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A bank guarantee is a promise by a financial institution that it will assume liability for a business contract if one party fails to uphold its obligation to another. In this way, the bank acts like a cosigner for a buyer or borrower on a business agreement, reducing the risk for the seller or lender.

This can be a valuable assurance for organizations that are conducting financial transactions. For a small fee, bank guarantees often enable small businesses to enter into contracts with larger companies with which they otherwise would not be able to do business. Read on to learn more about how bank guarantees work and their pros and cons.

What Is a Bank Guarantee?

A bank guarantee promises that, if one party in a business agreement fails to meet its obligations, the bank will cover its debts. By backing up a transaction, it adds confidence to riskier deals.

Bank guarantees involve a thorough review of the business applicant’s finances and credentials. If, after this due diligence, a commercial bank feels confident that an applicant (the debtor) will be able to uphold their contractual obligations, the bank may offer the guarantee to the other party (the beneficiary). This can lead to greater assurance that the transaction will go smoothly.

Bank guarantees are usually a part of more complex financial transactions between businesses. The average borrower won’t need to worry about bank guarantees for auto loans, mortgages, or personal loans.

A little more detail on bank guarantees for business clients of a financial institution:

•   Companies often use bank guarantees for complicated contracts involving goods and services. If a vendor fails to provide goods or services that have already been paid for, a bank guarantee ensures reimbursement for the business using that vendor.

   If, on the other hand, a buyer fails to pay for goods or services that have already been delivered or rendered, the bank guarantee covers the unpaid balance for the seller.

•   Because a bank guarantee might protect a buyer or a seller, it may be easier to think of them in terms of the beneficiary (the company that requires a bank guarantee to feel protected and move forward with a contract) and an applicant (the company that must apply for the bank guarantee to close the deal).

How Do Bank Guarantees Work?

If a contract includes a bank guarantee, that guarantee will specify an amount to be repaid (or the goods or services to be delivered) and a set timeframe in which the transaction will happen. The contract will also spell out the bank’s responsibility should the applicant fail to meet their contractual obligations.

To assume this risk, banks charge applicants a fee for the guarantee, expressed as a percentage of the cost or value of the transaction, typically around 0.5% to 1.5%.

If the bank deems a contract particularly risky, it might require the applicant to offer collateral. Unlike with secured personal loans, where a house or car might serve as collateral, bank guarantee collateral is typically liquid assets, like stocks or bonds.

Recommended: Business vs. Personal Checking Accounts: What’s the Difference?

Types of Bank Guarantees

There are two main types of bank guarantees: financial bank guarantees and performance guarantees.

Financial Bank Guarantee

With a financial bank guarantee, a bank promises to repay a debt if the borrower (or buyer) defaults on the agreement. For example, an applicant may purchase goods and services from a large company, receive said goods and services, and never pay the bill. In this instance, the bank would settle the debt with the large company since the funds can’t come out of the borrower’s bank account.

What Is a Performance Guarantee?

In this situation, if an applicant fails to perform the obligations laid out in contract (e.g., supplying parts to a company), the beneficiary can make a claim with the bank for the losses incurred from the non-performance of contractual obligations.

Performance failure might also mean that, though the goods or services were delivered, they did not meet quality standards specified in the contract. In these situations, the bank would step in to offset those losses.

Examples of Bank Guarantees

Bank guarantees can serve many purposes, usually between two businesses. Here are a few of the guarantees that banks often issue:

Rental Guarantee

A rental guarantee protects a landlord when entering into a contract with a company (like a restaurant or retailer) that wants to lease a space. This guarantee serves as collateral for a rental lease.

Advanced Payment Guarantee

An advanced guarantee protects a company that has paid in advance for goods or services that weren’t delivered. You may also hear this referred to as a cash guarantee. If the deal isn’t satisfied, the company that has paid out in advance will be refunded.

Performance Bond Guarantee

A performance bond is a kind of financial guarantee for a business deal, to protect against one party failing to meet its obligations. You may also hear this called a contract bond. If, say, a contractor doesn’t complete the work they agreed to do, a performance bond guarantee can protect the party paying for the project. That entity would be compensated for their loss.

