7 Tips to Help You Use Your Credit Cards Wisely

7 Tips to Help You Use Your Credit Cards Wisely

If you’re saddled with credit card debt, you’re not alone. A recent study based on Federal Reserve and Census data found that over 45% of households in America carry a credit card balance, and that their average balance is $6,270. Considering the average credit card interest rate is just under 17%, that average balance could end up costing Americans quite a bit in interest.

Not only can reducing your credit card debt allow you to stop making hefty interest payments, but because 30% of your FICO Score® is determined by your debts owed, reducing your debt could potentially help improve your credit. If you’re working on getting out of — and staying out of — credit card debt, here are some tips on being a savvy credit card user.

How to Use a Credit Card Wisely: 7 Tips to Follow

If you have a credit card, it’s crucial that you use your credit card responsibly. Here are some tips to keep in mind to ensure your credit card usage stays in check.

1. Always Try to Pay Off Your Statement Balance in Full

Again, with average interest rates around 17%, credit cards can be a very expensive way to borrow. It’s extremely important to pay off your statement balance in full after each billing cycle if you want to avoid dealing with high-interest charges.

If you’re already in the habit of paying your balance in full when it comes due, you could consider leveraging your credit card spending to earn favorable reward points, such as points toward travel or cash back rewards.

2. Cut Your Interest Rate If You Have Credit Card Debt

If you have a large balance or multiple cards, paying off your credit card debt is likely top of mind. It could help to consolidate your credit card debt with a personal loan, as consolidating your credit card balance(s) might help you pay off your debt at a lower interest rate.

When you pay off a credit card, you’re still able to spend using that card, which would increase your balance even as you’re trying to deplete it. That’s because credit card debt is revolving debt, which is the debt you can continue to grow even while paying some of it off.

However, if you consolidate your credit card debt with a personal loan, you’d be paying off your debt in monthly installments without adding to that debt and, hopefully, at a lower interest rate. A personal loan is considered installment debt, which is debt that has a set, regular payment schedule until the balance reaches $0.

3. Make Sure to Pay On Time

This one may seem like a no-brainer, but it’s still worth discussing. Paying your statement balance after the due date may mean that you’re incurring late fees or other interest charges. And because payment history is 35% of your FICO Score , paying late can also potentially hurt your credit.

4. Build an Emergency Fund to Avoid Turning to Credit Cards in a Bind

Emergencies happen, and ideally, you’d be able to turn to your savings instead of leaning on a credit card to take care of an unexpected expense. If you don’t have an emergency fund yet, it might be a good goal to prioritize once your credit card debt is under control. In general, an emergency fund makes for a much better safety net for these situations.

Recommended: Why Having Emergency Savings Should Be a Financial Priority

5. Use the Snowball Method to Help Pay Off Debt More Quickly

Haven’t heard of the snowball method? Here’s how the popular debt payoff method works:

•   Target the account with the smallest balance to pay off first. You’ll want to pay as much as possible on this target account to pay off the debt as soon as possible. Meanwhile, you’ll continue making minimum payments on all other accounts on time to avoid late fees.

•   Once the target account is paid off, add the amount that you were allocating to the old target account to the account with the next lowest balance. Make that account the new payoff target.

•   Repeat this process until all debt balances are paid off.

For many, this method works by providing incremental victories from knocking out smaller debts, which can offer momentum toward tackling larger balances.

6. Keep Your Card Open Even After You Pay Off the Balance

Having access to available credit that you don’t use can help to improve your FICO Score. This is because you’ll be using a smaller percentage of your available credit. Remember, “amounts owed” accounts for 30% of a FICO Score.

To keep your available credit as high as possible, even if you make the occasional purchase or automate a bill payment on the card, you’d probably want to pay off the balance either on or before the due date.

7. Try Sticking to Cash to Reduce Credit Card Spending

Paying in cash instead can, paradoxically, be easier to track than swiping a credit card for purchases. If you only withdraw a certain amount of cash to spend for the week, it could potentially help reduce unnecessary spending.

To try this method, you’d want to decide how much you need to spend each day and put that amount of cash in your pocket. When it’s gone, you’re done spending for the day. It may take a lot of discipline, but if it helps you successfully pay off your credit card debt, it could be worthwhile.

