pink credit card with confetti

Does Debt Consolidation Hurt Your Credit?

You may have heard that consolidating your debts can hurt your credit score. So, if you’re considering this financial strategy to free up cash flow and otherwise streamline debts, it’s natural to wonder if that’s true. And like so many questions related to finances, the answer depends upon your specific situation.

It’s important to remember that a combination of many factors can affect credit scores and to understand how those factors are considered in credit score algorithms. We’ll use FICO® as an example—according to them, the high-level breakdown of credit scores is as follows:

•  Payment history (35%): This includes delinquent payments and information found in public records.

•  Amount currently owed (30%): This includes money you owe on your accounts, as well as how much of your available credit on revolving accounts is currently used up.

•  Credit history length (15%): This includes when you opened your accounts and the amount of time since you used each account.

•  Credit types used (10%): What is your mix? For example, how much is revolving credit, like credit cards? How much is installment debt, such as car loans and personal loans?

•  New credit (10%): How much new credit are you pursuing?

Now, here is information to help you make the right debt consolidation decision.

Benefits of Debt Consolidation

When you’re juggling, say, multiple credit cards, it can be easy to accidentally miss a payment. Depending on the severity of the mistake, that can have a negative impact on your credit score. This, in turn, can make it more challenging to get loans when you need them, or prevent you from getting favorable loan terms, like low interest rates. Plus, even if you don’t miss a payment, when you have numerous credit card bills to juggle, you probably worry that one will get missed.

Plus, it’s not uncommon for credit cards to have high interest rates, and when you only make the minimum payments on each of them, you very well may be paying a significant amount of money each month without seeing balances drop very much at all.

So, when you combine multiple credit cards into one loan, preferably one with a lower interest rate, it’s much more convenient, making it less likely that you’ll accidentally miss a payment. And paying less in interest will likely make it easier to pay down your debt.

How you handle your debt consolidation, though, and the way in which you manage your finances after the consolidation each play significant roles in whether this strategy will ultimately help you.

Steps to Take: Before the Debt Consolidation Loan

Debt accumulates for different reasons for different people. For some, unexpected medical bills or emergency home repairs have served as culprits. For others, being underemployed for a period of time may have caused them to start carrying a credit card debt balance. For still others, it may be about learning how to budget more effectively.

No matter why credit card debt has built up, it can help to re-envision a debt consolidation strategy as something bigger and better than just combining your bills. As part of your plan, analyze why your debt accumulated and be honest about which ones were under your control and which were true emergencies.

And if you end up using a lower-cost loan to consolidate your bills, consider using any money saved to build up an emergency savings fund to help prevent the accumulation of credit card balances in the future.

The reality is that, if you consolidate your debts in conjunction with a carefully crafted budgeting and savings plan, then debt consolidation can be a wonderful first step in your brand-new financial strategy.

Debt Consolidation: When It Can Help Your Credit Score

Based on the factors used by FICO, here are ways in which a consolidation loan can help credit scores:

Payment history (35%)

Because making payments on time is the largest factor in FICO credit scores, a debt consolidation loan can help your credit if you make all of your payments on time.

Amount currently owed (30%)

Although you may not instantly reduce the amount you owe by, say, consolidating all of your credit card balances into a personal loan, there can be a benefit to your credit score here. That’s because the credit score algorithm looks at credit limits on your cards, as well as your outstanding balances, and creates a formula that calculates your credit card utilization.

Here is more information about credit card utilization, including how to calculate and manage yours.

Credit types used (10%)

As you may know, there are several different types of credit, such as credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. According to myFICO , responsibly using a mix of these, such as credit cards and installment loans, may help your credit score.

However, it’s certainly not necessary to have one of each, and it’s not a good idea to open credit accounts you don’t intend to use.

Debt Consolidation: When It Can Hurt Your Credit Score

Now, here are ways that the same initial step—taking out a debt consolidation loan—may hurt your credit.

Payment history (35%)

As is the case with most loans, making late payments on a consolidation loan can hurt your credit score (depending on the severity of the situation). Loans in a delinquent status are mostly likely to have a negative impact on your credit, depending on the lenders’ policies.

Learn more about payment history .