Warranty Bond Guarantee

When a bank provides a warranty bond guarantee, that protects the buyer in a transaction, ensuring that goods are delivered as specified. This could refer to the quality and condition of the items as well as the timing of their arrival.

You may also hear this term used in another situation. Sometimes referred to as a maintenance bond, a warranty bond guarantee can be a financial guarantee in which a builder promises to protect the owner of a construction project from problems with workmanship or faults with materials that could occur after the project’s completion. A financial institution or insurer will back up this promise.

Payment Guarantee

A payment guarantee is quite simply what it sounds like: It guarantees that, if, say, a buyer fails to send adequate funds for a purchase, the bank will step in and cover the shortfall. It allows a seller to feel confident that they will be paid in full on a predetermined date.

Recommended: Bank Guarantees vs Letters of Credit: What’s the Difference?

Pros and Cons of Bank Guarantees

Here’s what you need to know about the upsides and downsides of bank guarantees.

Pros

Among the most important advantages or a bank guarantee are the following:

•   Reduced costs: While not free, a bank guarantee can be a cost-effective way to encourage confidence and help a deal go through. It may be less expensive to obtain, say, than taking out a small business loan to cover a potential debt.

•   Reduced risk: A bank guarantee reduces risk since the bank promises to pay if one party doesn’t hold up their end of the deal. In this way, a bank guarantee can open up new opportunities for businesses, especially those without a long or solid credit history.

•   Quick activation: It typically takes only a few days to obtain a bank guarantee.

•   Enhanced credibility: Before offering a guarantee, a bank does a comprehensive assessment of an applicant’s financial standing. Earning a bank’s backing through a guarantee demonstrates that the bank finds the applicant company to be credible.

Cons

Next, the potential drawbacks of bank guarantees to be aware of:

•   Stringent approval guidelines: Bank guarantees aren’t given to just any entity. A business must show that it merits this backing. Not every applicant will qualify.

•   Collateral requirement: If a venture seems particularly risky, banks may require collateral from applicants; this can be risky for startups with limited funding.

•   Complex regulations: There have been scams involving bank guarantees in some international transactions. Using a bank guarantee for an international deal may therefore require many complex steps and assurances before it moves forward.

The Takeaway

In business transactions, a bank guarantee promises that the financial institution will cover any debts to one party if the other party does not meet its obligations. Larger companies often require small businesses and startups to obtain a bank guarantee before doing business with them. These guarantees can help a small or new business secure large deals since the bank has shown confidence in them.

That said, if you’re focused on your personal finances and are considering your options, see what SoFi offers.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is the difference between bank guarantees and letters of credit?

Both bank guarantees and letters of credit add confidence to business deals, with slight differences. With a bank guarantee, the financial institution promises to step in and pay debts, if needed, for the party they guaranteed. A letter of credit, useful in international trade, substitutes the bank’s credit for a business’. The bank will guarantee payment if the business defaults on their obligation, but only once certain criteria are met.

What is the purpose of a bank guarantee?

The purpose of a bank guarantee is to add confidence to a contract between two parties. If one party fails to uphold its contractual obligations or defaults on a loan, the bank promises to step in and uphold the contract and pay the debt that may result.

How can I get a bank guarantee?

If a business is requiring a bank guarantee to enter into a contract, contact your bank (or your business’ bank) and request an application. The bank will then review the completed application to determine your creditworthiness, typically within a few business days.

Photo credit: iStock/eclipse_images

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Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
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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Getting married can be a pricey proposition, with the average wedding in the U.S. now running $35,000. If you don’t have access to a large stockpile of cash, you may think you’ll never be able to afford the kind of wedding you envision. But that’s not necessarily the case. The key is to start budgeting and saving well ahead of the big day.

Whether you long for a fairy tale wedding or you prefer something more scaled back, there are ways to save for your dream day that will ensure you have the magical moment you’ve always wanted without having to start off your marriage mired in debt.

Set a Budget

Do you want a big lavish wedding worthy of the royals? A destination wedding? Or maybe you want something more intimate with just a few friends and family? There are different levels of spending when it comes to weddings, and deciding what is most important to you can help you determine just how much you’ll need to save.

