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Despite the saying, “cash is king,” there are pros and cons to using cash over credit cards in everyday transactions. Likewise, credit cards have their own share of advantages and disadvantages when it comes to making purchases.

Here’s what you need to consider when choosing cash vs. credit cards, and when you might opt for using one method of payment over the other.

Defining Cash and Credit Cards

Cash is the legal tender — whether coins, paper bills, or other notes — that you can exchange for goods and services. According to Merriam-Webster, cash is considered “ready money” in that you actually own the value of the cash and can use it immediately during a transaction.

Credit cards, on the other hand, can also be used to purchase goods and services. However, you’re borrowing the funds from a third party (i.e. a bank) to make your purchase today, with the promise that you’ll pay the credit card balance back later.

When to Consider Using Cash

Deciding whether to use cash vs. credit depends on your purchasing situation and preferences. Situations when paying with cash is preferred might include:

•   Buying goods or services from merchants who only accept cash

•   When your credit or income doesn’t qualify for a credit card

•   Limiting your spending to a specific amount

•   Keeping your personal information private during a transaction

•   Avoiding credit card-related fees

•   Avoiding credit card debt

You can also use cash to grow your money through an interest-bearing deposit account, instead of spending it. If you’d like to build your savings fund, you can only do so using cash.

Recommended: How to Avoid Interest On a Credit Card

Benefits of Using Cash

Since cash represents the monetary value you actually have, it makes budgeting simple. If you have $100 in cash to spend for the weekend, for instance, you’re focused to make careful decisions in how you spend that finite cash amount. After you’ve depleted your cash, you can’t make additional purchases until you have more cash.

Additionally, cash provides some convenience despite its additional physical bulkiness in your wallet. For merchants, the benefit of cash vs. credit cards is that they save money on credit card processing fees. To avoid this, some merchants only accept cash payments, while others offer a nominal discount as an incentive for customers to pay using cash.

Cash can also widely be used by any consumer, regardless of their credit score. This makes cash a more accessible payment method for everyday purchases. It also doesn’t contain any of your personal data, so if a private and untraceable purchase is important to you, cash is beneficial.

Recommended: When Are Credit Card Payments Due

Drawbacks of Using Cash

The biggest drawback to using cash vs. credit, however, is that it caps your buying power to only the amount of cash you have. Although this can be a benefit as mentioned above when you’re on a budget, it can restrict your ability to make larger purchases today.

For example, if your car unexpectedly needs a repair that costs $800, but you only have $500 in cash to pay upfront, you’ll have to make a tough decision. You might be forced to shop around for a cheaper car repair shop, spend time negotiating a lower price with the current mechanic, or possibly wait on the repair until you have the additional funds necessary. All of this can cost you extra time, and possibly earning potential if you rely on your car to drive to work.

Aside from fixed purchasing power, physical cash is harder to trace between transactions. Your personal information isn’t tied to cash bills in your pocket. This means that if you lose it or it gets stolen, and it’s used by someone else, it’s harder to get back.

When You Might Consider Using a Credit Card

There are many use cases for credit cards, if you qualify for one. Some situations when a credit card might make sense include:

•   Making a larger purchase now and paying it off later

•   Breaking down a large purchase into smaller installment payments

•   Earning points, miles, or cash back on purchases using a rewards credit card

•   Unlocking additional purchase protections

•   Building your credit profile

Recommended: Can You Buy Crypto With a Credit Card

Benefits of Using a Credit Card

Using a credit card as a payment method for daily transactions offers various benefits when managed responsibly. For example, if you don’t have enough cash for a purchase, a credit card lets you buy it now and pay it back the following month.

You can also choose to take out a credit card cash advance (though typically at a higher APR than your standard purchase APR), or even send money with a credit card.

With a credit card, you get to choose how you’ll repay your purchases, whether in full when your billing statement is due, or incrementally over multiple months. The caveat is that letting a balance roll over to the next month incurs interest charges.

Since all credit card activity is reported to the credit bureaus, on-time payments and other factors can be favorable to building your credit history and credit score. A high credit score can help you qualify for competitive interest rates and terms on other consumer credit products, like other credit cards and loans.

Credit cards also offer benefits and rewards that cash doesn’t provide. Rewards credit cards let you earn points or miles that you can then redeem for travel, cash back, gift cards, merchandise, special experiences, and more.

Different credit cards can also offer benefits like travel cancellation protection, warranty insurance, and more. For example, some cards feature purchase protection, which replaces an item that was lost, stolen, or damaged, if it was purchased using the card.

