Prepayment Penalty: When Paying Off a Loan Early Can Cost You

If you recently got a bonus or just sold off the antique nutcracker collection you inherited from your Uncle Leo, you might consider putting that extra cash toward paying off your loans or getting ahead on your mortgage. After all, one frequently given nugget of financial wisdom is to use unexpected windfalls to pay down your debt. But what happens when paying down your loans comes with a prepayment penalty?

Loan prepayment penalties are fees lenders might include in their terms to ensure you pay a certain amount of interest on your loan before paying it off. It might sound crazy, but making extra payments or paying your loan off early can actually cost you more because of loan prepayment penalties.

The best way to avoid prepayment fees, of course, is to choose a personal loan or mortgage loan without prepayment penalties. If you’re stuck with a prepayment penalty on your loan, however, all is not lost. There are ways to avoid paying loan prepayment penalties. Here’s what you need to know in order to avoid prepayment penalty fees:

What is a loan prepayment penalty?

A loan prepayment penalty is an extra fee that allows lenders to charge you a fee for paying off the loan before the end of the term. The term of your loan is the repayment time period that you and your lender agreed on when you applied for the loan.

Personal Loan Prepayment Penalties

For example, if you take out a $6,000 personal loan to turn your guest room into a pet portrait studio and agree to pay your lender back $150 per month for five years, the term of that loan is five years. Although your loan term says it can’t take you more than five years to pay it off, some lenders also require that you don’t pay it off in less than five years.

The lender makes money off the monthly interest you pay on your loan, and if you pay off your loan early, the lender doesn’t make as much money. Loan prepayment penalties allow the lender to recoup the money they lose when you pay your loan off early.

Mortgage Loan Prepayment Penalties

When it comes to mortgages, things get a little trickier. For loans that originated after 2014, there are restrictions on when a lender can use prepayment penalties, which has made the penalties less common on mortgages. If you took out a mortgage before 2014, however, your mortgage may be subject to loan prepayment penalties. If you’re not sure if your mortgage has a prepayment penalty, check your origination paperwork or call your lender.

How much are loan prepayment penalties?

The cost of the prepayment penalty can vary widely depending on whether you took out a small personal loan or a substantial mortgage, and how your lender calculates the penalty. Lenders have different ways to determine how much of a prepayment penalty to charge. It behooves you to figure out exactly what your prepayment fee will be, because it can help you determine whether the penalty will outweigh the benefits of paying your loan off early. Here’s how the penalty fee might be calculated:

1. Interest Costs. If your loan charges a prepayment penalty based on interest, the lender is basing the fee on the interest you would have paid over the total term. To take our example from above, if you have a $6,000 loan with a five-year term, and want to pay the loan off in full after only four years, the lender may try to charge you 12 months’ worth of interest as a penalty.

2. Percentage of balance. Some lenders use a percentage of the amount left on your loan to determine your penalty fee. This is a common way to calculate prepayment penalty fees on mortgages. For example, if you buy a house for $500,000 and want to pay off the remaining balance six months after purchase, your lender might require that you pay a percentage of your remaining balance as a penalty.

3. Flat fee. Some lenders also simply have a flat fee as a prepayment penalty. This means that no matter how early you pay your loan back, you’ll have to pay a previously-agreed-to penalty fee.

How can you avoid prepayment penalties?

Trying to avoid prepayment penalties can seem like an exercise in futility, but it is possible. The easiest way to avoid them is to take out a loan or mortgage without prepayment penalties. If that is not possible, you still have options.

First, you can stick to the loan terms you agreed to. It might feel like you’re letting the lender win by making monthly payments for the full term of your loan, but it ensures you avoid penalty fees.

You can also take a look at your loan origination paperwork to see if it allows for a partial payoff without penalty. If it does, you might be able to prepay on a portion of your loan each year, which allows you to get out of debt sooner without requiring you to pay a penalty fee. For example, some mortgages allow larger payments of up to 20% of the purchase price once a year—without charging a prepayment penalty. This means that while you might not be able to pay off the full mortgage, you could pay up to 20% of the purchase price each year without triggering a penalty.