Is the venue a priority? The number of people? The food? The DJ (or band)? It’s smart to start by making a list and getting a solid estimate of the costs for each of your need-to-haves and your want-to-haves. It’s also wise to leave a little wiggle room for unexpected wedding costs. Little things like the marriage license, dress or suit alterations, and even insurance costs, can start to eat into your budget pretty quickly.

Start a Savings Plan

Before you’ve locked in the date, you and your partner can start a savings plan. Some couples open a separate bank account and set up automatic monthly transfers to that account to build their wedding fund. When savings are automated, you often don’t notice the missing funds. And by picking an account with a competitive interest rate, your money can make money while you continue to plan and save.

If you’re thinking about financing part of your wedding, you’ll want to start investigating your options, which can range from credit cards to personal loans (which typically have lower rates than credit cards), early on and weigh the pros and cons of taking on debt.

Put the Wedding First

Sure, you may want to go on vacation, eat at fancy restaurants, and buy those new clothes, but that will put you further from your goal. Instead of spending on those luxuries now, cutting back and putting that money into your shared dream wedding account can help you get to your savings goal quicker.

There are also some simple ways to cut back that won’t make you feel deprived. For example, you can take local day trips or regional vacations instead of traveling afar. Eating out just once a month and cooking at home more can cut costs. You could even get swanky and hold cocktail hour with friends at your house instead of going to happy hour. Your new bank account will thank you.

Recommended: The Cost of Being in Someone’s Wedding

Do It Yourself

One way to keep wedding costs down is to plan the majority of the wedding yourself. If you already have experience managing projects, then this should be within the realm of your abilities. Researching the typical steps and fees associated with weddings before making any concrete decisions can be helpful. If that feels daunting, you may want to keep in mind that wedding planners cost an average of $2,100. And while there are advantages to using a planner (they already have a contact list of professionals and know their rates, saving you a lot of time and energy), the downside is you could be getting a one-size-fits-all experience instead of the personalized ceremony and party you may want.

Recommended: 8 Tips for a Budget Dream Wedding with Budget Breakdown

Comparison Shop

Just like other big expenses, getting more than one quote for each service you need can help you find the best price point to fit your needs and wants. Does your preferred venue charge a premium for a wedding, but a lower price for a party? You may want to consider negotiating the price. Calling multiple DJs and catering services can help you ensure you are not overpaying. New York City is going to have very different rates than, say, Asheville, North Carolina. This might even be a factor in deciding when to have your wedding, too. For a better idea of how much costs can vary, you can check out this comparison of costs by state .

You can wind up saving a ton of money by doing away with an expensive venue altogether and looking for a free or really inexpensive location, like parks, gardens and even beaches.

And if you’re able to hold your celebration on a weekday or during off-season, you’re likely to find some additional savings. For example, you can pick Friday instead of Saturday; or you can have a fall or winter event to help lower your costs.

Reassess the Dress

Maybe your dream wedding includes a Vera Wang gown, but your bank account can’t swing that. Consider shopping for a vintage dress and having it altered. Or if you want a more modern look, you don’t necessarily have to buy brand new — wedding dresses are usually only worn once and then either sit in the back of a closet or get sold or donated. Resellers often offer beautiful dresses at a fraction of the initial cost.

Consider this: Dresses less than three years old are usually sold for half their original price. And that Vera Wang might not be out of reach after all if you buy it used. Designer brands can sell for 60% to 70% of their original cost.

Recommended: What is the Ideal Wedding Budget?

Where not to Cut Costs

While you might not have much of an appetite on your big day, your guests likely will, so it’s a good idea not to scrimp on the food. It doesn’t have to be a five-star, multi-course meal, but if you want to create a memorable experience for all, it’s smart to offer quality food that doesn’t leave anyone grumbling about “wedding food.”

And what good is a dream wedding if you have bad or no photos to remember it? A good photographer can capture all of the moments of both you and your guests. These are photos that you will cherish when you are older and wiser, that will adorn your dresser and be sent out to family, so skimping here is best avoided if you can. The average cost of a wedding photographer is about $2,900, but It could end up being the best you put toward your special day.

