How Do Credit Card Companies Make Money?

How Do Credit Card Companies Make Money?

Using a credit card as a method of payment has become so commonplace and seemingly instantaneous that you might not think twice about it. However, there’s an elaborate credit card payment exchange happening in the background that enables you to buy your morning coffee or make an online purchase in seconds.
Providing this service, as well as charging interest and different fees for cardholders, is how credit card companies make money.

Types of Credit Card Companies

You might be keenly aware that you pay your monthly credit card bill to the bank or financial institution that approved your credit card line. However, there are other credit card companies involved in the payments process.

Credit Card Issuers

The credit card issuer is the entity that provided you with your credit card. Major U.S. banks, credit unions, and other financial institutions issue credit cards directly to consumers. Some examples include Chase, Capital One and Pentagon Federal Credit Union.

Credit Card Networks

Credit card networks, also called card associations, partner with credit card issuers to act as a middleman that communicates between your bank and the merchant’s bank. Visa, MasterCard, American Express, and Discover are the four major U.S. card networks.

Some networks also act as a card issuer, offering their own credit card products to consumers. The credit card network also typically determines transaction interchange rates (more on this later), relays whether a charge was approved or declined, and identifies potentially fraudulent activity on a credit card.

Credit Card Processors

As its name states, a credit card processor is the company that actually processes the transaction between the issuing bank and the receiving bank. Some examples of credit card processors are Stripe, PayPal, Block (formerly Square), and Elavon.

Additionally, some credit card processors ensure that the merchant and transaction are secure and compliant under the Payment Card Industry Data Security Standard (PCI DSS).

How Credit Card Companies Work

All of the types of credit card companies above work in unison so you can successfully pay for goods and services using a credit card as a cashless payment option. There’s a lot of back-and-forth communication between the three types of credit card companies after you provide your credit card to a merchant.

The process starts with obtaining authorization, which the merchant requests from its payment processor after a customer swipes or taps their card to pay. The card processor then submits your credit card information and transaction details to the card network. Your card’s credit card network routes this information to your issuing bank. The issuing bank either approves or denies the transaction based on your available credit and the status of your account.

If approved, your bank sends the approval to its partner credit card network. The card network then communicates the approval to the merchant’s bank. The merchant’s bank relays the approval to the merchant, so you can finally walk away with your purchase or close the transaction.

Although you walked away with your item or completed the online checkout process, the merchant doesn’t get your payment in their account instantly due to how credit cards work. Instead, the merchant goes through a separate process afterward to settle and receive funds for the authorized transaction. The transaction and payment details of transactions are communicated through the same channels that were used for authorization, involving the credit card network and issuing and merchant banks.

After the issuing bank draws the funds from your credit card account, it transfers the amount to the merchant’s bank, but withholds an interchange fee.

Recommended: What is a Charge Card

How Credit Card Companies Make Money From Cardholders

Credit card companies tack on various credit card charges as part of their business. Below are three ways that credit card companies make money from their customers and from each other.

Recommended: How to Avoid Interest On a Credit Card

Interest

As you use your credit line, credit card interest charges apply when all or a portion of your statement balance rolls into the following month. This interest is expressed as an annual percentage rate (APR). Credit cards typically have a variable APR that changes depending on market conditions, your creditworthiness, transaction type, and borrowing habits.

Fees

Your credit card issuer also makes money from charging you other fees related to your credit card use and borrowing habits. For example, if you open a new balance transfer credit card, making a balance transfer — which involves paying a credit card with another credit card — typically incurs a fee.

Similarly, your card issuer might charge a fee if you authorized a transaction in a different country; this is commonly called a “foreign transaction fee”. It might also charge you annual fees, cash advance fees, returned payment fees, and late fees.

Recommended: When Are Credit Card Payments Due

How Credit Card Companies Make Money From Merchants

The acquiring bank, issuing bank, and credit card network all make money by withholding a small percentage of the authorized transaction amount from the merchant.

Called the “merchant discount,” this fee combines various costs, such as interchange fees. The rate per transaction is determined by the credit card network. The merchant’s bank deducts the fee from the authorized purchase transaction amount, sending the remaining funds to the merchant.

This fee is then divided between the acquiring bank, the card network, and the issuing bank. The issuing bank makes the most money from interchange fees because it assumes the most risk throughout the process if you default on the debt.

