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It may come as a surprise, but sometimes your credit score drops after you pay off a loan or credit card debt. This happens because paying off debt can impact several factors that make up your credit score. For example, it might change your credit mix, shorten your credit history, or impact your credit utilization ratio.

If you’re wondering why your credit score dropped 40 points after paying off debt, here are some potential reasons to consider. 

Why Would My Credit Score Drop 40 Points After Paying Off Debt?

Paying off your debt is a big win and usually boosts your credit score. But sometimes, you might see a dip. To understand why, it’s important to know how your score is calculated.

Information from the three major credit bureaus — Equifax, TransUnion, and Experian — comes together to create your credit score. The bureaus gather details about your loans, credit cards, and other debts. Your credit score is calculated using a formula that measures how reliable you are at making payments. Lenders use this score to decide if they should give you credit.

Recommended: How Long Does It Take to Build Credit?

Credit Score Factors

Although there are many ways to calculate your creditworthiness, here are some common factors that may affect your credit score after you pay off your debt. 

Payment History

Payment history makes up 35% of your FICO credit score and is the most important factor. So while late or missing credit card payments might not seem significant at the time, they could bring down your overall score. 

If you need help keeping track of bills, consider a tool like a money tracker app. It allows you to spot upcoming bills, create budgets, and monitor your credit score.

Credit Utilization

Your credit card utilization ratio — or the amount of available credit you’re using — makes up 30% of your credit score, so it’s worth monitoring. 

Here’s how it works: If you have $10,000 in available credit and a $5,000 credit card balance, your credit utilization ratio is 50%. Usually, credit bureaus and lenders want to see a utilization ratio under 30%.

When you pay off your debt and close the account, your total available credit decreases and your credit utilization ratio increases. This, in turn, can cause your credit score to dip. 

Length of Your Credit History

Your credit reports show how long your credit accounts have been open. Having a longer credit history can improve your credit score, albeit not to the extent other factors can. (It makes up 15% of your credit score.) On the flip side, if you close an old account, you shorten your credit history — which can potentially lower your score.

Credit Mix

The variety of your credit accounts — like personal loans, credit cards, and mortgages — is 10% of your credit score. And managing different kinds of credit can help improve it. Paying off a specific type of credit, such as a car loan or mortgage, can have the opposite effect, as it reduces the diversity of your credit mix. 

New Credit Applications

When you apply for a new line of credit, lenders check your credit report to determine the risk of lending you money. This check, known as a hard inquiry or “hard pull,” can drop your credit score by a few points for a short time, though it stays on your report for two years. 

But keep in mind, when calculating your score, FICO, the scoring model most lenders use, only looks at credit pulls from the past 12 months. And new credit only makes up 10% of your credit score.

Recommended: What Is a FICO Score?

How to Pay Off Debt and Help Your Credit Score

Paying off debt may lead to a temporary dip in your credit score, but its benefits far outweigh any drawbacks. In fact, there are steps you can take build your credit as you whittle down your debt load:

•   Make on-time payments: Always make payments on time, whether it’s your credit card balance or mortgage. Punctual payments positively impact your score the most.

•   Prioritize high-interest debt: Pay off credit cards with the highest interest rates first to reduce debt risk.

•   Pay off cards with a low credit limit: This can help keep your debt-to-credit ratio in check.

•   Keep credit utilization low: Aim to use less than 10% — and no more than 30% — of your available credit.

•   Clear small balances on multiple cards: Having zero balances on more cards is better for your score.

•   Pay off past-due bills: Prioritize the most recent ones. This shows new lenders that you’ve settled your debts.

How Long Does It Take for Your Credit Score to Improve After Paying Off Debt?

Luckily, a drop in your credit score is generally brief. After you pay off your debt, your score should bounce back within a month or two because credit bureaus typically update your credit information every 30 to 45 days.

You can check your credit score without paying. If it doesn’t improve right away, don’t worry. The paid-off debt will stay on your credit report for up to 10 years. If you made payments on time, this positive history can help boost your credit score in the long run. 

Ways to Increase Your Credit Score After Paying Off a Loan

Once your debt is settled, you may want to turn your focus to boosting your credit score. Some steps you may have taken as you paid down the debt will serve you well at this point, such as making on-time payments and keeping credit utilization low. But there are other strategies that can help:

•   Build a long credit history: Keep older accounts open so you can build a long history of responsible credit use. The longer your history of on-time payments, the better your score may be. 

