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If you’re looking for a tool you can use to borrow money when you need it, you may be wondering which is the better choice: a personal line of credit or a home equity line of credit (HELOC).

In this guide we’ll compare these two types of credit lines — both of which function similarly to a credit card but typically have a lower interest rate and a higher credit limit. We’ll also cover some of the pros and cons of using a personal line of credit vs. a HELOC.

What Is a Personal Line of Credit?

A personal line of credit, sometimes shortened to PLOC, is a revolving credit account that allows you to borrow money as you need it, up to a preset limit.

Instead of borrowing a lump sum and making fixed monthly payments on that amount, as you would with a traditional installment loan, a personal line of credit allows you to draw funds as needed during a predetermined draw period. You’re required to make payments based only on your outstanding balance during the draw period.

In that way, a PLOC works like a credit card. Generally, you can pay as much as you want each month toward your balance, as long as you make at least the minimum payment due. The money you repay is added back to your credit limit, so it’s available for you to use again.

You can use a personal line of credit for just about anything you like as long you stay within your limit, which could range from $1,000 to $100,000, and possibly more.

A PLOC is usually unsecured debt, which means you don’t have to use collateral to qualify. The lender will base decisions about the amount you can borrow and the interest rate you’ll pay on your personal creditworthiness.

Can a Personal Line of Credit Be Used to Buy a House?

If you could qualify for a high enough credit limit — or if the property you want to buy is being sold at an extremely low price — you might be able to purchase a house with a personal line of credit. But it may not be the best tool available.

A traditional mortgage — there are different types of mortgage loans — secured by the home that’s being purchased may have lower overall costs than a personal line of credit.

A variable rate, which is typical of personal lines of credit, might not be the best option for a large purchase that could take a long time to pay off. Your payments could go lower, but they also could go higher. If interest rates increase, your loan could become unaffordable.

If you use all or most of your PLOC to make a major purchase like a home, it could have a negative impact on your credit score and future borrowing ability. The amount of revolving credit you’re using vs. how much you have available — your credit utilization ratio — is an important factor that affects your credit score. Lenders typically prefer this number to be less than 30%.

💡 Recommended: Personal Loan vs Personal Line of Credit

What Is a HELOC?

A HELOC is a revolving line of credit that is secured by the borrower’s home. It, too, usually has a variable interest rate.

Lenders typically will allow you to use a HELOC to borrow a large percentage of your home’s current value minus the amount you owe. That’s your home equity.

A lender also may review your credit score, credit history, employment history, and debt-to-income ratio (monthly debts / gross monthly income = DTI) when determining your borrowing limit and interest rate.

💡 Recommended: Learn More About How HELOCs Work

Personal Line of Credit vs HELOC Compared

If you’re comparing a personal line of credit with a HELOC, you’ll find many similarities. But there are important differences to keep in mind as well.

Similarities

Here are some ways in which a personal line of credit and a HELOC are alike:

•   Both are revolving credit accounts. Money can be borrowed, repaid, and borrowed again, up to the credit limit.

•   Both have a draw period and a repayment period. The draw period is typically 10 years, with monthly minimum payments required. The repayment period may be up to 20 years after the draw period ends.

•   Access to funds is convenient. Withdrawals can be made by check or debit card, depending on how the lender sets up the loan.

•   Lenders may charge monthly fees, transaction fees, or late or prepayment fees on either. It’s important to understand potential fees before closing.

•   Both typically have variable interest rates, which can affect the overall cost of the line of credit over time. (Each occasionally comes with a fixed rate. The starting rate of a fixed-rate HELOC is usually higher. The draw period of a fixed-rate personal line of credit could be relatively short.)

•   For both, you’ll usually need at least a “good” FICO® score (670 and up on the scale from 300 to 850). Your credit score also affects the interest rate you’re offered and credit limit.

Differences

The biggest difference between a HELOC and a personal line of credit is that a HELOC is secured. That can affect the borrower in a few ways, including:

•   In exchange for the risk that HELOC borrowers take (they could lose their home if they were to default on payments), they generally qualify for lower interest rates. HELOC borrowers also may qualify for a higher credit limit.

•   With a HELOC, the lender may require a home appraisal, which might slow down the approval process and be an added expense. HELOCs also typically come with other closing costs, but some lenders will reduce or waive them if you keep the loan open for a certain period — usually three years.

