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Whether you’re renting a car for a vacation or because your own vehicle is in the shop, the representative at the counter will likely ask, “Would you like to buy additional insurance protection?” The answer isn’t always a simple yes.

In many cases, this extra cost is unnecessary. Not only does your personal auto insurance often cover rentals, but many credit cards provide built-in protection — sometimes even primary coverage — that makes expensive agency waivers redundant.

Below, we take a closer look at credit card rental insurance, including how it works and what steps you need to take to ensure your rental is covered.

What Is Credit Card Rental Car Insurance?

Rental car insurance through a credit card is also called an “Auto Rental Collision Damage Waiver.” This type of rental car insurance essentially offers protection against damage or theft of your rental vehicle when you pay for it using your credit card and decline the rental company’s collision damage waiver.

Credit card rental car insurance is most commonly secondary insurance, which means it kicks in after your personal auto insurance pays. It typically covers damage to or theft of the rental vehicle itself, but not injuries, liability to others, or personal belongings in the car.

Understanding Your Credit Card’s Coverage for Rentals

When offered, credit card car rental insurance generally falls into one of two categories: primary or secondary coverage.

Primary Coverage

Though not common, some issuers offer credit card rental car insurance as primary coverage. Primary coverage means that, in the event of damage or theft, you can file a claim directly through the card issuer for reimbursement. You’re not required to file a claim through other insurance sources, like your personal auto insurance company, before the primary credit card car rental insurance benefit applies.

Secondary Coverage

More commonly, credit cards provide secondary rental car insurance protection, which kicks in after your personal auto insurance policy pays for damages. However, this coverage can be highly valuable, as it typically reimburses deductibles and other costs not covered by your primary insurance.

Recommended: How Much Auto Insurance Do You Need?

How Does Credit Card Rental Insurance Work?

Most major credit card networks (including Visa, Mastercard, and American Express) offer some form of rental car coverage. However, the extent of the coverage can vary depending on the type of card and the bank that issued it.

When a credit card offers car rental insurance, it typically covers:

•   Collision/damage: Physical damage to the rental car resulting from accidents.

•   Theft: Costs associated with the vehicle being stolen.

•   Loss of use fees: Administrative fees and revenue lost by the rental company while the car is being repaired.

•   Towing: Reasonable expenses related to towing the damaged vehicle.

However, credit card rental insurance does not replace full auto insurance. It generally does not cover:

•   Liability: Damage to other people’s property or vehicles, or medical expenses for you, your passengers, or other people.

•   Certain car types: Exclusions may include high-value, exotic, or antique cars, motorcycles, RVs, and trucks.

•   Personal property: Items stolen from the car (this is often already covered by homeowners or renters insurance).

•   Extended car rentals: Policies often cap coverage at 30 days.

Questions to Ask Your Credit Card Issuer

You can find out the details of your credit card’s coverage for rental cars by checking your “Guide to Benefits” (if you didn’t save this, you can often find it online). If you’re unclear about how your card can protect you while using a rental car, contact your issuer’s customer support number. Here are some important questions to ask:

•   Does the rental car insurance benefit offer primary or secondary coverage? The answer to this question can help you choose the best payment option to use for your next rental car. It will also give you a sense of what to expect if you need to file a claim.

•   What is included and not included in the coverage? In addition to reimbursements for damage, you’ll want to know if the card’s rental car insurance covers loss-of-use charges from the rental company, for example. Be clear on what isn’t eligible for reimbursement, too.

•   What are the coverage timelines? Depending on your credit card issuer, the number of days when your rental coverage is in effect might be limited.

•   Are there any countries in which the coverage is ineligible? Rental car insurance coverage might not be offered if the incident occurred in certain countries.

•   What do I need to do to ensure I’m covered? Ask what you can do on your end to ensure your rental car is covered by the credit card’s insurance benefit. This may include putting the entire purchase on the card, declining supplemental rental insurance coverage from the rental company, or other requirements stipulated by your insurer.

•   What’s the process for filing a claim? Knowing how to swiftly file a claim after an incident can offer some peace of mind during an already stressful situation.

Recommended: When Are Credit Card Payments Due?

Guide to Choosing the Right Credit Card for Car Rental Insurance

If you have multiple credit cards in your rotation that offer differing levels of credit card car insurance protection, see if one happens to offer primary coverage. This helps you avoid the added step of going through your own auto insurance company before being able to successfully file a claim through the card issuer.

The next factor for consideration is coverage amounts. Your maximum reimbursement amount may vary from one card to another, so be mindful about how high or low this limit is. Also, pay attention to the exclusions for coverage, including ineligible countries, activities (e.g. off-roading in the rental vehicle), and restrictions on vehicle type.