Amount currently owed (30%)

Now, let’s say that you pay off all your credit cards with a personal loan and then you begin using them again to the degree that you can’t pay them off monthly. Any gain that you saw in your credit score will likely disappear as your credit utilization numbers rise again.

Another way that credit consolidation can harm your score is if you combine all of your credit card balances to just one credit card, resulting in a high utilization rate. But if you are able to keep it relatively low, it is less likely to negatively affect your score.

Learn more about amounts owed .

Credit history length (15%)

If you close credit cards that you pay off, you’ll reduce the age of your accounts, overall, and this can hurt your credit score.

Learn more about length of credit history .

Credit types used (10%)

If you combine all of your credit card balances into just one credit card, as described above, you won’t have opened an installment (personal) loan, so that won’t help with diversifying credit types.

Learn more about credit mix .

New credit (10%)

If you apply for a personal loan or a balance-transfer credit card and are rejected, this can cause your credit score to decrease. And if you apply for multiple loans or credit cards, looking for a lender that will accept your application, this can also hurt your score. Multiple requests for your credit report information (known as “inquiries”) in a short period of time can decrease your score, though not by much.

Learn more about new credit .

Concerned about building or rebuilding credit? Check out a few tips SoFi put together on how to strategically boost your credit score.

Investigating a Personal Loan for Debt Consolidation

When it’s time to apply for the personal loan, you’ll want to get a low rate. In February 2019, the average credit card interest rate was reported as 17.67%; this means that, by not consolidating your credit cards into a personal loan with a lower interest rate, you could be paying more interest than if you did.

When choosing a lender, ask about the fees associated with the loan. Some lenders charge fees; others,like SoFi, don’t. You can always use a lender’s annual percentage rates (APRs) as a way to understand the true cost of financing.

Also, you may consider calculating the shortest loan term that your budget can comfortably accommodate because, the more quickly you pay off the debt, the more money you’ll save over the life of the loan because you’re paying less in interest.

You can find more information about saving money as you consolidate your debts, and you can also calculate payments using our personal loan calculator.

Consolidate Your Debt with a SoFi Personal Loan

If you’re ready to say goodbye to high-interest credit cards and to juggling multiple payments each month, a SoFi personal loan may be a good option.

Benefits of our personal loans include:

•  Fast, easy, and convenient online application process

•  Low interest rates

•  No origination fees required

•  No prepayment fees required

•  Fixed rate loan

You deserve peace of mind. And by taking out a personal loan to consolidate debt, the stress of juggling multiple credit card payments can be history. Ready for your fresh start?

Learn more about how using a SoFi personal loan to consolidate high-interest credit card debt could help you meet your goals.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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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hands cutting credit card

How Much Credit Card Debt Is Too Much?

First, you put the cost of a couch for your new apartment on your credit card. Then, your car needs new brakes so you put that on your credit card, too. Before you know it, you’re about to book a ticket to Maui on your credit card. But how much credit card debt might be okay, and how much credit card debt is too much?

Managing Monthly Credit Card Payments

Many people believe that as long as they can afford the monthly payments, their level of credit card debt is fine. But faithfully making the minimum monthly payment on your credit card might not be a good indicator of whether you have too much credit card debt.

Generally speaking, it can be helpful to pay off your entire balance each month, but that is not a realistic option for many— and it can be easy to just pay the minimum amount required. This can be problematic: Thanks to compound interest, paying only the minimum amount can actually cause your debt to grow.

For example, let’s say you have $5,000 worth of debt with a 16.71% interest rate and are paying off $100 a month. At that rate, it would take you more than five years to pay off the original $5,000 and would cost you an extra $3,616 in interest alone.

Curious how your credit card payments stack up? Use SoFi’s credit card interest calculator to see exactly how much you can expect to pay in interest. Pesky compound interest means that simply tackling minimum payments on your credit card doesn’t necessarily mean you’re in the clear with your credit card debt.

In general, looking at how much your monthly payments may not be the most reliable indicator of a safe debt threshold.

Credit Card Utilization

One helpful way to determine if you’re being smart with your credit cards is to look at your rate of credit card utilization. Credit card utilization is the amount of debt you have compared to the total amount of credit that is available to you.