The Takeaway

Using your credit card responsibly is key to avoid racking up interest charges and potentially harming your credit score. You’ll want to ensure you make at least the minimum payment on time each month and, if you can, pay off your balance in full. Other tips for using credit wisely include ensuring you have an emergency fund and considering sticking to cash for more strict budgeting guide rails.

And if you do find yourself in credit card debt, consider exploring solutions like the snowball method or securing a lower interest rate through a personal loan. With a SoFi personal loan, for instance, you could get funding as soon as the same day to start paying off your high-interest debt. Learn more and see your personal loan rate today with SoFi.

Got credit card debt? Learn more about how a SoFi personal loan can help you pay that debt off at a potentially lower interest rate.


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

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Can You Remove Student Loans from Your Credit Report?

Paying student loans on time can have a positive effect on your credit score and help build a good credit history. On the flip side, when you have a late or missed student loan payment, that can be reflected on your credit report as well. Delinquent payments can lower your credit score and have financial repercussions, such impacting your ability to qualify for a new credit card, car loan, or mortgage.

If you’re wondering how to remove student loans from a credit report, the answer is that it’s only an option if there’s inaccurate information on the report. Student loans are eventually removed from a credit report, however, after they’re paid off or seven years after they’ve been in default. Here’s what to know about student loans on a credit report, what happens when you default on a loan, and how to remove student loans from a credit report if there’s inaccurate information.

What Is a Credit Report?

Before considering the impact of student loans on your credit report, it’s helpful to review what a credit report is. It’s a statement that includes details about your current and prior credit activity, such as your history of loan payments or the status of your credit card accounts.

These statements are compiled by credit reporting companies who collect financial data about you from a range of sources, such as lenders or credit card companies. Lenders use credit reports to make decisions about whether to offer you a loan or what interest rate they will give you. Other companies use credit reports to make decisions about you as well – for example, when you rent an apartment, secure an insurance policy, or sign up for internet service.

Defaulting on Student Loans

It’s also worth reviewing what happens when a student loan goes into default. One in ten people in the United States has defaulted on a student loan, and 7.8% of total student loan debt is in default, according to the Education Data Initiative.

The point when a loan is considered to be in default depends on the type of student loan you have. For a loan made under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan (FFEL) Program, you’re considered to be in default if you don’t make your scheduled student loan payments for a period of at least 270 days (about nine months).

For a loan made under the Federal Perkins Loan Program, the holder of the loan may declare the loan to be in default if you don’t make any scheduled payment by its due date. The consequences of defaulting on student loans can be severe, including:

•   The entire unpaid balance of your student loans, including interest, could be due in full immediately.

•   The government can garnish your wages by up to 15%, meaning your employer is required to withhold a portion of your pay and send it directly to your loan holder.

•   Your tax return and federal benefits payments may be withheld and applied to cover the costs of your defaulted loan.

•   You could lose eligibility for any further federal student aid.

And you don’t have to default on your student loans to experience the consequences of nonpayment. Even if your payment is only a day late, your loan can be considered delinquent and you can be charged a penalty fee.

How Long Do Student Loans Remain on a Credit Report?

If your loan delinquency is reported to the credit bureaus, it will remain on your credit report for seven years. The exception to this is a Federal Perkins Loan, which is a low-interest federal student loan for undergraduate and graduate students who have exceptional financial need. This type of loan will remain on your credit report until you pay it off in full.

If you’re having difficulty making regular payments on your federal or private student loans, there are steps you can take before the consequences of defaulting kick in. One option is to apply for a student loan deferment—which allows you to temporarily stop making your federal student loan payments—or student loan forbearance, which temporarily reduces the amount of your payments. You can also contact your loan servicer to discuss adjusting your repayment plans.

Refinancing your student loans may also be an option—if you extend your term length, you may qualify for a lower monthly payment. Note that while these options provide short-term relief, they generally will result in paying more over the life of the loan.

How Do I Dispute a Student Loan on My Credit Report?

It’s a good habit to periodically check your credit report. You can request a free report from each of the three major credit agencies—Equifax, Experian, and TransUnion—all are required by law to give you a free report every 12 months.