Other Ways Your Card Can Protect You When You Travel

When a credit card is used responsibly, it can offer many travel-related benefits. In addition to rental car insurance coverage, some credit cards provide protection for lost luggage expenses and trip interruptions.

Credit card travel insurance is especially useful if your travel plans are canceled due to reasons like severe weather or illness.

Keep in mind that many premium travel credit cards come with substantial annual fees. They typically also have higher credit score requirements.

The Takeaway

If your credit card covers rental car insurance, in many cases you can decline the duplicative car rental company’s offer for collision coverage. However, it’s worth learning whether your credit card car rental insurance coverage is primary or secondary and what its coverage limits are in case you need to file a claim.

While SoFi does not currently offer credit cards with rental car insurance, we do offer other credit cards that may suit your needs.

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

Enjoy unlimited cash back rewards with fewer restrictions.

FAQ

Do you need a credit card to rent a car?

You do not always need a credit card to rent a car, but it is highly common. Rental car companies generally require a form of payment and a hold for a security deposit. While a credit card is the most accepted method, some agencies may allow you to use a debit card, though this often comes with more restrictions, such as a credit check, a higher deposit hold, or proof of a return flight. It is best to check the specific rental company’s policy before booking.

Do all credit cards have car rental insurance?

Not all credit cards include rental car insurance and while it is a common feature of travel rewards cards, the specific level of coverage varies significantly between different cards and issuers. You can check your credit card’s benefits guide to see if you’re eligible for rental car insurance.

How do I know if my card comes with primary or secondary insurance?

You can refer to your credit card’s “Guide to Benefits” to learn whether your credit card offers car rental insurance protection and, if it does, whether it’s primary or secondary coverage. You can also contact the customer support phone number listed on the back of your credit card to speak to a representative about your specific card’s car rental insurance benefits.

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SoFi Credit Cards are issued by SoFi Bank, N.A. 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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Whether you’re making home repairs, planning a bucket-list trip, or consolidating debt, getting a $4,000 personal loan can be a flexible solution. As long as you meet the lender’s criteria, the process of applying for a loan is generally straightforward. However, before you apply, it’s a good idea to understand how personal loans work, where to find one, and what they offer.

Read on to learn about the pros and cons of a personal loan for $4,000 and the qualifications you’ll need to meet to get one.

How to Get a $4,000 Personal Loan

Knowing how to apply for a $4,000 personal loan can make the process a lot easier. Here are some steps to help you get the loan that’s right for you.

Check Your Credit.

When you apply for a personal loan, lenders will check your creditworthiness, so you’ll want to review your credit report first. You can get a free copy from the three main consumer credit bureaus — Equifax®, Experian®, and TransUnion® — at AnnualCreditReport.com®.

After you receive your credit reports, read them over closely and report any inaccuracies. Errors could impact your loan terms and chance of getting approved.

Shop Around.

Interest rates and terms vary by lender, so shop around and compare your options. Many lenders will let you prequalify first, which gives you a sneak peek at potential interest rates, terms, and fees before you submit your final application. Comparing at least a few different offers can help you find the one that suits your needs and budget.

Apply for the Loan.

Once you’ve selected the loan you want, it’s time to apply. Once you send in your application, the lender will do a hard credit check to see how creditworthy you are. You may also be asked to provide certain documents, including:

•   Identification

•   Proof of income

•   Proof of residence

After your application and required documents are in, the waiting game begins. Some lenders may swiftly approve your application and get you the funds in a lump sum — minus any origination fees — in a few hours or days. But if you have a more complicated loan application, you could be waiting a week or more for a decision.

Recommended: Typical Personal Loan Requirements Needed for Approval

Pros of a $4,000 Personal Loan

There are several benefits to taking out a personal loan. These include:

•   Flexibility. You can use the funds for just about any purpose.

•   Lower interest rates. Personal loan interest rates are often lower than credit card rates.

•   Bad credit eligibility. You may still qualify for a $4,000 loan even with bad credit.

•   Fast approval. Certain lenders offer fast approval, with funds available to you in a matter of hours or days.

Recommended: $10,000 Personal Loan

Cons of a $4,000 Personal Loan

While personal loans have plenty of selling points, they also come with some drawbacks. Here are ones to keep in mind:

•   High fees. Personal loans can come with fees, such as origination fees ranging from 1% to 8% of the total loan amount.

•   Prepayment penalties. Some lenders charge penalties if you pay off your loan early.

•   Increased debt: A personal loan can add to your debt load, especially if you spend the funds on big-ticket items instead of consolidating high-interest debt.

•   Negative credit impact: When you apply for a personal loan, the lender will perform a hard inquiry. This can cause your credit score to drop slightly, though the dip is temporary.

Recommended: Fee or No Fee? How to Figure Out Which Loan Option Is Right for You

Can You Get a $4,000 Personal Loan With Bad Credit?