Another major perk when using a credit card is that it limits your liability when unauthorized or fraudulent purchases or activity occurs on your account. Depending on when you report the unusual activity, you might only be liable for up to $50 of those charges. Some credit cards even have zero-liability policies.

Recommended: What is a Charge Card

Drawbacks of Using a Credit Card

Interest charges, expressed as an annual percentage rate (APR), are one of the biggest disadvantages to using credit vs. cash. With how credit card payments work, unless you make full, on-time credit card payments each month, interest charges will likely apply to balances that roll over from one month to the next.

If you roll over a balance, you’ll not only pay more money toward your purchases, but your outstanding debt can snowball quickly. This can prove financially damaging to your everyday finances and to your credit if you fall behind on payments while amassing growing debt.

Certain credit cards also incur annual fees for the privilege of using them. This is money that you’ll pay out-of-pocket upfront. With a credit card, you can also incur other fees, such as foreign transaction fees, late payment fees, balance transfer fees, and more.

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

Is Using a Debit Card the Same Thing as Using Cash?

Using a debit card is similar to using cash. In fact, one of the biggest differences between a credit card and debit card is that debit cards draw funds from the cash that you already have in your personal checking or savings account. Still, a debit card provides the convenience of swiping or tapping a card on a payment processing machine, like a credit card, to process a digital transaction between your bank and the merchant’s bank.

However, debit cards carry many of the same disadvantages as cash. For one, a debit card limits your purchasing power to the amount that’s in your checking or savings account. Additionally, debit cards don’t offer the same level of protection against unauthorized or fraudulent activity as credit cards do.

Recommended: What is the Average Credit Card Limit

Understanding Your Spending Habits Is Key to Picking Which to Use

Taking stock of your buying habits can help you decide whether cash vs. credit is a better option for you. When considering these two payment options, think about the following:

•   How much do you spend each month?

•   How much discretionary income do you have?

•   Where do you typically make purchases — online or in a brick-and-mortar store?

•   Do you tend to overspend or stay within a budget that you can afford?

•   If you’re thinking about a credit card, what’s your goal?

By answering these questions, you will likely be able to tell which payment method will be more convenient for you. For instance, if you’re trying to curb your spending, then cash might be the better bet, given how credit cards work. On the other hand, if you’re primarily an online shopper or you’re trying to build your credit history, a credit card could be worth exploring.

The Takeaway

Cash helps you contain your spending to the money you actually own. This can potentially limit the amount of debt you’d take on through credit. It can also offer convenience when it comes to shopping through cash-only merchants. The caveat is the risk you’re taking on if the cash is lost or stolen since it can be difficult to get back.

Meanwhile, credit cards offer you peace of mind if your card is lost or stolen. They provide greater protection against unauthorized activity, including fraudulent payments. However, access to borrowed funds puts you at risk for getting deeper into debt if you’re unable to repay your balance on time each month. With responsible borrowing habits, however, credit cards can be a handy way to make purchases.

If you want the convenience and protection of using a credit card, consider a card that offers you cash-back rewards on every purchase.

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

Which is better when traveling, cash or credit?

When traveling, credit cards are a safer option to carry than cash. It can be difficult and near impossible to trace and verify whether lost or stolen cash belongs to you. If a credit card is lost or stolen, the card issuer can freeze new transactions on the account, and your maximum liability for fraudulent charges is $50, or nothing at all.

Are credit cards safer than cash?

Yes, credit cards are safer than cash. Credit cards reduce your liability in the event of unauthorized or fraudulent activity.

What is the difference between cash and credit cards?

Cash is a physical currency and liquid asset that provides you with purchasing power. When you use cash toward a purchase, you don’t owe that amount to another entity. Conversely, a credit card is a physical tool that lets you increase your purchasing power using borrowed money. You’ll need to repay purchases made to your credit card, possibly plus interest charges.

Cash or credit, which is more convenient?

Whether cash or credit is more convenient is subjective. For example, while many merchants accept credit cards, some only accept cash payments. However, as more businesses accept digital payments and transition to cashless transactions, a credit card might be more convenient.

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Photo credit: iStock/Ridofranz

¹Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

¹See Rewards Details at SoFi.com/card/rewards.

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

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

The SoFi Credit Card is issued by 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.

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It is (sometimes) possible to buy stocks with a credit card, but it’s rarely a good idea for most people. Most brokerages do not allow you to directly fund your account with a credit card, and even if you find a brokerage that does, the fees associated with buying stocks with a credit card can outweigh any advantages.

