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If you have a low income and sometimes struggle to make ends meet, you’re hardly alone. According to a May 2025 MarketWatch survey, as many as 57% of Americans currently feel like they’re living paycheck to paycheck, meaning that more than half of the population is feeling somewhat strapped.

Factors that can make saving money challenging include inflation (the cost of living has risen sharply in recent years) and heavy debt loads, with the average person carrying $6,500+ on their credit cards. These two forces can quickly eat away at your income, making it feel impossible to save.

Thankfully, there’s a way forward. What follows are 14 smart tips for how to save money on a low income. They can help boost your financial wellness.

Smart Ways to Save Money With Low Income

1. Finding a Budget Method That Suits You

A budget is a way for you to track your income, help you make good financial decisions, and plan toward goals. It paints a picture of how much money you have coming in and going out and how you’re allocating funds, which you can use to identify areas for improvement. A budget can also help you see what resources you have available to cover your living expenses. With it, you can see how to make money stretch further.

There is a wide range of budget methods to choose from. A traditional approach is building a line item budget, which involves tracking your expenses in a spreadsheet. You can build a spreadsheet from scratch or use a template.

Google Sheets has a free template that’s great for beginners, and you can also create a budget in Excel. If you prefer to simplify the process, you might want to download a budgeting app that can categorize and track your spending for you.

Whatever budgeting style you choose, it’s a good idea to automate the saving process. Once you see how much you can realistically set aside each month, consider setting up an automated recurring transfer from your checking account into a savings account (ideally a high-yield savings account).

2. Watching Money Spent on Food and Drink

If you’re thinking about how to save money with a low income, one wise move can be dining in. That may mean opting for pasta at home instead of the cute Italian place nearby.

Making meals at home is typically cheaper than eating out. And the gap has widened: In recent years, restaurant prices have often risen faster than general inflation. Just keep in mind that cooking at home can cut costs as long as your grocery bill is sensible. Look for budget-friendly recipes that are simple and use all the ingredients in your pantry. Search online for affordable recipes, including “recipes under $10.” You’ll likely find many options.

Another way to save money on groceries is to choose more affordable proteins, such as eggs, beans, chicken, fish, and quinoa, over beef and lamb. Also consider saving alcoholic beverages for weekends or special occasions only, and reach for lower-cost drink options, such as homemade iced tea, flavored seltzers, or good old tap water, on the weekdays.

3. Getting Rid of Debt One Step at a Time

Studies show that debt can cause stress and negatively impact mental and even physical health. Paying off debt can be a major motivation to save money. It’s one less bill to pay at the end of the month, and the freedom is empowering.

How to approach debt reduction? Always be sure to pay at least the minimum amount due. Then consider these two techniques that can help you become more financially stable with a low income:

•   In the snowball method, you use extra funds to pay off the smallest debt first, giving you a sense of accomplishment for wiping out a balance. Then you move on to the next smallest debt.

•   In the avalanche method, you use extra funds to pay off high-interest accounts first, regardless of the balance. That can be a wise move since this is the kind of debt that often keeps people owing money for a long period of time. Credit card debt is a common example of high-interest debt.

You can also combine your debts into one account with a debt consolidation loan. These personal loans typically have a lower annual percentage rate (APR), which can save you considerable money in the long run.

4. Finding Ways to Get Rid of Nonessentials

When creating a budget, it’s a good idea to create two main spending categories: essential and nonessential expenses.

Essential expenses will include housing, groceries, transportation, utility bills, and more. An example of transportation costs might be car payments, car insurance, gas, monthly train passes, and so forth.

Nonessentials usually include wants vs. needs (such as items of clothing you like but don’t require and entertainment). If you’re a sneakerhead or handbag collector, it may be time to pause shopping. But if you need fresh clothes and shoes for work, set a target amount you can afford to spend that month. Make your dollars stretch with sales racks at stores or secondhand steals.

5. Changing to a Cheaper Entertainment Subscription Model

Can’t live without Netflix? What about HBO, Disney, and Hulu? Combined, those streaming services can debit a fair amount of money out of your checking account each month (or, depending on how you pay, year).