As we mentioned, even if you have poor credit or no credit history at all, you might still be able to qualify for a $4,000 loan. If your FICO Score® is lower than 580, it’s considered poor, and you’re generally seen as a high-risk borrower.

While there’s no set credit score you need for a personal loan, many lenders prefer that borrowers have a credit score above 580. You can still qualify if you have a lower score, but the terms may not be as favorable. You could be offered loans with higher interest rates and additional fees, and you may be required to put up collateral, such as a car or your home, to secure the loan.

How to Compare $4,000 Personal Loans

Personal loans are offered through online lenders, traditional banks, and credit unions. Just like you shop around for the best deal on a big purchase, it’s smart to compare lenders’ rates and terms before you apply.

Here are a few things you’ll want to consider as you review your options.

Fees and Penalties

Some $4,000 personal loans come with fees, while others don’t. Lenders also have different ways of applying these fees. For example, some lenders may include fees in the loan amount, increasing your total debt. Others deduct fees from the loan proceeds, reducing the amount you receive. Be sure to crunch the numbers because they can increase your borrowing costs.

Prequalification

When you apply for a loan, the lender often looks at your credit to help determine the rates and terms you qualify for. This requires a hard inquiry, which can temporarily lower your credit score. If you prequalify with multiple lenders, you can compare different offers without harming your credit. You might also want to use a personal loan calculator to get a better idea of what your monthly loan payments may be.

Flexibility

What if you face financial difficulties and struggle to pay back the loan? Or if you miss a payment and incur a late fee? Some lenders offer financial protection programs for borrowers, which can give you peace of mind when choosing a $4,000 personal loan.

The Takeaway

A $4,000 personal loan can be a quick way to get money for almost any need. You can get these loans from banks, credit unions, and online lenders. Requirements vary by lender, and each might offer different interest rates and terms. However, having a good credit score typically gets you a better rate.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi’s Personal Loan is cheaper, safer, and more predictable than credit cards.

FAQ

How much would monthly payments be on a $4,000 loan?

The amount you’d pay each month for a $4,000 loan depends on the interest rate and loan term. For example, if you had a three-year loan at 12.00% APR, your monthly payment would be around $133. However, with a two-year term at the same rate, the monthly payment would be closer to $188.

What is the interest rate on a $4,000 loan?

According to data from Forbes Advisor, personal loan interest rates can vary widely, though they’re typically between 7.00% and 36.00%. Rates for a three-year loan are generally between 12.00% and 15.00%. But keep in mind that the rate you qualify for depends on your credit score and loan terms.

What credit score do you need for a $4,000 loan?

In order to qualify for a $4,000 personal loan, most lenders typically prefer a credit score above 580. However, borrowers with lower scores may also qualify for a loan depending on the lender’s criteria.

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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.

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.

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 .

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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When you purchase a home, you must pay closing costs, which include the fees the lender charges to recoup loan processing costs. These can add up to a hefty sum, typically 2% to 5% of your mortgage amount.

It is possible to take out a personal loan to cover closing costs and help you across the finish line, but it can be difficult, and borrowing money at this stage in the home purchase process could jeopardize your mortgage loan approval. Some buyers will choose to tap other funding sources for closing costs. Take a closer look at the pros and cons of using a personal loan for closing costs, plus the alternatives, so you can decide what’s best for your needs.

What Are Closing Costs?

Closing costs are fees paid to a lender and other professionals involved in the home purchase transaction.

•   Buyers: Buyers typically pay between 2% and 5% of the total loan amount in closing costs. Buyers must pay this amount out of pocket, so it’s important for them to have a plan for how they’ll access the money before they get to the closing table.

•   Sellers: If sellers contribute to closing costs (say, to negotiate a home sale), those fees usually get taken out from the sale proceeds.

Here’s an example: If you plan to buy a home with a $300,000 loan, as the buyer, you’ll need to bring between $6,000 and $15,000 to the closing table. If you were the seller, you’d see that amount taken out of the costs you’d pocket from the sale.

Fees Associated with Closing Costs

Closing cost fees may include:

•   Application fee: Lenders sometimes charge a one-time fee for borrowers to submit a loan application.

•   Credit report fee: A credit report or credit check fee covers the cost to dig into your credit report, which shows your credit history. Your lender uses the information it uncovers to decide whether to approve your loan and how much they’ll lend you.

•   Origination fee: You pay this fee to the lender to process the loan application.

•   Appraisal fee: A fee paid to a professional to appraise the home and determine its fair market value.

•   Title search: A title search looks into public records to determine who actually owns the property and who has liens on the property (for example, an unpaid contractor’s lien for work done on the home).

•   Title insurance: Title insurance protects you from financial loss and legal expenses in case the home has a bad title.