Recommended: What is the Average Credit Card Limit

Limiting the Amount Credit Card Companies Make From Cardholders

To avoid credit card interest charges, make a credit card payment for your entire statement balance every month. Additionally, using a credit card responsibly, such as by not exceeding your card limit, can help by avoiding an APR increase.

It’s also worthwhile to examine the features of your existing and future credit cards. Consider cards that impose limited fees, such as those that don’t charge annual or foreign transaction fees, for example. Also don’t forget the credit card rule that you can always negotiate on fees or interest for your credit card.

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

The Takeaway

There are many ways in which credit card companies make money through your purchases, both from you and the merchant you patronize. However, you can reduce how much your credit card companies make off of your purchase by paying your credit card bills on time and in full every month.

If you’re looking for a credit card with minimal fees, you might apply for a SoFi credit card. You have the freedom to use the card abroad without worrying about foreign transaction fees. Plus, you can lower your APR by 1% after making 12 months of on-time payments of at least the minimum due.

FAQ

Who profits from credit card convenience fees?

A convenience fee charged at the checkout counter is meant to benefit the merchant. Since merchants pay interchange fees for the ability to accept credit card payments, a convenience fee is a way for the merchant to recoup lost funds from credit card transactions. It’s also designed to discourage customers from using their credit card for payment.

Do credit card companies make money if I pay off my balance every month?

Yes, credit card companies still make money even if you pay off your balance each month. They achieve this through various fees. For example, a card issuer might still charge you an annual fee to use its card product or a foreign transaction fee if you use your card abroad. Similarly, a credit card network and credit card processor charges the merchant fees for the benefit of accepting credit card payments.

How do credit card companies make money if they offer cash back?

Despite offering you cash back on your card purchases, credit card issuers can make money through fees and interest charges. It will charge you interest if you’re unable to pay your statement balance in full each month, and you could face fees, such as a balance transfer fee, late fee, annual fee, or foreign transaction fee, depending on what may apply to your situation.


Photo credit: iStock/Talaj

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.
The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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Maxed-Out Credit Card: Consequences and Steps to Bounce Back

Maxed-Out Credit Card: Consequences and Steps to Bounce Back

Using a credit card can be easy — almost too easy. And should a financial emergency pop up, or you reach for your credit card to make a cascade of purchases, before you know it, you’re faced with a maxed out credit card.

When you’ve maxed out on your card — or reached your credit card spending limit — it can have a negative impact on your finances. Let’s take a look at what happens if you max out on a credit card and how it can affect your credit score, as well as how to prevent maxing out in the first place and tips to bounce back if you already have.

When Is a Credit Card Maxed Out?

So, what is a maxed out credit card? Maxing out on a credit card simply means that you’ve reached the credit limit on your credit card. For instance, if you have a $20,000 credit limit on a card, and your balance hits that $20,000 mark, it’s maxed out. As such, you may not be able to put any more purchases on that card.

Recommended: What is a Charge Card

What Happens If You Max Out Your Credit Card?

There are a number of financial impacts of a maxed-out credit card. For starters, your card will likely get declined if you try to make a purchase. This is because rather than overdrafting a credit card, your credit card is typically just turned down (though in some cases, you could instead face fees for exceeding the limit, and the charge will go through).

Additionally, you could end up paying quite a bit in interest if you can’t pay off your entire statement balance in full. Plus, it could take you a long time to pay off your balance, further increasing the interest you pay over time. Your minimum payment due may also increase, depending on how it’s calculated by your issuer.

A maxed-out credit card also means that your credit score will take a hit. That’s because your credit utilization — how much of your available your credit you’re using — makes up 30% of your credit score. If you’re maxing out a credit card, it looks as if you’re overextended financially, which signals to lenders that you’re a risk.

Recommended: When Are Credit Card Payments Due

Guide to Prevent Maxing Out Your Credit Card

To avoid maxing out on your credit card, here are some steps to take:

•  Establish an emergency fund: Without an emergency fund, you’ll likely resort to using your credit card in a pinch, which could lead you to max out your credit card. To avoid ending up in this situation, aim to stash away at least three to six months of living expenses. If that seems like a tall order, start with one month of living expenses, and go from there.

•  Keep tabs on your spending: A golden rule of using a credit card responsibly is to check your credit card statements to monitor usage. Aim to check your balance at least once a week, if not more frequently.