Before you buy stocks with a credit card, make sure you understand the risks as well as the benefits. Investing in the stock market always comes with a degree of risk. If your investments lose money, you may not be able to pay off your credit card statement, which will mean that you’ll have to pay additional interest.

Using Your Credit Card to Buy Stocks

Most brokerages do not allow you to use your credit card to buy stocks. For example, SoFi’s online trading platform does not permit you to fund your account with a credit card. Brokerages generally don’t allow you to buy stocks with a credit card to help comply with the federal regulations governing financial products, such as stocks.

However, while you can’t purchase stocks directly with a credit card, there are still ways you can use your credit card to fund your purchase of stocks. This includes using cash back rewards to fund investments as well as taking out cash advances. Another option is to use a credit card that allows you to transfer funds to a checking account, which you can then move over to your brokerage account.

Recommended: Tips for Using a Credit Card Responsibly

Benefits of Buying Stocks With a Credit Card

You generally aren’t able to buy shares of stock with a credit card, and even if you find a workaround to do so, the risks mostly outweigh the potential benefits.

Perhaps the main benefit if you’re investing with credit card rewards is that it can offer a way to put the rewards you get from your everyday purchases toward your financial future. While there’s no guarantee of success in investing, it’s possible the rewards points or cash you invest could grow in the stock market.

Risks of Buying Stocks With a Credit Card

Just like buying crypto with a credit card, buying stocks with a credit card comes with considerable risk. If you attempt to do so, take note of the following potential downsides:

•   Investments in the stock market may lose value. If this happens, you may have a hard time paying off your monthly credit card statement in full.

•   There are fees associated with buying stocks with a credit card. If you can find a brokerage that allows the purchase of stocks with a credit card, you’ll generally pay a fee to do so. Additionally, if you opt for a cash advance to use to buy stocks, you’ll also run into fees, not to mention a higher interest rate. There’s always a chance your investment returns won’t offset these costs.

•   High credit utilization could affect your credit score. Making stock purchases with your credit card, taking out sizable cash advances, or racking up spending in order to earn rewards could all drive up your credit utilization, a major factor in determining your credit score. Having a high credit utilization — meaning the percentage of your total credit you’re using — could cause your credit score drop.

•   You could get scammed. If you’re getting offers to buy certain shares with your credit card, there’s a chance it’s a scam. Do your own research before making any moves, and be wary before providing any personal information.

Recommended: Can You Buy Crypto With a Credit Card

Factors to Consider Before Buying Stocks With a Credit Card

There are a variety of different factors that you should keep in mind before buying stocks with a credit card.

Investment Fees

If you do find a brokerage that allows you to buy stocks with a credit card, they will likely charge a credit card convenience fee. This fee, which helps the brokerage to offset their costs for credit card processing, usually runs around 3% of the total price of your investment. Starting 3% in the hole makes it very difficult to make profitable investments.

Recommended: What is a Charge Card

Cash Advance Fees

If your brokerage does not support buying stocks with a credit card, you might consider taking out a cash advance from your credit card. Then, you could use the cash to fund your brokerage account.

However, this transfer will often involve a cash advance fee, which typically will run anywhere from 3% to 5% of the amount transferred. Additionally, interest on cash advances starts to accrue immediately, which is different than how credit cards work usually, and often at a higher rate than the standard purchase APR.

Transfer Fees

Another way to use your credit card to purchase stocks is by making a balance transfer. You can transfer funds from your credit card to your checking account, and then move that money again to your brokerage account. In addition to the hassle of moving money around, you’ll likely pay a balance transfer fee, which is often 3% or 5%. Plus, interest will start accruing on balance transfers right away unless you have a 0% APR introductory offer.

Interest

If you’re not able to pay your credit card statement in full (because your investments have decreased in value), your credit card company will charge you interest. With many credit card interest rates often approaching or even exceeding 20% APR, this will very likely swallow up any profits from your short-term investments.

You’ll also want to look out for interest getting charged at a higher rate and starting to accrue immediately if you opt for a cash advance or a balance transfer.

Recommended: How to Avoid Interest On a Credit Card

Avoiding Scams When Buying Stocks With a Credit Card

Because most reputable brokerages don’t allow you to buy stocks with a credit card, there are occasionally scams that you need to be on the lookout for.

Watch out for individuals or lesser-known companies that say you can buy stocks with a credit card through them. Do your own research to make sure it is a legitimate brokerage and offer before using these other companies.

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

Does Buying Stock With Your Credit Card Affect Your Credit Score?

