hands cutting credit card

How Much Credit Card Debt is Too Much?

First, you put the cost of a couch for your new apartment on your credit card. Then, your car needs new brakes so you put that on your credit card, too. Before you know it, you’re about to book a ticket to Maui on your credit card. But how much credit card debt might be okay, and how much credit card debt is too much?

Managing Monthly Credit Card Payments

Many people believe that as long as they can afford the monthly payments, their level of credit card debt is fine. But faithfully making the minimum monthly payment on your credit card might not be a good indicator of whether you have too much credit card debt.

Generally speaking, it can be helpful to pay off your entire balance each month, but that is not a realistic option for many— and it can be easy to just pay the minimum amount required. This can be problematic: Thanks to compound interest, paying only the minimum amount can actually cause your debt to grow.

For example, let’s say you have $5,000 worth of debt with a 16.71% interest rate and are paying off $100 a month. At that rate, it would take you more than five years to pay off the original $5,000 and would cost you an extra $3,616 in interest alone.

Curious how your credit card payments stack up? Use SoFi’s credit card interest calculator to see exactly how much you can expect to pay in interest. Pesky compound interest means that simply tackling minimum payments on your credit card doesn’t necessarily mean you’re in the clear with your credit card debt.

In general, looking at how much your monthly payments may not be the most reliable indicator of a safe debt threshold.

Credit Card Utilization

One helpful way to determine if you’re being smart with your credit cards is to look at your rate of credit card utilization. Credit card utilization is the amount of debt you have compared to the total amount of credit that is available to you.

Related: What is the Average Credit Card Debt for a 30-Year Old?

It can come as a shock to people that using their full line of credit can negatively impact their credit score, but in general, it is commonly recommended to use only 30% of the credit available . Credit reporting agencies use your credit card utilization percentage as an important part of determining your credit score.

What does that look like in practice? If you have a credit card with a $10,000 limit, and you spend $1,000 on a new couch, $900 on new brakes, and $500 on a plane ticket, you’re using $2,400—or 24% of your available credit. That’s relatively close to that 30% threshold, so you’ll want to consider treading carefully.

If, on the other hand, you made the exact same purchases but you only have access to a $5,000 line of credit, you would be using 48% of your available credit. A credit card utilization rate of 48% has the potential of negatively impacting your credit score.

If you’re concerned about your credit score, you may want to keep your credit card usage to below 30% of the total credit line available to you.

Debt-to-Income Ratio

Another important consideration when looking at your credit card debt is your debt-to-income ratio. Your debt-to-income ratio is essentially a measure of how much of your pretax income goes to paying monthly debt, like car payments, student loans, and credit cards.

If your debt-to-income ratio is very high, meaning that a large portion of your monthly income goes to paying off debt, some lenders might be reluctant to lend to you.

This means that you could be charged a higher interest rate on new loans or a mortgage because the lender is worried that you won’t be able to make your monthly payments—if you’re able to get a loan at all.

In general, industry professionals suggest that a debt-to-income ratio of about 36% or lower is considered ideal , but of course, that will vary by your specific circumstances.
If your debt-to-income ratio is higher than you hope, that may be one sign that you’re carrying too much credit card debt.

Keeping Credit Card Debt in Check

If you’re worried about the amount of debt you’re carrying on your credit card, there are several ways to take control. First, consider making more than the minimum payment. Many people simply stick with minimum payments because they think that is what they should pay. But increasing your monthly payment could help you pay down credit card debt faster.

Likewise, if you’re worried about your credit card utilization rate (and are not carrying a credit card debt balance), you may simply be due for an increase in your line of credit. For example, if you’re still using the same credit card with a $5,000 limit that you got right after college, but now you have a better job and more monthly expenses, you might want to ask your lender for an increase in your credit line in order to improve your credit card utilization rate.