There are three reasons your student loan might have been wrongly placed in default and reported to the credit bureaus by mistake. Here’s how to begin the process to correct these errors:

1. If You Are Still in School

If you believe your loan was wrongly placed in default and you are attending school, contact your school’s registrar and ask for a record of your school attendance. Then call your loan servicer to ask about your record regarding school attendance.

If they have the incorrect information on file, provide your loan servicer with your records and request that your student loans be accurately reported to the credit bureaus.

2. If You Were Approved for Deferment or Forbearance

If you believe your loan was wrongly placed in default, but you were approved for (and were supposed to be in) a deferment or forbearance, there is a chance your loan servicer’s files aren’t up to date. You can contact the loan servicer and ask them to confirm the start and end dates of any deferments or forbearances that were applied to your account.

If the loan servicer doesn’t have the correct dates, provide documentation with the correct information and ask that your student loans be accurately reported to the credit bureaus. Under the Fair Credit Reporting Act, a borrower may appeal the accuracy and validity of the information reported to the credit bureau and reflected on their credit report.

Recommended: Student Loan Deferment vs Forbearance: What’s the Difference?

3. Inaccurate Reporting of Payments

If your loan has been reported as delinquent or in default to the credit bureaus, but you believe your payments are current, you can request a statement from your loan servicer that shows all the payments made on your student loan account, which you can compare against your bank records.

If some of your payments are missing from the statement provided by your loan servicer, you can provide proof of payment and request that your account be accurately reported to the credit reporting agencies.

Recommended: How to Build Credit Over Time

In all three cases, if you believe there is any type of error related to your student loan on your credit report, it’s best practice to also send a written copy of your dispute to the credit bureaus so they are aware that you have reported an error.

Why Your Student Loans Should Stay on Your Credit Report

While you can’t actually remove your student loans from your credit report, you can dispute the student loans on your credit report if they are being reported incorrectly.

On the bright side, if you’re paying your student loans on time each month, that looks good on your credit report. It shows lenders that you are responsible and likely to pay loans back diligently.

When You’re Having Problems Paying Your Student Loans

If you’re having trouble paying your student loans on time, you may be able to make your loans more affordable, either with a federal income-based repayment plan or by refinancing with an extended loan term.

When you start making your payments by the due date each month, you may see that your student loans can become a more positive part of your credit report. Again, while these options provide short-term relief, they generally will result in paying more over the life of the loan.

How to Remove Student Loans From Credit Report

As mentioned earlier, you can only remove student loans from a credit report if they contain inaccurate information. If there’s information on your credit report that’s incorrect, you can reach out to the loan servicer to fix the errors, and it’s a good idea to send a copy to each of the major credit bureaus. A defaulted student loan is removed from a credit report after seven years.

If you made timely payments on your loan and paid it off in full, it may still appear on your credit report for up to 10 years as evidence of your positive payment history and can boost your credit score.

The Takeaway

While you generally can’t remove student loans from a credit report unless there are errors, it isn’t a bad thing if you make payments on time. If a loan is delinquent, it will be removed from your credit report after seven years, though you will still be responsible for paying back the loan.

If you’re having trouble making loan payments, there are ways to make repayment easier. Borrowers with federal student loans can look into forgiveness, an income-driven repayment plan, or a change to the loan’s terms.

And if you qualify, refinancing your student loans with a private lender like SoFi allows you to consolidate multiple student loan balances into a single new loan, ideally at a lower interest rate. Keep in mind, however, that refinancing federal loans with a private lender means you’ll lose access to federal benefits like forbearance, deferment, and income-based repayment plans.

If you’re looking to simplify your monthly loan payments and potentially lower your interest rate, or lengthen your loan term to lower your monthly payments, check out SoFi student loan refinancing.

FAQ

Is it illegal to remove student loans from a credit report?

There’s no legal way to remove student loans from a credit report unless the information is incorrect. If you think there’s an error on your credit report, you can contact your loan servicer with documentation and ask them to provide accurate information to the credit reporting agencies. It’s also a good idea to send a copy of the dispute to the credit bureaus as well.