The act of just buying stock with your credit card won’t affect your credit score any more than any other purchase on a credit card. However, your credit score might be affected if you aren’t able to pay your monthly balance off in full. One of the best ways to improve your credit score is to always make sure that you have the financial ability and discipline to pay off your credit card statement in full, each and every month.

Additionally, your credit score could take a hit if you use too much of your available balance or even max out your credit card with your stock purchases, as this would increase your credit utilization. Also, you might see an impact on your credit if you open a new account to fund your stock purchases. This is because credit card applications trigger a hard inquiry, which will temporarily cause a dip in your score.

Alternatives to Buying Stocks With a Credit Card

As you can see, buying stocks with a credit card generally isn’t a great option — or even possible with most brokerages. If you want to start investing in stocks, you might consider these other ways to do so:

•   Cash back rewards: Then, you can take your cash back rewards that you earn and use them to invest in stocks or other investments.

•   Employer-sponsored 401(k): A great way to invest is through an employer-sponsored retirement plan like a 401(k). By using a 401(k), you’ll get to invest with pre-tax dollars and defer paying taxes until you make withdrawals in retirement.

•   Brokerage margin loans: If you’re looking to borrow money to invest, one option could be a brokerage margin loan. These allow you to borrow money directly from the brokerage, often at a lower rate than what’s offered by most credit cards. Be aware of the risk involved here though — even if your investments don’t pan out, you’ll still have to repay your loan.

The Takeaway

Very few (if any) brokerages allow you to directly buy stocks with a credit card. If you do find a brokerage that allows you to buy stocks with a credit card, note the fees involved, not to mention the risk of loss in investing and the possibility of damaging your credit score. This is why even if you do find a way to do it, it’s rarely a good idea to buy stocks with a credit card for most people.

One alternative is to get a cash back rewards credit card and then use rewards you earn to fund your stock investments.

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

What is credit card arbitrage?

Credit card arbitrage is usually defined as borrowing money at a low interest rate using a credit card and then investing that money, hoping to earn a higher return on investment. This is often done with cards that offer 0% introductory APRs.

What are the risks of credit card arbitrage?

The biggest risk of credit card arbitrage is that your investments will lose money, or they won’t make enough money to repay your credit card balance. This can cost you a significant amount of interest and/or credit card fees. You should also be aware that having a large balance on your credit card (even if it’s at 0% interest) can have a negative effect on your credit score.

Does buying stock with a credit card affect my tax?

Buying and selling stocks does often come with tax consequences, and you should be aware of how your investments affect your tax liability. How you buy stocks (with cash, credit card ,or in other ways) doesn’t affect the amount of taxes you might owe on your stock purchase.

Should I buy stocks with my credit card?

The way that credit cards work is that you borrow money and, if you don’t pay the full amount each month, you’re charged interest. Some brokerages may also charge credit card processing or convenience fees if they allow you to purchase stocks with a credit card. Because of the interest and fees potentially involved, it’s very difficult to come out ahead buying stocks with a credit card. Plus, there’s no guarantee of success when investing.

Is it safe to buy stocks with a credit card?

Because most reputable stockbrokers do not accept credit card payments to fund your account or buy stocks, you’ll want to be careful with any site that says that it will let you buy stocks with a credit card. Follow best practices for internet safety when trying to buy stocks with a credit card, just like you would before making any purchase online.

Do stockbrokers accept credit card payments?

Most stockbrokers do not accept credit card payments to fund your account or to buy stocks. If you want to buy stocks with a credit card, you will need to find a workaround such as taking a cash advance from your credit card and using that to fund your brokerage account. Just be sure that you understand any cash advance fees and the interest rate that come with that type of financial transaction.

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Photo credit: iStock/katleho Seisa

¹Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

The SoFi Credit Card is 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.

¹See Rewards Details at SoFi.com/card/rewards.

Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details, please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, Member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

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

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

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If you find yourself in a situation where you’re not able to make even the minimum payment on your credit card, your account may get sent to credit card collections. Credit card debt collection is the process where credit card companies try to collect on the debt that they are owed.

The credit card companies may try to collect the debt themselves, or they may hire a third-party credit card debt collection firm to collect. In some cases, the debt owed may be sold to another company, who might then try to collect. Here’s a look at what happens when credit card debt goes to collections.

What Are Credit Card Collections?

Credit card collections is a term referring to the process that lenders go through to try to get paid for outstanding debts they’re owed.

If you know what a credit card is, you’ll know that credit card issuers allow you to make purchases with the promise of eventual repayment. But if you don’t make even the credit card minimum payment, the credit card company eventually may send your debt to collections in an effort to recoup the money owed.

How Do Credit Card Collections Work?