While it’s important to unwind, sometimes cutting entertainment is worth the savings. Consider free entertainment on your TV or computer. There are plenty of apps that offer free on-demand and live streaming services. You can also get classic TV antennas that pick up the major networks for free.

Finally, try the library. Most carry more than just books: They often offer movies, too. You just need a library card.

6. Cutting Back on Larger Expenses

Looking for other ways to save money on a low income? You may also be able to cut some of your large monthly bills. Your biggest expense is likely housing, so you might start there. Several factors affect rent or mortgages, such as location and amenities. Consider living in a cheaper neighborhood temporarily. Also, a home with fewer amenities, such as a patio or a pool, is typically cheaper.

Other options include getting roommates or, if it’s feasible, even going rent-free. If you have family nearby, it might be worth asking to live with them for a low fee or even rent-free, provided you have a plan to get on your feet or can contribute to the household (say, by cooking or cleaning).

Transportation is another large cost. If your job is a safe and reasonable distance to bike to, try it out. Bikes are generally inexpensive to maintain, plus they offer the benefit of staying fit and going green.

Recommended: Determining the Right Spending/Budgeting Categories

7. Saving What You Can

It’s also a good idea to cut smaller costs that, due to frequency or habit, tend to add up. An $8 fancy coffee once a week costs $416 a year. On a smaller income, that can eat away at your earnings. If you can save $5 or $10 a week by making one or two minor changes — that’s a good start. It’s better than saving zero dollars. And even small savings can add up to a significant sum over time.

8. Separating Money for Yourself From Other Expenses

One simple way to make sure you save is to pay yourself first. That means that before you pay your other bills, you take out a set amount of money and put it into savings as soon as you get paid. Whatever is left over is the money you can spend on everything else. Once the money you set aside for yourself (and your goals) is out of your checking account, you won’t be tempted to spend it.

9. Turning On Alerts for Bill Payments

Setting up reminders for your bills can help you avoid late fees, which can eat up your funds. You can set up alerts using the calendar on your phone, or you can use a budgeting or payment app to keep you on top of upcoming payment due dates.

Even better: Consider setting up autopay for all of your regular bills. This can help ensure you never miss a payment. Just keep in mind that you will need to make sure you have sufficient funds in your account before payments are pulled.

10. Spending Less on Your Car

A car can be expensive. Some tips to make it more affordable:

•   Buy a car — don’t lease. You generally get more value from paying off a car compared to leasing a car.

•   Buy used. Used cars are typically cheaper than new cars. And, because they’re used, the insurance tends to be cheaper as well. Buying a preowned car also means it won’t lose value as quickly as a new car. Some estimates say that a new car loses an average of 16% of its value in the first year.

•   Aim to get a car that gets great gas mileage. An SUV or truck can easily cost $100 for a full tank. If you’re paying for a gas guzzler, it might be worth downsizing to a car that gets better gas mileage.

11. Finding Ways to Cut Entertainment Costs

Reading, listening to music, and tuning into your favorite program are all free or low-cost ways to relax and have fun.

Instead of booking concert tickets for your favorite band, consider listening to their tunes on free apps (YouTube, for instance). Check listings and see which local bands are playing, which can be a good way to discover some new favorites.

If you enjoy a good show, check out free TV streaming apps, such as Tubi or Pluto TV. Both have a great selection of movies and shows on demand or live.

12. Eliminating Your Bad Habits

If you’re looking to improve your financial situation, it’s a good idea to look at your good and bad spending habits.

Do you buy groceries at the gourmet deli instead of a cheaper supermarket? Do you tend to eat out because you didn’t pack a lunch? Do you leave the air conditioning running in your apartment while you’re out all day?

These are all costly habits you can change. Find a more affordable grocery store. You’ll find your dollar can stretch a lot further with cheaper prices. Try meal prepping on weekends so you can pack lunches for work each week. Lastly, run electricity only when you need it, and compare the bills. You’ll likely see a difference.

13. Committing to a Month of No Spending

A no-spend challenge can be a fun way to save. A no-spend challenge means that you avoid discretionary spending altogether for a set period of time, such as 30 days. During that time, you only spend on necessities, such as rent and groceries, and don’t spend money on movie theater tickets, clothes, or even chocolate. You might want to let your friends know you are doing the challenge so they don’t tempt you into spending. They might even join you.