Related: What is the Average Credit Card Debt for a 30-Year Old?

It can come as a shock to people that using their full line of credit can negatively impact their credit score, but in general, it is commonly recommended to use only 30% of the credit available . Credit reporting agencies use your credit card utilization percentage as an important part of determining your credit score.

What does that look like in practice? If you have a credit card with a $10,000 limit, and you spend $1,000 on a new couch, $900 on new brakes, and $500 on a plane ticket, you’re using $2,400—or 24% of your available credit. That’s relatively close to that 30% threshold, so you’ll want to consider treading carefully.

If, on the other hand, you made the exact same purchases but you only have access to a $5,000 line of credit, you would be using 48% of your available credit. A credit card utilization rate of 48% has the potential of negatively impacting your credit score.

If you’re concerned about your credit score, you may want to keep your credit card usage to below 30% of the total credit line available to you.

Debt-to-Income Ratio

Another important consideration when looking at your credit card debt is your debt-to-income ratio. Your debt-to-income ratio is essentially a measure of how much of your pretax income goes to paying monthly debt, like car payments, student loans, and credit cards.

If your debt-to-income ratio is very high, meaning that a large portion of your monthly income goes to paying off debt, some lenders might be reluctant to lend to you.

This means that you could be charged a higher interest rate on new loans or a mortgage because the lender is worried that you won’t be able to make your monthly payments—if you’re able to get a loan at all.

In general, industry professionals suggest that a debt-to-income ratio of about 36% or lower is considered ideal , but of course, that will vary by your specific circumstances.
If your debt-to-income ratio is higher than you hope, that may be one sign that you’re carrying too much credit card debt.

Keeping Credit Card Debt in Check

If you’re worried about the amount of debt you’re carrying on your credit card, there are several ways to take control. First, consider making more than the minimum payment. Many people simply stick with minimum payments because they think that is what they should pay. But increasing your monthly payment could help you pay down credit card debt faster.

Likewise, if you’re worried about your credit card utilization rate (and are not carrying a credit card debt balance), you may simply be due for an increase in your line of credit. For example, if you’re still using the same credit card with a $5,000 limit that you got right after college, but now you have a better job and more monthly expenses, you might want to ask your lender for an increase in your credit line in order to improve your credit card utilization rate.

Your debt-to-income ratio can also be helped by either increasing your income or decreasing your debt. One of the downsides to credit cards is notoriously high interest rates. One solution—using a personal loan to pay off your credit cards—may help you take control of your credit card debt and save you some money on your monthly payments.

The benefit of paying off your credit cards with a personal loan is that you may be able to trade a high interest rate for a lower interest rate and secure a more favorable repayment plan. A personal loan allows you to make a static payment every month for a set amount of time instead of trying to pay off the minimum amount due on your credit card, which can make you feel like you’ll never get out from underneath credit card debt.

Bear in mind that once you’ve paid off your credit card balances, it’s important to keep them low. Running those balances back up has the potential of making your credit profile less attractive to lenders due to the increased total debt.

And in the future, keep an eye on your credit limit when you’re making big purchases—it can pay off in the long run.

With SoFi Personal Loans also have no fees required and no surprises—just a helpful way to manage your money. Additionally, applying is all online. Find out how you can get out from under your credit card debt today.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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 on credit.

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gold credit cards on wood background

The Growing Average Credit Card Debt in America

Hard as this may be to imagine, 75 years ago, we didn’t have anything like today’s modern credit cards. Nowadays, studies are conducted annually to monitor the rising average credit card debt in our country, and this figure is seen as an indicator of the economy and of people’s individual spending habits.

It wasn’t as easy to buy what you needed in the pre-credit card era, and this form of payment has important benefits, including giving users a short window of time to make purchases on credit without paying interest on the balance.

But, the ease of credit card use also makes it ultra-easy to build up a mountain of debt, and the credit card debt spiral can be especially challenging to break. We’ll share more about why that’s so, later on in this post, along with tried-and-true methods to get out of this unwanted spiral of debt.

First, though, we’ll answer two commonly asked questions:

•  What is the average credit card debt this year?

•  How can I get out of credit card debt?