•  Know how much of your credit you’re utilizing: Another of the golden credit card rules is to know what a reasonable balance to keep is and how much of your credit card is being utilized at any given time. For instance, if 30% is the maximum amount you’d like to maintain on your card, and your credit limit is $5,000, then $1,500 is the highest balance you should aim to carry.

•  Request an increase to your credit limit: If you increase your credit limit, it would lower your credit use. However, keep in mind that you also run the risk of racking up a higher credit bill. When considering requesting a credit limit increase, you’ll want to make sure you won’t end up simply spending more.

How Maxed-Out Credit Cards Can Affect Your Credit Score

If you’re wondering if it is bad to max out on your credit card, know that it absolutely can have a negative impact on your credit score due to how credit cards work.

When you carry a high balance on a card, it drives up your credit utilization ratio, which can drag down your score. It’s generally recommended to keep the amount of your total credit you’re using at around 30%; if your cards are all maxed out, your ratio is closer to 100%.

However, you can save your score from the negative effects of a maxed-out credit card if you can pay off the balance in full before the statement period closes. If you do this, the maxed-out balance would not get reported to the credit bureaus.

Recommended: How to Avoid Interest On a Credit Card

Tips on Bouncing Back from a Maxed-Out Credit Card

If you’ve hit your credit card spending limit, it is possible to recover. Here are some tips for how to bounce back from what happens when you max out your credit card.

Consider a Balance Transfer Card

Transferring your existing balance to a balance transfer card with a 0% APR interest rate could help you save money on interest. However, you’ll need to have a plan in place to pay off the balance in full before the interest rate kicks in and you’re back in the same place once again. Also note that balance transfer fees may apply, which are generally 3% to 5% of the amount you’re transferring.

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

Request Help

If you’re really struggling to keep your credit card spending down or are having trouble making payments, consider working with a professional. A credit counselor or non-profit credit counseling organization can sit down with you to learn about your debt situation and the state of your finances. From there, they can suggest a game plan to help you manage your debt.

Consider Personal Loans

Another way to bounce back from maxing out on a credit card is to take out a personal loan to pay off your credit card debt. This might make sense financially if you qualify for a lower interest rate with the loan than you have on your credit cards. It could also simplify the payment process by rolling all your debts into a single loan.

Recommended: Can You Buy Crypto With a Credit Card

The Takeaway

If you’ve hit your spending limit on your credit cards, it can negatively impact your credit score and translate to paying more in interest over time. While it’s best to avoid, should you max out on your cards, there are ways to recover and rebuild your credit.

Once you’re back on track, look for a credit card that will reward you for your use. The SoFi credit card, for instance, features up to 3% cash back rewards on all eligible purchases. Cardholders earn 1% cash back rewards when redeemed for a statement credit.1 Plus, you can lower your APR after making 12 on-time payments of at least the minimum due.

Learn more about getting a credit card with SoFi today.

FAQ

What happens if I max out my credit card but pay in full?

If you max out your credit card but pay off your balance in full before the statement period ends, your credit utilization ratio won’t be impacted. In turn, it won’t have a negative impact on your score.

Can I still use my card after reaching the credit limit?

After you’ve reached the credit limit on your card, you generally won’t be able to make purchases on it. Your card won’t go through, and transactions will be declined. In some cases, however, your transaction may go through and you’ll instead owe a fee.

Is it bad to max out your credit card?

Hitting the spending limit on your credit card can have a negative financial impact. First, it can bump up your credit utilization ratio, which can bring down your credit score. It also could equate to a higher monthly minimum payment, and more interest paid over time. Plus, you likely won’t be able to put any more purchases on that card.

How can maxing out your credit card affect your credit score?

When you hit the spending limit on a card and don’t pay it off before the statement period ends, it impacts your credit utilization ratio, which makes up 30% of your credit score. In turn, your credit score will take a hit. On the flip side, decreasing the balances on your card can help boost your score by lowering your credit utilization.


Photo credit: iStock/nensuria

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
1See Rewards Details at SoFi.com/card/rewards.
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A Guide to Credit Card Grace Periods

A Guide to Credit Card Grace Periods

Your credit card’s grace period is the length of time that starts at the end of your billing cycle and ends when your payment is due. During this period, you may not have to pay interest on your balance — as long as you pay it off in full by your payment due date.

While a lot of credit cards have a grace period, not all of them do. Here’s a look at how grace periods on credit cards work and how you can take full advantage of them.