Recommended: 2024 Wedding Cost Calculator with Examples

The Takeaway

Saving for your dream wedding might seem impossible, but it’s within your grasp if you’re willing to put in the time and effort. By cutting a few everyday costs and making automatic transfers into a high-yield savings account every month, you and your soon-to-be spouse will be able to slowly but surely build your wedding fund.

You can also find ways to trim wedding costs while still staying true to your vision for the day. If you find you’ll still need to rely on some type of financing to pay for your big day, be sure to look at all your options to find one with the least cost.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

Photo credit: iStock/standret

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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.

Adding supplementary credit cards — credit cards tied to a primary credit card account — can be a good way to help someone establish credit. For example, adding a supplementary credit card for a child can help them build credit, since they will get the benefit of the primary cardholder’s good credit history. Someone working to rebuild their credit could also benefit.

Still, it’s important to keep in mind that the primary cardholder is responsible for any charges made by any authorized users on the account. Read on to learn more about who can benefit from a supplementary credit card and the pros and cons of adding an authorized user to your account.

What Is a Supplementary Credit Card?

A supplementary credit card, also known as an authorized user credit card, is a secondary credit card tied to the account of an existing user. This existing user could be a trusted friend, family member, or caregiver. The primary cardholder is responsible for all charges made by any authorized users or supplementary credit card holders.

Recommended: What Is Considered a Fair Credit Score?

How Do Supplementary Credit Cards Work?

When you add a supplementary credit card to your credit card account, your credit card company will send a new physical card. The credit card issuer will typically mail the card to the address of the primary cardholder in order to prevent fraud.

In some cases, the supplementary credit card number will be the same as the card number of the primary credit card. In other cases, it may have a different number. Either way, all charges made on the account — including those made by supplementary cardholders — are the responsibility of the primary cardholder.

Supplementary Credit Card Annual Fees

For most credit cards, there is not a charge to add a supplementary credit card or authorized user. However, some premium cards, such as The Platinum Card from American Express, do charge an annual fee for additional cards.

Supplementary Credit Card Sign-Up Bonuses

Typically there is not a sign-up bonus or welcome offer for adding a supplementary card user. If you want to enjoy credit card bonuses, you must apply as the primary account holder.

Supplementary Credit Card Earnings and Redemption Rates

The earnings rates for supplementary credit cards are the same as the rates for the primary credit cardholder. Because the primary cardholder is financially responsible for all charges, they will receive the benefits of all rewards, regardless of which account makes the charges.

Who Needs a Supplementary Credit Card?

A supplementary credit card can be useful for someone who does not meet the credit card requirements to qualify for a credit card on their own.

For instance, you can get a supplementary card for a child to help them establish credit. Adding them to your account also offers an opportunity for you to teach them the ins and outs of using a credit card responsibly.

You might also add a trusted friend or family member to your account to help them build their credit score although this will depend on the primary cardholder keeping the account in good standing. Another reason you might add an authorized user to your account is to allow them to take advantage of travel or other benefits when you are not with them.

It’s also possible to add someone as an authorized user without actually giving them a card. This can allow them to enjoy the benefits to their credit score without the risk that they’ll overspend or otherwise use the card irresponsibly.

Pros and Cons of Supplementary Credit Cards

While there are benefits to supplementary credit cards, there are also downsides that are worth noting. Consider these pros and cons.

Do Supplementary Credit Cards Affect Your Credit Score?

Yes, using a supplementary credit card can affect the credit score of both the primary and the secondary user. Depending on how a credit card is used, the effects could be either positive or negative.

If all cardholders on the account use their credit card responsibly, a supplementary credit card can have a positive impact on their credit scores due to how credit cards work. However, if the supplementary cardholder makes charges that the primary cardholder can’t repay, both of their credit scores could go down. Similarly, if the primary cardholder fails to make on-time payments, that could hurt the supplementary cardholder’s credit rather than helping it.

This is why it’s important that both cardholders are on the same page when it comes to credit card rules and best practices.

Recommended: When Are Credit Card Payments Due

How Much Do Supplementary Credit Cards Cost?

In most cases, there is no charge for adding supplementary credit cards or authorized user cards. However, some credit card issuers do charge an additional fee for adding supplementary cards. Make sure to check with your issuer before ordering one.

