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If you don’t pay your credit card bill, you could face more severe consequences than you might think. Though it will depend on your credit card issuer, you can generally expect to be charged a late fee as well as a penalty interest rate which is higher than the regular purchase annual percentage rate, or APR.

Life happens, and, from time to time, payments are missed, especially if you’re dealing with emergencies such as losing a job or a family crisis. In the event you have skipped a credit card payment, it’s crucial you understand what consequences you may face. That way, you can take steps to reduce the odds of it having a major impact on your financial health.

What Happens If You Don’t Pay Your Credit Card?

Consequences for missed credit card payments could include being changed late fees and possibly losing your grace period. It may also negatively affect your credit score since issuers report your payment activity to the credit bureaus — in most cases after 30 days.

There may be other consequences depending on how late your payment is and whether it’s your first time missing a payment.

Accruing Interest

When you don’t pay your credit card, interest will accrue and will continue to do so as long as you have a balance on your card. In essence, you are paying more for your initial purchase thanks to that interest.

The longer you go without paying your credit card, the more you risk your rate going up. Your credit card issuer may start imposing a penalty annual percentage rate (APR), which tends to be higher than your regular purchase APR. If this happens, you’ll end up paying more in interest charges. The penalty APR may apply to all subsequent transactions until a certain period of time, such as for six billing cycles.

Collections

Depending on your credit card issuer, your missed payments may go into collections if it goes unpaid for a period of time. You’ll still continue to receive notices about missed payments until this point.

More specifically, if you don’t pay your credit card after 120 to 180 days, the issuer may charge off your account. This means that your credit card issuer wrote off your account as a loss, and the debt is transferred over to a collection agency or a debt buyer who will try to collect the debt.

Once this happens, you now owe the third-party debt buyer or collections agency. Your credit card issuer will also report your account status to the major credit bureaus — Experian®, TransUnion®, and Equifax®. This negative information could stay on your credit report for up to seven years.

It’s hard to tell what third-party debt collectors will do to try and collect your debt. Yes, they may send letters, call, and otherwise attempt to obtain the money due.

Some collections agencies may even try to file a lawsuit after the statute of limitations expires. In rare cases, a court may award a judgment against you. This means the collections agency may have the right to garnish your wages or even place a lien against your house.

If your credit card bill ends up going to collections, take the time to understand what your rights are and seek help resolving the situation. Low- or no-cost debt counseling is available through organizations like the National Foundation for Credit Counseling (NFCC).

Bankruptcy

You may find that you have to declare bankruptcy if you still aren’t able to pay your high credit card debt and other financial obligations. This kind of major decision shouldn’t be taken lightly. You will most likely need to see legal counsel to determine whether you’re eligible.

If you do file for bankruptcy, an automatic stay can come into effect, which protects you from collection agencies trying to get what you owe them. If you successfully declare bankruptcy, then your credit card debt will most likely be discharged, though there may be exceptions. Seek legal counsel to see what your rights and financial obligations are once you’ve filed for bankruptcy.

Recommended: Understanding Purchase Interest Charges on Credit Cards

Making Minimum Payments

A minimum payment is typically found in your credit card statement and outlines the smallest payment you need to make by the due date. Making the minimum payment ensures you are making on-time payments even if you don’t pay off your credit card balance. Any balance you do carry over to the next billing cycle will be charged interest. You can also avoid late fees and any other related charges by making a minimum payment vs. not paying at all.

If you find you’re regularly struggling to make the minimum payment, or preferably, more than the minimum payment, it may be time to consider finding a lower interest rate. Carrying a balance longer-term on a high interest credit card can cause your debt to spiral.

💡 Quick Tip: Credit card interest rate caps have recently been proposed in response to rising interest rates. However, one option already available to borrowers is securing a fixed, lower-interest rate loan. A SoFi credit card consolidation loan may offer a lower interest rate, set terms, and a transparent pay-off plan.