•   A borrower assumes the risk of losing their home if they default on a HELOC. A personal line of credit does not come with a risk of that significance.

💡 Recommended: Credit Cards vs Personal Loans

Pros and Cons of HELOCs

A HELOC and personal line of credit share many of the same pros and cons. An advantage of borrowing with a HELOC, however, is that because it’s secured, the interest rate may be more favorable than that of a personal line of credit.

A HELOC may offer a tax benefit if you itemize and take the mortgage interest deduction. But there are potential downsides, too.

Pros and Cons of Personal Lines of Credit

Because you draw just the amount of money you need at any one time, a personal line of credit can be a good way to pay for home renovations, ongoing medical or dental treatments, or other expenses that might be spread out over time.

You pay interest only on the funds you’ve drawn, not the entire line of credit that’s available, which can keep monthly costs down. As you make payments, the line of credit is replenished, so you can borrow repeatedly during the draw period. And you don’t have to come up with collateral.

But there are other factors to be wary of. Here’s a summary.

Alternatives to Lines of Credit

As you consider the pros and cons of a HELOC vs. a personal LOC, you also may wish to evaluate some alternative borrowing strategies, including:

Personal Loan

With a personal loan, a borrower receives a lump sum and makes fixed monthly payments, with interest, until the loan is repaid.

Most personal loans are unsecured, and most come with a fixed interest rate. The rate and other terms are determined by the borrower’s credit score, income, debt level, and other factors.

You’ll owe interest from day one on the full amount that you borrow. But if you’re using the loan to make a large purchase, consolidate debt, or pay off one big bill, it may make sense to borrow a specific amount and budget around the predictable monthly payments.

Personal loan rates and fees can vary significantly by lender and borrower. You can use a loan comparison site to check multiple lenders’ rates and terms, or you can go to individual websites to find a match for your goals.

Auto Loan

If you’re thinking about buying a car with a personal loan, you may want to consider an auto loan, an installment loan that’s secured by the car being purchased. Qualification may be easier than for an unsecured personal loan or personal line of credit.

Most auto loans have a fixed interest rate that’s based on the applicant’s creditworthiness, the loan amount, and the type of vehicle that’s being purchased.

Down the road, if you think you can get a better interest rate, you can look into car refinancing.

Beware no credit check loans. Car title loans have very short repayment periods and sky-high interest rates.

Mortgage

A mortgage is an installment loan that is secured by the real estate you’re purchasing or refinancing.

There are many types of mortgage loans. You’ll likely need a down payment, and borrowers typically pay closing costs of 2% to 5% of the loan amount.

A mortgage may have a fixed or adjustable interest rate. An adjustable-rate mortgage typically starts with a lower interest rate than its fixed-rate counterpart. The most common repayment period, or mortgage term, is 30 years.

Your ability to qualify for the mortgage you want may depend on your creditworthiness, down payment, and value of the home.

Credit Cards

A credit card is a revolving line of credit that may be used for day-to-day purchases like groceries, gas, or online shopping. Well, you know. You likely have more than one. Gen X and baby boomers have an average of more than four credit cards per person, Experian has found.

Convenience can be one of the best and worst things about using credit cards. You can use them almost anywhere to pay for almost anything. But it can be easy to accrue debt you can’t repay.

Because most credit cards are unsecured, interest rates can be higher than for other types of borrowing. Making late payments or using a high percentage of your credit limit can hurt your credit score. And making just the minimum payment can cost you in interest and credit score.

If you manage your cards wisely, however, credit card rewards can add up. And you may be able to qualify for a low- or no-interest introductory offer.

Credit card issuers typically base a consumer’s interest rate and credit limit on their credit score, income, and other financial factors.

Student Loans

Federal student loans typically offer lower interest rates and more borrower protections than private student loans or other lending options.

But if your federal financial aid package doesn’t cover all of your education costs, it could be worth comparing what private lenders offer.

The Takeaway

A HELOC or a personal line of credit can be useful for borrowers whose costs are spread out over time, especially those who don’t want to pay interest from day one on a lump-sum loan that may be more money than they need.

If you’re a homeowner, tap your home equity with a generous HELOC brokered by SoFi. You might find that the rate and terms unlock lots of possibilities.

Check your rate on a SoFi Personal Loan.