What is the Average Credit Card Debt This Year? reported on a 2018 study that shared how more than 40% of households in the United States have credit card debt, with the average household having a balance of $5,700. This average varies by where exactly you live in the country.

On the one hand, the percentage of Americans who have credit card debts has been decreasing for the past 10 years. On the other hand, when looking at people who do have this kind of debt, the average amount has been increasing.

Related: What is the Average Debt by Age?

From an economic standpoint, this is useful information to have. This data can also be helpful in allowing you to place your own financial situation into context. And if you’re unhappy with the amount of debt you’re carrying, the real question is how to get out of credit card debt. Fortunately, we’ve got plenty of insights and solutions to share.

First, let’s take a closer look at that average amount of credit card debt: $5,700. This takes into account every household, about 40% of which are in debt. However, if you just count the households in debt that don’t pay off their balances every month, that average debt increases to $9,333.

If you don’t have the means to pay the debt balance off all at once, then as you’re making payments interest keeps accruing, often compounding daily. So, it can be challenging to pay down that debt, especially if you’re making minimum payments or an amount that’s not significantly more than the minimum.

Here are a few more credit card facts to consider:

•  About one in every five adults in the United States has a credit card balance that’s higher than the amount of funds in their emergency savings accounts.

•  Men have, on average, higher credit card balances than women do, about 22% more.

•  About 68% of Americans have credit card debt when they die, on average $4,531. Compare that to the number of people who have mortgage loans when they pass away (37%) and those who have car loans (25%), and you can see how prevalent credit card really is.

Rising credit card debt can be exacerbated when there isn’t an emergency savings account to fall back on, and our cultural climate of consumerism, one where more is always better, doesn’t help.

If you no longer want to be average in the amount of your credit card debt, meaning you want to get out from underneath your debt, there are solutions.

Tips to Get Out of Credit Card Debt

To break the cycle of debt, it’s important to reverse engineer how it works and understand what makes it so challenging to get out of. Credit card companies typically compound interest, which means that interest accrues on the debt, and then you also pay interest on the interest.

Related: What is the Average Credit Card Debt for a 30-Year Old?

To make the situation even more challenging, interest is sometimes compounded daily, and so it’s easy to see how interest can quickly add up. This is true especially when you make minimum payments. It’s even true if you pay more than what’s owed as a minimum payment, but still have a remaining balance. If you’re late on a payment, you’re often charged a late fee, which is added to your balance—and then you’ll owe interest on that new total amount, as well.

So, What Can You Do?

Here are four methods to consider to ultimately pay off your high-interest credit card debt. You can choose the strategy that fits your financial philosophy and needs best, continue paying on all your debts, and then focus on not adding to your credit card debt as you pay down what you currently owe.

Choices include:

•  Debt snowball method: Using this method, you’d rank your credit card debts by outstanding balances. Then, focus on paying off your smallest debt first, and use the sense of accomplishment you’ll feel to fuel your motivation going forward. Then, pay off the smallest of your remaining debts, continuing until you’ve paid off your credit card debt entirely. A Harvard Business Review study showed that people using this method tend to pay off their credit card debts the quickest.

•  Debt avalanche method: In this method, you’d rank your credit cards by the interest rate charged. Then, focus on paying off the card with the highest interest rate first, and then the next highest and so forth. This is also known as the debt-stacking or ladder method.

•  Debt snowflake method: As a different strategy, you can use any extra money collected—from gathering change to a side gig—to pay down your credit card balances.

•  Debt consolidation method: Using this method, you would consolidate your credit cards into one debt, with low-rate personal loans/a>. You can potentially reduce your interest rate by using a personal loan and streamline the number of bills you need to pay monthly.

Here’s another idea to consider. What has been billed to your credit cards that you don’t really need? It’s pretty common to subscribe to a service you think you’ll need but don’t use, or one that you’ll need for a short period of time only.

Yet, until you cancel that service/subscription, the monthly charge will keep getting added to your credit card balance. So, review those monthly charges and consider tools that help identify places you can cut back on expenses.

Personal Loans with SoFi

If, as part of your financial plan, you’ve decided to apply for a low-rate personal loan to consolidate your credit card debt, there are numerous reasons why SoFi could be a great choice. This includes:

•  We don’t charge an origination fee.