What Happens if You Miss a Payment

If you can’t pay your credit card for whatever reason, it’s best to contact your issuer right away to minimize the impact. Let them know why you can’t make your payment, such as if you experienced a job loss or simply forgot. For the latter, pay at least the minimum amount owed as soon as you can (ideally before the penalty or higher APR kicks in).

If this is your first time missing a payment but you have otherwise paid on time, you can try talking to the credit card company to see if they can waive the late fee.

Some credit card issuers may offer financial hardship programs to those who qualify, such as waiving interest rates, extending the due date, or putting a pause on payments (though interest may still accrue) until you’re back on your feet.

Recommended: Breaking Down the Different Types of Credit Cards

15/3 Rule for Paying Off Credit Cards

The 15/3 payment method can help you keep on top of payments and lower your credit utilization — the percentage of the credit limit you’re using on revolving credit accounts — which can impact your score.

Instead of making one payment when you receive our monthly statement, you pay twice — once 15 days before the payment due date, and the other three days beforehand. This plan is useful if you want to help build your credit history and pay on time.

The Takeaway

Missing your credit card payment may not be a massive deal if it just happens once or twice, but it can turn into one if you continue to ignore your bill. Late fees, a higher penalty APR or, worse still, having your account go to collections could result. That’s why if you are having trouble paying your bill (or simply forget to), you should contact your credit card issuer ASAP.

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

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

How long can a credit card go unpaid?

The statute of limitations, or how long a creditor can try to collect the debt owed, varies from state to state, which can be decades or more.

What happens if you never pay your credit card bill?

If you never pay your credit card bill, the unpaid portion will eventually go into collections. You could also be sued for the debt. If the judge sides with the creditor, they can collect the debt by garnishing your wages or putting a lien on your property.

Is it true that after 7 years your credit is clear?

After seven years, most negative remarks on your credit report, such as accounts going to collections, are generally removed.

Photo credit: iStock/MStudioImages

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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.

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 .

This article is not intended to be legal advice. Please consult an attorney for advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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Credit cards, when used responsibly, can enhance your financial life, allowing you to build your credit score, earn rewards, and more. Unfortunately, if you’re not careful and make credit card mistakes, using a credit card can have the opposite effect on your financial life.

Here are some of the most common credit card mistakes to avoid, including some specific travel credit card mistakes to watch out for.

Credit Card Mistakes to Avoid

When using your credit card, here are some credit mistakes you could be making — and how you can avoid them by following some basic credit card rules.

1. Making Late Payments

Payment history is one of the most significant factors in determining your credit score. The more payments you miss, the more your credit score could go down, and it could take a fair amount of time to repair your credit.

A late or missed payment can stay on your credit report for up to seven years (unless you can prove it was a credit report mistake).

How to avoid it: Set up automatic payments, or set reminders to help yourself remember when your credit card payment is due.

2. Making Only Minimum Payments Monthly

While making minimum payments is important to avoid incurring late fees, it won’t allow you to avoid interest charges. In fact, by only making the minimum payment, you’ll end up paying a high amount of interest (assuming you’re not using a card in its 0% introductory period). You also risk getting further into debt if you keep using your credit card, and it could take years to pay off your balance in full.

How to avoid it: Budget carefully so you can pay off more than the minimum amount due or ideally, the entire balance off each month.

💡 Quick Tip: Credit card interest caps have become a hot topic, as the total U.S. credit card balance continues to rise. Balances on high-interest credit cards can be carried for years with no principal reduction. A SoFi personal loan for credit card debt may significantly reduce your timeline, however, and could save you money in interest payments.

3. Misunderstanding Credit Card Interest

Interest is a key part of what a credit card is, but the way credit card interest is charged can be confusing. A credit card can have a few different annual percentage rates (APR) depending on the type of transaction, including on purchases, cash advances, and balance transfers.

The bottom line: To avoid interest on new credit card purchases, make sure to pay off your balance in full each month. You’ll owe interest on any amount you carry over.

How to avoid it: Check your credit card agreement to understand how interest is charged, and aim to pay off your balance in full to avoid incurring interest.