How do I get a student loan removed from my credit report?

If you paid your student loan off in full, it may still appear on your credit report for up to 10 years as evidence of your positive payment history. It takes seven years to have a defaulted student loan removed from a credit report. Keep in mind you are still responsible for paying off the defaulted loan and you won’t be able to secure another type of federal loan until you do.

How can I get rid of student loans legally?

If you have federal student loans, options such as federal forgiveness programs or income-driven repayment plans can help decrease the amount of your student loan that you need to pay back. If you have private or federal student loans, refinancing can help lower monthly payments by securing a lower interest rate and/or extending your loan term. If you refinance a federal loan, however, you will no longer have access to federal protections and benefits.



SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

CLICK HERE for more information.


Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.


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

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.
$500 Student Loan Refinancing Bonus Offer: Terms and conditions apply. Offer is subject to lender approval, and not available to residents of Ohio. The offer is only open to new Student Loan Refinance borrowers. To receive the offer you must: (1) register and apply through the unique link provided by 11:59pm ET 11/30/2021; (2) complete and fund a student loan refinance application with SoFi before 11/14/2021; (3) have or apply for a SoFi Money account within 60 days of starting your Student Loan Refinance application to receive the bonus; and (4) meet SoFi’s underwriting criteria. Once conditions are met and the loan has been disbursed, your welcome bonus will be deposited into your SoFi Money account within 30 calendar days. If you do not qualify for the SoFi Money account, SoFi will offer other payment options. Bonuses that are not redeemed within 180 calendar days of the date they were made available to the recipient may be subject to forfeit. Bonus amounts of $600 or greater in a single calendar year may be reported to the Internal Revenue Service (IRS) as miscellaneous income to the recipient on Form 1099-MISC in the year received as required by applicable law. Recipient is responsible for any applicable federal, state, or local taxes associated with receiving the bonus offer; consult your tax advisor to determine applicable tax consequences. SoFi reserves the right to change or terminate the offer at any time with or without notice.
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What Is A Personal Line of Credit & How Do You Get One?

What Is A Personal Line of Credit & How Do You Get One?

A personal line of credit is a type of revolving credit line that can be used to pay for a variety of personal expenses. This is different from a personal loan, which is an installment loan — awarded in a lump sum to the borrower that must be repaid at specified intervals.

While both options allow you to borrow money there are benefits and drawbacks of each. Continue reading for more information on personal lines of credit and when this type of financing may make the most financial sense.

What Is a Personal Line of Credit?

A personal line of credit is what’s known as a revolving credit vehicle. It’s similar to a credit card in that:

•  It has a maximum credit limit.

•  A minimum payment is required every month.

•  When the debt on the credit line is repaid, money can be withdrawn again.

Although a personal line of credit doesn’t include a physical card, it’s still possible to write checks, withdraw cash at an ATM, and transfer money into another account. Generally speaking, the interest rates on a personal line of credit are lower than those on a credit card.

Personal lines of credit may be secured — requiring collateral — or unsecured — not requiring collateral. For example, a home equity line of credit is secured. This is a very popular option, so much so, that it’s often referred to by people in the know by its acronym alone — HELOC.

💡 Recommended: What Is a HELOC and How Does It Work?

Whether secured or unsecured, some lines of credit require minimum payments of interest and principal, while others only require interest payments for a period of time. This is known as the draw period.

That means that for a certain period of time you can draw money from your line of credit and most borrowers are usually required to make interest payments.

After the draw period is over, the line of credit is no longer revolving (meaning, you can’t borrow against it anymore), and you’re required to make interest and principal payments.

Where to Get a Personal Line of Credit

Not every bank or lender will offer personal lines of credits though they can be found at some banks, banks, credit unions, and other financial institutions.

How to Get a Personal Line of Credit


The process for applying for a personal line of credit is usually similar to applying for other loans or credit cards. Lenders may accept applications online, in-person, or over the phone, and specific application requirements may vary by lender.

Before formally applying, review your credit score and shop around at different lenders to compare the rates and terms you may qualify for. Many lenders will allow you to see if you prequalify, which may require a soft credit check, which won’t impact your credit score. Also be sure to evaluate any fees associated with the line of credit and review the draw period and repayment periods.