FAQ

What is better, a home equity line of credit or a personal line of credit?

If you qualify for both, a HELOC will almost always come with a lower interest rate.

Can I use a HELOC for personal use?

Yes. HELOC withdrawals can be used for almost anything, but the line of credit is best suited for ongoing expenses like home renovations, medical bills, or college expenses. Some people secure a HELOC as a safety net during uncertain times.

How many years do you have to pay off a HELOC?

Most HELOCs have a “draw period” of 10 years, followed by a repayment period.

What happens if you don’t use your home equity line of credit?

Having a HELOC you don’t use could help your credit score by improving your credit utilization ratio.

How high of a credit score is needed for a line of credit?

Personal lines of credit are usually reserved for borrowers with a credit score of 670 or higher. A credit score of at least 680 is typically needed for HELOC approval, but requirements can vary among lenders. Some may be more lenient if an applicant has a good DTI or accepts a lower loan limit.

Does a HELOC increase your mortgage payments?

The HELOC is a separate loan from your mortgage. The two payments are not made together.

Photo credit: iStock/KTStock

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

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

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If you’re considering a personal loan, you might wonder what kind of impact it may have on your credit. It’s true that the application process can cause your credit score to dip temporarily, but a loan can potentially help it too.

We’ll run through all the ways a personal loan can affect your credit score, as well as when you might consider a personal loan for your financial life.

How Is Your Credit Score Calculated?

To understand how a personal loan can affect your credit, it helps to know the basics of how your credit score is calculated. According to FICO®, a company that generates credit scores, five principal components are used to calculate your FICO Score:

•   Payment History (35%): Your history of making on-time payments to lenders is a key factor, accounting for more than a third of your score.

•   Amounts Owed (30%): The amount of credit you are currently using is the second-most important factor.

•   Length of Credit History (15%): The length of time you’ve had credit accounts open, and in good standing, is also a factor. Opening new lines of credit will bring down the average age of your credit history.

•   New Credit (10%): This component considers the amount of new credit recently taken out.

•   Credit Mix (10%): This final factor takes into account the different types of credit you hold: credit cards, personal loans, mortgages, etc.

How Do Personal Loans Work?

A personal loan is a borrowed sum of money that is paid back in installments, with interest. Loan amounts typically range from $5K to $100K.

Common uses for personal loans include consolidating high-interest credit card debt, and funding large purchases such as home improvements, weddings, unexpected medical expenses, moving expenses, and funerals.

Recommended: Types of Personal Loans

Do Personal Loans Hurt Your Credit?

Any debts you have can impact your credit, so taking out a personal loan might lead to a drop in your credit score over the short term. On the flip side, there are ways for your personal loan to positively affect your credit score.

Here’s how a personal loan can impact your credit score, negatively or positively:

Con: Requires a hard credit inquiry

Taking out a loan often requires a hard credit inquiry, which can adversely impact your credit score. Hard inquiries remain on your credit report for two years, though their negative effect on your score is minor (typically 5 points or less) and lasts only a year.

Con: May increase amounts owed

The “amounts owed” on your credit score may increase because you are taking on new debt. However, if you’re consolidating credit card debt, you will reduce that debt by paying it down with the personal loan — your amount owed doesn’t change.

Con: Can impact your payment history if you miss a payment

If you miss a payment on your personal loan, that can negatively impact the “payment history” component of your credit score. That factor specifically looks at whether you make your debt payments on time.

Con: Some lenders charge fees

Fees can drive up the cost of a loan, beyond what you’re paying in interest. For example, an origination fee, which lenders charge upfront, is typically a percentage of the principal. And prepayment penalties discourage borrowers from paying off their loan early. (SoFi never charges any fees.)

Pro: Can add to your credit mix

Having a new loan type (and paying it back on-time) can positively impact the “new credit” and “credit mix” components of your score.

Pro: Can improve your payment history if you pay on time

Making on-time payments and showing responsible management of a personal loan is a nice checkmark for the “payment history” part of your credit score.

Pro: May help you keep your credit utilization ratio in check

If you’re using a personal loan to reduce credit card debt, it replaces revolving debt (your credit card debt) with an installment loan. Revolving debt is one you can continue adding to even when paying it down. An installment loan involves borrowing one specific amount and repaying it in — wait for it — installments. Because you won’t be able to add further debt to your installment loan, it may help you keep your credit utilization ratio under control, which can be a good thing for your credit score.