•   Underwriting fee: Underwriting is the process of reviewing your finances to determine the risk of offering you a mortgage, and the fees cover this process.

•   Property survey fee: Property survey fees cover the cost of checking the boundaries and easements of a property. This process shows exactly where the property’s perimeter is and what the property includes.

•   Attorney fee: You will probably need to hire a lawyer to review the terms in your purchase contract and handle your closing.

•   Discount points: Discount points, also called mortgage points, are a way to balance your upfront costs and your monthly loan payment. Each point you purchase reduces your interest rate by a certain percentage, meaning that you could pay less monthly and over your loan term.

•   Homeowners insurance premiums: Homeowners insurance provides financial protection if your home undergoes a disaster or accident. You must typically show your lender that you have purchased homeowners insurance.

•   Mortgage insurance: If you have a down payment of less than 20%, you will often have to pay mortgage insurance, a monthly fee that helps protect your lender if you were to default. You’ll also have to make a similar type of payment on Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans. You may have to pay these insurance fees with your closing costs in addition to your monthly payments, particularly for the FHA and USDA loans.

•   Property tax: Homeowners pay property tax to state, county, and local authorities for schools, roads, and other municipal services. You may have to pay a portion of your property tax at closing.

•   Homeowners association (HOA) fees: If you’re buying into a neighborhood that has an HOA, or an organization that makes and enforces rules for a neighborhood, you may owe HOA fees at closing. The seller may pay these on a prorated basis.

•   Per-diem interest: Per-diem interest refers to the interest a lender charges for the days between a closing date and the first day of your billing period.

•   Transfer tax: State or local governments often charge real estate transfer taxes, meaning that they charge when properties transfer ownership.

•   Recording fee: State and local governments charge recording fees to legally record your deed, mortgage, and other home loan documents.

Note that this isn’t an exhaustive list of closing costs — you may be on the hook for other fees as well.

How Much Are Closing Costs Typically?

As noted above, closing costs tend to add up to 2% to 5% of your mortgage loan amount. They can vary according to your loan type, lender, and other factors. If you’re paying for a home with cash and not taking out a loan, you can still expect to have some costs associated with the closing. The total will likely be around 1% to 3% of the home purchase price.

Can You Use a Personal Loan for Closing Costs?

First, it’s important to understand how a personal loan works. It is usually funded by a bank, credit union, or online lender. You can typically use the money however you want — there aren’t as many restrictions on personal loans compared to, say, student loans. After you receive a personal loan, you pay it back with regular, fixed payments (with interest) over a specified term.

As mentioned above, you can use the cash as you see fit. So, yes, you can use a personal loan for closing costs. However, you can’t use it for a down payment, and you must tell your lender that you’re using a closing costs loan. The lender will include it in your debt-to-income (DTI) ratio, which is the amount of debt you have relative to your income.

Applying for a personal loan can involve prequalifying with several lenders and comparing their interest rate and terms, gathering required documents (ID, proof of address and income, Social Security number, and education history), filling out the loan application, and receiving your funds after approval. You may be able to get a personal loan in one to three days.

As you shop around for funds, you’ll likely want to consider what credit score you need for a personal loan at a given interest rate. Also consider the length of the loan term; this can typically range from one to seven years.

Why You Can’t Use a Personal Loan for a Down Payment

Borrowing money for a down payment is generally discouraged when purchasing a home. For one thing, it sends a signal to a potential lender that you are stretching your finances thin to make the home purchase. This is why some lenders, such as those offering conventional or FHA loans, forbid using personal loans for down payments.

How a Personal Loan Can Affect Mortgage Approval

A closing costs loan could result in a lender offering you a higher interest rate for your home mortgage loan. In some cases, financing closing costs could send a signal that you are having trouble making ends meet on the home purchase. A lender might decide not to approve your loan. This is why it’s important to discuss with a prospective lender the idea of financing your closing costs before you move forward.

Recommended: Guide to Personal Loans

Pros of Taking Out a Personal Loan for Closing Costs

Here are some potential benefits of taking out a personal loan for closing costs.

•   Collateral not required: Personal loans are often unsecured loans, meaning that you don’t have to put an asset up in order to receive the loan. Therefore, if you fail to repay the loan, your lender will not claim the asset to repay your debts.

•   Quick approval: It usually doesn’t take long to get a personal loan once you’ve been approved. After you submit your application and materials, it might take just a day to get the personal loan, though it could take longer.

•   Flexible repayment options: You can tap into flexible repayment plans, including no prepayment penalty, meaning that the lender won’t penalize you for paying off the loan early.

Recommended: How Personal Loans Impact Mortgages

Cons of Taking Out a Personal Loan for Closing Costs

Next, consider the downsides of using a personal loan to cover closing costs.