Once you’ve determined which loan you’d like to apply for, gather the required documentation (such as statements for proof of income). Your chosen lender will generally have a list of required documents. From there, you’ll fill out the application and wait for approval. At this stage, the lender will usually complete a hard credit inquiry which may impact your credit score.

When to Use a Personal Line of Credit


Personal lines of credit typically offer greater flexibility when it comes to accessing the loan and repaying it than other types of financing like a personal loan or credit card.

If you’re planning to do a home renovation, for example, you may not need a big chunk of money all at once. A line of credit allows you to access money over time (versus all at once) to pay for things in dribs and drabs as you pick out the tile for your kitchen and your contractor finally gets around to installing it. This flexibility can reduce your interest charges because you are only borrowing money you plan to use immediately.

Another benefit of a line of credit is that you can pay it off and then typically borrow from it again. This makes it a great backup to have in case you suddenly experience an expensive emergency that you don’t want to put on your credit cards.

You can also choose a line of credit with a draw period (similar to a HELOC) that allows you to only pay interest on the money borrowed for a period of time.

Awarded Best Personal Loan of 2022 by NerdWallet.
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Drawbacks to personal lines of credit


One drawback is that it can be difficult to get an unsecured line of credit with a good interest rate because they can be more difficult to qualify for than some other types of loans, such as a HELOC. This is because personal lines of credit are unsecured loans, and therefore, more risky for the lender. Without collateral, the lender needs to be sure that the borrower has the ability to pay back their loan. That’s why for some, it may be easier to qualify for a HELOC — but it means that you’re jeopardizing your home if you fail to repay it.

Also, the flexibility that comes with a line of credit may be a double-edged sword. The ability to keep borrowing for an extended period of time could lead to feeling tempted to take on more debt or take longer to pay off debt… all of which could mean more interest charges over time.

Using a Personal Loan as a Personal Line of Credit Alternative


When comparing a personal line of credit vs a personal loan, the major difference is that a personal loan is, as mentioned, an installment loan. Like a personal line of credit, personal loans can be used to pay for nearly any personal expense. Borrowers receive a lump sum payment and pay back the loan in installments. Personal loans may have fixed or variable interest rates.

A personal loan may make more sense for borrowers who have a firm idea of their budget or a fixed expense, such as for medical bills, buying an engagement ring, or consolidating debt. Additionally, depending on creditworthiness, the average interest rate on a personal loan may be lower than that of a personal line of credit. Though interest rates will vary by lender so evaluate the options available to you.

Also compare any fees or penalties associated with the personal loan. If a personal loan has a prepayment penalty, you may not be able to pay off the personal loan early.

Other Personal Line of Credit Alternatives


HELOC. As mentioned, this is a home equity line of credit. Borrowers tap into the equity in their home to borrow a line of credit. This is a secured loan where the house functions as the collateral. This can help borrowers qualify for a more competitive interest rate than with an unsecured personal line of credit, but it also means that if the borrower has issues repaying the HELOC, their home is at risk.

Credit Cards. In certain situations, a credit card may be used to help pay for emergency expenses. Be aware that credit cards generally have high interest rates — the average credit card interest rate was 14.56% in February 2022, according to recent data available from the Federal Reserve .

Secured Loans for a Specific Purpose. For example, if you are buying a car consider a car loan over a personal line of credit or personal loan.

The Takeaway


Personal lines of credit offer flexibility for borrowers because they are a revolving line of credit that functions similarly to a credit card. Borrowers can continue drawing on the line of credit for a set period of time to cover the cost of necessary expenses.

Personal loans are an alternative to consider for borrowers who are paying a fixed cost.

If you’re in the market for a personal loan — consider SoFi. Personal loans offer low fixed interest rates and have no fees, including origination fees or prepayment penalties.

If you think a personal loan might be right for you, check out SoFi personal loans to see if you may qualify.


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

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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.
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How Do Credit Card Companies Make Money?

How Do Credit Card Companies Make Money?