4. Ignoring Your Credit Card Agreement

Credit card agreements contain important details like fees, your credit limit, and other important terms you’ll benefit from knowing. Ignoring credit card terms could lead to nasty surprises, like fees you didn’t anticipate paying.

How to avoid it: Set aside time to read your credit card agreement, and contact your credit card issuer if you have any questions about how credit cards work.

5. Neglecting Your Monthly Statement

It might seem like a slog, but reading your monthly statement is important to staying on top of your credit card account. For starters, it includes a plethora of important information, such as your statement balance, the amount of your minimum payment owed, and your payment due date. Plus, regularly reviewing your credit card statement can ensure you quickly spot any signs of fraud.

How to avoid it: Set reminders to look at your monthly statement to see how much you owe, and make sure to dispute credit card transactions you didn’t approve.

6. Getting Close to Your Credit Limit

Your credit card limit is the amount that you can charge your card. If you get close to hitting your limit, it could hurt your credit score because you’ll have a higher credit utilization ratio. This ratio compares your balance to your available credit, and the higher it is, the more adversely it could affect your score.

How to avoid it: Monitor your balance to ensure you’re not close to your limit — ideally, you’re only using up to 30% of what’s available to you or less. Some financial experts suggest using no more than 10% of your limit.

7. Applying for Multiple Credit Cards at Once

Each time you apply for a new credit card, lenders will conduct a hard inquiry, which tends to temporarily lower your credit score. While this dip might not make a huge difference, applying for multiple accounts could cause lenders to take pause. It can possibly give them the wrong impression as to why you want so many new cards.

How to avoid it: Get preapproved for a credit card before applying to see your chances of getting approved before submitting a full application.

8. Applying Without Comparing Credit Cards

There are many benefits and features that come with credit cards, and without comparing them, you may not end up opening a card that’s not the right fit. By shopping around and exploring different credit card rewards, you’ll ensure you understand your options and get the most competitive choice available to you.

How to avoid it: Take the time to think about the features you want the most from a credit card and do some research to narrow down your choices before applying.

9. Canceling Your Card on a Whim

Canceling a credit card could mean the issuer will require you to pay off your entire balance with interest. Plus, it could affect your credit utilization ratio since it will lower your overall credit limit. It also could shorten the length of your credit history, which is another factor used when calculating credit scores.

How to avoid it: Consider the consequences of canceling your credit card, and make sure to pay off the entire balance before you do so.

10. Not Reporting Lost or Stolen Credit Cards Instantly

The longer you go without reporting a lost or stolen credit card, the more likely you’ll be responsible for fraudulent changes that show up. Some credit card companies waive all fraudulent charges (or up to $50) as long as you’re quick to report.

How to avoid it: As soon as you notice your card missing, report it to your credit card company, and then continue to monitor your statements for any fraudulent charges.

11. Loaning Your Credit Card

When you give your credit card to someone else to use, you’re still responsible for the charges made on it. If the person you lent your credit card to doesn’t pay you back, then you’re stuck with the bill. The same applies with an authorized user on a credit card — you’re the one ultimately responsible for paying even if you didn’t make the charges yourself.

How to avoid it: Don’t let anyone borrow your card, and if you do, ask them to pay you upfront for the changes they intend to make.

Travel Credit Card Mistakes to Avoid

In addition to the mistakes above, take care to avoid these particular mistakes if you have a travel rewards credit card.

12. Overspending

To earn welcome or bonus offers, credit card companies typically require you to spend a minimum amount within a certain period of time. If you don’t plan ahead properly, you could end up making unnecessary purchases and racking up charges you can’t afford to pay off.

How to avoid it: Have a plan for how you’ll meet the minimum spending requirements, such as by timing a necessary big purchase with opening a new card.

13. Underspending

On the opposite spectrum, opening a new credit card and not meeting the minimum spend requirements could mean you’re disqualified from earning the welcome bonus. This would mean passing up a big benefit of getting the card.

How to avoid it: Review your spending habits before opening a credit card to ensure you can meet the card’s minimum spending requirements.