At the end of the challenge, you’ll have likely saved a significant sum of cash. You may also find that you didn’t miss some of the things you stopped spending on and decide to cut them out of your budget or reduce how much you spend on them.

14. Getting Help if You Need It

If you find yourself still living paycheck to paycheck, there’s help. If you have substantial debt, consider reaching out to the nonprofit National Foundation for Credit Counseling (NFCC). They offer free and low-cost debt and credit counseling, along with other services.

Also, cities, states, and the federal government provide help in the form of subsidized housing, discounted healthcare, and free groceries. Simply call the 211 network 24/7 to share your situation and get connected to the right people.

You can also use the government’s benefit finder, which can match you with the right programs.

15. Automating Your Savings

Once you have a budget in place, it’s easier to know how much you should save a month.

As mentioned above, one way to simplify saving is to try automating transfers, a feature many banks offer that moves money from your checking account to your savings account on a certain date. For example, if you’re paid every Friday, you can set up an automatic transfer of the desired amount to your savings or investment accounts.

If you put away $50 each week, you’ll have $2,600 at the end of the year.

Why Saving Money With a Low Income Is Possible

No matter what your income, it’s tempting to live like a rock star or just try to keep up with your higher-earning friends. Or you might feel like your smaller earnings aren’t worth saving, and you’ll wait till you make more. But it’s possible to save more than you think, even on a lower income.

If you make saving a priority and adjust your lifestyle to your income, it can pay off and help you increase your financial well-being. Simple changes such as learning to budget, choosing lower-cost groceries, swapping out driving for cheaper (and greener) forms of transportation, and buying secondhand can all help you take control. These moves can also help you pay down any debt you may have, build your rainy-day savings, and achieve longer-term financial goals.

The Takeaway

Whether you earn a lot or a little, living within your means always pays off. Budgeting is the first step to getting your finances organized. It’ll help you see how much money you have to cover your monthly expenses and how much you have left over for savings. You’ll also have a clearer picture of your spending habits.

Once you have a sense of your spending habits, you can find ways to spend smarter. That means finding cheaper options for necessities and cutting nonessential spending.

Finally, be sure to set attainable savings goals and put your cash away in a high-yield account to help it grow faster.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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

Why is saving money so hard?

Saving can often be hard because of our mindset. We don’t focus on creating and sticking to a budget and instead spend freely, in the moment. If you’re following a budget but find it hard to free up cash to save, you might take on a side hustle to help bring in more income.

What happens if you don’t save money?

Having money in savings is a safety net for unexpected expenses, such as a medical bill or a job loss. Without one, you may find yourself unable to pay bills, which could cause you to take on high-interest debt and/or pull you closer to poverty. It’s wise to have at least 3-6 months’ worth of living expenses stored away in case of emergency.

How do I get the motivation to save when I do not make much?

With social media in today’s culture, it might seem like everyone has what they want (except you), so it’s important to put on blinders and focus on your journey. Delete apps that encourage you to overspend, and ask trusted friends or mentors to navigate this territory together. Save whatever amount you can, and don’t get discouraged by comparing yourself to others’ savings plans.

Photo credit: iStock/Rocco-Herrmann

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2026 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 5/28/26. 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

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

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.
We do not charge any account, service, or maintenance fees for SoFi Checking and Savings. We do charge transaction fees for outgoing wire transfers, Instant Transfers, and global remittance transfers. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

*Awards or rankings from Forbes are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.


¹SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $3M through participation in the program. See full terms at SoFi.com/banking/fdic/sidpterms. See list of participating banks at SoFi.com/banking/fdic/participatingbanks.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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.

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

SOBNK-Q226-058

Cashier’s checks and money orders are two common payment instruments. While there are similarities between the two, there are also significant differences. Cashier’s checks are drawn on a bank account and guaranteed by the financial institution. A money order, on the other hand, is a prepaid financial tool that you can obtain at banks, the post office, or retail businesses.

Depending on your needs, one payment method may be a better choice than the other. Read on to learn what distinguishes a money order from a cashier’s check, the way they work, plus the pros and cons of each.

What Is a Cashier’s Check?