Using a credit card as a method of payment has become so commonplace and seemingly instantaneous that you might not think twice about it. However, there’s an elaborate credit card payment exchange happening in the background that enables you to buy your morning coffee or make an online purchase in seconds.
Providing this service, as well as charging interest and different fees for cardholders, is how credit card companies make money.

Types of Credit Card Companies

You might be keenly aware that you pay your monthly credit card bill to the bank or financial institution that approved your credit card line. However, there are other credit card companies involved in the payments process.

Credit Card Issuers

The credit card issuer is the entity that provided you with your credit card. Major U.S. banks, credit unions, and other financial institutions issue credit cards directly to consumers. Some examples include Chase, Capital One and Pentagon Federal Credit Union.

Credit Card Networks

Credit card networks, also called card associations, partner with credit card issuers to act as a middleman that communicates between your bank and the merchant’s bank. Visa, MasterCard, American Express, and Discover are the four major U.S. card networks.

Some networks also act as a card issuer, offering their own credit card products to consumers. The credit card network also typically determines transaction interchange rates (more on this later), relays whether a charge was approved or declined, and identifies potentially fraudulent activity on a credit card.

Credit Card Processors

As its name states, a credit card processor is the company that actually processes the transaction between the issuing bank and the receiving bank. Some examples of credit card processors are Stripe, PayPal, Block (formerly Square), and Elavon.

Additionally, some credit card processors ensure that the merchant and transaction are secure and compliant under the Payment Card Industry Data Security Standard (PCI DSS).

How Credit Card Companies Work

All of the types of credit card companies above work in unison so you can successfully pay for goods and services using a credit card as a cashless payment option. There’s a lot of back-and-forth communication between the three types of credit card companies after you provide your credit card to a merchant.

The process starts with obtaining authorization, which the merchant requests from its payment processor after a customer swipes or taps their card to pay. The card processor then submits your credit card information and transaction details to the card network. Your card’s credit card network routes this information to your issuing bank. The issuing bank either approves or denies the transaction based on your available credit and the status of your account.

If approved, your bank sends the approval to its partner credit card network. The card network then communicates the approval to the merchant’s bank. The merchant’s bank relays the approval to the merchant, so you can finally walk away with your purchase or close the transaction.

Although you walked away with your item or completed the online checkout process, the merchant doesn’t get your payment in their account instantly due to how credit cards work. Instead, the merchant goes through a separate process afterward to settle and receive funds for the authorized transaction. The transaction and payment details of transactions are communicated through the same channels that were used for authorization, involving the credit card network and issuing and merchant banks.

After the issuing bank draws the funds from your credit card account, it transfers the amount to the merchant’s bank, but withholds an interchange fee.

Recommended: What is a Charge Card

How Credit Card Companies Make Money From Cardholders

Credit card companies tack on various credit card charges as part of their business. Below are three ways that credit card companies make money from their customers and from each other.

Recommended: How to Avoid Interest On a Credit Card

Interest

As you use your credit line, credit card interest charges apply when all or a portion of your statement balance rolls into the following month. This interest is expressed as an annual percentage rate (APR). Credit cards typically have a variable APR that changes depending on market conditions, your creditworthiness, transaction type, and borrowing habits.

Fees

Your credit card issuer also makes money from charging you other fees related to your credit card use and borrowing habits. For example, if you open a new balance transfer credit card, making a balance transfer — which involves paying a credit card with another credit card — typically incurs a fee.

Similarly, your card issuer might charge a fee if you authorized a transaction in a different country; this is commonly called a “foreign transaction fee”. It might also charge you annual fees, cash advance fees, returned payment fees, and late fees.

Recommended: When Are Credit Card Payments Due

How Credit Card Companies Make Money From Merchants

The acquiring bank, issuing bank, and credit card network all make money by withholding a small percentage of the authorized transaction amount from the merchant.

Called the “merchant discount,” this fee combines various costs, such as interchange fees. The rate per transaction is determined by the credit card network. The merchant’s bank deducts the fee from the authorized purchase transaction amount, sending the remaining funds to the merchant.

This fee is then divided between the acquiring bank, the card network, and the issuing bank. The issuing bank makes the most money from interchange fees because it assumes the most risk throughout the process if you default on the debt.