Pro: No collateral required

Loans can be either secured or unsecured. A secured loan is one that requires the borrower to put up collateral, such as a car or home. An unsecured loan requires no collateral.

When To Consider Taking Out a Personal Loan

There’s not a clearcut answer to whether a personal loan can hurt your credit, because everyone’s financial situation is different. But here are some instances when a personal loan may be appropriate:

•   You’re consolidating high-interest debt

•   You have an emergency expense you can’t otherwise afford

•   You’re paying for a home improvement project that will add value to your home

•   It’s your least expensive borrowing option

•   You don’t have any collateral to offer

Before you take on any debt, it’s always important to consider whether it’s really necessary and what other ways you might cover your costs. For instance, it’s often not recommended to take out a personal loan to pay for a vacation when you can scale back on your travel plans or simply wait until you’ve saved up enough money. It’s obviously a very different story if you have to cover the cost of a medical emergency.

Consider whether you can afford to make the payments on time. And make sure you understand the total cost of the loan, with interest and any fees added in. Also think about whether your credit score is high enough to qualify for competitive rates and terms, and whether it can withstand any dips applying for a loan might cause.

Recommended: How To Get Approved for a Personal Loan

The Takeaway

Applying for a personal loan requires a hard credit inquiry, which typically dings your credit score by around 5 points. But overall, as long as you don’t borrow more than you can pay back, and you make all scheduled payments on time, a personal loan can have a positive impact on your credit score over the long term. A personal loan can add to your credit mix, and will improve your available credit if you’re using it to pay off high-interest credit cards.

Shop around for the best personal loan offers for you. SoFi’s personal loan calculator can show you what your monthly payment might be in different scenarios. SoFi can give you a rate quote in minutes.

FAQ

Is a personal loan bad for your credit?

There’s no clearcut answer because personal loans can have a positive or negative impact on your credit score. The loan itself has less of an impact than how you manage your loan. If you never miss a payment, a personal loan can help your credit score over time. But if you can’t afford to make your monthly payments on time, that can hurt your score.

Will a personal loan affect my credit card application?

It can. If you applied for the loan recently, you may want to wait and see how your credit score is affected before applying for a credit card. A personal loan can have a positive or negative impact on your credit score, depending on your financial situation and how you manage the loan.

Will a personal loan affect my car loan application?

It can. A personal loan affects your “credit utilization,” which impacts your credit score. How much impact it has depends on your financial situation. If the personal loan is your only debt, for instance, your credit utilization might be able to accommodate both loans.

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

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

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

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It’s a common dilemma: Should you pay off credit cards or student loans first? The answer isn’t totally cut and dried. But if your credit card interest rates are higher than your student loan interest rates, paying down credit cards first will probably save you more money in interest.

But don’t stop there. Keep reading to learn how to calculate what’s best for your situation, and why. Along the way, you’ll learn more about how credit cards work, the complexities of student loans, and two very different strategies for paying down debt.

Prioritizing Your Debts

Experts are split over the best debt to pay off first. Some recommend you tackle the smallest balance first because of the psychological boost that comes from erasing a debt entirely.

However, from a purely financial standpoint, you’re better off paying off the debt that carries the highest interest rate first. That’s because the higher the interest rate, and the longer you hold the debt, the more you end up paying overall. This usually means tackling high-interest credit card debt first.

Keep in mind that prioritizing one debt over another does not mean that you stop paying the less urgent bill. It’s important to stay on top of all debts, making at least minimum monthly payment on each.

Failing to make bill payments can hurt your credit score, which can have all sorts of effects down the road. For example, a poor credit score can make it difficult to secure new loans at low rates when you want to buy a new car or home, or to take out a business loan.

You might consider setting up automatic payments on your loans. Automatic payments can make it easier to pay bills on time and juggle multiple payments.

If you’re having trouble making your monthly payments, consider strategies to make your payments more manageable, such as refinancing.

Student Loan vs Credit Card Debt

Before we get into if it’s better to pay off credit cards or student loans first, let’s look at how each debt is structured.

Student Loan Debt

A student loan is a type of installment loan used to pay for tuition and related schooling expenses for undergraduate or postgraduate study. Borrowers receive a lump sum, which they agree to pay back with interest in regular installments, usually monthly, over a predetermined period of time. In this way, student loans are similar to other installment loans such as mortgages, car loans, and personal loans.