What Is the Grace Period on a Credit Card?

Credit cards allow you to borrow money over the course of a one-month billing cycle, during which you may not need to pay interest. The end of your credit card billing cycle is also called your statement date. That’s when your monthly credit card statement is sent to you in the mail or becomes available online. Credit card payments are due on the payment due date, about three weeks later. The time in between these dates is what’s known as the grace period.

During this time, you won’t be charged any interest on the purchases that you made during the billing cycle. However, because of how credit card payments work, you must pay off your credit card balance in full by your payment due date in order to avoid interest payments. At the very least, you must make your minimum payment, and you’ll then owe interest on whatever balance you carry into the next month.

Recommended: What is a Charge Card

How Credit Card Billing Cycles and Grace Periods Work

Grace periods on credit cards are different from the grace period for other loan products. For example, the grace period for a mortgage lasts about 15 days. If your payment is due on the first of the month, you’d have until mid-month to make your payment before it’s considered late and you’re charged potential late fees.

This is not how credit card grace periods work. The grace period for revolving credit — which is what a credit card is — comes before the payment due date. As such, credit card grace periods don’t protect you from late fees. Rather, they give you a period of time in which you can avoid interest payments.

If you miss the date when credit card payments are due, your payment is considered late. Late payments may trigger penalties, and they can have a negative effect on your credit score if they’re reported to the credit reporting bureaus.

Recommended: When Are Credit Card Payments Due

Limits on Credit Card Grace Periods

Credit card companies are not required to offer their customers a grace period. However, many of them choose to do so.

Federal law requires credit card companies to send you a bill within 21 days of the payment due date, meaning you’ll get at least three weeks’ notice of how much you owe for your previous billing cycle. However, the amount of time you’ll have for your grace period will vary by lender.

Credit card grace periods typically only apply to purchases. That means if you’ve used your credit card for a cash advance, for example, you’ll have to start paying interest on the date of the cash advance transaction.

Recommended: Tips for Using a Credit Card Responsibly

How Long Is the Typical Grace Period for a Credit Card?

Typically, grace periods last at least 21 days and up to 25 days.

You can find out how long your grace period is by checking your cardholder agreement. The length of your grace period should be listed alongside fees and your annual percentage rate (APR). You can also call your credit card company and ask them directly.

Recommended: How to Avoid Interest On a Credit Card

What Types of Transactions Are Eligible for Credit Card Grace Periods?

As mentioned above, generally only purchase transactions are eligible for the credit card grace period. Cash advances — which allow you to borrow a certain amount of money against your line of credit — typically are not eligible. They will start accruing interest the day you make the transaction.

Similarly, if you transfer a balance from one credit card to another, you’ll start to accrue interest on that balance immediately. The only exception is if you have a balance transfer credit card with a 0% introductory rate for a period of time. If you pay off the balance during that period, you won’t owe interest. However, interest will accrue on whatever remains of your balance at the end of that period.

Taking Maximum Advantage of Your Credit Card’s Grace Period

If you pay off your credit card bill in full each month, you’ll avoid paying interest. Even carrying a small balance will disrupt your grace periods. If you do, you’ll owe interest on the remaining amount, and all of the new purchases that you make in the next billing cycle will accrue interest immediately as well.

To take full advantage of your credit card’s grace period, plan your purchases accordingly to ensure you’re able to pay your bills in full and on time. For example, if you’re going to make a large purchase, you may want to do so close to the first day of your billing cycle. That way, you’ll have the full cycle (about four weeks), plus your grace period (about three weeks), to pay off your purchase without owing any interest.

Can You Lose Your Credit Card’s Grace Period?

It is possible to lose your credit card grace period if you don’t make on-time payments in full each month by the payment due date. If you lose your grace period, you’ll be charged interest on the remaining portion of your balance. In the new billing cycle, you’ll also owe interest on any new purchases on the day the transaction takes place. This can lead to you falling into a debt cycle, which isn’t easy to get out of (here’s what happens to credit card debt when you die).

Luckily, issuers usually restore grace periods once you’ve paid your outstanding balance and are back to making full on-time payments for a month or two.

Recommended: Can You Buy Crypto With a Credit Card

The Takeaway

Your credit card grace period is an important tool that can save you money on interest if you pay off your balance in full each month. If you don’t pay your balance in full each month, you could lose this privilege temporarily. As such, you’d end up owing interest on your previous remaining balance and any new purchases.