Applying for a Supplementary Credit Card

Because any supplementary credit cards are tied to the account of the primary cardholder, you can’t apply for a supplementary credit card directly. Instead, the primary cardholder will need to request an additional card directly from the issuer.

To do so, the primary cardholder can either call the customer service number listed on the back of their credit card or request an additional card through their online account or app.

Alternatives to Supplementary Credit Card

Opening a supplementary credit card can be a good way to help a family member build their credit, but it does come with some risk. One alternative to giving someone a supplementary credit card is to open a supplementary credit card account but keep the actual card.

With this arrangement, the authorized user gets the advantages of a supplementary account — namely, building their credit through the primary cardholder’s responsible use — without the risk that they will use their card irresponsibly.

The Takeaway

Supplementary credit cards, or authorized user cards, are additional cards tied to the credit card account of a primary cardholder. When used responsibly, they can help the authorized user build or establish credit. However, the primary account holder is responsible for all charges made by supplementary cardholders, so there is also some risk if the supplementary credit card is used irresponsibly.

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.

FAQ

Are bills paid with the card number of the primary or supplementary card?

The card numbers of the primary and supplementary cards are both tied to the primary cardholder’s account. As such, the primary cardholder is responsible for all charges made, including by authorized users.

Is a supplementary credit card the same as a joint card?

A joint credit card account allows two people to use the same credit card account, with both account owners holding responsibility for all charges made to the account. In contrast, a supplementary credit cardholder is not responsible for charges they make. Instead, only the primary cardholder is financially responsible for all charges made by any user.

Who is responsible for a supplementary credit card?

Only the primary account holder is responsible for charges made by any and all authorized users. Any secondary or supplementary cardholders are not considered financially liable for any charges they make.

Does a supplementary card affect credit score?

Yes, having a supplementary card can affect your credit score. It can help build credit when used responsibly. But because the primary cardholder is ultimately responsible for all charges, their credit could suffer if an authorized user uses the card irresponsibly. An authorized user could also see their score suffer if the primary account holder fails to manage their account responsibly.

Photo credit: iStock/MixMedia

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.

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 .

SOCC-Q224-1910822-V1

Credit card residual interest is interest that builds up between when your billing cycle ends and when the issuer actually receives your payment. Read on to learn more about what is residual interest, when it may apply, and how you can avoid it.

What Is Credit Card Residual Interest?

Residual interest, also called “trailing interest,” is one of the ways credit card companies make money. It’s a finance charge that’s applied to any balance that is carried over to the new billing cycle.

The charges accrue from the date your statement was issued until the bank receives your credit card payment.

How Credit Card Residual Interest Works

If you thought you paid your last credit card bill in full, you might be surprised to see a residual interest charge on your next statement. However, this can occur if you keep a rolling balance on your credit card, meaning you’ve carried an unpaid portion of your credit card balance from month to month.

Some credit card issuers charge interest based on a daily periodic rate. To calculate your daily periodic rate, the issuer divides your APR (annual percentage rate) by 360 or 365 days. Then, it adds the result to your daily balance.

Here’s where credit card rules around interest get tricky, so take a closer look:

•   Your card issuer is required by law to provide you with your billing statement at least 21 days before your credit card payment due date. If you always make on-time full payments, your card issuer typically won’t charge interest during this “grace period.”

•   However, if you’ve been rolling over a balance to your new statement, trailing interest on the old charges are applied. You’ll also lose your grace period for new purchases made during the billing cycle so interest charges accrue immediately. Each day that the balance goes unpaid, the residual interest compounds.

•   Since this residual interest is added during the days after your billing statement was sent, they can feel like unexpected credit card charges on your next billing period despite making the “full” payment the prior month.

Do All Credit Cards Charge Residual Interest?

Generally, the practice of charging residual interest is common across credit card companies. However, how and when it charges trailing interest varies between issuers.

If you’re unsure how your card issuer handles this type of interest charge, review your credit card agreement, or contact your issuer directly to learn more about its terms.

Why Is It Important to Keep Track of Residual Interest?