A bank or credit union issues cashier’s checks, also known as bank checks. You can obtain a cashier’s check by paying cash upfront or, if you’re a customer of the issuing bank, drawing the funds from your bank account.

Because the bank backs the cashier’s check, it’s guaranteed, so you don’t have to worry about a bounced check. That’s why it’s considered a safe and secure method of payment. Cashier’s checks also clear quickly, usually making some funds available within one business day.

Cashier’s checks are available in small and large amounts, and there’s no limit to the amount. Many people use a cashier’s check for a large purchase or deposit, such as a car, a boat, the down payment on a home, or a security deposit to a landlord.

Recommended: Where to Cash a Check Without Paying a Fee

How Do Cashier’s Checks Work?

In most cases, you’ll visit your bank in person to buy a cashier’s check. You may be able to order one via the bank’s website, but that takes longer since the check will have to go through the mail.

At the bank, the process involves telling the bank employee the amount of the check and the recipient’s name. You can either purchase the check with cash or have the money debited from your checking or savings account at the bank. Cashier’s checks often come with a fee, usually about $8 to $15.

Don’t have a bank account? You may be able to get a cashier’s check from a bank at which you’re not a customer, but you’ll have to check with the financial institution first and purchase the cashier’s check with cash.

Credit unions may offer you more flexibility if you’re not a customer. They often issue cashier’s checks to members of other credit unions.

Recommended: Issuing a Stop Payment on a Check

What Is a Money Order?

Like a cashier’s check, a money order is a form of paper payment and an acceptable alternative to paying a bill or debt with cash or a check. You can purchase a money order with cash, traveler’s checks, or a debit card. Since a money order is prepaid, it can’t bounce like a regular check can.

Filling out a money order is similar to writing out a check. Besides the amount to be paid and the date of issue, you’ll need to fill out your name, your address, and the name of the payee and then add your signature. In the memo line, you can fill in the reason for payment.

There may be limits on the money order amount. For example, at a United States post office, a single money order can’t exceed $1,000.

You’ll also get a receipt when you purchase a money order, which you should keep so you can track your money order and, if the payment is lost or stolen, use it to try to recover the funds.

Money orders can be obtained at numerous places, including post offices, Western Union and similar retail businesses, check-cashing outlets, financial institutions, supermarkets, and convenience stores. Along with paying the face value of the money order, you may have to pay a small fee.

People who want to cash a money order can generally do so at the same places that offer them. Unless you deposit it into a bank account, be aware that you may have to pay a small fee for cashing the money order.

Money Orders vs Cashier’s Checks

While money orders and cashier’s checks have some similarities, there are also differences. Here’s how they compare.

Similarities

Both money orders and cashier’s checks are forms of payment that can be alternatives to cash or a personal check. Because they are prepaid, you can cash or deposit a money order or a cashier’s check without worrying that it’ll be declined or returned for insufficient funds.

Money orders and cashier’s checks share the following features:

•   You can purchase both at banks or credit unions.

•   Both are prepaid, so their funds are guaranteed.

•   They provide more payer privacy because neither contains your checking account number.

•   Each typically comes with fees.

•   They allow you to trace or track payments.

Differences

Now, consider their differences,:

•   Cashier’s checks may be available in large sums, while money orders often have limits.

•   You can obtain money orders at more locations than cashier’s checks.

•   Cashier’s checks are guaranteed by the financial institution that issued them; money orders are paid for with cash.

•   Money orders must usually be purchased in person.

•   The fees on money orders may be lower.

Differences Between a Money Order and a Cashier’s Check

How money orders and cashier’s checks compare in chart form.

Pros and Cons of Cashier’s Checks

Let’s take a closer look at the advantages and disadvantages of cashier’s checks. First, the pros:

•   Available in higher dollar amounts

•   Higher security because the bank guarantees it

•   May be purchased through a bank’s website

Next, the cons:

•   Not as widely accessible because you can only obtain them at banks or credit unions

•   Harder to get from a bank if you’re not an account holder

•   Higher fees than money orders

Pros and Cons of Money Orders

Here’s a closer look at money orders and their benefits and downsides. First, the pros:

•   Useful for people who don’t have a bank account

•   Can be purchased with cash or a debit card

•   Has lower fees than a cashier’s check

•   More widely and readily available

Now, the cons:

•   Typically can only be purchased for up to $1,000

•   Must get them in person

•   May not be able to deposit them through mobile banking

•   Can be cashed by anyone if you don’t fill out the “payment to” line

The Takeaway

Both cashier’s checks and money orders are forms of prepaid payment that guarantee the funds, so you don’t have to worry about a bounced check. Which one to use depends on many factors, including the size of the payment you’re making, whether you have a bank account, and the outlet where you choose to make the purchase. Assessing the pros and cons of each can help you decide which method is right for you.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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

Are a cashier’s check and a money order the same?