In addition to a grace period, the SoFi credit card offers other features to help you manage your finances. This includes 2% unlimited cash back rewards when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back rewards when redeemed for a statement credit.1 Plus, you can secure a lower APR by making 12 on-time monthly payments of at least the minimum amount due.

FAQ

What is the grace period for credit card payments after the due date?

Credit card grace periods occur before the payment due date. Payments made after that date are considered late. After the due date, cardholders will owe interest on their balance. Further, they may lose their grace period until they can pay their balance off in full for one or two months.

What happens if you are one day late on a credit card payment?

Being one day late on a credit card payment can still trigger late fees, interest, and potentially the loss of your grace period. Late payments may also be reported to the credit reporting bureaus, which can have a negative impact on your credit score.

What is the typical grace period for a credit card?

Federal law requires that credit card companies provide your bill at least 21 days before your next payment due date. The length of the grace period can vary depending on the credit card issuer, though they typically last 21 to 25 days.


Photo credit: iStock/Moyo Studio

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
1See Rewards Details at SoFi.com/card/rewards.
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What Is a Credit Card Sign-up Bonus?

What Is a Credit Card Sign-up Bonus and How Does It Work?

A credit card sign-up bonus, or credit card welcome bonus, can come in the form of cash back, discounts on purchases, or other rewards, such as airline miles that you can put toward travel. These bonuses are a way for card companies and branded partners — such as airlines and other merchants — to incentivize you to sign up for a new card.

Sign-up bonuses can be a great way to get extra value out of a credit card in its first year. Just beware that there may be strings attached. Here’s a closer look at how sign-up bonuses work, their pros and cons, and how to make the most of them.

Recommended: Can You Buy Crypto With a Credit Card

How Do Sign-Up Bonuses Work?

Rewards are offered through a variety of credit cards, including co-branded cards and even prepaid credit cards. In order to receive your credit card sign-up bonus you must open a new account. Then, depending on the reward you’re being offered, you’ll usually have to meet one of three criteria:

•   First, and most simply, you may receive your bonus after your application is approved or after your first purchase.

•   If your new card is from a branded retailer, you may need to make a purchase with them before you can earn your sign-up bonus.

•   Finally, you may have to spend a certain amount of money over a set period to trigger the bonus. For example, you may have to spend $500 on purchase within the first three months of account opening.

Sign-up bonuses vary by card, as will the amount you’ll have to spend and the timeframe within which you have to do it. You may have to spend thousands of dollars in a short period of time to earn your bonus on some cards, while other cards may have no spending requirement.

Earning Sign-Up Bonuses

Spending requirements to earn a sign-up bonus on a credit card can be high, ranging anywhere from $500 to $5,000. The amount usually must be charged to your card within a set period of time, often the first three months after opening your account.

Make sure you can afford to meet these spending requirements before you decide on a particular card. Even if you technically can afford to meet the requirement, avoid the temptation to overspend on things you don’t need just to earn rewards.

Also, it may take a month or two for your bonus cash or points to appear in your account. If you’re planning to use them for something specific, say to buy a plane ticket to a friend’s wedding, be sure to take this timeframe into account.

Recommended: What is a Charge Card

Types of Credit Card Bonuses

There are different credit card rewards, depending on the card company and on branded partnerships. An airline is much more likely to offer points toward a flight, while a big box store is more likely to offer you an in-store discount. Here’s a look at some of the most common bonus types.

Cash Back and Bonus Points

Perhaps the two most common sign-up bonuses are getting cash back with a credit card or rewards points that you can use toward booking a hotel room or buying an airline ticket. For example, you might earn 50,000 points after spending $4,000, or you might receive a cash credit after you make your first purchase.

You may receive the bonus all at once, or there may be a tiered system in place with different eligibility requirements you’ll need to meet to earn the full reward.

Purchase Discounts

Another common sign-up bonus is a discount on a current or future purchase. For example, a retailer might offer you 20% off your next purchase when you sign up for their in-store credit card. These cards are often co-branded with a major credit card company, and they may be offered by brick-and-mortar stores or online retailers.

Your reward may come in the form of an immediate discount when you’re approved for the card. You could also receive a coupon or discount code. Or, you might get a credit when you make your first purchase with the retailer.