•   Apply for credit sparingly: Only apply for new lines of credit when needed. Too many applications in a short period can negatively impact your score.

•   Review your credit reports: Regularly review your credit reports for any errors or inaccuracies. If you spot anything out of the normal, make sure to dispute any mistakes. This way, you can ensure your score reflects accurate information.

How to Get Credit Score Monitoring

Using a credit monitoring service can help you keep tabs on your credit score. These services notify you when there are changes to your credit reports, which can help you catch any suspicious activity. While comprehensive monitoring services are available, there are ways to monitor it yourself:

•   Ask for a free copy of your credit report: You’re entitled to a free credit report every year from each of the three credit bureaus. Visit AnnualCreditReport.com to get started. 

•   Check for complimentary credit monitoring: Some accounts offer free credit score monitoring. Call your bank or credit card company to see if you qualify.

•   Freeze your credit reports: If you suspect a data breach or theft of your Social Security number, consider freezing your credit report. This restricts access to your credit information, stopping thieves from opening new accounts in your name. Note that freezing or unfreezing your credit is free and doesn’t affect your credit score.

•   Set up fraud alerts: You can place a fraud alert on your credit report if you think you’re a fraud or identity theft victim. Creditors will verify your identity by calling you when a credit application is made. It’s free to request and lasts for one year without affecting your credit score.

The Takeaway

There are many reasons why your credit score dropped 40 points after paying off debt. You may see a temporary dip in your credit score due to changes in your credit mix, history length, and utilization ratio. 

To help boost your score, make on-time payments, use less credit, maintain old accounts, apply for new credit sparingly, and regularly check for errors in your credit reports. These habits can help you maintain a strong credit score. And if you need help managing your finances as you pay off debt, consider enlisting the help of a spending app.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

How long does it take for a credit score to update after paying off debt?

You can expect your credit score to update within a month or two as long as you continue practicing good credit habits like making on-time payments. Credit bureaus usually refresh your information every 30 to 45 days.

Why is my credit score going down even though I pay on time?

Paying on time is just one part of your credit score. Other factors, like how much credit you’re using or the length of your credit history, can also cause your score to drop, even if you don’t miss any payments.

How to increase credit score after paying off debt?

To keep your credit score strong after paying off debt, follow a few key tips. For example, always make your payments on time, avoid using too much of your available credit, and apply for new credit only when you really need it. Also, review your credit score regularly so you can spot discrepancies.

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Photo credit: iStock/Erdark

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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

Third-Party Brand Mentions: No brands, 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.

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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A minor drop in your credit score — like the less-than-five-point drop you’ll temporarily encounter after a hard inquiry when applying for credit — is nothing to sweat in the long term. But a 40-point drop is more worrisome.

Are you asking yourself, “Why did my credit score drop 40 points after paying off debt,” following a credit dispute or for no reason at all? We’ll break down what might be happening to your score below.

Why Did Your Credit Score Drop 40 Points?

Your credit score is a number based on several factors that appear on your credit reports from various credit bureaus. And in fact, you have more than one credit score, though the most common one people refer to is your FICO Score. Because it’s complex — and there’s more than one — there are many reasons your credit score may have dropped 40 points.

Reasons Your Credit Score Went Down

There are several reasons your credit score could have gone down. Here are the main culprits:

•   You made a late payment (or several late payments), which were reported to the credit bureaus. A spending app can help you track upcoming bills so you don’t miss a due date.

•   You paid off a loan or credit card, which decreased your average age of credit and your credit mix and also affected your credit utilization.

•   You applied for a new loan, which resulted in a hard inquiry.

•   You’ve increased your credit utilization, perhaps by maxing out your credit cards.

Often, a sudden 40-point decrease in your credit score is the result of two or more of these actions happening all at once or close together. A hard inquiry, for instance, results in only a five-point decrease in your credit score. But if that hard inquiry was for a credit card that you immediately maxed out and then missed a payment on, you’re much more likely to see a larger decrease in your credit score.

There’s one other important reason your credit score may have dropped 40 points: You could be the victim of identity theft, meaning someone is using your personal information to open new lines of credit in your name and then maxing them out to purchase things for them.

Recommended: How Do I Check My Credit Score Without Paying?

Should You Be Worried About Your Credit Score Dropping?

A minimal drop in your credit score is no cause for concern, but a larger drop, such as 40 points, should be alarming.