Credit card credit card debt collection is the end result of repeatedly not paying your credit card bills. The best way to use credit cards is to always pay the full amount each month on the credit card payment due date. Even if you’re not able to, you’ll want to at least make the credit card minimum payment.

If you don’t make any payments toward your credit card balance, the credit card company may start the credit card collections process. At this point, a third-party debt collector will assume responsibility for trying to get you to repay the money owed, relying on the contact information the credit card company has on file to get in touch.

Recommended: When Are Credit Card Payments Due

Credit Card Debt Collections Process

Most credit card companies will begin the credit card debt collections process by attempting to contact you directly to pay off the debt. If you haven’t made any credit card payments recently, the bank will likely try to email or send you certified letters. Then, if you still don’t make any payments and don’t arrange for a payment plan with your lender within 30 to 90 days, they’ll likely turn it over to a third-party debt collector.

Most credit card companies do not have the staff or business model to engage in a long-term credit card collection process. That’s why they will usually hire a third-party company or companies to do the actual debt collection. If these companies do not successfully collect the debt, it’s also possible your debt will be sold to another company, which will then try to collect on it.

At any point, one of these companies may formally sue you in an attempt to collect the money from you, one of the many consequences of credit card late payment.

Features of Credit Card Debt Collections

The credit card collections process is not a pleasant experience. Persistent letters, emails, and phone calls are all features of the debt collections process.

At the beginning, when the credit card company itself is handling the collection process, it may be a bit better. However, once your debt has been sold and/or turned over to a debt collections agency, things often become more intense.

What Is a Collection Lawsuit?

If debt collectors are not successful in using phone calls, letters, or emails, the next step is often a lawsuit. A collection lawsuit is when either the debt owner or collector files in court asking you to pay the debt. If they win, the judge will issue a judgment, which could allow the debt collector to garnish your wages or put a levy on your bank account.

It’s important to note that different states have different rules for how long a debt collector has to file a lawsuit. In most states, if you incurred the debt, the debt collector can legally collect it, and if they have the correct amount, they can keep asking you to pay the debt. However, there may be a statute of limitations on how long they can initiate a collection lawsuit. Check with a lawyer if you’re not sure about the law where you live.

Responding to a Collection Lawsuit: What to Know

If you receive a collection lawsuit, you may be wondering if you should respond. In most cases, it’s a good idea to respond to the collection lawsuit, since that requires the owner of the debt to prove their case.

If they can’t show they own your debt and that you’re obligated to pay it, you may have the debt vacated. Further, you may also have your debt discharged if it’s past your state’s statute of limitations.

Consult with a debt relief lawyer if you’re not sure what to do in your particular circumstances.

What Happens If You Don’t Respond to a Collection Lawsuit?

If you don’t respond to a collection lawsuit, it’s possible that the judge will issue a default judgment against you. A default judgment means that the plaintiff (the debt collector) automatically wins, since the defendant (you) did not respond to the lawsuit. In that case, the debt collector or owner now has the legal right to garnish your wages and/or attempt to go after the money in any of your bank accounts.

How a Debt in Collection Affects Your Credit

Having debts that are in collection will have a negative impact on your credit score. The more recent the date of collection, the more of a negative impact it will have on your credit score.

In most cases, a debt that is in collection will stay on your credit report for seven years (though note this differs from how long credit card debt can be collected).

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

Guide to Dealing With Credit Card Debt in Collection

If you have a debt that’s already in collection, you may want to consult a lawyer that specializes in debt relief. While it may seem daunting to hire and pay for a lawyer, they may be able to help you settle the debt for a fraction of the original amount or even completely discharge the debt.

Taking Charge of Your Finances

If you’re worrying about credit card debt collections, you may feel like your finances have spun out of your control. Here are some tips to take charge once again:

•   Only spend what you can afford to pay off: One of the best tips for using a credit card is to avoid making purchases that you won’t be able to pay off each month. This will stop your spending from spiraling into debt.

•   Always try to pay off your credit card in full: When you pay your full credit card statement amount each month, you stay out of debt and are more likely to have a good or excellent credit score. Although credit card debt can be hard to pay off, doing so can have a positive impact on your credit score.

•   Address any debt head on: If you find yourself in the position of having credit card debt, the best thing to do is to openly acknowledge your situation and make a plan to pay off your credit card bill. Start a budget, cut expenses if needed, and use any monthly surplus amount to pay down your debt. It’s also smart to stop spending on your credit card until you’ve reduced or eliminated any outstanding balance.