•  We don’t charge any prepayment penalties.

•  We make it fast, easy, and convenient to apply for your personal loan online.

•  Live customer service support is available every day of the week.

•  If you lose your job, we can temporarily pause your payments—and even help you find a new job.

•  You can find your rate in just two minutes’ time!

Ready to get started? Apply for your personal loan at SoFi today!

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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 on credit.
No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

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10 Questions About the Equifax Security Breach, Answered

Identity theft is a nightmare millions of Americans go through every year. It starts when a cybercriminal gets hold of your personal information (Social Security number, birth date, driver’s license number, etc.), and sells it to others who then pretend to be you.

Except it’s you on a spending spree. They might open bank and credit card accounts, or maybe file for a hefty income tax refund in your name. It can take months or even years to find out you’ve been victimized, and even longer to clean up the mess.

A year ago, Equifax, one of the big three credit reporting bureaus, disclosed that a data breach it discovered on July 29, 2017, may have exposed as many as 143 million U.S. consumers to the risk of identity theft. Seven months later, in March 2018, the company announced that another 2.4 million people had their data stolen in the same breach. That means close to half the U.S. population could feel some impact.

The fallout was substantial, including class action lawsuits, a Federal Trade Commission probe , and a move toward more regulation regarding corporate security defenses and timely disclosures. Still, anxious consumers continue to question how such a failure could happen and what’s next.
Here are answers to 10 common questions about the Equifax security breach and identity theft in general:

1. Should I ever Trust Equifax Again?

You don’t have much choice. Equifax is one of three major for-profit credit reporting agencies in the United States. The others are TransUnion and Experian. (There is no federal credit bureau.) Each agency collects and stores financial data submitted by creditors—large and small—you’ve dealt with over the years.

That information goes into the credit reports they sell to lenders, landlords, potential employers, and others. Those folks are their customers. You’re the commodity. That said, your personal stats should be more secure than they were a year ago.

Since the breach, Equifax has hired a new chief information security officer, Jamil Farschchi , who told Wired Magazine the company has invested $200 million in its data security infrastructure.

2. It took nearly six weeks for Equifax to disclose the 2017 security breach and months before we learned even more people were affected. Why so long?

All 50 states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands have enacted legislation requiring private or governmental entities to notify individuals of security breaches involving personally identifiable information.

Still, it can take weeks, months, or longer depending on protocols, to discover a data breach. A company is allowed to delay disclosure if law enforcement asks them to hold off. Of course, it’s also in a business’s best interests to try to get ahead of a hack before announcing it. A statement that reads, “We know what happened and we’ve fixed the problem” comes off a lot better than, “Sorry, folks. We have no clue what going on!”

3. If I didn’t do anything to protect myself when the Equifax security breach was announced, is it too late now?

Yes and no. A 2017 FTC study found that when leaked consumer data goes public, thieves will grab it and get to work trying to use it within minutes. So, the faster you take steps to put protections in place, the better off you’ll be.

If are still concerned about the Equifax breach, check to see if your data was affected . You also can get a free credit report annually from each of the big three credit bureaus, and it’s always smart to review those for errors.

Soon, thanks to new legislation, you’ll be able to freeze your credit for free, as well. New rules in the Economic Growth, Regulatory Relief, and Consumer Protection Act , signed by President Trump on May 24, 2018, should start in September. (Equifax, which planned to provide breach-related free freezes until June 30, told The New York Times they would extend the offer until the new law takes effect.)

4. I keep hearing the terms credit freeze and fraud alert. What’s the difference?

A credit freeze clamps down tight on your credit, while a fraud alert allows creditors to get a copy of your credit report as long as they take steps to verify your identity. According to the FTC, a fraud alert may stop someone from opening new credit accounts in your name but won’t necessarily prevent the misuse of your existing accounts.

You’ll still need to monitor all bank, credit card, and insurance statements for fraudulent transactions. The credit bureaus also now offer something called a “credit lock,” which is more convenient than a full-on freeze. But Consumer Reports says a lock doesn’t offer the same protections , so check it out before signing up.

5. Will a credit freeze hurt my credit rating?

No, freezing your credit won’t affect your credit score, and you’ll still be able to get free credit reports annually.