If your credit score dropped because of your own actions — overspending on credit cards, missing payments, etc. — do your best to get your financial habits back on track. Tools like a money tracker can help you monitor your spending and credit score. 

However, if your credit score dropped by 40 points for no reason, you could be the victim of identity theft. Check your credit reports for signs of suspicious activity. If you notice any, you need to freeze your credit reports and begin the remediation process. Here’s how to report identity theft.

What Can You Do If Your Credit Score Dropped by 40 Points?

If your credit score has dropped by 40 points, here are some things you can do:

•   Make on-time payments. Ensure all your bills are paid on time and in full, every month.

•   Reduce your credit utilization. Stop swiping your credit card unless you can immediately pay it off. Pay off as much of your card as you can, but resist the temptation to spend more with it. Lowering your credit utilization is crucial to repairing your credit score.

•   Keep old accounts open. Average age of credit is one of the major factors that affect your credit score. Keeping an old account open, even if you don’t use it, will help keep your score from falling further.

•   Review your credit report for errors. Simple reporting errors could be hurting your score. It’s a good idea to familiarize yourself with common credit report errors and how to dispute them.

•   Report identity theft. If someone has opened a credit card in your name, follow the proper steps to report the identity theft to the lender, the credit bureaus, and the authorities.

Recommended: Why Did My Credit Score Drop After a Dispute?

How to Build Credit

While establishing and improving credit takes time, there are several steps you can take now to help repair your score after a 40-point drop. Here are some basic actions you can take:

•   Make on-time payments. Turn on autopay for all your bills, and make sure there’s always enough money in your checking account to cover the costs.

•   Stop spending on credit. Having a credit card with a high credit limit makes it easy to spend more than you should. But you should only use a credit card if you have the money to pay it off immediately (or for emergencies).

•   Keep old cards open. Don’t forget — old cards that you don’t use help keep your credit utilization down and help keep your average age of credit higher.

•   Monitor your credit. Regularly monitor your credit report and dispute any errors.

•   Don’t apply for credit often. Apply for credit only if you absolutely need it, like to buy a car or a house.

What Factors Impact Credit Scores?

Several factors impact your two main credit scores (FICO Score and VantageScore). The two scoring companies use different algorithms to calculate your score; we’ll focus on FICO because it’s more common.

Here are the five major factors that affect your credit score — and how much weight each one has on your score:

•   Payment history: This accounts for 35% of your score. Lenders want to see that you make on-time payments for all your debts. Mortgage and rent payments, utility bills, and other loan repayments (such as credit cards or personal loans) will show up on your credit report.

•   Amounts owed: This is your credit utilization, and it accounts for 30% of your score. Creditors love to see that you have a high credit limit available to you, but that you use very little of it. This shows you’re a responsible borrower.

•   Length of credit history: This accounts for 15% and is why keeping old cards and accounts open is important. It demonstrates to lenders that you’ve been borrowing responsibly for a long time.

•   Credit mix: This makes up 10% of your FICO Score. Lenders like seeing that you can manage a healthy mix of credit accounts (credit cards, installment loans, home loans, etc.).

•   New credit: If you open too much new credit all at once, that sends a sign to creditors that you may be a high risk. This makes up 10% of your score.

Allow Some Time Before Checking Your Score

After a major drop, it’s tempting to want to monitor your credit score every day for signs of an upswing. But be patient — it can take time before you see an improvement. 

While credit score updates happen fairly often, they don’t happen on a set date. That’s because a lender or creditor can send information to the main credit bureaus at different times, which will impact when a score changes. That said, you can plan on an update occurring at least every 45 days.

Closing a Credit Card Account Can Hurt Your Score

Considering closing a credit card account? You may want to think twice, as doing so could negatively impact your credit score. 

When you close a credit card, the amount of your available credit decreases. This, in turn, may lead to a higher credit utilization, which as we mentioned above counts for 30% of your score. Closing a card also decreases the length of your credit history, which makes up 15% of your score.

However, there might be times when closing a credit card makes the most sense for you, such as a separation or divorce or a card with a high annual fee. The good news is, there are ways to cancel a credit card without affecting your credit score. 

How to Monitor Your Credit Score

You can monitor your credit score in a number of ways. Your bank or credit card issuer may offer credit score insights in your mobile banking app, and you can check your FICO Score for free with Experian. Several money management apps offer free credit score monitoring, including access to your FICO Score or VantageScore.