At a high level, there are two types of student loans: federal and private. The U.S. government is the single largest source of student loans. Federal student loans have low fixed interest rates: Current rates are 4.99% for undergrad loans, and 7.44% for graduate and professional loans. These loans come with protections like income-driven repayment plans, deferment and forbearance, and loan forgiveness.

Private student loans are managed by banks, credit unions, and online lenders. They may have a fixed or variable interest rate, which is tied to the borrower’s credit score and income. Average interest rates range from 3.22% to 13.95% for a fixed rate, and from 1.29% to 12.99% for variable.

Private student loans don’t come with the same protections as federal student loans. For instance, they are not eligible for President Biden’s loan forgiveness plan.

Payback timelines vary widely. As with other loans, the longer your repayment timeline, the lower your monthly payment will be — but you’ll pay more in interest over the life of the loan. The shorter your repayment period, the larger your monthly payment, and the less interest you’ll pay.

Recommended: Types of Federal Student Loans

Credit Card Debt

Credit cards offer a type of revolving credit, where account holders can borrow money as needed up to a set maximum. You can either pay off the balance in full or make minimum monthly payments on the account. Any remaining balance accrues interest.

Credit cards usually come with higher interest rates than installment loans. The average credit card interest rate in September 2022 was 21.59%. But an individual credit card holder’s rate depends on their credit score. People with Excellent credit will pay an average of 18.04%, while those with Bad credit will pay closer to 25.14%.

Depending how the account is managed, credit card debt can be either very expensive or essentially free. If you always pay off credit cards in full each month, no interest usually accrues. However, if you make only minimum payments, your debt can spiral upward.

Recommended: Taking Out a Personal Loan to Pay Off Credit Card Debt

Should I Pay Off Credit Card or Student Loan First?

When it comes to student loan vs credit card debt, there’s no universal answer that fits everyone in every situation. A number of factors can tip the scales one way or another, especially the interest rates on your loan and credit card.

We’ll explore two scenarios: one in which paying off credit cards is the best move, and another where student loans get priority.

The Case for Paying Down Credit Cards First

If you are carrying high-interest credit card debt, you’ll likely want to focus on paying off credit cards first. As you saw above, the average credit card interest rate (21.59%) is significantly higher than the maximum student loan interest rate (13.95%). Even if your credit card interest rate is lower than average, it’s unlikely to be much lower than your student loan’s rate.

Credit card debt can add up quickly, and the higher the interest rate, the faster your debt can accumulate. Making minimum payments still means you’re accruing interest on your balance. And as that interest compounds (as you pay interest on your interest), your balance can get more difficult to pay off.

A high balance can also hurt your credit score, which is partially determined by how much outstanding debt you owe.

Paying Off Credit Card Debt

Once you decide to focus on paying off credit cards first, start by finding extra funds to send to the cause. Look for places in your budget where you can cut costs, and direct any savings to paying down your cards. Also consider earmarking bonuses, tax refunds, and gifts of cash for your credit card payment.

Next, make a list of your credit card balances in order of highest interest rate to lowest. The Debt Avalanche method refers to paying off the credit card with the highest interest rate first, then taking on the credit card with the next highest rate.

It bears repeating that focusing on one debt doesn’t mean you put off the others. Don’t forget to make minimum payments on your other cards while you put extra effort into one individual card.

You may also choose to use a Debt Snowball strategy. When using this method, order your credit cards from smallest to largest balance. Pay off the card with the smallest balance first. Once you do, move on to the card with the next smallest balance, adding the payment from the card you paid off to the payment you’re already making on that card.

The idea here is that, like a snowball rolling down a hill gets bigger and faster as it rolls, the momentum of paying off debt in this way can help you stay motivated and pay it off quicker.

Managing Your Student Loans

Meanwhile, it’s important that you continue making regular student loan payments while you’re prioritizing your credit card debt. For one thing, you shouldn’t just stop paying your student loans. If you do, federal student loans go into default after 270 days (about 9 months). From there, your loans can go to a collections agency, which may charge you fees for recouping your debt. The government can also garnish your wages or your tax return.

You can, however, typically adjust your student loan repayment plan to make monthly payments more manageable. If you have federal loans, consider an income-driven repayment plan, which bases your monthly payment on your discretionary income.