14. Spending Points vs Paying a Low Cash Price

Redeeming your credit card points is fine (it’s free!), but spending them on low-value rewards may be a waste. For example, you might be able to nab a flight or hotel at a much lower price in cash than you’d get if you used points for the purchase.

How to avoid it: Research reward redemption options to ensure you maximize the value from the points you’ve earned.

15. Not Using Your Benefits

Travel credit cards can offer other perks, such as annual credits toward travel and free stays at hotels. However, you’ll typically need to take advantage of them within a year, and they won’t roll over. In other words, if you don’t use these benefits in time, they’ll go to waste.

How to avoid it: Read your credit card agreement to see what additional benefits you can take advantage of.

16. Losing Your Points

Some points earned through rewards programs expire. In other cases, you’ll automatically lose your points when you decide to cancel your credit card.

How to avoid it: Use up your points before canceling your card, or check if they expire and make sure to use them up in time.

Recommended: What Is a Charge Card?

17. Failing to Transfer Points

Most card issuers allow you to transfer points to travel partners like airlines and hotels. This can offer a greater value for your points compared to what you’d get through the card issuer’s travel portal.

How to avoid it: Before booking travel, check whether it’s more valuable to book through the card issuer’s travel portal or by transferring points instead.

18. Not Understanding Credit Card Bonus Categories

Many travel credit cards offer bonus points if you spend in certain categories. These bonus rewards tend to vary for different cards. Not understanding what each card offers could result in losing out on earning extra points.

How to avoid it: Read through the terms and conditions of each travel credit card you own to ensure you’re maximizing your earnings.

19. Redeeming Points at Low Value

Not all points are created equal. You might not get the same value from your travel points if you redeem them for a gift card as opposed to with partner hotels or airlines, for instance.

How to avoid it: Do your research on how best to redeem your rewards for your credit card to get the most value.

Recommended: When Are Credit Card Payments Due?

The Takeaway

Knowing and avoiding common credit card mistakes can be a good way to avoid excessive credit card debt and keep your finances in good order. Responsible use of credit can be a foundation of financial fitness. What’s more, avoiding credit card mistakes can also help you enjoy perks, like rewards, that come with your account.

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

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

What are some of the most common credit card mistakes?

Some of the most common credit card mistakes include not paying on time, only making the minimum payment, and not understanding the terms of your credit card agreement.

What credit card mistakes can damage my credit?

Major factors that can damage your credit include late or missed payments, having a high credit utilization ratio, and having too many new credit inquiries. Making all of these mistakes can lead to damage to your credit.

Can problems arise from not using my credit history?

Having a lack of credit history could make it harder to qualify for loans. Or you may only qualify for ones with higher interest rates.

Photo credit: iStock/Mikolette

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 .

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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A balance transfer can affect your credit score either positively or negatively — though the upsides are likely to outweigh any adverse effects in the long-term if you manage the balance transfer responsibly. Typically, applying for a new line of credit triggers a hard credit inquiry, which temporarily lowers your credit score by five points or so.

However, the period of low or no interest that these cards offer can allow the cardholder to catch up on payments, lowering their credit utilization and possibly building their credit score. Read on to learn more about how a balance transfer can impact your credit score.

How Does a Balance Transfer Work?

A balance transfer is the process of consolidating existing high-interest debt to a different credit card. In other words, you’re effectively paying a credit card with another. Usually, you transfer the balance to a new credit card, but some cards allow you to do a balance transfer to an existing card.

Balance transfer credit cards often offer a low, or even 0%, annual percentage rate (APR) for a promotional period. This temporarily lowers the credit card interest rate, potentially allowing you to save on interest and more quickly pay off your debt. The length of the introductory APR offer varies by card, usually lasting anywhere from six to 21 months, after which the standard purchase APR will apply.

There is usually a fee required to make a balance transfer. This fee is either a flat rate or a percentage of the balance you’re transferring, such as 3% to 5% of your balance.

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

When to Transfer the Balance on Your Credit Card

There are two key things to look for in order to identify an opportune time for a balance transfer. First, you’re approved for a balance transfer card that offers a 0% APR introductory period. Second, you’re in a place where you can focus on paying off the balance you transfer to your new card before the promotional period ends.