Finally, some lenders shift their prepayment penalty terms over the life of your loan. This means that as you get closer to the end of your original loan term, you might face less harsh penalty fees, or no fees at all. If that’s the case, it might make sense to sit on Uncle Leo’s nutcracker fortune for a year or two until the prepayment penalties no longer apply.

If you’re looking for a loan or mortgage, remember that there are lenders like SoFi that don’t impose prepayment penalties. With no prepayment penalties, you can use an unexpected cash windfall to pay down your debt fast without worrying about fees.

If you’re looking for a loan or mortgage with no prepayment penalties, check out SoFi personal loans and mortgages today.

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A How to-Guide on Avoiding the Most Common Credit Card Fees

There are few annoyances in this world that compare to unexpected bank fees, and credit card fees are some of the most frustrating. Here’s a not-so-fun fact: The average credit card charges six different types of fees —some cards have as few as one fee, others charges as many as 12. *Takes deep sip of wine.*

While smart use of a credit card may allow you to earn rewards and build a credit history, there can be a sinister side to some credit cards. The average American carries an approximate balance of $6,354 on multiple credit cards . And getting out of credit card debt can be particularly challenging, especially if your credit cards have high interest fees.

Breaking Down the 6 Main Credit Card Fees

Can you name six different types of credit card fees off the top of your head? It’s okay, almost no one can, because it’s pretty crazy that, on average, credit cards ding you in six-plus ways. Still, the best way to sidestep fees is to know what they are. Sounds obvious, but understanding what types of behaviors to avoid is your primary defense in the battle against fees. Here’s a summary of the most common credit card fees, and a few tips on how to avoid them.

1. Annual Fees

An annual fee is the yearly price you pay to use a credit card. Not all credit cards have annual fees, but most reward-heavy and premium cards do. It’s not inherently bad to pay an annual fee on a credit card, but it does require busting out a calculator and doing some math. To justify paying an annual credit card fee, you should earn enough in rewards to cover the fee and then some.

To avoid it: Lots of cards have no annual fee or will waive an annual fee in the first year. When choosing a credit card, you’ll want to do some comparison shopping and annual fees should be something you pay close attention to. Ultimately, if you’re going to pay a fee for using a rewards card, you should make sure you’ll be cashing in on rewards you’ll actually use.

2. Late Payment Fees

Late payment fees are pretty self-explanatory. Basically, some banks will ding you if you miss a payment. As of 2017, late payment fees are capped at $38, so that’s about what you’ll pay, until the amount gets adjusted again for inflation.

To avoid it: Make your payments on time by setting a calendar reminder (or two). If you still can’t seem to remember your due date, set up an automatic payment for at least the minimum monthly payment. If you do miss a payment, call your credit card company and ask them to waive the fee. (If you’re a first-time offender, they might be amenable to it.)

3. Cash Advance Fees

When you use a credit card to withdraw cash from a bank or ATM, you will almost always be charged a cash advance fee. Cash advance fees generally range from 2% to 5% of the amount you withdraw or $10, whichever is higher. Though the rate is different per lender, credit card issuers are required to disclose the method they use to calculate your cash advance fee, so it is a good idea to research their method. Remember, the interest rate on a cash advance is likely to be higher than on “normal” credit card purchases, and interest accrues immediately.

Related: Consult our Credit Card Interest Rate Calculator to find out how much interest you are paying on your credit card debt.

To avoid it: Don’t use your credit card like a debit card. If you’re going to take out cash, it should be with a debit card. If you do have to take out a cash advance on your credit card, try to pay it back as soon as possible. And to avoid needing to take out a cash advance in the future, establish a cash emergency fund that’s easily accessible.

4. Balance Transfer Fees

When you transfer a credit card balance to a new card with a lower interest rate, the new credit card issuer may charge you a fee. The fee is usually 3% of the balance being transferred. Balance transfer cards usually offer 0% interest rates to new customers who want to transfer their credit card debt—so charging a fee allows them to make some money on the initial transaction.

This is another fee where the math could work in your favor. If you’re paying off your credit card debt, and you can transfer your debt to a card with 0% interest, that might be worth the small fee. However, that 0% interest deal might only last a certain amount of time—then a higher interest rate kicks in, and if so, make that part of your calculation.