Pros and Cons of Credit Monitoring

Credit monitoring services offer several advantages, but there may be drawbacks to consider.

The Takeaway

A sudden, unexpected drop in your credit score can be scary. This is especially true if you’re trying to build credit and have been responsibly paying your bills on time and keeping your credit utilization in check. It’s wise to use credit monitoring services so you’re always updated when something changes on your credit report, as it can help you spot errors or even stop identity theft before it gets out of hand.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

Why is my credit score going down if I pay everything on time?

Even if you make on-time payments, your credit score can drop if you open too many new accounts at once or use up all your available credit every month. A major drop in your credit score could also indicate errors on your credit report or, even worse, identity theft.

Why has my credit score gone down when nothing has changed?

If nothing has truly changed in your finances, your credit score would likely only drop because of an error on your credit report or identity theft. It’s always important to monitor your credit to stay aware of these things. If it’s not a case of error or identity theft, consider your recent credit actions: Did you max out a card or close an old account? These can lead to drops in your credit score.

Why did my credit score drop 40 points when nothing changed?

If your credit score dropped 40 points and nothing changed on your end, check your credit reports with all three major credit bureaus immediately. It’s possible there is an error or that you are the victim of identity theft, meaning someone is using your name to open new credit accounts.

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Photo credit: iStock/Miljan Živković

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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

Third-Party Brand Mentions: No brands, 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.

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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A passbook loan is a loan that allows you to borrow against the money you have in your savings account. In other words, your savings serve as collateral for the loan.

While you will likely have to pay interest when borrowing money in this way (which you wouldn’t have to do if you used your savings directly), a passbook loan can help you build credit if your financial institution reports the activity to the credit bureaus and you manage the loan well. Passbook loans may also be a valuable financial tool if you’re having trouble securing a personal loan or find their interest rates to be higher than you can afford.

Keep reading for all the details about how passbook loans work, plus their pros and cons.

Understanding Passbook Loans

Here, learn more about the definition and history of passbook loans as well as how they usually work.

Definition and Historical Background

Passbook loans (often called share-secured or savings-secured loans) are a way to borrow funds, typically at a lower interest rate, by using your savings as collateral.

Passbooks are physical books that record a bank account holder’s transactions. These passport-sized books originated in the 18th century; bank tellers and postmasters could record account transactions in them. For example, a bank teller could write the date of a transaction, the amount deposited or withdrawn, and the amount of money available to the customer. In the late 20th century, bank statements began to make their appearance and replaced passbooks to a large degree. (For those who want them, however, passbook accounts are still available from some financial institutions and can provide a customer with a classic booklet to track transactions.)

A passbook loan borrows from the name of these old-fashioned books. With passbook loans, you use your savings account, held at the same institution, as collateral for a loan, and you may pay a relatively low interest rate. Putting the money in your account up for collateral, however, means your lender can seize that cash if you default on your loan payments.

How Passbook Loans Work

Here’s how a passbook loan works:

•   First, you’ll have to find a bank or lending institution that offers passbook loans. Most banks don’t offer them, so you might consider checking at a credit union.

•   Once you find a potential lender and establish a savings account or a certificate of deposit (CD) there, the financial institution will usually let you borrow up to 90% to 100% of the money in your savings account. For example, if you have $20,000 in your savings account, you may be able to borrow $18,000 to $20,000. Check with the lender to learn the exact amount.

•   Once you receive the loan from your financial institution, it’s important to note that you can’t access your savings. The financial institution might put a hold on your account, or you might have to hand over your savings passbook until the loan is repaid.

•   As you repay your loan with interest, your lender will usually release the amount you repay from your withheld savings.

•   Your payments may be reported to the national credit bureaus, but check with your lender to be sure. Timely payments can help build your credit score, while making late payments on your passbook loan can damage your score.

Obtaining a Passbook Loan

Next, take a closer look at the usual eligibility and requirements, interest rates, and repayment terms for passbook loans.

Eligibility and Requirements

You’ll need a funded savings account or certificate of deposit to be eligible for a passbook loan, and it’ll typically have to be held at the institution you plan to borrow from. These types of loans are usually easier to get and less risky to the lender because they use collateral to back them (unlike unsecured loans, which don’t require collateral).

Interest Rates and Repayment Terms

It’s important to understand passbook loan interest rates (the amount you repay in addition to the principal), particularly because you’re basically paying interest on your own money.