No. While both are prepaid forms of payment and therefore guaranteed not to bounce, you can only get a cashier’s check at a bank or credit union, while money orders are more widely available at other venues, including post offices, check-cashing places, and various retailers. Cashier’s checks are better for large purchases or deposits since there’s no monetary limit, while money orders often have a limit of $1,000.

Why would someone use a money order instead of a cashier’s check?

People who choose to use a money order may not have a bank account and could be paying a bill or a debt of less than $1,000. They might also want to avoid the higher fees associated with a cashier’s check.

How quickly do money orders and cashier’s checks clear?

In most cases, funds from deposited money orders and cashier’s checks are available the next business day. However, if the bank suspects fraud might be involved, it could take several weeks.

Photo credit: iStock/Fly View Productions

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2026 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 5/28/26. 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

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

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.
We do not charge any account, service, or maintenance fees for SoFi Checking and Savings. We do charge transaction fees for outgoing wire transfers, Instant Transfers, and global remittance transfers. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

*Awards or rankings from Forbes are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.


¹SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $3M through participation in the program. See full terms at SoFi.com/banking/fdic/sidpterms. See list of participating banks at SoFi.com/banking/fdic/participatingbanks.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax 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.

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

SOBNK-Q126-055

A health savings account (HSA) and a flexible spending account (FSA) are both tax-advantaged savings accounts that help you pay for out-of-pocket medical expenses. To contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP). To contribute to an FSA, you can have any type of health plan, but your employer must offer an FSA as a benefit.

Here’s a closer look at the similarities and differences between FSAs and HSAs and how to choose between them.

HSAs and FSAs Explained

A health savings account (HSA) is designed to help individuals with high-deductible health plans (HDHPs) save for medical expenses. Once you open an HSA, contributions to it are tax-deductible (or deducted from your paycheck pretax), and the funds can be used for a wide range of qualified medical expenses. HSAs also offer investment options and grow tax-free. In addition, withdrawals for qualified expenses are tax-free.

In 2026, a health plan is considered an HDHP if it has a minimum annual deductible of $1,700 for individual plans and $3,400 for family coverage.

A flexible spending account (FSA) is a benefit offered by employers that allows employees to set aside pretax dollars for eligible health care expenses. Unlike HSAs, FSAs do not require an HDHP. However, FSAs typically have a “use-it-or-lose-it” rule, meaning that any unused funds at the end of the plan year are forfeited unless your employer offers a grace period or a certain amount to roll over.

Many FSAs come with an FSA debit card that can be used to pay for qualified health care expenses directly. If you leave your job, you lose your FSA unless you’re eligible for FSA continuation through COBRA (the Consolidated Omnibus Budget Reconciliation Act).

Differences Between an HSA and an FSA

Even when you have health insurance, you may run into medical expenses that your plan doesn’t cover, such as copays, eyeglasses, dental expenses, medications, diagnostic tests, and hospital fees. Both HSAs and FSAs allow you to set aside pretax money to cover these costs. But there are some key differences between them. Here’s how these two types of savings accounts compare at a glance.

Similarities Between an HSA and an FSA

Despite their differences, HSAs and FSAs share several similarities:

•   Funds from either type of account can be used for qualified medical expenses.

•   With both accounts, you can save significantly on medical expenses thanks to tax advantages.

•   Employers are allowed to contribute to both HSAs and FSAs.

•   You can access funds immediately with either type of account. With an FSA, however, you’ll have access to a full elected contribution at the start of the year.

Once you have all the numbers available, you can use a savings calculator to help measure their impact on your spending.

Recommended: HSA vs. HRA: Main Differences and Which Is Right for You

Can You Have an HSA and an FSA at the Same Time?