To avoid it: If a balance transfer card would stress you out with its tight timeline before it’s interest rates change, you could instead consider taking out a personal loan to pay off your credit card debt. A personal loan will usually charge a lower interest rate than your credit card, but it will allow you pay off your debt on a timeline that’s right for you.

5. Foreign Transaction Fees

If you use a credit card while traveling outside of the country, you may be charged a foreign transaction fee of around 3%. Once very common, these fees are declining in popularity thanks to the rise of cards with no foreign transaction fees.

To avoid it: Choose a card that doesn’t charge foreign transaction fees. There are lots of options out there, it’s just a matter of shopping around. Airline cards don’t generally have foreign transaction fees, but plenty of other cards have eschewed these fees as well. If you aren’t ready for a new credit card, you may be able to use your debit card to take out cash once you get to your foreign destination without as many fees.

6. Finance Charges for Outstanding Balances

A finance charge includes not only interest but other charges as well, such as financial transaction fees for the cost of borrowing that you can be charged if you don’t pay your balance in full each month. Some folks consider finance charges separate from credit card fees, but it’s the largest expense associated with credit cards.

Simply put, the higher the annual percentage rate (APR) on your credit card, the more you’ll owe if you can’t pay your balance in full. The average APR on credit cards is just over 16% .

To avoid it: Pay off your credit card balance in full each month. If you’re unable to do that, pay as much as you can—every dollar counts.

If you’re currently chipping away at a balance, you may want to consider taking out a personal loan to pay off your credit card. A personal loan won’t have confusing fees and the payback schedule is straightforward.

Using a personal loan to pay off your debt is a particularly good idea if you can lower your rate of interest. Considering the 16% average APR on credit cards, you could save hundreds or thousands on interest if you opted for a loan with a lower interest rate.

Ready to see if a personal loan could get you out of credit card debt, while helping you save money on interest payments? Get a quote for a SoFi personal loan in as little as two minutes.

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.

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Saving Money with a Debt Consolidation Loan

You might be the kind of person who relishes spending money on exciting purchases, but can’t stand paying for boring things, like $8 shipping or a $25 oil change. And while it’s fair to be stingy sometimes, it doesn’t make sense to stress out about the inevitable costs of living while ignoring the far more important kind of spend: how much of your money goes toward accruing interest on debt.

The average American family has approximately $16,000 in credit card debt , and even more if you’re counting other types of consumer debt. If they’re paying the average credit card interest rate of 16.4% APR, they’re shelling out thousands of dollars per year on interest charges alone. That’s worth putting some thought and action toward. If you have credit card debt, use our Credit Card Interest Calculator to see how much interest you are paying.

With interest rates running into double digits, it’s no wonder people are seeking out ways to lessen interest payments. That’s where a debt consolidation loan comes in. Here’s how to determine if it is the right choice for you.

What are debt consolidation loans?

A debt consolidation loan is another name for a personal loan that you use to pay off other sources of debt, such as credit card debt. You’re basically just taking out a new loan out from a bank, credit union, or other non-bank lender and then using that money to pay off existing debt.

This is not the same as debt or credit relief, where a credit counselor helps you reduce interest rates or eliminate debt altogether. Credit relief programs can help you consolidate your debt, but they aren’t getting you a new loan—it’s only consolidation.

With a personal loan—also called a debt consolidation loan—you can merge multiple payments into one streamlined payment and potentially lower the combined interest rate. To put it in perspective, the average credit card interest rate is 16% APR.

Credit Card ConsolidationCredit Card Consolidation

When should you take out a personal loan for debt consolidation?

Most people considering a personal loan—also called a debt consolidation loan—feel overwhelmed by having multiple debt payments every month. A personal loan can lighten this load for two reasons. For one, you can lower the interest you pay on your debt, which means you could potentially save money on paying interest over time.

For two, it can also make it possible to opt for a shorter term, which could mean paying off your credit card debt years ahead of schedule. If it’s possible to get lower interest than you have on your current debt, or a shorter term on your debt to pay it off faster, a personal loan could be worth looking into.