These loans can offer some of the lowest interest rates of any type of loan, likely because, since they are secured, they pose less risk to your financial institution. For instance, BankFive charges passbook loan rates of 3.00% to 3.50% APR (annual percentage rate) over the interest rate of the savings account used as collateral.

You repay the loan in regular, monthly installments over a specified period, such as three years.

Application Process

You’ll have to fill out an application for a passbook loan. Each bank or credit union has its own application. Simply request the application from your financial institution. Depending on the lender’s requirements, you may be able to complete the application online, in person, over the phone, or via mail.

You may find the paperwork simpler and shorter than what is required for other kinds of loans. That can reflect the fact that you are already a customer of the financial institution and that you are borrowing against your own money.

Advantages and Disadvantages of Passbook Loans

It’s important to consider the pros and cons of passbook loans before you pursue one.

Benefits of Passbook Loans

First, the upsides of passbook loans:

•   Lower interest rates: Passbook loans typically carry a lower interest rate than other types of loans, which means the amount you pay back (principal plus interest) could total less than what you’d pay for other types of loans.

•   Credit building: Passbook loans may help you build credit, provided your lender reports the loan activity to the credit bureaus and you make your payments on time.

•   Few approval requirements: You usually don’t have to meet as many approval requirements to get a passbook loan as you would with other types of loans. That’s because your savings account, typically at the same financial institution, serves as collateral.

Potential Drawbacks and Risks

Now, the downsides of passbook loans:

•   Credit may not improve: Though unlikely, your lender may not report your passbook loan payments to the credit bureaus. In that case, a passbook loan might not help you build your credit, even if you are meticulous about paying it back on time. It’s wise to check this point in advance. (Also, you must manage the debt responsibly to build credit if the lender does report your activity.)

•   Uses your account as collateral: If you fail to make your payments on your passbook loan, your financial institution can take the money from your savings account.

•   Cannot access your money while you borrow: You cannot access your savings account when you borrow money using a passbook loan. This can put you in a tricky situation if you need money immediately.

•   Paying the bank for your own funds: At a basic level, a passbook loan means you’re paying the bank to borrow your own money.

•   Restricted amount: In a best-case scenario, you can only borrow the amount you have in the bank. So if you have $3,000 in your savings account but are hoping to borrow $10,000 via a passbook loan to buy a car, you won’t be able to do so.

Alternatives to Consider

Passbook loans may not be the right fit for your situation, so you might consider these options instead.

•   Personal loans: Personal loans, which generally range between $1,000 to $50,000, are unsecured loans that come from a wide variety of financial institutions, including banks and credit unions. You can use them for any purpose, including home improvements, debt consolidation, and more. Personal loans may cost you more in interest compared to passbook loans, and repayment terms usually range from two to seven years.

However, you typically don’t need collateral for a personal loan, unless it’s a secured personal loan.

Use a personal loan calculator to learn more about how much a personal loan might cost you.

•   Credit-builder loans: If you have little to no credit, a credit-builder loan may help you improve your credit score. These loans, which usually range between $300 and $1,000, involve depositing money into a certificate of deposit (CD) or savings account, which the lender holds as collateral. You don’t receive a lump-sum disbursement upfront, as you do with many loans. Instead, you make fixed monthly payments toward the loan (principal plus interest). Your lender may release some of the borrowed funds when you make a monthly payment, or they might hold the full amount till you make the final payment. Interest and fees are usually deducted from the amount you receive. This activity is reported to credit bureaus and contribute to an uptick in your score.

•   Secured credit cards: You may want to consider a secured credit credit card instead of a passbook loan. A secured credit card is a credit card that requires a security deposit, which becomes your line of credit. If you don’t make your payments on time or default on your loan, your lender can take your deposit. However, using the credit card responsibly can help you build credit because your lender typically reports your payments to the three major credit-reporting agencies — Experian®, Equifax®, and TransUnion®.

Recommended: What Is the Average Interest Rate on a Personal Loan?

Using Passbook Loans for Different Purposes

There are many uses for funds borrowed via a passbook loan, such as:

•   Purchases, such as a new laptop

•   Expenses, like homeowners insurance or summer camp for the kids

•   Debt consolidation, such as paying off your credit card bill

•   Buying a car

•   Home improvement projects

•   Wedding costs

•   Medical or educational expenses

•   Vacations

Ultimately, you can use a passbook loan for whatever you want.