The Takeaway

If you don’t pay the balance on your credit card, your credit card issuer may begin the credit card debt collection process. This may mean that they contact you directly, hire a third-party collection company, or even sell your debt to another company. Having a debt in collections will have a negative effect on your credit score and is something to avoid if possible.

When your finances are back in order and you’re ready for a new credit card, consider the SoFi credit card.

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

What happens when credit card debt goes to collections?

If you have an outstanding credit card balance that goes to collections, the credit card company likely will ask you to make at least the minimum payment on the debt. This may continue for the first few months, after which point they’ll likely hire a third-party debt collector. The debt collector will then start trying to collect the debt from you, which may include filing a lawsuit against you.

Can a debt collector force me to pay?

A debt collector company cannot directly force you to pay a debt. However, depending on the statute of limitations in the state you live in and how long ago the debt was incurred, they may be able to sue you in court. If they win, the court may issue a judgment, which would allow them to collect by garnishing your wages and/or levying your bank account.

How long can credit card debt be collected?

In most states, as long as it’s a valid debt, there is no statute of limitations for how long a debtor can ask for repayment. However, many states do limit how long legal action can be taken to collect the debt. Additionally, the Fair Debt Collection Practices Act details what a debt collector can and cannot do while attempting to collect a debt.

Do debt collections affect your credit score?

If you have a debt in collection, especially one that has recently gone into collections, it’s likely to have a severe impact on your score. This is because payment history is one of the factors used in the calculation of your credit score, and credit card debt in collections is considered far past due.

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Photo credit: iStock/courtneyk

¹Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

¹See Rewards Details at SoFi.com/card/rewards.

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

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

The SoFi Credit Card is issued by 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.

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Your available credit and the total credit limit on a particular credit card are both tied to the potential amount that you can spend, but they differ in a few key areas. Your credit limit is the total amount of credit that the card issuer is willing to lend you. On the other hand, your available credit is the potential amount you can spend right now.

Unlike your credit limit, your available credit takes into consideration your outstanding balance and any pending charges. So, for example, if your total credit limit is $10,000, and you have an outstanding balance of $2,000, then your available credit is $8,000.

Recommended: What is a Charge Card

What Is Available Credit?

Your available credit on a credit card is the total amount that you can spend on your credit card. It is usually calculated as the total credit limit minus any outstanding balance or pending charges. If you attempt a transaction that is larger than your available credit, the credit card company will typically decline the transaction.

Recommended: What is the Average Credit Card Limit

What Is a Credit Limit?

The way most credit cards work is that the credit card company issues you a maximum amount that they are willing to lend you. This is called your credit limit. It is usually determined by your financial information, such as your credit score, income, and other items on your credit history.

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

Why Is Available Credit Important?

Your available credit is one of the most important things about your credit card. The amount of available credit you have is the total amount of money that you can spend on your credit card. If you try to make a purchase that’s more than your total available credit, your credit card company will usually decline your transaction.

Differences Between Credit Limit and Available Credit

The main difference between credit limit and available credit is one of a theoretical limit vs. a limit in practice.

Your credit limit is the theoretical limit that represents how much the credit card company is willing to lend you. If you’ve used a portion of your credit limit, then that amount is subtracted from your total credit limit and becomes your available credit. This is the maximum amount that you can spend right now on your credit card.

In other words, your credit limit will generally remain the same, whereas your available credit will vary based on your spending. When you haven’t spent any money using your credit card, meaning your balance is $0, your credit limit and available credit are the same.

What Happens If You Go Over Your Available Credit?

If you have a credit card balance or outstanding pending charges on your credit card, those amounts are subtracted from the total credit limit that you have on that card. This marks your current available credit, and it’s the maximum amount that you can charge on your credit card at the current point in time.

If you try to make a charge for more than your available credit, it’s likely that your credit card company will decline the charge. With some credit card companies or specific credit cards, it’s possible that the credit card company will allow a charge above your available credit, but they may charge additional fees and/or interest. Check with your credit card company for the specific rules and terms for your particular card.

Recommended: How to Avoid Interest On a Credit Card

What Happens If You Go Over Your Credit Limit?

If you continue to spend all of your available credit until you’ve reached your total credit limit, you may not be able to continue to use your credit card. You’ll first need to make payments to lower your total balance and raise your available credit.

In some cases, if you continue to keep your outstanding balance near your total credit limit, the credit card company may choose to close your credit card account. If this doesn’t happen, your card issuer may also increase your interest rate, lower your credit limit, or even raise the minimum payment requested.