On the other hand, you’ll also want to be careful about fees that might come with your new loan, separate from the interest rate you’ll pay. For example, some online lenders charge a fee just to take out a personal loan, and some don’t, so you’ll want to do your research.

How are personal loans used for debt consolidation?

Generally, people seeking debt consolidation loans have multiple sources of debt and want to accomplish two things: First, lower their interest rate—and thereby pay less each month—and reduce the amount they have to pay over the life of their loan. Second, they are trying to merge multiple loans into one, making it easier to keep track of monthly payments.

With a lower rate of interest, you are able to lower your monthly payment, shoring up money for other expenses or financial goals. You can also opt for a shorter repayment term, which shortens your payback period and gets you out of debt faster.

Who is eligible for a personal loan for debt consolidation?

If you have one or more sources of debt where the interest rate is higher than 10%, it’s worth exploring a personal loan. While there’s no guarantee that you’ll find a lower interest rate, you can’t know unless you get quotes from a few lenders. (And these days, it’s a pretty painless process. If it proves difficult, find yourself a different lender.)

Those with the best credit scores will typically qualify for the best rates on their new personal loans, but don’t let an average or even poor score keep you from requesting quotes. This is especially true if you have more than $10,000 in credit card debt and those cards charge exorbitant interest rates, which most of them do.

Also know that your credit score isn’t the only data point that’ll be considered in determining whether you qualify for a loan and at what rate. Potential lenders typically also consider employment history and salary, and other financial information they deem important in determining loan-worthiness.

A personal loan isn’t for everyone. If you’re doing it only for convenience and there isn’t a legitimate financial motive, it’s probably not worth it. Instead, focus that energy on paying back the money you owe as efficiently as possible.

While personal loans can be a great tool to reduce interest payments, it doesn’t reduce the actual debt you owe. If you’re looking to get out of debt so you can focus on other financial goals, but the interest rates on your debt are making it nearly impossible, a personal loan could be exactly what you need.


Considering a personal loan to consolidate your debt? Head to SoFi to see what rates you may qualify for.

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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Refinance Federal Student Loans: What to Consider

Graduating from college and starting your career is a time filled with questions and excitement. On the one hand, everything is new and getting to check all the “firsts” (first solo apartment, first salaried job, first absolutely terrible post-grad roommate) off your list is incredibly rewarding. On the other hand, some of those first financial questions can be just a bit overwhelming, especially when it comes to student loans.

Understanding your student loans, whether they are private or federal, and how much you need to pay to make a dent is all new territory and brings on even more questions. But know that you’re not alone. The latest numbers suggest over 44 million people in the country have a total of $1.4 trillion in student loan debt.

As you start managing your post-grad budget, you might realize that student loan payments are a large portion of your monthly bills. If that’s the case, it’s a good idea to start learning about student loan refinancing. Can it get you a lower interest rate? How does refinancing differ from student loan consolidation? And will any of this save you money?

The most important answer, first: Yes, student loan consolidation and refinancing can save you money. However, they are both different, and you’ll need to figure out which option is a better fit for you. Now let’s get into the nitty-gritty.

What is federal student loan refinancing?

If you graduated with student loans, you likely have a combination of private and federal student loans, which are loans funded by the federal government. Direct subsidized loans or Direct PLUS loans are both examples of federal student loans.

Interest rates on federal student loans are fixed and set by the government, so you can’t refinance at a lower rate and keep it as a federal loan. However, you can refinance your federal student loans into private loans with a new—ideally, lower—interest rate.

When you refinance into a private loan, you lose some of the benefits that come with a federal loan, which is worth keeping in mind. However, the new loan (and the new interest rate) could translate to a lower interest rate and paying off loans sooner.

What is the difference between federal student loan refinancing and student loan consolidation?

Student loan consolidation and student loan refinancing are not the same thing, but it’s easy to confuse the two. In both cases, you’re essentially signing new loan terms that replace your old student loans.

Consolidation takes your student loans and bundles them together. This allows you to work with the provider of your choice and qualify for new repayment options. Consolidation, however, does not get you a lower interest rate. Refinancing, on the other hand, takes your old loans and finances them at new interest rates with a private lender.