Residual interest can impact your finances in many ways. For starters, you’ll owe more money on interest fees and miss out on a grace period. Additionally, a residual interest charge can easily slip past your radar if you thought you’ve zeroed-out your credit card balance.

If you didn’t add new card purchases during a billing period, you might not even look at your new statement and can easily miss a residual interest charge. This seemingly small issue can snowball into a late payment — or worse, a missed payment — that adversely affects your credit rating.

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

Tips for Avoiding Credit Card Residual Interest

To avoid this costly mistake, make sure you’re practicing smart habits when using a credit card responsibly.

Making the Full Payoff Amount

Given how credit cards work, the best way to know your card’s true outstanding balance is to directly ask your credit card issuer for your “full payoff amount.” Since residual interest is charged daily, your full payoff amount will change each day your account goes unpaid.

On the day you’re ready to make your credit card payment, contact the phone number on the back of your credit card. Ask the associate for your full payoff amount to date. Or look for this information on the credit card issuer’s website or in their app. This is the payment amount you can make toward your bill to fully pay your account.

Paying Your Bills on Time

If you haven’t carried a balance between statements and your credit card offers a grace period, making a payment for the full statement balance by the credit card’s due date is enough to prevent residual interest. This can also help you maintain your grace period.

If you’ve already rolled over a balance, pay off your total account balance before the billing cycle closes. This can help you avoid trailing interest charges that start between the date your statement is sent and when the bank receives your payment.

Considering a Balance Transfer to a 0% APR Card

A 0% APR balance transfer card can be a useful tool if you have a balance that’s too large to pay off early or in one fell swoop. Balance transfer cards effectively allow you to pay a credit card with another credit card by transferring the prior balance onto the new card at no interest.

Keep in mind that the promotional interest rate is only valid for a short period of time. For example, the transferred amount might incur no interest for six months or a year, depending on the balance transfer terms. After that, the standard interest rate will apply.

When considering this strategy, make sure you weigh the pros and cons of a balance transfer card, such as the cost of a balance transfer fee. This fee might be a fixed dollar amount or a percentage of the amount you’re transferring. Always do the math to ensure that the amount you’ll save on residual interest from your original card outweighs the balance transfer fees.

Recommended: How to Avoid Interest On a Credit Card

How Long Does Credit Card Residual Interest Last?

Typically, if you’re hit with residual interest, it might take about two consecutive statement periods to clear out residual interest charges. However, you can get rid of residual interest faster by contacting your card issuer to request your full payoff amount.

The Takeaway

Carrying a balance into a new statement period results in losing your interest-free grace period on all purchases shown on that statement. You’ll owe residual interest on purchases carried over from the previous cycle, and you’ll also be charged interest immediately on new purchases made within the new billing cycle.

To avoid getting residual interest credit card charges, always pay your entire statement balance in full. By doing so, you can pay less interest (or none at all) on your credit card purchases.

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.

FAQ

What is credit card residual interest?

Residual interest is the interest that’s charged on purchases you’ve rolled over from one statement into the next. It starts accruing the day after your new billing cycle begins to the date when the bank receives your payment.

Do all credit cards charge residual interest?

Yes, most credit cards charge residual interest when you carry over a balance between billing statements. However, when and how your card issuer applies residual interest can vary; check your card’s terms of agreement to learn more.

How can I pay off residual interest?

If you see a residual interest charge on your credit card statement, the best way to pay it off is by making a payment for the full payoff amount, rather than just the statement balance. This helps you capture daily trailing interest charges as of the day you plan on making a payment.

Photo credit: iStock/fizkes

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What does it mean to be prequalified or preapproved for a mortgage? One lets a future homebuyer dream, and the other takes that homebuyer one giant step closer to reality. Here’s a look at how these two steps vary, how each can play a part in a home-buying strategy, and how one in particular can increase the chances of having a purchase offer accepted.

What Does Prequalified Mean?

Getting prequalified is a way of finding out how much you might be able to borrow to purchase a home, using the most basic information about your finances. Getting prequalified by phone or online usually takes just minutes.

Here’s how it goes: You provide a few financial details to mortgage lenders. The lenders use this unverified information, usually along with a soft credit inquiry, which does not affect your credit scores, to let you know how much you may be able to borrow and at what interest rate.