6. How do I contact the three major credit bureaus if I want to do a credit freeze or fraud alert?

For Equifax, call 800-349-9960 or go to their website ; for Experian, call 888-397-3742 or go to their website ; for TransUnion, call 888-909-8872 or go to their website .

7. When I’ve thought about cybercrime, I guess I’ve mostly been worried about somebody racking up charges on my credit card. What else can be compromised if my data is stolen?

Your identity is valuable to different people for different reasons. The big focus is on financial crimes, but the bad guys can use your Social Security number, passwords, and PIN numbers to get medical benefits, file false tax returns, or get certain government benefits.

They can create a fraudulent job history or steal your work if you’re a researcher or writer. They can open utility and other accounts in your name. The possibilities are pretty much endless.

8. If I think I’ve been the victim of identity theft, what should I do?

Report identity theft to the FTC at or call 877-438-4338. The FTC will use the information you provide to help create a personal recovery plan. Their website also offers a useful guide for how to proceed from there.

9. What can I do on a daily basis, to protect my data?

Practice good personal cyber hygiene.

•  Only give out your Social Security number when absolutely necessary. (Just because there’s a space for it on a form doesn’t mean you have to supply it.)

•  Don’t respond to unsolicited requests for personal information.

•  Pay attention to your billing cycles. If bills or financial statements are late, contact the sender. And review your credit card and bank accounts regularly—at least every month.

•  Enable and update the security features on all devices and be cautious when using public WiFi.

•  Create complex passwords and change them occasionally.

•  Don’t share passwords and PINs.

10. How can I be sure the companies I deal with are looking out for my security?

That’s a tough one. As a consumer, you can take steps to protect yourself, but once you engage with the outside world—by choice or not, as with Equifax—you can only hope companies handling sensitive information have a sound security plan .

When it comes to financial transactions or online services, more and more companies are embracing two-factor authentication (sometimes shortened to 2FA). This means going beyond a simple password and using a second verification tool: fingerprint or facial recognition, for example, or a numerical code.

And when you’re online, look at a website’s URL. If it begins with “https” instead of “http,” it means the site is secured using an SSL certificate (the “s” in https stands for secure). SSL certificates secure all your data as it moves from your browser to the website’s server. To get an SSL Certificate, the company must go through a validation process.

If you’ve been burned by a data breach (maybe even going so far as to get a credit freeze). it can be difficult to build back to the same level of confidence you had before—particularly with businesses that handle money electronically. That’s why it’s so important to do your research. You should always be confident in the type of encryption and the protections put in place by the those handling your finances.

With SoFi Invest®, investors have access to human advisors, but the diversified investment portfolios they create are influenced by sophisticated computer algorithms—or robo-advisors. Robo-advisors actually have built-in protections.

SSL encryption keeps your information safe, and SoFi account holders can enable two-factor authentication (using a verification code), as well as facial identification or Touch ID on iOS. And you can start small—investing with as little as $100.

A SoFi Invest account combines convenience and security to help put your money to work for you. Learn more about investing with SoFi Invest in under two minutes.

SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.

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How Does a Finance Charge on Credit Cards Work?

What is a finance charge? How about a purchase charge? The jargon used to describe credit card late fees is enough to make anyone’s head spin. Unfortunately, a survey by of 100 common credit cards found that while fees have remained stable (or even gone down a bit) thanks to recent annual percentage rate (APR) hikes, these charges are still pretty universal—and potentially very costly.

Of the 100 credit cards surveyed, for example, 98 charged a late fee for missed payments. And credit card companies made $104 billion from the fees and interest we all pay on our credit card debt. Any interest and fees we pay are collectively called “finance charges.”

Finance charges might sound like another complicated fee, but they’re really just a way of referring to the interest charges that accumulate on your credit card balance. The amount you pay in interest is determined by the credit card’s APR.

In an ideal world, we would all pay off our credit card balance in full at the end of each billing cycle. If you’re doing that, then you don’t have to worry as much about your interest rate or racking up finance charges. But in reality, nearly 45% of credit card accounts are considered “revolvers,” meaning they carry a balance from month to month.