•   DTI ratio increase: Lenders will look at your overall debt under a microscope, so taking on a personal loan may factor into your overall debt. It may signal to the lender that you aren’t in a good financial position since an additional loan could raise your DTI ratio. It might keep you from being approved for a mortgage or could result in a higher mortgage interest rate.

•   Additional loan payment: You might find it tricky to repay a personal loan in addition to a mortgage payment. Consider whether you can comfortably make both payments every month.

•   High interest rates: There is the potential for high interest rates if you have poor credit. This can make it more challenging to afford a personal loan.

Recommended: Personal Loan Requirements

Alternatives to a Personal Loan for Closing Costs

You may have options you can turn to instead of getting a personal loan for closing costs. Consider how else you might handle those fees.

•   Roll them into your mortgage: You may be able to add your closing costs to your mortgage, but this means you’ll increase the principal balance of your loan. This will in turn increase the interest you’ll pay. But it will allow you to pay off your closing costs over the 10, 20, or 30 years of your home loan.

•   Ask for a waiver: Your lender may be willing to waive certain fees. For example, it may reduce certain processing fees. There’s no guarantee, but it can be worth asking. That might help chip away at your final closing cost amount.

•   Ask the seller to pay: As mentioned previously, sellers may pay for some of the closing costs if they’re eager to ensure that the property sale doesn’t fall through.

•   Tap into assistance programs: Many state and local governments offer down payment and closing cost assistance programs for moderate- to low-income home buyers. Look into your state’s housing finance agency, your city or county website, the U.S. Department of Housing and Urban Development (HUD), or check with your lender to learn more about your options.

•   Use gift money: Do you have a generous grandparent or parent who wants to help you cover your closing costs? Your state may have rules and regulations attached with gift money (especially ensuring that it’s an actual gift). Check with your lender to learn more.

•   Use savings: If you’re thinking about getting a loan for closing costs, perhaps you’ve already earmarked your savings for a down payment. If not, consider tapping savings to cover closing costs.

How to Decide if a Personal Loan for Closing Costs Is Right for You

Whether a personal loan is a suitable solution for closing costs is going to be based on your personal financial profile. If your DTI ratio is relatively low, taking out another loan on top of your mortgage may be doable. But ultimately you’ll want to confer with your lender so that seeking approval for a personal loan during the mortgage process doesn’t scuttle your entire deal.

The Takeaway

You may be able to use a personal loan to finance closing costs (the fees that can cost 2% to 5% of your home loan amount when you purchase a property). But while personal loans are a convenient source of funding, adding a personal loan to your monthly financial burden can also raise a red flag where mortgage lenders are concerned. It’s wise to carefully consider all the pros and cons, as well as alternative funding sources, when deciding whether to use a personal loan for closing costs.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

FAQ

Is it smart to finance closing costs?

Whether or not it’s smart to finance closing costs will depend on your personal situation. For those paying cash for a home and those who can handle the additional monthly loan payment, it may be a convenient move. On the other hand, getting a personal loan may increase your DTI ratio, which could lead a mortgage lender to charge you a higher interest rate or deny you a loan altogether.

Can I put closing costs on a credit card?

While you’ll usually use a cashier’s check, certified check, or wire transfer to pay for closing costs, you can put some closing costs on a credit card, such as attorney, appraisal, and survey fees. Check with your lender to learn more about which fees you can put on a credit card. (Also note that using your credit card in this way can raise your credit utilization rate and potentially lower your credit score.)

What is not an acceptable source of funds for closing?

Closing costs are typically paid by a cashier’s or certified check or by wire transfer. Funds for these could be acquired by such sources as a government program or a personal loan. Less frequently, credit cards, debit cards, and personal checks may be accepted for some closing costs.

Can you use a personal loan for closing costs on a refinance?

You might be able to use a personal loan for closing costs on a refinance, but whether it’s a good idea will depend on your overall debt load. It’s a good idea to speak with your prospective lender, who can give you a sense of whether using a personal loan in this way will compromise your refinance or increase the interest rate you’re offered.

When should you avoid using a personal loan for closing costs?

If you are already facing a debt-to-income ratio that is near the limit for a conventional mortgage (around 43% to 45%), you’ll probably want to avoid adding any new debt to your plate. Speak with your lender to learn whether a personal loan might result in an increased mortgage interest rate or might put your home loan approval at risk.

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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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
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 Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Anyone who’s ever had a credit card knows they have an interest rate, which represents the cost consumers pay for borrowing money. What you may not know is that interest rates come in two forms: fixed and variable interest rates.

Fixed interest rates stay the same over time and are generally tied to your creditworthiness. Variable interest rates, on the other hand, may change over time and are connected to economic indexes. Read on to learn how to determine if the interest rate of a credit card is fixed or variable, as well as why it’s important to know.

What Is Credit Card APR?