Future of Passbook Loans

Will passbook loans be part of the future financial landscape? Given all the other financial products currently available (such as the personal loans described above), consumers may not want to pay interest to borrow against their own savings.

Decline in Popularity

Passbook loans are not very common, having seen their popularity ebb over the years. Their usefulness is often limited to those who want to build their credit in this particular way or are seeking an especially low interest rate. If you find yourself in that situation, you may want to check with various lenders, especially credit unions, to see what’s available.

On the other hand, market data indicates that personal loans are gaining popularity.

The Takeaway

Passbook loans are a way of borrowing money against your savings, which can be useful for some people looking to build their credit. Ultimately, however, you end up paying a financial institution to borrow your own money with a passbook loan.

If you’re looking to access funds for debt consolidation, home improvement projects, a wedding, or other needs, you might want to consider a personal loan instead.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Are passbook loans still available today?

Yes, passbook loans are still available today. Not every lender offers them, so search online for options. You may find that credit unions are more likely to fund these loans.

Can I get a passbook loan without a savings account?

Typically, you need a savings account or a certificate of deposit (CD) account for a passbook loan, typically with the institution you intend to borrow from.

What happens if I default on a passbook loan?

If you default on a passbook loan, your lender could seize your savings (the loan’s collateral) to repay the delinquent balance. Defaulting on your loan can also hurt your credit score.

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Photo credit: iStock/Jinda Noipho

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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 .

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.

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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Credit card companies don’t alway make it easy, but there are ways to pay your credit card bill with your debit card. To use your debit card to pay a credit card bill, you must do so via bank transfer payment. In other words, you have to use either a credit card provider’s payment portal or a third-party payment portal that includes not only your debit card information, but also your banking information.

Keep in mind, however, that credit card companies usually prefer to receive payment funds from the customer’s bank account over a physical debit card. Many credit card providers simply don’t accept monthly bill payments with physical debit cards, but they will allow debit card payments if you play by their rules. That may change the way you use a debit card to pay a credit card bill, but it doesn’t mean you can’t do it.

Can You Pay a Credit Card With a Debit Card?

You might be able to pay a credit card with a debit card. Whether you can do so really depends on the credit card provider’s policy on debit card payments — some credit card policies allow for them, and others don’t.

Consequently, you may have to go out of your way to get the job done. When you go to pay your credit card bill, there likely won’t be an option to enter a card number as a method of payment, whether that card is a credit card or a debit card. In most cases, however, you can pay your credit card bill with the bank account that the debit card is attached to by making an electronic transfer.

Recommended: Tips for Using a Credit Card Responsibly

How to Make a Credit Card Bill Payment (Indirectly) With a Debit Card

Even if you can’t use a debit card to directly pay a credit card bill, you can indirectly use a debit card — or rather the funds attached to that debit card — to pay your outstanding credit card debt. Here’s how:

1.    Review your checking account, and get the bank routing number and checking account number. Do so privately and securely, so as not to attract financial fraudsters.

2.    Go to your credit card account to set up automatic payment. A handy feature of how credit cards work, this will allow money to be withdrawn from your bank account ahead of the monthly payment due date. On that date, the credit card company will withdraw the specified cash amount from your bank account.

3.    Make sure you have enough cash in your bank account to cover the withdrawal. If you don’t, your credit card company will reject the payment. It’s up to you to reach out and make good on your monthly credit card payment that’s due. Any delay in doing so could result in a missed or late payment, which could have financial consequences.

Recommended: When Are Credit Card Payments Due?

Paying a Credit Card Bill With a Debit Card Online

If you’re using a debit card to pay a credit card bill online, you’ll probably need to make that payment through the credit card’s payment portal. The good news is that credit card companies may accommodate online debit card payments.

Once you’ve signed into your credit card account, you’ll be given several options to pay your bill. The most common methods include ACH bank payment, a third-party payment platform, over the phone, or with your debit card.

Simply click on the debit card payment option and fill in your card details (this should only be a one-time occurrence as your debit card information should be securely held by your credit card provider in its payment portal.)

Once your debit card information is accurately entered, review the payment and hit “send.” Your payment should be confirmed immediately by the card carrier, and the money will leave your debit card account within 24 hours or so.

Paying a Credit Card Bill With a Debit Card Offline

Credit card companies likely allow you to use your debit card to make a credit card payment by phone, in person, and sometimes through the sponsoring bank’s ATM.