While this may reduce your monthly student loan payments, it extends your loan term to 20 to 25 years. That can end up costing you more in interest. So make sure the extra interest payments don’t outweigh the benefits of paying down your credit card debt first.

Refinancing Your Student Loans

It can also be a smart idea to refinance student loans. When you refinance a loan or multiple loans, a lender pays off your current loans and provides you with a new one, ideally at a lower rate.

You can use refinancing to serve a couple of purposes. One option is to lower your monthly payment by lengthening the loan term. This can free up some room in your budget, making it easier to stay on top of your monthly payments and redirect money to credit card payments. Just remember that lengthening the loan term can result in you paying more interest over the course of your loan.

Or you can shorten your loan term instead. This can be a good way to kick your student loan repayment into overdrive. Your payments will increase, but you’ll reduce the cost of interest over the life of the loan. In other words, you’re giving equal weight to paying off your student loans and your credit card debt.

When you refinance with SoFi, there are no origination or application fees.

To see how refinancing with SoFi can help you tackle your student loan debt, take advantage of our student loan refinancing calculator.

Take control of your debt by refinancing your student loans. You can get a quote from SoFi in as little as two minutes.

FAQ

Should you pay off your student loans or your credit cards first?

The answer depends on a number of factors, especially the interest rates on your loans and credit cards. But if your credit cards carry high interest rates, you’ll likely save more money in interest by paying off your credit cards before your student loans.

What is the best debt to pay off first?

From a purely financial perspective, it’s best to pay off your highest interest-rate debt first. This is called the Debt Avalanche method. Paying off the most expensive debt (usually credit cards) first will save you the most money in interest.

Is it smart to pay off credit card debt with student loans?

This is probably not a good idea. First of all, paying off credit cards with student loans may violate your student loan agreement, which limits the use of funds to tuition and related expenses. If you use a credit card exclusively for educational expenses like textbooks and computers, you might be able to use loan funds to pay it off. However, you should check your loan agreement carefully to make sure this is allowed.

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

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Your credit card statement can feel like information overload with all of its numbers and terminology. Understanding the definition of terms like outstanding balance, statement balance, and billing cycle can help you to navigate this monthly statement a little more easily.

So what is an outstanding balance, how is it different from a statement balance, and can it affect your credit score? Put simply, the outstanding balance on a credit card is what the amount of money you still owe to the credit card company is called. Knowing this figure is important to avoiding interest and potential effects on your credit.

What Is an Outstanding Balance on a Credit Card?

Outstanding balance is another way to express current balance. In fact, depending on your credit card issuer, your monthly statement and mobile app may use the term “current balance” instead of “outstanding balance.”

But what is an outstanding balance in credit card terminology? A credit card outstanding balance is simply the amount of money you have not paid to the credit card issuer — i.e., it’s what you still owe.

Your outstanding balance includes any purchases you have made on your credit card but have not yet paid off (from the current and previous billing cycles), but it also includes:

•   Interest earned on previous balances

•   Balance transfers (and any balance transfer fees)

•   Cash advances

•   Any other fees you may owe, like late fees or foreign transaction fees

Recommended: Closing a Credit Card with a Balance

Where to Find Your Outstanding Balance on a Credit Card

You can check your outstanding balance by calling your credit card issuer or accessing your account online or through the mobile app. Depending on the terminology the company uses, you may see the outstanding balance listed as your current balance or simply your credit card balance.

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

Current Balance vs Outstanding Balance

Current balance is simply another term for outstanding balance. Depending on your credit card issuer, you might see one term or the other used. In some cases, it may simply be labeled “account balance” or “credit card balance.”

Recommended: How to Avoid Interest On a Credit Card

Statement Balance vs Outstanding Balance

So what’s the difference between a credit card statement balance and outstanding balance? Your credit card statement balance is the total amount owed after a billing cycle. It can include any purchases made during the billing cycle, plus any balance, interest, and fees carried over from the previous billing cycle.

Once issued, the statement balance amount does not change, even if you continue to swipe your card for more purchases during the grace period (this is the period between statement closing date and due date, during which you won’t earn interest on your unpaid statement balance). As long as you pay off the statement balance in full by the due date, you should not accrue any interest.