Going over your credit limit can also have serious implications for your credit score. This is because credit utilization — how much of your available credit you’re currently using — is a major factor used to determine your score. It’s recommended to keep your credit utilization below 30% to maintain a healthy score; if you’ve reached your credit limit, your utilization will be at 100%.

Recommended: When Are Credit Card Payments Due

How to Increase Your Available Credit

The best way to increase the available credit on your credit card is to spend less on your card and make additional payments toward your total outstanding balance. Every dollar that you pay toward your outstanding balance will increase your available credit.

Ideally, you’d get to a situation where you’d pay off your statement balance in full, each and every month. In that scenario, your available credit and your total credit limit would be equal.

How to Increase Your Credit Limit

You have a few options for increasing credit limit. Some credit card companies will regularly review the accounts of their cardmembers, and proactively increase their credit limits.

You also have the option to contact your card issuer directly and ask them to increase your credit limit. Keep in mind that most issuers are more likely to increase your credit limit if you’re already using your credit card responsibly.

If you’re not having any luck increasing the credit limit on your existing credit card, another option is to open a new credit card. This could substantially increase your available credit if you’re approved — especially if the new card’s limit is at or above the average credit card limit.

Recommended: Tips for Using a Credit Card Responsibly

The Takeaway

Your total credit limit and available credit are two terms that refer to the amount of money that you can spend on your credit card. However, there is a difference between credit limit and available credit. Your credit limit usually refers to the maximum amount that your card’s issuer is willing to lend you. Meanwhile, your available credit is the maximum credit limit, minus any outstanding balance or pending charges on the card.

If you’re looking to increase your credit limit, another way to do so is by opening a new credit card.

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

Why is my available credit less than my credit limit?

Your available credit will often be less than your credit limit based on any outstanding balance or pending charges that you have on your credit card. If you have a total credit limit of $7,500 on a particular card, and an outstanding balance of $1,000, then your available credit is $6,500. The available credit amount is the maximum amount that you can charge on your credit card at the current moment.

Why is my available credit higher than my credit limit?

It’s rare that your available credit will be higher than your total credit limit. Instead, it’s much more common for your available credit to be less than (or equal to) your total credit limit. One scenario where your available credit may be higher is if you have a credit on your account, such as from a refunded transaction.

How is my credit limit determined?

Credit card issuers typically determine your total credit limit based on the financial information that you provide when you apply for the card. This includes your employment information, salary, and overall creditworthiness. If your financial situation has materially changed since you first applied, or if you have a history of responsibly using your card, you may be able to contact your issuer and have your credit limit increased.

What is a good amount of available credit?

Experian reported that in 2020, the average credit card limit was just over $30,000, though credit limits vary widely by card issuer, credit card, and individual. A good amount of available credit is one that allows you to make all of the transactions that you need to make each month, with a little bit of buffer room. You should aim to put yourself into a financial position where you can pay off each of your credit card statements in full, each and every month.

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Photo credit: iStock/Georgii Boronin

¹Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

¹See Rewards Details at SoFi.com/card/rewards.

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

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

The SoFi Credit Card is issued by 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.

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The difference between a payment due date vs. closing date is important to know for responsible credit card management. The credit card closing date marks the end of your billing cycle, which determines how much you’ll owe when your credit card payment comes due. Your credit card due date, on the other hand, is when you’ll need to make at least the minimum payment if you want to avoid a late fee.

By understanding the implications of both your credit card closing date and your credit card due date, you can better strategize to make purchases and also ensure you make on-time payments.

Recommended: Tips for Using a Credit Card Responsibly

What Is a Credit Card Closing Date?

A credit card closing date determines your credit card “billing cycle,” which spans an interval of about 28 to 31 days. This day might vary each month, but according to the Consumer Financial Protection Bureau (CFPB), it can’t vary by more than four days.

The bank uses your credit card’s statement closing date to determine which purchases are calculated toward the current statement’s total balance and the minimum credit card payment that’s due. Any purchases made after your credit card closing date are applied to the next month’s billing statement.

The closing date for a credit card is also the date the bank uses to calculate your credit card’s finance charges, which are also called the interest charges. Typically, credit card issuers offer a grace period on new purchases starting on the date after the closing date until your credit card payment due date. During this time, interest charges aren’t incurred yet.

Although many credit card companies offer a grace period, it’s not a requirement, so check the terms of your credit card closely.

Recommended: What Is a Charge Card?

What Is a Credit Card Due Date?

Another critical date to remember when it comes to your credit card account is your credit card due date. Payments received by the bank by 5 p.m. on the credit card payment deadline are considered on-time; after this period, your credit card payment is considered past due.