A credit card’s annual percentage rate, or APR, represents the yearly cost a consumer pays to borrow money from a credit card issuer, including both interest and any fees the card issuer might charge.

When a cardholder doesn’t pay off their credit card balance in full each month, they’ll owe credit card interest charges on the remaining balance. Credit card interest rates vary among credit card issuers, individual cardholders, and credit card categories. The average credit card interest rate stands at 20.97%, according to the most recent report from the Federal Reserve Bank of St. Louis.

Recommended: Pros and Cons of Charge Cards?

Types of Credit Card APRs

Your credit card payment is impacted by what type of APR your credit card has. Let’s have a look at how a fixed-rate credit card and a variable-rate credit card may affect your credit experience. (If you have other questions about credit cards, how they work, and how to manage your credit card responsibly, check out our credit card guide.)

Fixed Interest Rate

Fixed-rate credit cards have an interest rate that generally doesn’t vary over the course of your credit card contract. Rather than being tied to economic indexes, fixed interest rates are generally determined based on payment history and creditworthiness, as well as any ongoing promotions.

However, just because the term “fixed” is used, doesn’t mean a fixed interest rate can never change. While a fixed-rate credit card’s interest rate won’t change based on factors like the prime index, increasing credit card APR can occur if payments are late or missed or if your credit score dips. If that occurs, the credit card company must notify the cardholder at least 45 days before the adjusted rate takes effect.

While fixed-rate credit cards offer the benefit of predictability, one downside is that their rates are, on average, higher than variable credit card rates.

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

Variable Interest Rate

A variable-rate credit card offers interest rates that can shift over time. There’s a reason for that, as variable card rates are tied to major benchmark interest rates, like the U.S. prime rate.

Since major benchmark rates change, so will variable interest rates. That’s why banks and other major financial institutions often shift rates for things like credit cards, home mortgages, auto loans, and student loans. When major interest indexes change, the rates for loans change with them.

What does that mean for a cardholder? For starters, there’s more risk with variable interest rates. Rates can go up, and credit card payments increase when interest rates rise. Conversely, variable rates may go down, which works in favor of the credit cardholder, who will then pay less in interest.

Credit card consumers should check their credit card contracts for the specific conditions that can trigger a variable rate change. Credit card issuers don’t have to notify you of interest rate changes with variable rate cards, so it’s up to the consumer to keep a sharp eye out for changing interest rates.

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When Do Variable APRs Change?

As mentioned, the interest rate on a variable-rate credit card changes with the index interest rate, such as the prime rate. If the prime rate goes up, so will your credit card’s APR. Similarly, if the prime rate goes down, your APR will drop.

How often your interest rate changes will depend on which index rate your lender uses as a benchmark as well as the terms of your contract. As such, the number of rate changes you may experience can vary widely, often multiple times a year.

Details on how a card’s APR may fluctuate over time will appear in a cardholder’s agreement, which you can generally find on the card issuer’s website. If you’re unable to locate it, you can request a copy from your card issuer.

Differences Between Fixed and Variable Credit Card Rates

Both fixed and variable credit card rates have pros and cons. Here’s a look at the major differences with a credit card with a variable or fixed interest rate.

Fixed Interest Rate	Variable Interest Rates
The interest rate usually remains the same.	Variable rates change on an ongoing basis.
Fixed rates are often determined based on an applicant’s payment history.	Rates are based on a benchmark index, like the U.S. primate rate.
The card provider is required to let you know when the rate does change (usually for late or missed payments).	The credit card issuer is not required to let you know when rates shift.

How Credit Card Interest Rates Are Determined

Credit card interest rates are generally determined based on your creditworthiness — meaning, your payment history and credit score — as well as prevailing interest rates and the card issuer and card type.

For instance, a basic card may have a lower rate than a premium rewards card. Additionally, credit cards can have different types of APRs, such as an APR that applies for credit card charges and another rate for cash advances or balance transfers.

Another factor that can impact credit card rates is promotional offers. Sometimes, credit card issuers may offer low- or no-interest periods. After that period ends, the card’s standard APR will kick in, and the card’s rate will go up.

Once determined, how and why a credit card’s interest rate changes over time depends on whether the interest rate is fixed or variable. A fixed rate will generally stay the same, though it may increase if payments are late or missed, or if the cardholder’s credit score takes a dive. Meanwhile, variable rates fluctuate depending on current index rates.

Recommended: Tips for Using a Credit Card Responsibly

Reducing Interest Charges on Credit Cards

Perhaps the easiest way to reduce interest charges on credit cards is to pay your statement balance in full each billing cycle. By doing so, you’ll avoid incurring interest charges entirely.

Of course, this isn’t always feasible. If you may end up carrying a balance and want to decrease how much a credit card costs, there are ways to do so. For one, you can call your credit card issuer and request a lower rate. Of course, for this to be successful, you’ll likely have needed to stay on top of payments and have a history of responsible credit card usage.