Make sure you have your debit card on you before paying at any bank or over the phone. If even one digit is wrong, the payment won’t go through, and you’ll have to revert to another form of payment to cover your credit card debt.

Are There Any Downsides to Paying Your Credit Card Bill With a Debit Card?

The fact is, while credit card companies will accept debit card bill payments, it’s not their preferred form of payment. It’s easier for credit card carriers to process bank ACH payments or third-party payments through platforms like PayPal, which handle the process for the card company. As such, you’ll have to jump through hoops or go an indirect route, similar to if you were to try to pay a credit card statement with another credit card.

Further, debit card payments may be prone to various outcomes that credit card companies don’t like. This includes scenarios such as the cardholder not having enough money in their account to cover the credit card payment or the fact that debit cards are common targets of financial fraudsters. In fact, a key difference between a credit card and debit card is their levels of payment protection.

The Takeaway

Just because you can use a debit card, even in limited fashion, to pay your credit card bill doesn’t mean you should. To keep payments flowing smoothly and to protect your debit card (and your bank account), it’s likely a better move to pay your credit card bills via bank ACH transactions or through secure third-party payment processors. That way, your payment still originates from your bank checking account — only without the potential payment and security headaches that may come with using a debit card to pay a credit card bill.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Can I pay a credit card online with a debit card?

Technically, yes, you can pay your credit card bill with your debit card. However, it may take some extra steps to do so.

Can I pay my credit card at an ATM with a debit card?

Yes, you can typically use a debit card at an ATM to pay a credit card bill — but only an ATM from the bank that offers the credit card.

Are there extra charges for paying a credit card with a debit card?

You generally won’t face any extra charges for paying a credit card with a debit card. You may simply have to jump through some extra hoops to do so.

Can I pay my credit card bill with someone else’s debit card?

While this is technically doable, it’s not advisable. Using another party’s debit card to pay a credit card bill can get complicated, especially if you’re not certain the other person’s bank account has sufficient funds to cover your balance.

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Photo credit: iStock/insta_photos

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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

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A price protection credit card benefit offers a limited lowest price guarantee on your purchases. If an item you purchased is advertised at a lower price than you paid, then you might be eligible for a refund of the difference if you paid using a credit card with price protection.

Although the idea seems straightforward, price protection credit card clauses aren’t as simple due to differences between card programs. Here’s a closer look at what price protection is and how it works.

What Is Credit Card Price Protection?

Credit card price protection is a card benefit that some programs offer their cardholders. It guarantees that if an eligible item you purchased using your credit card is advertised at a lower price, the card issuer will refund you the price difference.

To receive the funds, you’ll have to file a claim asking to be refunded — it won’t automatically get deducted from your credit card balance. It’s also up to the cardholder to be on the lookout for price fluctuations.

Recommended: When Are Credit Card Payments Due?

How to Use Price Protection

Credit cards with price protection are most advantageous when used toward a purchase that commonly changes in price. For example, this could include electronics, clothing, and other items that often go on sale.

There are also a few things to keep in mind when it comes to how credit cards work with price protection. For starters, to use price protection, the lower-priced item must be the exact specifications of your original purchase. This includes the product manufacturer, model number, and year it was released.

You’ll also need to ensure that the reduced price was advertised within the program’s specified timeframe, which is usually anywhere from 30 to 90 days and occasionally longer. Plus, you’ll need to file a refund request within the allotted claim window.

Questions to Ask Issuers That Offer Credit Card Price Protection

If you’re specifically looking for a credit card with price protection, make sure you know all of the terms associated with this benefit. Contact the card issuer upfront to get clarity about the eligibility requirements for filing a price protection claim.

What Items Are Eligible for Price Protection?

The range of items that are eligible for price protection under your card’s benefit program can be quite broad. For example, home goods, furniture, clothing, footwear, kitchenware, bedroom linen sets, pet accessories, and more might qualify under your price protection credit card.

What Items Are Not Eligible for Price Protection?

Below are some examples of goods that might be excluded from price protection, depending on your benefits program:

•   Animals

•   Antiques

•   Bespoke or one-of-a-kind items

•   Cash-only purchases

•   Collector items

•   Food and beverages

•   Discontinued items

•   Jewelry

•   Limited edition items

•   Live plants

•   Original artwork

•   Perishable goods

•   Tickets

•   Services and related costs

•   Vehicles

•   Watches

Further, items purchased at liquidation sales, storewide sales, or online might not be eligible for price protection. Also note that price protection isn’t the route you take if you’re simply unsatisfied with the service or product you received. In that scenario, you’d request a credit card chargeback.