Additional Spending Rewards

In addition to rewarding you for spending in the months shortly after opening your account, your credit card company may offer rewards for spending throughout the first year.

Waived Annual Fee

Rewards cards can be a little bit tricky with their various requirements, and there can be credit card costs involved. Often, rewards cards charge an annual fee that helps to offset the cost of the rewards they provide. As part of the sign-up bonus, some rewards cards will waive the card’s annual fee for the first year.

Pros and Cons of Sign-up Bonus Credit Cards

When determining whether or not you want to open a credit card with a sign-up bonus, it’s important to consider both the potential rewards and the potential drawbacks. Here’s a look at the pros and cons:

Pros

Cons

Sign-up bonuses may include cash back, rewards points, or discounts on purchases made with co-branded partners. You may be limited in how you can use your bonus. For example, you may be able to use airline points online only at certain airlines.
Annual fees may be waived for the first year. Cards may have steep annual fees and high interest rates to help credit card companies offset the cost of rewards.
The right card can allow you to reap benefits from purchases you’d make anyways. There may be high spending requirements you must meet before you can claim your bonus.
Using your credit card responsibly can help you build credit. If you can’t pay off your credit card bill each month, you may miss payments, which can damage your credit.

Making the Most Out of Your Credit Card Bonus

Before choosing a credit card with a sign-up bonus, consider these ways that you can take advantage of credit card bonuses.

Recommended: How to Avoid Interest On a Credit Card

Pick the Most Suitable Card

Reward cards often offer flashy bonuses that are real attention-grabbers — but make sure the card you choose has a bonus you’ll actually use. For example, sign up for a card with an airline you fly often or a retailer you frequent. Or, make sure that you’ll receive cash back rewards on purchases that you already make or will need to make in the future. It doesn’t make sense to sign up for a card that gives you a bonus you won’t actually use.

You also may want to consider applying for cards with a high spending requirement in the first three months when you’re planning to make a series of big purchases anyway. That way, you won’t be buying anything that you don’t need already, and you’ll be rewarded for the purchases you were going to make. For example, maybe your car is scheduled for major maintenance or repairs, or perhaps you’re planning a wedding and will put some of the costs on your credit card.

It’s always worth considering how signing up for a new card will affect your credit. Applying for a new card will trigger what’s known as a “hard inquiry,” which will bring down your credit score temporarily. The damage to your credit may not be worth it, especially if you’re unlikely to use the bonus, you won’t really need the credit card later, or you’re planning to seek out other loans in the near future.

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

Look for Special Offers

From time to time, credit cards may offer special sign-up bonuses that are much bigger than usual. Keep an eye out for these, and make sure that you hit the application deadlines. These are usually limited-time offers, so be sure the offer is still valid before you sign up.

Ensure You’re Eligible for the Bonus

In some cases, you may not be eligible to sign up for a credit card and receive its bonus. For example, if you’ve had a specific card and canceled it in the past, you likely won’t be able to sign up for that card again and receive the bonus.

Before you apply, make sure you read the terms and conditions to understand your eligibility and to see if there’s any reason you might not receive your bonus if you sign up. Also, know that if you’ve recently opened several new credit cards, you may be declined automatically for a new bonus card.

Recommended: What is the Average Credit Card Limit

Make Sure You Can Pay Down Your Debt

Before signing up for a bonus card, it’s crucial that you understand your ability to pay your bills on time. Bonus rewards cards often carry extremely high interest rates, meaning that any balance you carry from month to month can end up costing you a lot of money, quickly outweighing the rewards you earned initially.

Consider, too, that carrying a high credit card balance can have a negative impact on your credit score. Ideally, you should keep your credit card utilization ratio — calculated by dividing your total credit card balance by your total loan limit — below 30%. If you can, aim to keep your ratio at 6% or less to give you the best shot at maintaining a high credit score.

You’ll also want to be sure that if you pick up a rewards card, you’ll still be able to make on-time payments on all of your other obligations, as this is another crucial component of a healthy credit score.

Recommended: When Are Credit Card Payments Due

Redeeming Your Bonus Reward Points

Depending on your card, you may have a variety of options to redeem your rewards. For example, if you sign up for a card with a co-branded retailer, you may receive a coupon or rebate for a purchase at the store. Meanwhile, airline or hotel points may need to be redeemed by booking flights on certain airlines or rooms at certain hotel chains.