Perhaps the surest way to secure a better interest rate on your credit card is to build your credit score. In general, lower interest rates are awarded to those who have higher credit scores and follow the credit card rules, so to speak.

You can build your credit score by making your payments on time, every time, and by keeping your credit utilization ratio (how much of your available credit limit you’re using) well below 30%. You might also avoid applying for new credit accounts, which results in hard inquiries and temporarily lowers your score.

And if you simply feel in over your head with credit card debt and a skyrocketing APR, you may choose between credit card refinancing or consolidation as potential solutions.

💡 Quick Tip: Credit card interest rate caps have recently been proposed in response to rising interest rates. However, one option already available to borrowers is securing a fixed, lower-interest rate loan. A SoFi credit card consolidation loan may offer a lower interest rate, set terms, and a transparent pay-off plan.

Fixed vs. Variable Interest Rate Cards: Which Is Right for You?

In a word, choosing between a fixed-rate and a variable-rate credit card comes down to whether you prefer stability or risk versus reward.

A fixed-rate credit card offers a known quantity — a rate that stays the same over time, as long as you pay your credit card bill on time. On the other hand, a variable-rate credit card offers an element of risk and reward. If the rate goes up, cardholders usually spend more on interest if they carry a balance. If card rates go down, however, the cost of using the card usually goes down, too, as interest rates are lower.

Of course, cardholders can largely negate the impact of credit card interest rates by paying their bills in full every month. Of, for those who don’t quite feel ready to tackle the responsibility, there’s always the option of becoming an authorized user on a credit card of a parent or another responsible adult.

The Takeaway

As you can see, it’s important for a number of reasons to know whether a credit card is fixed or variable. Fixed interest rates offer more predictability (though there’s no guarantee they’ll never change), but rates also tend to be higher compared to variable rates. With variable rates, your interest rate will fluctuate over time based on market indexes.

As you shop around for credit cards, interest rate is critical to pay attention to. It can have an impact on your ability to pay your credit card bill and use credit responsibly.

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

Enjoy unlimited cash back rewards with fewer restrictions.

FAQ

Do all credit cards have fixed interest rates?

No, actually most credit cards come with variable interest rates tied to major interest rate indexes. That connection to interest rate changes enables card companies to keep rates competitive on a regular basis.

How do I get notified of an interest rate increase?

By law, credit card companies must notify cardholders in writing at least 45 days ahead of a significant interest rate change taking effect. The exception? Card companies are not required to notify variable-rate cardholders whose rate is tied to a benchmark index rate. Nor must they alert you if you have an introductory interest rate that is expiring and changing to the previously agreed-upon post-expiration rate. And if you have failed to make your payments on your card, the rate may change without you being notified as well.

Can I control whether I have a fixed or variable interest rate?

Yes, you can opt for a fixed or variable-rate credit card, but know that most credit cards come with variable rates. It’s tougher to find a fixed-rate card, but banks and credit unions, which are more likely to offer both, are a good place to start your search.

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

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Your credit utilization ratio is a factor that represents how much of your available credit you have already used; the higher it goes, the closer you are to maxing out your credit limit, which can negatively impact your credit score.

Granted, there are several factors that make up your credit score, which is an important three-digit number that can impact your ability to borrow funds and at what interest rate. While the exact makeup and percentage of each factor varies depending on the company calculating the score, there are a few commonalities.

Since your credit utilization is one of the more important contributors to your credit score, it’s important to understand it. Here, you’ll learn what credit utilization is, how it impacts your credit score, and how to manage it.

What Is a Credit Utilization Ratio?

Credit utilization, history of payments, length of credit history, credit mix, and number of recent inquiries are among the factors that make up a credit score.

A simple way to calculate your credit utilization ratio is by dividing your current outstanding balance by your total credit limit. Your credit utilization ratio can be anywhere from 0% (you have a $0 balance) to 100% (your credit cards are all maxed out).

Generally, a low credit utilization ratio is viewed as a positive factor in determining your credit score. It can show that you aren’t living beyond your means and are managing debt well.

What Is Utilization Rate?

Your utilization rate is another name for your credit utilization ratio. In other words, it is determined by the amount of available credit you have and your current credit card balance. You can calculate your utilization rate by dividing your current balance by your total available credit. Lowering your utilization ratio can be a great way to maintain a good credit score.

How Utilization Rate Affects Credit Scores

Your utilization rate is one of the factors that makes up your credit score, along with other factors like your payment history, number and type of accounts, and your average age of accounts.

Having a low utilization rate is a positive factor in making up your credit score, so it can make good financial sense to keep your utilization rate down.