Getting prequalified can give homebuyers a general idea of loan programs, the amount they may be eligible for, and what monthly payments might look like, the way a home affordability calculator provides an estimate based on a few factors.

You might want to get prequalified with several lenders to compare monthly payments and interest rates, which vary by mortgage term. But because the information provided has not been verified, there’s no guarantee that the mortgage or the amount will be approved.

What Does It Mean to Be Preapproved?

After you get prequalified, you can consider the options before you from a range of lenders. You’ll want to brush up on types of mortgage loans, and then zero in on the lender — and loan — you feel is the best fit. Then you’ll face the probe known as mortgage preapproval.

Preapproval for a mortgage loan requires a more thorough investigation of your income sources, debts, employment history, assets, and credit history. Verification of this information, along with a hard credit pull from all three credit bureaus (which may cause a small, temporary reduction in your credit scores) allows the lender to conditionally preapprove a mortgage before you shop for homes.

A preapproval letter from a lender stating that you qualify for a loan of a specific amount can be useful or essential in a competitive real estate market. When sellers are getting multiple offers, some will disregard a purchase offer if it isn’t accompanied by a preapproval letter.

When seeking preapproval, besides filling out an application, you will likely be asked to submit the following to a lender for verification:

•   Social Security number and card

•   Photo ID

•   Recent pay stubs

•   Tax returns, including W-2 statements, for the past two years

•   Two to three months’ worth of documentation for checking and savings accounts

•   Recent investment account statements

•   List of fixed debts

•   Residential addresses from the past two years

•   Down payment amount and a gift letter, if applicable

The lender may require backup documentation for certain types of income. Freelancers may be asked to provide 1099 forms, a profit and loss statement, a client list, or work contracts. Rental property owners may be asked to show lease agreements.

You should be ready to explain any negative information that might show up in a credit check. To avoid surprises, you might want to order free credit reports from www.annualcreditreport.com. A credit report shows all balances, payments, and derogatory information but does not give credit scores.

Knowing your scores is also helpful. There are a few ways to check your credit scores without paying.

Those who have filed for bankruptcy may have to show documentation that it has been discharged.

Calculate Your Potential Mortgage

Use the following mortgage calculator to get an idea of what your monthly mortgage payment would look like.

Do Preapproval and Prequalification Affect Credit Scores?

Getting prequalified shouldn’t affect your credit scores. Only preapproval requires a hard credit inquiry, which can affect scores. But the good news for mortgage shoppers is that multiple hard pulls are typically counted as a single inquiry as long as they’re made within the same 14 to 45 days.

Newer versions of FICO^® allow a 45-day window for rate shoppers to enjoy the single-inquiry advantage; older versions of FICO and VantageScore 3.0 narrow the time to 14 days.

You might want to ask each lender you apply with which credit scoring model they use.

Do I Have to Spend How Much I’m Preapproved for?

No! The preapproval amount is your maximum house-hunting budget. Staying well under that number can’t hurt and might free up money for, say, a college fund, retirement, or — groan — emergency home repairs.

Recommended: Guide to First-Time Home Buying

Are Prequalification and Preapproval the Same Thing?

By now you know that they are not one and the same. Here’s a visual on what’s needed for each:

Do I Need a Prequalification Letter to Buy a House?

No. Nor do you have to have a preapproval letter when making an offer on a house.

But getting prequalified can allow you to quickly get a ballpark figure on a mortgage amount and an interest rate you qualify for, and preapproval has at least three selling points:

1.    Preapproval lets you know the specific amount you are qualified to borrow from a particular lender.

2.    Going through preapproval before house hunting could take some stress out of the loan process by easing the mortgage underwriting step. Underwriting, the final say on mortgage approval or disapproval, comes after you’ve been preapproved, found a house you love and agreed on a price, and applied for the mortgage.

3.    Being preapproved for a loan helps to show sellers that you’re a vetted buyer.

The Takeaway

Prequalified vs. preapproved: If you’re serious about buying a house, it’s important to know the difference. Getting prequalified and then preapproved may increase the odds that your house hunt will lead to a set of jangling keys.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

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