Your outstanding balance encompasses everything you owe at a specific moment in time. Sometimes your outstanding balance can be higher than your statement balance; sometimes it may be lower. Consider this example:

Your billing cycle ends, and you now have a statement balance of $1,000. In the next week, you spend $500 more with your credit card. Your statement balance remains $1,000, while your outstanding balance grows to $1,500. But as long as you pay that $1,000 statement balance by the due date, you will not incur any interest — and your statement balance will drop to $0 until the end of the next billing cycle.

Recommended: Tips for Using a Credit Card Responsibly

Remaining Balance vs Outstanding Balance

Remaining balance refers to whatever amount is still due after you’ve made your monthly credit card payment. For example, if your statement balance is $500 but you only pay $300, your remaining balance is $200. This, along with the interest it accrues, becomes a part of your outstanding balance.

You can avoid accruing interest on a remaining balance by paying off your statement balance in full each month rather than only the credit card minimum payment.

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What Is an Average Outstanding Balance?

The typical amount of an outstanding balance can vary widely from person to person — it all depends on how much you use your credit card, what your credit limit is, and whether you carry a balance. That being said, your average outstanding balance is simply the amount you owe on a credit card, averaged over a certain period of time.

The average outstanding balance formula for a statement period would be the total of your balance for each day of the statement period, divided by the number of days in the cycle. This can be helpful to know given most credit card issuers calculate interest on a daily basis, based on your average daily account balance.

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Paying Your Credit Card Outstanding Balance: What to Know

The nuances of credit card balances can be tough to nail down, but understanding how they work — particularly outstanding balances — may help you avoid interest and impacts to your credit score.

Here’s the short version:

•   Paying the minimum balance due each month will help you avoid late fees and negative marks for late payments on your credit report.

•   Paying the statement balance in full by the due date will keep you from accruing interest.

•   Paying down the outstanding balance, or current balance, even outside of your normal payment cycle, can reduce your overall credit utilization, which influences your credit score.

How Interest Contributes to Outstanding Balances

When you make purchases with your credit card throughout a billing cycle, the card issuer has lent you money to cover the expenses. And if you don’t pay the lender the statement balance in full by the specified due date, any remaining balance will become part of your outstanding balance — and it will start accruing interest.

The best way to avoid paying credit card interest is to pay your statement balance in full by each due date.

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How an Outstanding Balance Affects Your Credit Score

When you carry over unpaid balances, you’ll do more than earn interest that you have to pay. You’ll also increase your overall credit utilization, which is the amount of your total available credit you’re using. That’s because your outstanding balance counts toward your credit limit.

For example, if your credit limit is $5,000 and your outstanding balance is $2,500, you’ve utilized 50% of your credit limit. In general, creditors prefer to see a credit utilization of 30% or lower. This signals to them that you can responsibly pay back your debts.

In fact, credit utilization is the second most important factor affecting your FICO credit score. It accounts for 30% of your overall credit score. Thus, carrying a high outstanding balance regularly can adversely affect your credit score.

For this reason, experts typically recommend paying off your full statement balance every month if you’re able. And if you make a large payment on your credit card during a billing cycle that increases your outstanding balance tremendously, you may want to pay it off early to reduce your credit utilization — or else you chance a drop in your credit score.

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The Takeaway

Credit cards can be confusing, especially when you’re new to the terminology. But once you understand how your statement and outstanding balances work and can responsibly make payments in full and on time, credit cards can be a great tool for boosting your credit score.

FAQ

Does outstanding balance mean past due?

Having an outstanding balance does not necessarily mean it’s past due. Your credit card requires a minimum monthly payment; if you have satisfied that payment, you do not need to immediately pay your outstanding balance. But keep in mind that you generally need to pay the full statement balance each month to avoid accruing interest.

How do I clear the outstanding balance on my credit card?

To clear the outstanding balance on a credit card, you can make a payment equal to the amount. This should bring the balance down to zero. However, you do not always have to pay your outstanding, or current, balance to avoid interest. Paying your monthly statement balance in full should keep you from accruing interest, even if your outstanding balance is higher.

Why is my outstanding balance negative?

Your credit card outstanding balance can go negative if you pay off the card and then receive a credit for a returned item or claim cash-back rewards from your purchases. If you want, you can request a check from the credit card issuer in the amount of the negative balance. Or, you can apply the negative balance on a credit card toward future purchases on the credit card.

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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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