Recommended: What is the Average Credit Card Limit

Limiting the Amount Credit Card Companies Make From Cardholders

To avoid credit card interest charges, make a credit card payment for your entire statement balance every month. Additionally, using a credit card responsibly, such as by not exceeding your card limit, can help by avoiding an APR increase.

It’s also worthwhile to examine the features of your existing and future credit cards. Consider cards that impose limited fees, such as those that don’t charge annual or foreign transaction fees, for example. Also don’t forget the credit card rule that you can always negotiate on fees or interest for your credit card.

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

The Takeaway

There are many ways in which credit card companies make money through your purchases, both from you and the merchant you patronize. However, you can reduce how much your credit card companies make off of your purchase by paying your credit card bills on time and in full every month.

If you’re looking for a credit card with minimal fees, you might apply for a SoFi credit card. You have the freedom to use the card abroad without worrying about foreign transaction fees. Plus, you can lower your APR by 1% after making 12 months of on-time payments of at least the minimum due.

FAQ

Who profits from credit card convenience fees?

A convenience fee charged at the checkout counter is meant to benefit the merchant. Since merchants pay interchange fees for the ability to accept credit card payments, a convenience fee is a way for the merchant to recoup lost funds from credit card transactions. It’s also designed to discourage customers from using their credit card for payment.

Do credit card companies make money if I pay off my balance every month?

Yes, credit card companies still make money even if you pay off your balance each month. They achieve this through various fees. For example, a card issuer might still charge you an annual fee to use its card product or a foreign transaction fee if you use your card abroad. Similarly, a credit card network and credit card processor charges the merchant fees for the benefit of accepting credit card payments.

How do credit card companies make money if they offer cash back?

Despite offering you cash back on your card purchases, credit card issuers can make money through fees and interest charges. It will charge you interest if you’re unable to pay your statement balance in full each month, and you could face fees, such as a balance transfer fee, late fee, annual fee, or foreign transaction fee, depending on what may apply to your situation.


Photo credit: iStock/Talaj

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.
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.
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.
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Maxed-Out Credit Card: Consequences and Steps to Bounce Back

Maxed-Out Credit Card: Consequences and Steps to Bounce Back

Using a credit card can be easy — almost too easy. And should a financial emergency pop up, or you reach for your credit card to make a cascade of purchases, before you know it, you’re faced with a maxed out credit card.

When you’ve maxed out on your card — or reached your credit card spending limit — it can have a negative impact on your finances. Let’s take a look at what happens if you max out on a credit card and how it can affect your credit score, as well as how to prevent maxing out in the first place and tips to bounce back if you already have.

When Is a Credit Card Maxed Out?

So, what is a maxed out credit card? Maxing out on a credit card simply means that you’ve reached the credit limit on your credit card. For instance, if you have a $20,000 credit limit on a card, and your balance hits that $20,000 mark, it’s maxed out. As such, you may not be able to put any more purchases on that card.

Recommended: What is a Charge Card

What Happens If You Max Out Your Credit Card?

There are a number of financial impacts of a maxed-out credit card. For starters, your card will likely get declined if you try to make a purchase. This is because rather than overdrafting a credit card, your credit card is typically just turned down (though in some cases, you could instead face fees for exceeding the limit, and the charge will go through).

Additionally, you could end up paying quite a bit in interest if you can’t pay off your entire statement balance in full. Plus, it could take you a long time to pay off your balance, further increasing the interest you pay over time. Your minimum payment due may also increase, depending on how it’s calculated by your issuer.

A maxed-out credit card also means that your credit score will take a hit. That’s because your credit utilization — how much of your available your credit you’re using — makes up 30% of your credit score. If you’re maxing out a credit card, it looks as if you’re overextended financially, which signals to lenders that you’re a risk.

Recommended: When Are Credit Card Payments Due

Guide to Prevent Maxing Out Your Credit Card

To avoid maxing out on your credit card, here are some steps to take:

•  Establish an emergency fund: Without an emergency fund, you’ll likely resort to using your credit card in a pinch, which could lead you to max out your credit card. To avoid ending up in this situation, aim to stash away at least three to six months of living expenses. If that seems like a tall order, start with one month of living expenses, and go from there.