It’s important to work aggressively on eliminating your balance during this period. Otherwise, once the promotional APR kicks over to the usual APR, the interest rate could potentially be as high — if not higher — than the APR of your old card.

If it may not be possible to pay off the balance within the introductory period, it’s worth looking into other options to avoid potentially getting yourself even deeper into debt. The average credit card interest rate was close to 22.00% in late 2025, according to data from the Federal Reserve, compared to late 2015, when it was less than 14%. In fact, high interest rates have recently elicited calls to temporarily cap credit card interest rates at 10%.

While there are vastly different viewpoints on credit card rate caps, there are other options to consider. Though less flexible than a credit card, a non-revolving credit line, such as a personal loan, typically offers lower interest rates, as well as predictable, fixed payments and a clear end date. It’s important to think about options that might be best for your current financial situation.

💡 Quick Tip: There is a lot of debate around credit card interest caps, currently. For those carrying high-interest credit card debt, however, one of the shortest paths to debt relief is switching to a lower-interest personal loan. With a SoFi credit card consolidation loan, every payment brings you closer to financial freedom.

How a Balance Transfer May Hurt Your Credit Score

While a balance transfer itself won’t directly impact your credit score, opening a new balance transfer card could have a ripple effect on your credit. A balance transfer to an existing credit card may not affect your credit score as much as opening a new account.
Here are a couple of the ways a balance transfer could cause your credit score to drop:

•   Applying for new credit results in a hard inquiry. Whenever you apply for a credit card, the credit card issuer will do a hard pull of your credit, which usually lowers your score by a few points. Hard inquiries stay on your credit report for two years. That being said, when compared to what affects your credit score on the whole, hard inquiries don’t impact your credit as much as, say, your payment history or credit utilization.

•   Getting a new card will lower the average age of your credit. Another way that opening a new balance transfer credit could hurt your credit score is by lowering the average age of your credit. The length of your credit history makes up 15% of your score. A longer credit history is an indicator that you’ve taken steps toward establishing credit.

Recommended: When Are Credit Card Payments Due?

How a Balance Transfer May Impact Your Credit Score

Now, let’s take a look at how a balance transfer can impact your credit score:

•   It can lower your credit utilization rate. As credit usage makes up a significant chunk of your credit score — 30%, to be exact — a balance transfer could give your credit score a lift. When you open a new credit card account, it will add to your total credit limit, which, in turn, can lower your credit utilization. As a credit card rule, the lower your credit utilization, the better it can be for your credit score.

   Here’s an example: Say you have two credit cards, and they each have a $10,000 credit limit, for a total credit limit of $20,000. You’re carrying a $10,000 balance. In turn, your credit usage is 50%.

   Now, let’s say you open a new balance transfer credit card that has a credit limit of $10,000. Combined with your other two cards, you’ll now have a total credit limit of $30,000. With a $10,000 balance, your total credit usage is lowered to about 33%.

•   You may be able to pay down debt faster. As you’re paying less interest — or perhaps no interest at all — during your card’s promotional period, you can more easily whittle away at your outstanding debt quicker. That’s because more of your payments will go toward paying down your principal. Plus, lowering that outstanding balance also feeds into lowering your credit utilization ratio — another positive when it comes to building credit.

•   A balance transfer can make it easier to stay on top of payments. A balance transfer may allow you to consolidate multiple balances into one monthly payment. This can make it easier to stay on top of making on-time payments, as you won’t have numerous due dates to juggle. In turn, this can have a positive impact on your payment history, which makes up 35% of your credit score.

Recommended: What is the Average Credit Card Limit?

Steps to Take After a Balance Transfer

So you’ve decided to do a balance transfer. Congrats! Now, here are the steps to take to make the most of it.

Stop Using Your Other Credit Cards

If possible, put a halt on spending with your other credit cards. That way, you can focus solely on paying off the outstanding balance you’ve transferred.