You can consolidate federal loans into a federal Direct Consolidation Loan at no cost. This keeps your loans federal and can give you a longer repayment timeframe, and simplifies the repayment process to help you not miss payments. But it doesn’t necessarily save you money. Generally, the new interest rate on your federal direct consolidation loan is the weighted average of your original loans’ interest rates. For some people, even if it doesn’t save them money, the streamlining of loans is worthwhile.

What are the benefits to federal student loans?

There are a number of benefits to federal loans that aren’t always available for private loans. For example, you may be eligible for the Public Service Student Loan Forgiveness program if you’re working in public service and have made 120 loan payments.

You may also have access to certain income-based repayment plans or protections on your loans if you default or miss payments. However, as with all things, there are pros and cons. Loan forgiveness is great if you qualify, but double-check the requirements before thinking you can just write off all that debt. And income-based repayment plans can be a life-saver if you’re in between jobs or just getting started, but it may mean you pay more over the life of your loans.

Should I refinance my federal student loans?

It depends on how much you might save with a lower interest rate from a student loan refinance, versus how likely you are to use the benefits that come with having federal student loans.

First, you can use the SoFi student loan calculator to figure out how much you might save with a lower interest rate. In general, borrowers often refinance federal graduate student loans and PLUS loans, since those have historically offered less competitive rates.

Next, ask yourself: Are you going to use the programs or benefits that come with federal student loans? These include income-based repayment plans , as well as loan forgiveness for teachers, doctors, or even lawyers in public service. If that’s you, great, but if it’s not, that’s OK too. (There is also some concern Public Service Loan Forgiveness programs could disappear .

There are some downsides to income-driven student loan repayment plans, too. You can end up paying more in interest or get hit with a higher tax bill after your loan is forgiven. However, depending on your financial situation, that flexible repayment plan could be a saving grace. It depends on how much you have in federal student loans and how confident you are about your repayment options.

The last thing you’ll want to consider before you opt to refinance your student loans is the terms of your new student loan. Weigh all the costs and benefits, and figure out what makes sense for you. We know you can do it. After all, you’re a college graduate.

If it’s right for you, check your rates in two minutes to refinance your federal student loans. SoFi’s student refinance loan is a private loan and does not have the same repayment options/benefits offered by federal programs. You should explore and compare federal and private loan options, terms, and features to determine what is best for you and your situation.

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.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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A History of Credit (and How to Manage Yours Better)

Alfred Bloomingdale, Diners Club developer and grandson of the famous department store founder, once said , “The day will come when the plastic card will make money obsolete.” At the time, this might have sounded futuristic, but today 62% of Americans think society will become cashless in their lifetimes, with all purchases made electronically.

So how did we get to a place where cash is on the way out, and credit is everywhere? The origin of the credit card, and its subsequent rise, can help explain the current credit landscape, and lend powerful insight into how to control your own credit today.

The Origins of Credit

Here’s how the story goes: Businessman Frank McNamara was having dinner at a New York City restaurant in 1949 when he realized he forgot his wallet. Rather than dine and dash, he came clean and asked if he could sign for the meal and pay later.

Though some say this legendary dinner never happened, everyone agrees McNamara founded Diners Club, the world’s first multipurpose charge card , in 1950. McNamara sold Diners Club memberships to friends and acquaintances willing to pay $3 for the “sign now, pay later” privilege at participating restaurants and hotels.

Related: Psychologists Explain How Money Matters Affect The Mind

Until that point, only individual stores extended credit to customers. If you couldn’t pay for, say, a dress or a new suit at the general store—and the owner knew you were good for the money—you could run up a tab and pay cash later. But the Diners Club card provided the benefit of credit at multiple locations instead of just one establishment.

And Then Came the “Big Four”

Of course, future entrepreneurs and banks wouldn’t let Diners Club monopolize the charge and credit market for long. Eventually, other cards came on the scene—most notably Visa, Mastercard, American Express, and Discover.

Visa . In 1958, Bank of America issued the BankAmericard—the first true credit card—to customers in California. While the original Diners Club card required payment in full at the end of each month, BankAmericard users could pay off purchases over time. In 1976, BankAmericard became Visa.

Fun fact: Visa is pronounced the same in every language—ideal for a now global corporation.