And any time you have an unpaid balance, you’re probably going to be paying a finance charge on that money. Because most credit cards have sky-high interest rates (the average for new accounts was 17.01% in October, 2018), the amount of interest you’re paying can add up quickly.

What is a Finance Charge?

A credit card finance charge refers to all fees and interest you pay on credit card debt. You’re essentially paying the credit card company a fee in exchange for them financing your debt. Again, finance charges only come into play if you carry a credit card balance.

If you pay off your credit card balance in full when it’s due, or you’re paying your balance during a 0% interest rate promotion, then you won’t accrue any finance charges. Typically, there is a grace period between the end of a billing cycle and when the payment is due. After that due date, a finance charge is typically calculated based on the amount you owe, how long you’ve owed it for, and your APR at the time your bill is due.

Even if you make the minimum payment when it’s due, you can still accrue a finance charge if you don’t pay the full statement balance. The finance charge will simply be levied on the amount of debt you still owe, and a late fee can be additionally assessed if you don’t make at least the minimum payment by the due date.

Using the Finance Charge Formula

The finance charge formula is based on your annual percentage rate and credit card balance—which means the exact amount can vary from billing cycle to billing cycle.

The APR is used to calculate a daily interest rate, which you can figure out by dividing your APR by 365. You then multiply your daily interest rate by how much debt you carry on your credit card, and how many days you’ve carried that debt, to determine the total finance charge. This is added to what you already owe on your credit card.

For example, if your credit card has a 16% APR, then your daily interest rate is .16 divided by 365 days, which equals .0004383. That means you accumulate .04383% of interest per day. (Remember that when converting numbers into percentages, you need to divide by 100. That’s why 16% became .16 instead.)

That daily credit card interest rate of .04383% is then multiplied by the balance you’re carrying and by the number of days you’ve had this balance.

So if you carried an unpaid $1,000 balance for 28 days after it was due, then $1000 x .0004383 x 28 days = $12.27 in finance charges.

Using our example, you’re adding $12.27 to your credit card if you’ve been carrying a $1,000 balance on your card for 28 days with a 16% APR. That may not seem like a lot up front, but it can add up quickly, because if your balance isn’t paid off in full by the next billing cycle, you can incur another finance charge.

The Credit CARD Act of 2009 did put some limits on fees credit card companies can charge, but once finance charges start piling up, it can get a bit overwhelming. And P.S., if this math gave you a headache, you can always consult a finance charge calculator .

How Can I Get Rid of a Finance Charge on My Credit Card?

The only way to completely avoid paying a finance charge is to pay your credit card in full by the due date. If you’re already paying a finance charge, the only way to get rid of it is to pay off the existing credit card debt that’s incurring the charges. This can get you back to a clean, finance charge-free slate.

It should be noted that some credit cards offer a promotional 0% APR for a certain amount of time. During the promotional period, finance charges do not accrue. It is possible to use a 0% APR credit card to pay off existing debt.

These are usually called balance transfer credit cards. While there is usually a balance transfer fee, the promotional 0% interest rate can allow you to pay off your debt without incurring finance charges. However, promotional 0% interest rates are typically temporary, so if you aren’t able to pay off the new credit card within the promotional period, you could end up back in the same place you started.

Can a Personal Loan Help?

If you need to get out from under your credit card debt and stop incurring finance charges, one way to do that is to pay off the credit card debt with an unsecured personal loan. If you’re considering a personal loan to get out of debt, look for a loan with a lower interest rate than you are paying on your credit card.

With some credit card interest rates hovering around 20%, using a personal loan can be a simpler way to pay off your debt without dealing with exorbitant interest rates.

When taking out a personal loan, you can decide whether your interest rate is fixed or variable. And because personal loans have set terms, you’ll know exactly when you’re going to be out of debt, as opposed to chipping away at your credit card balance indefinitely.

If you’re considering paying off your credit card debt with a personal loan, keep in mind that some personal loans charge origination fees and prepayment penalties. Fortunately, SoFi personal loans don’t have origination, application, or prepayment fees.

If you’re stuck paying finance charges on your high-interest credit card, a personal loan can help. Check out SoFi personal loans if you’re ready to take control of your credit card debt—it takes just two minutes to find your rate.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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 on credit.

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