Generally, no. However, there is one exception: If you have a limited-purpose FSA (LPFSA), which only covers dental and vision expenses, you can contribute to both an HSA and an LPFSA. This allows you to put more pretax dollars aside for your health care expenses than you could with an HSA alone.

Just keep in mind that you can’t “double dip,” meaning you cannot get reimbursed twice for the same expense — you must decide which account you want to use for reimbursement.

Recommended: HSA vs. HMO: What’s the Difference?

How Do You Choose Between an HSA and an FSA?

Choosing between an HSA and an FSA depends on your health care needs, financial situation, and employment status.

Scenarios When You Should Consider an HSA

•   You have a high-deductible health plan: If you have an HDHP, you are eligible for an HSA. The tax advantages and ability to save for future health care expenses can make opening an HSA a smart choice.

•   You’re interested in long-term savings: HSAs allow you to roll over unused funds year to year, making them ideal for long-term health care savings. And at age 65, you can effectively treat an HSA like a traditional 401(k) or IRA — you can withdraw funds for any reason, though you will pay taxes on any funds not used for qualified medical expenses.

•   You want to grow your health care savings: HSAs offer investment options, such as stocks, bonds, and mutual funds.

•   You want to be able to take your health care savings with you if you leave your job: HSAs are portable and remain with you even if you change jobs, providing consistent coverage regardless of employment status.

Scenarios When You Should Consider an FSA

•   You don’t have (or want to enroll in) an HDHP. FSAs do not require a high-deductible health plan, making them accessible regardless of current health insurance.

•   You have fairly predictable health care costs. If you’re able to anticipate regular health care expenses each year, an FSA can help you save money by using pretax dollars for these predictable costs. If you over-contribute, however, you forfeit any unused balance (unless your employer allows a grace period or a certain amount to roll over).

•   Your employer offers FSA contributions. Some employers offer contributions to FSAs, providing additional savings and making FSAs a valuable benefit.

•   You want to have immediate access to your health care savings. FSAs provide immediate access to the full annual contribution amount at the beginning of the year, which can be beneficial for upfront medical expenses.

The Takeaway

Both HSAs and FSAs offer valuable tax advantages and can help you manage health care costs, but they cater to different needs and situations.

If you have a high-deductible health plan and want long-term savings with investment opportunities, an HSA can be a great choice. On the other hand, if you don’t have a high-deductible health plan and your employer offers an FSA, you’ll likely want to take advantage of this benefit. An FSA can help you save for (and save money on) health care expenses in the coming year.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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

Is it better to have an HSA or an FSA?

It depends on your health care plan and employment situation. A health savings account (HSA) can be a good fit if you have a high-deductible health plan (HDHP), since it offers higher contribution limits and allows you to carry funds forward. An FSA can work well if your employer offers this benefit, you do not have an HDHP, and you have predictable health care expenses (since these plans are often “use-it-or-lose-it”).,

Is it good to have both an HSA and an FSA?

Generally, you cannot contribute to or spend from a health savings account (HSA) and a flexible spending account (FSA) simultaneously, as both accounts are designed for medical expenses and have overlapping benefits.

However, there is an exception: You can have an HSA and a limited-purpose FSA (LPFSA) at the same time. An LPFSA specifically covers dental and vision expenses. This combination can be beneficial if you have significant dental and vision expenses in addition to regular medical costs, providing comprehensive coverage and enhanced tax advantages.

What happens if I switch from an HSA to an FSA?

If you switch from a health savings account (HSA) to a flexible savings account (FSA), you can no longer contribute to your HSA once your FSA becomes active. However, you still own the HSA and can use the remaining HSA funds for qualified medical expenses. In addition, the funds in your HSA will continue to grow tax-free.

Can I have an HSA if my spouse has an FSA?

If your spouse’s flexible savings account (FSA) is a general-purpose FSA, which covers a range of medical expenses, you cannot contribute to a health savings account (HSA. However, if her FSA is a limited-purpose FSA (LPFSA), which only covers dental and vision expenses, you can contribute to your HSA.

It’s important to review the specific rules and eligibility criteria for both accounts and coordinate with your spouse to optimize your tax savings and health care benefits.