Mastercard . BankAmericard got a run for its money when a group of banks joined forces in 1966 to create the Interbank Card Association (ICA). In 1969, ICA created Master Charge: The Interbank Card, which became Mastercard in 1979.

Fun fact: Mastercard was the first payment card issued in the People’s Republic of China.

American Express . The American Express Company has been around since 1850, but it didn’t issue its first charge card until 1958. Like Diners Club, the American Express card had to be paid in full each month. That changed in 1987 with the introduction of the Optima card—the first true credit card by American Express.

Fun fact: Elvis Presley was one of the earliest American Express card members.

Discover . Discover is the newest major credit card network on the scene. Sears launched the Discover card in 1986, distinguishing it from the pack by charging no annual fees and offering higher credit limits than other cards at the time.

Discover was also the innovator of cash rewards on credit card purchases—back in 1986. At that time, Discover cardholders could earn rewards of up to 1% cash back on all purchases.

Fun fact: Discover Financial Services purchased Diners Club International in 2008.

How Credit Cards Have Changed Over Time

A lot has changed since McNamara’s legendary dinner. Take a look at some of the biggest shifts in the credit industry:

The Ubiquity of Credit

In the early decades, credit was curbed by restrictive interstate banking laws. But credit’s big breakthrough came in 1978, when the Supreme Court ruled to allow nationally chartered banks to charge out-of-state customers the interest rate set in the bank’s home state.

Credit expanded as a result, and today, the average American credit card holder has nearly four cards .

The Evolution of Fees

When Diners Club began, it made money by charging stores a 7% fee on all transactions. Today, credit card companies charge interest on debt, too, so they make money when you don’t pay your bill in full. Also, Diners Club used to charge nominal membership fees, but by the 1980s, many credit card companies eliminated annual fees to stay competitive.

The Advent of Rewards

The ’80s also brought tangible rewards for using credit cards instead of cash. Discover pioneered cash rewards, allowing cardholders get a percentage back on purchases charged. And in 1989, Citibank made a deal with American Airlines to give consumers reward points to use for future flights.

Today, consumers continue to use credit card rewards programs to earn cash or points for future purchases, including travel. In fact, more than 80% of credit card users have rewards programs associated with their cards.

How Different Cultures Pay for Things

Credit may be king in the United States, but other countries have varying relationships with money based on their unique culture, history, and economy.

While 67% of Americans and 81% of Canadians have at least one credit card, less than half of the people in Australia, Austria, France, and Germany have one credit card to their name. Outside of North America, people rely on debit cards far more than credit cards for electronic payment.

What’s more, in places like Austria and Germany, cash is actually the preferred method of payment —and they have packed wallets to prove it. It’s typical for Germans to carry more than $120 in their wallets, and for Austrians to hold nearly $150. Americans, on the other hand, usually carry less than $75 in cash.

Why Germans Pay Cash for Almost Everything

Believe it or not, a whopping 82% of all transactions in Germany are conducted in cash, compared to 46% of transactions in the United States. Why the reluctance to pay with plastic? For some, using cash makes it easier to keep track of money and spending. Cash also helps maintain anonymity and privacy—after all, you can’t track a cash-paying customer the same way you can trail credit card purchases.

But Germany’s preference for cash (and related fear of debt) probably has more to do with history than anything else. Remember, the World Wars wreaked havoc on the country’s economy. When Germans were forced to convert their reichsmarks to the new deutsche marks in 1948, they lost 93% of their savings . Painful memories like that tend to linger, influencing attitudes toward money in general.

How to Control Your Credit

Across all cultures, credit is a powerful tool that must be managed wisely. Here are some ways to control your credit to make it work for you.

Building Your Credit From the Ground up

It might sound enticing to pay for everything in cash (and thus stay out of debt), but most of us don’t have the cash flow to pay for college, buy a car, and purchase a home outright. Besides, even if you do have the cash to buy everything you need right now, when the day comes to apply for a loan, you’ll need a solid credit history to qualify.

(In the old days, lending was much more subjective .) If you’ve never had a single credit card or loan, your credit history is minimal, which means you pose a higher risk to lenders. In that way it pays to borrow, as long as you do so responsibly—spend less than you earn and pay your bills on time, every time.