Still, you’ll want to keep your other cards open. You might consider using a credit card to make a small purchase every so often to keep those accounts active.

Know When the Introductory Period Ends

Make sure you’re aware of when the introductory APR for your balance transfer card ends. Also take time to note what the balance transfer card’s standard APR is. When the promotional APR ends, that rate is what your new APR will be.

Devise a Payoff Plan

A balance transfer is really only worthwhile if you aim to pay off your outstanding debt — or as much of it as possible — during the promotional APR period.

Let’s say you have $6,000 in debt, and you’ve secured a 0% APR that will last for 12 months. Aim to pay off $500 every month, or $250 twice a month. That way, you’ll have your debt paid off before the higher APR kicks in.

Make Shifts in your Spending

To ensure that you’re paying off the outstanding amount on your balance transfer card at a steady clip, look at ways you can scale back on your spending. Doing so will free up money that you could throw at your debt payoff efforts instead.

Along the same lines, see if you can increase your cash flow. Perhaps you can take on more hours at work or get a side hustle.

Is a Balance Transfer a Good Idea?

A balance transfer can be a solid move to make if you’re prepared to knock off the debt before the introductory APR period ends. Otherwise, you’re left with a mountain of debt — potentially with a higher interest rate than you currently have.

When deciding whether a balance transfer is right for you, you’ll also want to take into account any balance transfer fees you’ll pay. Do the math to ensure the amount you’ll save on interest will more than offset the cost of these fees.

Also note that, before you worry about balance transfer effects on your credit score, you’ll need to consider whether your credit is even strong enough for you to qualify. The most competitive balance transfer offers generally require at least good credit (meaning a FICO® score of 670 or above), further underscoring the importance of good credit.

If you’re not sure of where you stand credit-wise, don’t worry about taking a peek: here’s how checking your credit score affects your rating (spoiler: it doesn’t).

The Takeaway

A balance transfer can both hurt and help your credit score. Your credit score could temporarily suffer slightly after applying for a new balance transfer card and triggering a hard credit inquiry. However, a balance transfer has the potential to help build your credit score, as it can lower your credit utilization rate and make it easier for you to stay on top of your payments.

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

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

Do balance transfers hurt your credit score?

Balance transfers can both hurt or help your credit score. Making a balance transfer can hurt your credit score if you apply for a new card to do so, which requires a hard pull of your credit. It can also ding your score because it may lower the average age of your credit lines.

Will I need a credit credit score for a balance transfer?

To qualify for a balance transfer card with a zero or low interest rate, you’ll need a strong credit score. A good credit score to qualify is generally considered in the range of 670+.

Will I lose points with a balance transfer?

You will not lose rewards points with a balance transfer. That’s because your old creditor will generally consider the balance transfer as payment.

What are the negatives of a balance transfer?

Getting a balance transfer credit card can temporarily bring down your credit score by five points or so if it requires a hard inquiry on your credit report. Plus, it can lower your average credit age. Another downside of a balance transfer is that you’ll need to pay a balance transfer fee, which is either a flat rate or a percentage of the outstanding amount.

Photo credit: iStock/Roman Novitskii

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 .

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.

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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What is a good price to earnings ratio? An exploration into the popular stock analysis tool.

Investing in the cannabis industry is becoming a bigger area of interest for many investors, as marijuana becomes increasingly legal in different states around the U.S. As more states legalize cannabis use for recreational purposes, investors may be attracted to its growth potential.

But investing in cannabis carries some significant risks. It’s still a federally illegal substance, for one, and it’s unclear if there’s a path to national legalization. There’s a lot to take into consideration for investors.

Understanding the Cannabis Industry

As of 2024, 24 states in the U.S., as well as the District of Columbia, Guam, and the Northern Mariana Islands, have legalized cannabis for recreational use. In all 47 states and territories allow for legal cannabis use for either medical or recreational use. It’s important to know that cannabis remains federally illegal.

It’s likely, but not guaranteed that more states will legalize marijuana for recreational or medical use in the years ahead, too. Federal legalization is also a possibility, but for now, it’s uncertain. Given that recreational legalization has grown from zero to roughly half of states, though, many investors may see investing in cannabis as an opportunity.