•  Keep tabs on your spending: A golden rule of using a credit card responsibly is to check your credit card statements to monitor usage. Aim to check your balance at least once a week, if not more frequently.

•  Know how much of your credit you’re utilizing: Another of the golden credit card rules is to know what a reasonable balance to keep is and how much of your credit card is being utilized at any given time. For instance, if 30% is the maximum amount you’d like to maintain on your card, and your credit limit is $5,000, then $1,500 is the highest balance you should aim to carry.

•  Request an increase to your credit limit: If you increase your credit limit, it would lower your credit use. However, keep in mind that you also run the risk of racking up a higher credit bill. When considering requesting a credit limit increase, you’ll want to make sure you won’t end up simply spending more.

How Maxed-Out Credit Cards Can Affect Your Credit Score

If you’re wondering if it is bad to max out on your credit card, know that it absolutely can have a negative impact on your credit score due to how credit cards work.

When you carry a high balance on a card, it drives up your credit utilization ratio, which can drag down your score. It’s generally recommended to keep the amount of your total credit you’re using at around 30%; if your cards are all maxed out, your ratio is closer to 100%.

However, you can save your score from the negative effects of a maxed-out credit card if you can pay off the balance in full before the statement period closes. If you do this, the maxed-out balance would not get reported to the credit bureaus.

Recommended: How to Avoid Interest On a Credit Card

Tips on Bouncing Back from a Maxed-Out Credit Card

If you’ve hit your credit card spending limit, it is possible to recover. Here are some tips for how to bounce back from what happens when you max out your credit card.

Consider a Balance Transfer Card

Transferring your existing balance to a balance transfer card with a 0% APR interest rate could help you save money on interest. However, you’ll need to have a plan in place to pay off the balance in full before the interest rate kicks in and you’re back in the same place once again. Also note that balance transfer fees may apply, which are generally 3% to 5% of the amount you’re transferring.

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

Request Help

If you’re really struggling to keep your credit card spending down or are having trouble making payments, consider working with a professional. A credit counselor or non-profit credit counseling organization can sit down with you to learn about your debt situation and the state of your finances. From there, they can suggest a game plan to help you manage your debt.

Consider Personal Loans

Another way to bounce back from maxing out on a credit card is to take out a personal loan to pay off your credit card debt. This might make sense financially if you qualify for a lower interest rate with the loan than you have on your credit cards. It could also simplify the payment process by rolling all your debts into a single loan.

Recommended: Can You Buy Crypto With a Credit Card

The Takeaway

If you’ve hit your spending limit on your credit cards, it can negatively impact your credit score and translate to paying more in interest over time. While it’s best to avoid, should you max out on your cards, there are ways to recover and rebuild your credit.

Once you’re back on track, look for a credit card that will reward you for your use. The SoFi credit card, for instance, features up to 3% cash back rewards on all eligible purchases. Cardholders earn 1% cash back rewards when redeemed for a statement credit.1 Plus, you can lower your APR after making 12 on-time payments of at least the minimum due.

Learn more about getting a credit card with SoFi today.

FAQ

What happens if I max out my credit card but pay in full?

If you max out your credit card but pay off your balance in full before the statement period ends, your credit utilization ratio won’t be impacted. In turn, it won’t have a negative impact on your score.

Can I still use my card after reaching the credit limit?

After you’ve reached the credit limit on your card, you generally won’t be able to make purchases on it. Your card won’t go through, and transactions will be declined. In some cases, however, your transaction may go through and you’ll instead owe a fee.

Is it bad to max out your credit card?

Hitting the spending limit on your credit card can have a negative financial impact. First, it can bump up your credit utilization ratio, which can bring down your credit score. It also could equate to a higher monthly minimum payment, and more interest paid over time. Plus, you likely won’t be able to put any more purchases on that card.

How can maxing out your credit card affect your credit score?

When you hit the spending limit on a card and don’t pay it off before the statement period ends, it impacts your credit utilization ratio, which makes up 30% of your credit score. In turn, your credit score will take a hit. On the flip side, decreasing the balances on your card can help boost your score by lowering your credit utilization.


Photo credit: iStock/nensuria

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

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