“The further away a person is from hitting their credit limit, the healthier their credit score will be, in most circumstances,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “A borrower’s debt-to-credit ratio, also known as their credit utilization rate, should ideally be no more than 30%. Higher utilization can negatively affect a person’s credit score.”

Why Utilization Rate Affects Credit Scores

The reason your utilization rate affects your credit score is that it is explicitly named as a factor by the companies that calculate credit score. Having a higher credit utilization can decrease your credit score.

It makes a bit of sense, after all: If your total balance is approaching the available limit on your credit card, you may not have the financial cushion to weather an emergency. Having a balance too close to your credit limit might also indicate that you are struggling with cost of living or impulsive buying. That can give lenders pause if you are applying for additional credit.

How Can You Calculate Your Credit Utilization Ratio?

It’s fairly simple to calculate your credit utilization ratio, as long as you know the outstanding balance and your total credit limit for all your credit cards. Then it’s just a matter of basic math. Here’s how to find your number:

•   Add up your total balances across all of your cards.

•   Divide it by your total credit limit.

•   Multiply the result by 100 to get your credit utilization ratio percentage.

Examples of Credit Utilization

Here are two examples of calculating your credit utilization ratio:

•   You have one credit card with a $10,000 credit limit, and you have a current balance of $2,000. Your credit utilization ratio is 20% ($2,000 divided by $10,000 times 100).

•   You have two credit cards, both with a $7,500 credit limit. You have a balance of $1,000 on one of your cards and a balance of $4,000 on the other card. Your credit utilization rate is 33.3% (a total balance of $5,000 divided by a total limit of $15,000 times 100).

How Can You Lower Your Credit Utilization Ratio?

There are a few ways that you can lower your credit card utilization. Consider these ideas:

Keep Credit Card Balances as Low as Possible

One of the best ways to lower your credit utilization ratio is to keep your card balances as low as possible. One way to do that is by following the 15/3 credit card payment strategy. This strategy has you make an additional credit card payment each month to minimize your average balance.

Pay Off Your Balances

In a similar vein, one way to keep your credit utilization ratio low is to avoid carrying a balance on your credit cards. If you can start the habit of paying off your credit cards in full, each and every month, doing so will help keep your utilization ratio low.

Request a Credit Limit Increase

In addition to keeping your total credit card balance low, you can also lower your credit utilization ratio by increasing your total credit limit. Many credit card issuers will increase your credit limit after you have shown a positive usage history or if your underlying financials have changed.

If you have recently gotten a salary increase or paid down other debt, consider asking your issuer to increase your credit limit. This is not to say you should spend up to that limit, however (which could cause a decrease in your credit score). Rather, the goal is to make any balance you are working on paying down yield a lower credit utilization vs. the newly higher limit.

Apply for a New Credit Card

Because your utilization rate is calculated based on your total available credit, another way to positively impact your ratio is by applying for a new credit card. If you are approved, the credit limit on your new card will then be factored into the calculation. If nothing else changes, that will lower your utilization ratio. If you struggle to manage payments on the account(s) you already have or tend to run up balances on any new line of credit you have, this probably isn’t the strategy for you. Learn more about credit cards and how to use them wisely by exploring this credit card guide.

Maintaining your total credit limit is also why it may not make sense to cancel unused credit cards. After all, a credit line, even on an unused card, contributes to your overall available credit. Bear in mind, too, that opening a new account could negatively impact your credit score as it could lower the overall age of your accounts on record, which is also part of the credit score calculation.

The Takeaway

Your credit utilization ratio is defined as your total outstanding credit card balance divided by your total credit limit. This utilization ratio is one of the key factors that contributes to your credit score. Generally, a higher credit utilization ratio leads to a lower credit score, and vice versa. If you are trying to cultivate a strong credit score, lowering your utilization ratio can be one way to make that happen.

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

Enjoy unlimited cash back rewards with fewer restrictions.

FAQ

Does high credit utilization lower credit score?

Yes, your utilization ratio is one factor that makes up your credit score, and a high credit utilization can lower your credit score. If you’re looking to build your credit score, one thing you can do is lower your utilization ratio by paying down your balance on existing credit cards or by increasing your total credit limit.

Why did my credit score drop when my credit utilization decreased?

While credit utilization is a major factor that makes up your credit score, it is not the only factor. Even if your credit utilization decreases, that may be offset by changes in some of the other factors that make up your credit score (such as late payments), causing an overall decrease.

How does high credit utilization affect credit score?

Your credit utilization percentage is among the biggest factors that make up your credit score. A high credit utilization can be a negative factor that drags your credit score down. One way to build your credit score is to lower your utilization ratio, either by increasing your credit limit or paying down your existing balances.

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Photo credit: iStock/Xsandra

SoFi Credit Cards are issued by SoFi Bank, N.A. 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.

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 Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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