Cash back rewards could be received as a credit card refund by having your rewards applied to your credit card balance, transferred to a bank account, mailed to you as a check, or converted into rewards points.

Check your card’s terms and conditions to find out rules for redeeming your points so you can start to put them to use.

Recommended: Tips for Using a Credit Card Responsibly

The Takeaway

Sign-up bonuses can offer credit card users a lot of value. (In fact, some users will open and close credit cards just to earn the bonuses, a practice known as credit card churning.) However, it’s important that you do your research before jumping on a flashy offer. Make sure the bonus is actually something you’ll use and that you have the means to meet eligibility requirements without damaging your overall financial health and credit score. Read all terms and conditions carefully before you sign up.

In the market for a new rewards card? Consider the SoFi credit card, which offers up to 3% cash back rewards when redeemed to save, invest, or pay down eligible SoFi debt.

Cardholders earn 1% cash back rewards when redeemed for a statement credit.1 Plus, if you make a year’s worth of monthly minimum due on-time payments, you can lower your annual percentage rate (APR) by 1%.

FAQ

When do you get a credit card sign-up bonus?

When you sign up for a bonus rewards card, you’ll receive your bonus when you meet the card’s eligibility requirements. This could mean simply making a purchase, or you may need to spend a certain amount over a set period of time. The card could also require you to spend money with a particular merchant.

Are sign-up bonuses taxable on credit cards?

The bonus rewards that you receive are not taxable. They’re considered a rebate as opposed to taxable income. That simplifies things come tax time, when you will not have to claim your bonus as income.

Can you open multiple cards to get more sign-up bonuses?

Technically, you can open multiple cards to receive more signing bonuses, but there are limitations. You won’t be able to open the same card multiple times, though you may be able to open a number of different cards. However, you eventually may get automatically declined if a card company sees that you’ve opened several recent accounts.

Opening several accounts also may not be a good idea, as hard inquiries when you apply for credit have a negative impact on your credit score. Multiple cards may also stretch your finances thin as you attempt to keep up with paying your bills on time on all of them.


1See Rewards Details at SoFi.com/card/rewards.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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Tips for Handling Incorrect or Fraudulent Credit Card Charges

Tips for Handling Incorrect or Fraudulent Credit Card Charges

It’s never a good feeling to look at your credit card statement and wonder, what is this charge on my credit card? When it comes to fraudulent credit card charges, your bank has often got your back. They have methods for spotting activity that isn’t normal, and they’ll usually alert you when a charge seems suspicious.

That said, your bank might not catch everything, and there may be a charge that’s accidentally incorrect. So it’s important that you, too, keep an eye on your credit card statement to catch these errors and report anything that’s amiss immediately. Here’s what to watch out for and tips for handling a dispute.

What Are Fraudulent Credit Card Charges?

Credit card fraud can happen if someone steals your card or the information on your card, or hacks into your account. Someone could do so by stealing your physical card, skimming your card information at a credit card terminal, through phishing scams over email, or by stealing your mail. Fraudsters then use the information they’ve stolen to make unauthorized purchases on your credit card.

Most cards offer zero liability on fraudulent charges, meaning you won’t be responsible for covering charges you didn’t authorize. This is an important feature of how credit cards work. However, it’s important that you catch fraudulent charges early so you can report them quickly and minimize your liability.

Recommended: Tips for Using a Credit Card Responsibly

Detecting Unauthorized Credit Card Charges Early

The key to spotting unauthorized charges on your credit card is remaining vigilant and always checking your credit card statement each month. When you receive your statement, follow these steps:

•   Open statements immediately. Avoid letting a few months of credit card statements accumulate before checking them. Open them immediately so you can catch errors and head off fraud as quickly as possible. Going through your statements regularly will also offer a clearer understanding of how credit card payments work.

•   Check every purchase. Fraudsters know that small unauthorized credit card charges are less likely to get flagged. Go down the list of purchases you’ve made on your card over the last month and make sure you recognize the merchant and can match the sale with an item or service you bought.

•   Keep receipts. Hang on to receipts from credit card purchases so you can match them up to the items in your statement. This can also help if you’re unsure of how to identify a credit card transaction.

Recommended: What is the Average Credit Card Limit

Fraudulent Credit Card Charges vs Billing Errors

Fraudulent charges are a result of theft. However, sometimes you may be charged for something that was due to a billing error. For example, perhaps you were charged twice for an item, or you were charged for goods or services that you never received.