Recommended: What Is a Charge Card?

Guide to Filing for a Credit Card Refund

If the advertisement you’ve found shows a lower price than what you paid for your original purchase, and your situation fits your credit card price protection requirements, you can submit a claim for reimbursement. To do so, you’ll generally need to go through the following steps:

1.    Save the lower-priced advertisement. Retain the original physical ad that shows the product’s name, merchant or retailer, price, and date, if applicable.

2.    Find your original receipt. The purchase receipt for the item you bought should include the merchant’s name, date of purchase, item, and price. It should also show that you used the credit card with price protection. You might also be asked to supply a copy of your statement that has the original purchase on it.

3.    Submit a claim. Contact your card’s Benefits Administrator, or call the number at the back of your card to file a claim for a price protection refund. Make sure that your claim is submitted within the eligible claim period.

4.    Review your balance. Check your credit card balance or statement to confirm that the refunded amount is correctly reflected on your account.

How long a credit card refund takes depends on your card issuer and its processing timeline. Generally, it can take five to 14 business days to see a refund posted to your account’s balance.

How Long Do You Have to File for a Credit Card Refund?

The timeline you have to claim a credit card refund under price protection varies between credit card programs. Some cards allow you to file claims up to 90 days after your purchase date, while others may give you longer.

Additionally, some benefits programs require that the advertisement date is within a certain number of days of your original date of purchase. Make sure to confirm the ad date requirement under the credit card price protection benefit, as well as the deadline to file a formal claim.

Is There a Limit to Reimbursement Through Price Protection?

Another restriction you might encounter for cards with price protection is the minimum and maximum refund limit per item. For example, your card might impose a minimum refund threshold of $10 up to a maximum refund of $250 per item. It also might have an annual reimbursement limit, which caps the total refund amount you can receive in a year.

If you want to file a refund claim under your price protection benefits, check your credit card’s benefits guide to learn about its specific requirements.

Recommended: What Is the Average Credit Card Limit?

Tips for Saving Money Without Credit Card Price Protection

Using a credit card with price protection isn’t the only way to save money when prices are reduced. Here are some other possibilities for saving:

•   Look for same-retailer price adjustments: Some retailers offer a price adjustment if you recently purchased an item in their store, and the same item is marked down at the same store not too long afterward.

•   Find price matches. To outprice their competitors, a retailer might offer a price match or lowest price guarantee. If you find the exact item elsewhere at a lower price, it will offer to match the price or offer a credit card refund for the difference if you’ve already purchased the item at their store.

•   Catch items on sale. Track upcoming sales, like a retailer’s annual sale or holiday sale, that offers a large discount off of the retail price. If shopping online, using an online price-tracking tool can help you find the lowest price.

•   Keep an eye on your credit card statements. While not necessarily a guaranteed path to savings, regularly reviewing your credit card statement can help you catch any charges that aren’t right, whether due to fraud or getting charged incorrectly. In those instances, you could dispute a credit card charge to attempt to get your money back.

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

The Takeaway

A price protection credit card offers peace of mind when purchasing goods that might fluctuate in price. It can allow you to claim a partial refund if there is a published price drop within a period of time after you make your purchase with your card and within the plan’s guidelines. Aside from applying to tangible goods, you may be able to take advantage of price guarantees for travel-related purchases like hotel rates, which can change daily.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What is price protection on a credit card?

Price protection allows cardholders to claim a credit card refund on a price difference if a lower published price becomes available. Typically, price protection is available for a limited period after the original purchase was made.

Do all credit cards offer price protection?

No, not all credit cards offer price protection. Card benefits, like price protection, vary across card issuers and credit card programs. See your card agreement to learn more about your card’s benefits and terms.

How can I use price protection?

In order to take advantage of price protection, you’ll first have to make a purchase using a credit card with price protection. Then, within the permitted time period, find the same product marked at a lower price and following the stipulations of your plan. From there, you’d contact your card issuer to submit a claim for a refund in the amount of the difference between the two prices.

What is a price protection clause?

A price protection clause is the written parameters of your card’s price protection benefit. It states the issuer’s criteria for claiming the benefit, including the allowable time frame for a price protection request, eligible purchase categories, and more.

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Photo credit: iStock/jroballo

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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