It Pays to Pre-Finance

Of course, credit cards aren’t the only way to pay for purchases and build a strong debt payment history. Pre-financing (getting access to a sum of money in advance of a purchase), such as taking out a personal loan, is another option. When you apply for a loan, you’re requesting a specific amount of money from a lender and agreeing to repay that loan over a predetermined period of time.

Credit cards work differently. When you pay on credit, the credit card network (e.g., Visa) pays the merchant (e.g., Home Depot) for your purchases, and you pay the network back for your purchases each month. If you don’t pay your balance in full, you’ll be charged interest on future payments.

Recommended: Personal Loans – The Key Ingredient to Navigating Life’s Ups and Downs Like a Boss

Between the two options, pre-financing offers the benefit of lower interest rates and shorter loan terms, helping you get out of debt quicker. After all, if you don’t have a system in place to pay off purchases in a reasonable time frame, credit card debt can haunt you for a long time.

Think about it: If you’ve racked up $15,000 in credit card debt at an interest rate of 17%, and make a payment of $250 each month, it will take you 134 months (11+ years) to pay off your debt—debt that includes more than $18,000 in interest, by the way.

The Skinny on Credit Scores

Whenever you borrow money via a personal loan or use your credit card, your lenders and creditors send details of those transactions to national credit bureaus (Equifax, Experian, and TransUnion). That information is then used to assess your creditworthiness, which is expressed as a three-digit credit score that represents the risk you pose to lenders.

The higher your credit score, the less risky you are in their eyes. FICO scores are the ones used most often in lending decisions in the United States, with scores typically ranging from 300 (poor) to 850 (exceptional).

Your credit score comprises five categories, and each one has an impact:

•   Payment history: Late or missed payments drag down your score.

•   Amounts owed: High balances can hurt you; maxing out your credit cards is even more damaging.

•   Length of credit history: A long history can increase your score.

•   Credit mix in use: A healthy mix of credit cards, student loans, a mortgage loan, etc., can boost your score.
•   New credit: Opening several credit accounts in a short period of time can damage your score.

The Difference Three Digits can Make

Your credit score counts for a lot. It often helps creditors and lenders determine approval for credit, as well as the interest rate you’ll have to pay once you’re approved.

Typically, the higher your score, the lower the interest rate you’ll receive. Unfortunately, the reverse is also true, and the difference can be more than you bargained for. When it comes to car loans, for instance, a low score typically increases the cost of a $20,000, 60-month loan by more than $5,000 .

Giving Your Score a Boost

If your credit score isn’t where you want it to be, there’s good news: Scores aren’t set in stone. Try these tips to improve yours:

Do's and Don'ts of Credit Cards

Getting out of Credit Card Debt With a Personal Loan

Sometimes the problem is bigger than a low credit score. Unfortunately, some people get so deep into debt that it’s hard to find a way out on their own. But there’s good news on that front, too.

A personal loan allows you to consolidate high-interest credit card debt into one low-interest loan with a fixed monthly payment. (We’re not kidding about high interest: Currently, the average annual percentage rate for variable-rate credit cards is 16.38% .)

And, instead of transferring your debt to another credit card, you can get a loan that charges zero origination or balance-transfer fees. It’s no wonder refinancing your credit card debt with a personal loan is a smart financial move.

Related: Check out our Credit Card Interest Calculator to see how much interest you are paying on your credit card debt.

Plus, even if your score isn’t an accurate portrayal of how financially responsible you are, you might still qualify for a loan. SoFi, for example, looks at more than just your credit score, considering your employment history, debt payment record, and cash flow, too.

Clearly, credit cards have been a significant part of culture for most of our lives—and that’s not necessarily a bad thing, or bound to change any time soon. When managed effectively, credit cards are valuable tools to help you pay for the things you need and to sustain the life you want.

If you feel weighed down by credit card debt, it’s not too late to eliminate the burden—simply start taking steps to control your credit, rather than letting it control you.

Check your rate for a personal loan to consolidate high-interest credit card debt, and then share this article with others who would love to learn how to manage their credit better.

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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