Related: How to Cancel a Credit Card

Finally, if you are earning rewards points, consider the best way to use them. Sometimes it’s possible to get a bigger bang for your buck if, say, you use your rewards points at an approved store rather than opting for cash back.

4. Signing Up for Automatic Payments

To avoid missing payments or making them late, consider signing up for an automatic payment plan with the credit card company.

Another option is to sign up for automatic reminders about payment due dates (by text, for example, or by email), either through the credit card company or via a calendar app. What’s most important is coming up with a plan that accomplishes your goals in a way that works best for you.

5. Regularly Checking Your Statements

Mistakes do happen on credit card statements and, unfortunately, fraudulent activities could affect the account. So you might want to check your statement every month to ensure that you’ve made all the charges that appear on each statement, and that any payments you’ve made are reflected.

If something is missing, review the statement dates to see if the transaction may have happened, for example, right after the statement cut-off date. If something seems off, consider contacting the credit card company to verify.

If you notice any fraudulent activity, contact the credit card company as soon as possible.

Tackling Outstanding Balances

Let’s face it: Credit card debt can be hard to pay off—and here is one of the reasons why. Many credit card companies charge compounding interest, which means that not only will you owe interest on any outstanding balance, you’ll also end up paying interest on the interest.

That’s because this interest is calculated continually, then added to your balance—and may be compounded daily. So it’s easy to see how fast balances can keep going up—and up and up.

Interest compounds even when you make required minimum payments. It compounds unless you pay off your balance in full. To get an idea of what unpaid interest could mean for you, use our credit card interest calculator.

Consolidating Credit Card Debt With a Personal Loan

To break this debt cycle, and depending upon the terms offered, it may make sense to consolidate your credit cards into a personal loan. Reasons could include:

•   Qualifying for a lower interest rate on a personal loan. Lower interest rate = less interest owed overall = more money going to pay down the principal (depending on the loan term).
•   Most personal loans offer a fixed rate option, which means the interest rate does not change over the life of the loan. This can be helpful when creating a budget, since you know how much is due each month in terms of payment.
•   A personal loan to consolidate credit cards could lower how much you’re paying each month on what you owe depending on what term you choose.

The Takeaway

When used responsibly, credit cards can be helpful for a whole slew of things, from making online purchases to building credit. The keywords there are, “when used responsibly.”

To stay on top of your credit cards, tips like signing up for automatic payments, making the most of the rewards programming, and using the right type of credit card for your use are all important.

If you’re currently repaying credit card debt, crafting a plan to get on top of it is important. One strategy is to consolidate credit card debt with a personal loan, which can help streamline monthly payments and could allow borrowers to qualify for a lower interest rate than on their credit cards.

If you think a personal loan may be right for you, feel free to explore at SoFi.



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

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

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.
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.

SOPL18156

Read more
TLS 1.2 Encrypted
Equal Housing Lender