Your credit card due date is the same for each billing statement. For example, if this month’s credit card bill is due on June 15, your next billing statement will be due on July 15. This due date applies regardless of whether you’re making a full payment for your statement balance or the minimum amount due.

Although you should always aim to make your credit card payment on time, card issuers generally don’t report late payments to credit bureaus until 30 to 60 days after your credit card due date. Late fees might be applied to your credit card account if you don’t make a payment by the credit card payment due date, however, given how credit cards work.

Recommended: When Are Credit Card Payments Due?

Differences Between a Credit Card Closing Date vs Due Date

Here’s a look at some of the key distinctions between credit card payment due date vs. closing date to keep in mind:

Credit Card Closing Date	Credit Card Due Date
Last date of billing cycle	Last date to submit an on-time payment
Date before grace period begins	Date before the next billing cycle begins
Date might change slightly	Same date every statement period
Affects your credit utilization ratio	Can impact your credit score

How Your Credit Card Closing Date Affects Your Credit Score

On your credit card statement closing date, your card issuer typically reports your account activity, including your card’s outstanding balance, to the three credit bureaus — Experian, Equifax, and TransUnion. This information impacts your credit utilization ratio, which is the ratio of credit in use compared to the amount of credit you can access.

As an example, let’s say your closing date is May 20, and you made a $2,000 purchase on your credit card on May 15. That purchase will be reported and can increase your credit utilization ratio. A high credit utilization ratio can adversely affect your credit score.

Now, let’s assume the purchase isn’t urgent and you waited until May 21 to put the charge on your credit card. In this scenario, your $2,000 credit card purchase wouldn’t be reported to the credit bureaus until the end of your next billing cycle. And if you pay it off before then, it might not affect your credit utilization ratio.

Determining Your Next Credit Card Statement Closing Date

Knowing how to decipher your credit card bill each month can help you to uncover your statement closing date. Typically, you’ll find your billing cycle dates at the top of your credit card bill. This might be called your “opening/closing dates,” and it typically will be displayed as a date range.

When reading your credit card statement, you can find these dates and then count the number of days between the dates. Then, count forward from the credit card closing date to determine your next credit card statement closing date.

Guide to Changing Your Credit Card Due Date

You might find that changing your credit card due date can help you better manage your credit card payments. This might come up if you get paid on a certain date each month and want your due date to fall closer to payday.

Generally, card issuers are willing to work with you on a due date that will help you make regular, on-time payments. However, credit issuers have different restrictions, so talk to your credit card issuer to see whether it’s flexible.

To change your credit card due date, you can either:

1.    Call the phone number at the back of your credit card to speak to a customer service associate who can help.

2.    Log in to your credit card’s online account and make the change (if available) yourself.

Be aware that it can take one to two billing cycles to see the change on your account.

What You Should Know About Determining Your Time to Pay

Your credit card closing date and payment due date can help you strategically decide when it’s time to pay your credit card bill. For example, if you need to keep your credit utilization low to improve your credit to secure a mortgage loan approval, then paying your credit card bill before your closing date can help.

However, if you simply want to avoid interest charges and late fees on your purchases, making a payment by your credit card due date is sufficient. Still, make sure to stay mindful of the potential to fall into credit card debt, which can be hard to shake (here’s what happens to credit card debt when you die).

Recommended: Can You Buy Crypto With a Credit Card?

The Takeaway

Your payment due date vs. closing date are two very important dates that relate to your credit card account. However, they aren’t the same and have different implications for your credit. Being aware of both dates can help you strategically make purchases in a manageable way and ensure you make payments on time.

If you’re looking for a new rewards credit card, the SoFi Credit Card is an option to consider.

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

Should I pay off my credit card before the closing date?

Paying off your credit card as early as possible is always ideal, if it’s possible. Doing so can help you maintain a low credit utilization ratio, which is beneficial to your credit score.

Can I make more than one payment per statement period on my credit card?

Yes, you’re allowed to make more than one payment per statement period to pay off your statement balance. In fact, doing so can help you potentially avoid incurring interest charges and rolling a balance into your next billing cycle.

Can I use my credit card between the due date and the closing date?

Yes, you can use your credit card between the due date and the credit card statement closing date. Purchases made after your credit card due date are simply included in the next billing statement.

Is the credit card closing date the same every month?

Not always. Your credit card closing date might be the same date each month, but billing cycles can vary up to four days from the regular closing date.

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Photo credit: iStock/Seiya Tabuchi

¹Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

¹See Rewards Details at SoFi.com/card/rewards.

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

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

The SoFi Credit Card is issued by 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.

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