Other billing errors could include:

•   Unauthorized charges, for which federal law limits your liability to $50

•   Charges that list the wrong date or amount

•   Errors in math

•   Charges for goods or services that you didn’t accept or weren’t delivered as agreed

•   Failure to post payments or credits, such as after you’ve returned an item.

You can correct these errors using procedures laid out by the Fair Credit Billing Act (FCBA). If a charge is found to be made in error, your credit card company will carry out a credit card chargeback, reversing the charges.

Reporting Unauthorized Credit Card Charges

Procedures for reporting fraud and billing errors are slightly different.

If you suspect fraud, you’ll take the following steps:

•   Contact your card issuer immediately. Tell them you suspect that you’ve been a victim of fraud. Your issuer can then investigate the charge.

•   Ask for your accounts to be suspended or closed, and ask to be issued a new card. Change passwords and personal identification numbers (PINs) on your accounts.

•   File an identity theft report with the Federal Trade Commission (FTC). You can do so at Identitytheft.gov .

•   Contact the three credit reporting bureaus, Experian, TransUnion, and Equifax. Confirm your identity with them and check your credit reports for any other fraudulent activities. Consider having a fraud alert connected to your accounts.

If you’re disputing a billing error, first call your credit card company and alert them to the error. The credit card company will investigate. If they find there was an error, your account will be corrected, and you will not pay credit card purchase interest charges on the amount for which you were billed.

In addition, send your credit card company written notification of an error. Use FBCA procedures to dispute the credit card charges, including the following steps:

•   Write to the creditor at the address they provide for billing inquiries. This address may be different from the one to which you send payments. Include your name, address, and account number, as well as a description of the billing error you’ve spotted. The FTC provides a sample letter that you can use.

•   In the envelope, include copies of receipts and other supporting documents.

•   Be sure to mail your letter within 60 days of the first bill you received that contained the error.

•   Send the letter by certified mail and ask for a receipt so you can be sure your creditor received it.

•   Keep a copy of the dispute letter.

Recommended: When Are Credit Card Payments Due

How to Read Your Credit Card Statement

It’s important to get familiar with how to read your credit card statement. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) requires that each of your credit card statements includes certain pieces of information.

First, there should be a section that includes your account information. This is where you’ll find your name, account number, and the date of the billing cycle.

Next, the account summary is an overview of transaction information on your card. This section will include the payment due date, any payments or credits that have been applied to the account, any fees that have been charged to you, and the total amount of your account balance.

Following this summary is a detailed account of the purchases you’ve made over the billing period. Each line item will include the vendor name, the date the purchase was made, the category (such as “groceries”), and the amount that was charged to your card. Go through this section carefully as you look for fraudulent charges or charges in error. This is how to find who charged your credit card.

Your statement will include other sections that detail payment information, interest or credit card finance charges, rewards, and account fine print.

Recommended: What is a Charge Card

Credit Card Security and Fraud Protection

When you apply for a credit card, carefully look at the security measures the card issuer has in place. Credit cards, such as the credit card offered by SoFi, can have a variety of measures to keep your information safe and protected from fraud.

Fraud protection limits your responsibility and liability for fraudulent charges. Many banks offer $0 liability. The FCBA limits liability to $50 for card-present fraudulent charges, and $0 if the card is not present, such as for online charges made with stolen credit card information.

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

The Takeaway

Fraudulent charges or billing errors are an unfortunate part of having a credit card. Your bank may catch some of them, but it’s also important to be proactive and keep an eye out for fraud and errors on your credit card statement. Bringing them to the attention of your credit card company will help you get the issue sorted faster and head off potential future fraud.

Another way to keep yourself safe is by choosing a credit card that offers strong fraud protections. The credit card offered by SoFi, for example, offers Mastercard ID theft protection, which keeps your personal information safe by detecting potential fraud.

FAQ

How do I file a fraudulent charge claim with my credit card company?

If you spot a fraudulent charge on your credit card statement, call your card company immediately and ask them to investigate.

How do I find out where a charge came from?

You can see where a charge was made in the detailed purchase information provided on your credit card statement.

How do I look up a charge from my credit card statement?

If you’re unsure about a charge on your credit card statement, call your credit card company, which may be able to do a credit card charge lookup by merchant.


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.
The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
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.

Photo credit: iStock/Pekic
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