Outside the U.S., Mexico legalized recreational marijuana in 2021, becoming the largest market for cannabis in the world. It followed Canada, which in 2018 made the same move.

There are many facets to the cannabis industry, too. There are producers (growers), processors (that may turn cannabis into cannabis-infused products), and sellers or retailers, who operate point-of-sale stores where customers can make purchases.

Why Consider Investing in the Cannabis Sector?

As noted, investors may be interested in the cannabis sector because of the opportunity it presents. The industry itself is still in sort of a gray area — though cannabis is legal in some places, it’s still federally illegal. Many, if not most companies operating in the cannabis space still have trouble accessing banking services, to put things in perspective.

If laws were to continue to change or soften in terms of federal law, it could spur even more growth in the industry. That, primarily, is what may drive investor interest in the sector.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

3 Ways to Invest in Cannabis

There are a few main ways investors can add exposure to the cannabis industry to their portfolio, such as buying individual stocks, or funds, such as cannabis-themed exchange-traded funds, or ETFs.

1. Buy Individual Cannabis Stocks

Historically, cannabis companies tended to remain private companies. But in Canada, medical use of marijuana has been legal since 2001, making the Toronto Stock Exchange and TSX Venture Exchange the listing venues for many cannabis-related businesses. Investors in the U.S. are able to trade Canadian stocks via American Depository Receipts (ADRs).

Then in 2018, medical marijuana company Tilray became the first cannabis company to directly list in the U.S., having its initial public offering (IPO) on the Nasdaq Stock Exchange. Since then, many other cannabis companies have gone public. There are also publicly-traded companies that offer cannabis or cannabis-related products or that are otherwise active in the cannabis space, such as Anheuser-Busch InBev, Altria Group, Molson Coors, and Scotts Miracle-Gro, among others.

While a listing on a major exchange does not imply that an investment is good or bad, stocks that are listed on an exchange are held to higher regulatory and reporting standards. Those that don’t qualify to be listed on an exchange typically trade over-the-counter (OTC).

However, no matter where an investor purchases a stock — on an exchange or OTC – it’s wise to be cautious.

Understanding the Types of Cannabis Companies

As noted, there are several types of companies that may operate in or adjacent to the cannabis industry.

Growers and Producers

When investors think of cannabis stocks, they may think of marijuana growers. Growers, or producers, are companies that actually produce and harvest cannabis plants. They may operate outdoor farms, greenhouses, etc., and operate more or less like a farm.

Cannabis-focused Biotech Companies

Investors may be interested in biotech companies that are developing prescription drugs using the compounds found in marijuana (cannabinoids).

Ancillary Product and Service Providers

There are companies that provide products and services to the cannabis industry itself, such as distribution, packaging, energy and lighting systems (for greenhouse growth), and hydroponics – a plant-growing method that involves no soil.

So, another way to look at investing in marijuana businesses is via companies that do the majority of their business in other markets, but have growing cannabis-related arms.

2. Investing in Cannabis ETFs for Diversification

An ETF is a basket of securities, such as stocks or bonds, that’s packaged into a single share that investors can find listed on stock exchanges. Many ETFs mirror the moves of an underlying index, like the S&P 500 Index or Nasdaq 100 gauge.

In general, ETFs have been lauded for their ability to help investors get exposure to a broad array of investments at a low cost. Similarly, a cannabis ETF may allow an investor to diversify their stocks holdings, while avoiding potentially pricey management or transaction fees and the research required when picking individual stocks.

Cannabis ETFs generally have higher expense ratios than those of the most popular, non-cannabis, low-cost ETFs. This is largely due to the fact that investing in individual marijuana stocks remains expensive, and the active management involved in curating stocks to include in the ETF.

Cannabis ETFs may also hold fewer stocks than more traditional ETF. This is typical of so-called thematic ETFs, ones that allow investors to wager on more focused or niche trends. While such funds allow for more targeted bets, investors may also be exposed to fewer names, making it more likely that a big move in one company will impact the price of the ETF as a whole.