Photo credit: iStock/zimmytws

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2026 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 5/28/26. 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

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

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.
We do not charge any account, service, or maintenance fees for SoFi Checking and Savings. We do charge transaction fees for outgoing wire transfers, Instant Transfers, and global remittance transfers. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

*Awards or rankings from Forbes are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.


¹SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $3M through participation in the program. See full terms at SoFi.com/banking/fdic/sidpterms. See list of participating banks at SoFi.com/banking/fdic/participatingbanks.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

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.

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

SOBNK-Q126-039

Are you toying with the idea of opening a Christmas Club account? It may sound like a retro idea, but a Christmas Club (or Holiday Club) account is simply a short-term savings fund that can help you plan for and manage the annual spending blizzard. The strategy can be smart. During the most recent holiday season (November 1 through December 31, 2025), retail sales were projected to reach a whopping $1.01 trillion-$1.02 trillion, representing a growth of 3.7%-4.2% over the 2024 season, according to the National Retail Foundation. Pacing yourself to save in advance of the holiday crush is great, but there can be pros and cons to a Christmas Club account. Learn the details here.

What Is a Christmas Club Account?

Christmas Club accounts, which started in 1909 at a Pennsylvania bank, are designed to help you save money for holiday expenses. They typically don’t earn high interest but can help you pull back your purse strings and avoid debt when December comes along.

After you make regular, scheduled contributions to the Christmas account, you can withdraw the money, typically in October, November, or December, depending on your bank’s rules. Christmas Club funds are transferred to your regular checking account with the bank or withdrawn in a check to cover your holiday expenses, be they toys, trimmings, or latke parties.

Saving in increments can be easier on your budget than scrambling for cash when Yuletide, Hanukkah, and Kwanzaa come around. It can also spare you from putting all those charges on your credit cards and having a high balance.

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

How a Christmas Club Account Works

When you sign up for a Christmas Club account, you start with a deposit. Rules and regulations vary by bank. Many Christmas or Holiday Club accounts have no minimum deposit requirement or a very low minimum, often $0-$10. Others may require an initial deposit of $10-$50.

You get to decide the amount you want to contribute regularly. For instance, you might opt for $25 or $100 transferred from your checking account to your Christmas account every week or payday.

Historically, banks have charged fees for withdrawing money before the club account matures. This encourages customers to leave their money there until holiday shopping time. Just be aware that if an emergency comes up, such as a broken water heater, and you take the money out, you’ll get hit with a fee.

Reasons to Use a Christmas Club Account

There are several benefits to Christmas Club accounts that can make them a helpful financial tool. Here are some of the reasons why people open them.

•   To save for a predictable spend above and beyond your year-round monthly budget: Many of us try to celebrate the holidays on a budget. But the gifting/decorating/entertaining spree can still hit every winter. A club account plumps up a money cushion to help you avoid credit card debt.

•   To afford holiday travel: Most of us need extra dough to rent a car to visit family or fly the kids home from college. To score the lowest airfare, car rental, and lodging costs, brush up on smart tips for finding travel deals. (If short-term savings won’t cover your or your loved ones’ trip, shop for the best travel loans with lower annual percentage rates, no compounding interest, and no fees.) Stashing funds in a club account, of course, is a viable solution.

•   To build up funds for other planned annual costs: Just because they’re called Christmas Club accounts doesn’t mean they have to be used for holiday spending. Puzzling over how to save on spring break expenses or how to pay for your child’s summer sleepaway camp? In those cases, a club account can be golden.

Where Can You Find a Christmas Club Account?

Christmas Club accounts are most often available at smaller community banks and credit unions vs. banks with a national presence. You can open one in person at a branch or online at your bank’s website — search under savings accounts. Often, the same banks that set up payroll direct deposit plans also offer short-term club accounts.

Christmas Club accounts are offered at credit unions all across America, from the Fidelity Bank and Trust in Iowa to the Pasadena Federal Credit Union in California, and in too many places in between to count.

Pros of a Christmas Club Account

If you’re trying to decide if a Christmas Club account is right for you, it’s worthwhile considering the advantages of these accounts.