3. Consider “Picks and Shovels” Ancillary Stocks

Investors may also consider a pick-and-shovel investment strategy that involves buying stocks of companies supporting the cannabis sector. As discussed, cannabis companies work with adjacent or ancillary companies to support them — farming materials and equipment, packaging, etc. Investors may look at investing in those companies, rather than cannabis producers, processors, or biotech firms, to get exposure to the industry.

“Pick-and-shovel” refers to the companies that would or might supply miners with equipment, rather than mining companies themselves.

What Are the Risks of Cannabis Investing?

Marijuana stocks have tended to be more volatile than the overall market. In addition, pot stocks have also been a target for short sellers — investors who bet shares of a company will fall. Investors who aren’t comfortable with such stock volatility may want to forgo investing in cannabis stocks.

Legal & Regulatory Risks

Because marijuana is still prohibited on the federal level in the U.S., there can be a legal risk to investing in pot-related companies. For instance, cannabis-related businesses in the U.S. are shut out from the banking system in many respects. Some financial companies do offer banking services to those businesses, however.

In addition, even if the U.S. were to reschedule cannabis and effectively legalize it nationwide, that doesn’t mean growers and retailers will be able to sell their products immediately under a streamlined regulatory structure. Some states may put in place new regulation that makes cannabis sales and usage onerous.

After Canada legalized marijuana in 2018, many people thought that the move would lead to quick sales and profits. But in reality, the opening and licensing of cannabis stores took place slowly. Plus, illegal marijuana sales continued to thrive and compete with the legal marketplace.

High Market Volatility

Because the legal marijuana industry is relatively young, so are many of the companies within it. Many of these companies have untested business models.

From a stock investment standpoint, many of the stocks that are currently for sale in the OTC market qualify as microcap stocks and penny stocks. Many of these companies have yet to post positive earnings and bear no track record. Microcaps typically experience a high rate of failure and are often highly volatile.

Separately, unexpected developments and news reports may hit a new industry like cannabis.

Fraud

In addition to the general market risk that comes with investing in a new industry, fraud often attaches itself to new, exciting, and less-regulated industries.

In a 2018 investor bulletin, the Securities and Exchange Commission (SEC) alerted investors that their office regularly receives complaints about marijuana-related investments. “Scam artists often exploit ‘hot’ industries to trick investors,” the regulator said.

The SEC said investors should particularly be wary of risks related to investment fraud and market manipulation. Investment fraud includes unlicensed, unregistered sellers; guaranteed returns; and unsolicited offers. Meanwhile, market manipulation can involve suspended trading in shares, changes to a company name or type of business, and false press releases.

The Takeaway

Investing relatively early in a potentially expanding sector may seem like an exciting endeavor. But investors should keep in mind that the cannabis industry may continue to encounter obstacles even if legalization on a broader scale occurs in the near future.

And outside the regulatory challenges, cannabis-related businesses tend to be newer, untested, and not yet profitable, posing greater risks for investors. The marijuana market may turn out to be an area of growth for stocks, but investors should weigh the considerable risks associated with it, too.

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FAQ

What are the top three cannabis stocks to invest in?

There are many cannabis or cannabis-related stocks that investors can invest in on the market, and what the “best” or “top” stocks are could vary from day to day. Investors should do their due diligence to make the best decision per their strategy.

Will cannabis stocks recover?

Historically, the market has bounced back from a downturn, and that holds true for most, if not all, market sectors.

How do I find and research cannabis stocks?

Investors can use online research tools or speak with their brokerage to generate a list of cannabis stocks, and then do their due diligence on those companies by looking at news reports and financial statements.

Is investing in cannabis stocks a good idea?

It’s neither a good nor a bad idea, as it all depends on the individual investor and how cannabis stocks may or may not fit into their investment strategy.

Can you invest in cannabis through a retirement account like an IRA?

Yes, it’s possible to invest in cannabis through certain retirement accounts, such as self-directed IRAs.