Simplifies the Process of Saving for the Holidays

Framing your holiday budget ahead of time can cut stress. Pacing yourself to save over months may be even better. If it helps, you can give these targeted accounts nicknames to keep your eye on the goal — say, “Christmas in Vermont” or “Kids’ Lego Fund.”

Alternative to Putting Holiday Purchases on Credit Card

Using Christmas cash can help you avoid overspending with credit cards. Once you turn to plastic, things can get out of control. You start hunting online for a scooter a child has her heart set on and then see an ad for the brown suede boots you’ve been wanting … ka-ching. Interest rates on credit cards are quite high, and you can be left with debt that takes a long time to pay off.

Recommended: How Does a Credit Limit Work?

Cons of a Christmas Club Account

It’s not all a winter wonderland. Christmas Club accounts can have downsides. Here are a few to consider.

Most Banks Have Saving Limits

Most Christmas Club accounts have a maximum dollar amount you can save ($15,000, for example), but this number will vary. The cap might be less than what you’d like to save. If need be, consider opening a second Christmas Club account if the bank allows it, or open one at another bank.

Potential Fees for Early Withdrawal

If you need to get the money out before the set withdrawal date, you’ll most likely incur early withdrawal fees. These can vary. Find out what they are when you open your account.

Alternatives to Christmas Club Accounts

If you want to save money for the holidays but aren’t sure a Christmas Club account is right for you, consider these options.

•   Certificate of deposit: A certificate of deposit (CD) generally offers a higher interest rate than a savings account but comes with a term. The bank holds your money for anywhere from months to years, and you collect the interest when the CD matures at the end of the term. Since a CD will lock up your money for a specific amount of time (typically between 3 months and 5 years, but some institutions offer terms as short as one month or as long as 10 years or more), you may need to plan this right to have funds available for holiday expenses.

•   Money market account: A money market account is an interest-bearing account that is federally insured and has competitive interest rates. It generally requires a higher opening deposit.

•   High-yield savings account: These high-yield bank accounts earn significantly more interest than standard savings. You may find higher rates at online banks compared to brick-and-mortar banks. However, the accessibility of these funds can be a downside. We all know how tempting it can be to transfer money from savings to checking when an unexpected household expense or special occasion comes up.

•   Travel account: Like Christmas accounts, these savings accounts likely won’t pay great interest, but they help you save for your goal. You can pick where to keep travel fund savings and then use the money to hop on a plane when the holidays roll around.

The Takeaway

Christmas Clubs (or Holiday Club accounts) can spur you on to save regularly for the winter holiday spend. Planning ahead reduces stress. What’s more, setting a savings goal can help you keep your eye on the limit and avoid credit card overspending. But beware of fees for early withdrawals and caps on the total amount saved. In some cases, you might be better off with another savings vehicle, such as a CD or money market account.

Another option is to stash cash in a high-yield account and earn more interest there.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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

Do banks still do Christmas Club accounts?

Yes, community banks, smaller banks, and credit unions still offer Christmas Club accounts. Ask at your branch or search the bank’s website.

Are Christmas Club accounts worth it?

Christmas Club accounts generally have low interest rates. However, they can be worthwhile if they help you put money away regularly and thereby avoid a holiday spending blowout using credit cards.

Is there interest on Christmas Club accounts?

Yes, most accounts offer interest. The rates, though, tend to be lower than the interest rates for regular savings accounts, money market accounts, and certificates of deposit.

Photo credit: iStock/NoSystem images

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2026 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.

^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

We do not charge any account, service, or maintenance fees for SoFi Checking and Savings. We do charge transaction fees for outgoing wire transfers, Instant Transfers, and global remittance transfers. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 5/28/26. 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

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

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.
*Awards or rankings from Forbes are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

SOBNK-Q126-094

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 0.00% 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 12-21 months, after which the standard purchase APR will apply.

There’s 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 3.00%-5.00% 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 0.00% 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 above 22.00% in late 2025, according to data from the Federal Reserve, compared to late 2015, when it was less than 14.00%. In fact, high interest rates have recently elicited calls to temporarily cap credit card interest rates at 10.00%.

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 nonrevolving 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 card 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, here’s 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, 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, which is 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 to 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.

Say you have $6,000 in debt, and you’ve secured a 0.00% 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.

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 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 won’t 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

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