Your debt-to-income ratio can also be helped by either increasing your income or decreasing your debt. One of the downsides to credit cards is notoriously high interest rates. One solution—using a personal loan to pay off your credit cards—may help you take control of your credit card debt and save you some money on your monthly payments.

The benefit of paying off your credit cards with a personal loan is that you may be able to trade a high interest rate for a lower interest rate and secure a more favorable repayment plan. A personal loan allows you to make a static payment every month for a set amount of time instead of trying to pay off the minimum amount due on your credit card, which can make you feel like you’ll never get out from underneath credit card debt.

Bear in mind that once you’ve paid off your credit card balances, it’s important to keep them low. Running those balances back up has the potential of making your credit profile less attractive to lenders due to the increased total debt.

And in the future, keep an eye on your credit limit when you’re making big purchases—it can pay off in the long run.

With SoFi personal loans also have no fees and no surprises—just a helpful way to manage your money.

Additionally, applying is all online. Find out how you can get out from under your credit card debt today.

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.
Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.

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8 Ways to Bounce Back After a Financial Mistake

Say you made a bad investment and now you’ve lost a considerable amount of your savings. Or maybe you had an accident that left you with hefty car repairs and medical bills. Whatever the case, an unforeseen or unavoidable mishap doesn’t need to turn into a financial crisis.

The first step to any problem is admitting there is one. By recognizing you’re facing a financial dilemma, you’ve already made the first step toward coming back from financial ruin. Now that you’re ready to tackle the issues that resulted from a financial mistake, these tips can help you as you start recovering from financial disaster.

Take Inventory

If you’re trying to bounce back from a financial mistake, a great first step is to take inventory of your finances post error. Facing the problem head-on may be difficult, but it’s the best way to gauge the situation. And it can help you gain perspective on how large the problem actually is and how impactful the losses could be on your goals for the future.

Take stock of how much money you owe on any outstanding bills or loans. How much money is left in your bank account? Were your investments or retirement savings affected? Getting all of the information out in the open will help you determine how bad the damage is.

Now that you understand how your financial mistake has impacted your savings, it’s time to create a plan so you can move forward and start working toward overcoming financial setbacks.

Make a Budget

Now that you understand your current financial situation, it’s time to make a new budget. With a fresh perspective on your finances, take this opportunity to set new goals. Whether it be recovering from this financial mistake, growing your emergency fund, or breathing new life into your retirement investments, now is the time to make those decisions and craft a budget that will help you meet those goals.

You’ve already done the hard part and taken stock of your current financial situation and reviewed all the relevant financial documents and accounts. Next, make a list of all of your monthly expenses and sources of income.

Also, list out any savings or investments. You should have a complete picture of your finances, which will give you a good idea of where you can make some improvements in your spending habits to save for your financial goals and recover from your financial setback.

Get Professional Advice

When you’re in the middle of a financial crisis, it can sometimes feel like there is no way out. If you’re dealing with monetary issues and are not sure what your next steps should be, it can be worth seeing a professional for advice. A financial advisor can help you review your finances, set goals, and establish a plan to help you reach those goals.

Yes, getting professional advice will usually cost you a bit upfront, but investing in the financial health of your future is worth it. If you’re too strapped for cash to pay for professional consultation, consider speaking with a trusted friend or family member who has a strong track record with their own finances.

Sometimes a fresh pair of eyes and a new perspective is all it takes to start formulating a plan. And remember, you’re not the first person to make a financial mistake, and you won’t be the last. It’s okay to ask for help.

Secure Your Home

Overcoming financial setbacks can be a challenge, but with some budgeting and strategic planning, you’ll be able to bounce back. One of your top priorities should be securing your home.

If you are in danger of missing mortgage payments or losing your home, finding a way to make those payments and keep a roof over your head should be priority number one. There is no one-size-fits-all solution to mortgage issues, but finding an attorney or real estate agent that specializes in working with homeowners can help.

Target Credit Card Debt

Next up on your to-do list: Get your credit card debt under control. If your financial mistake caused you to rely heavily on your credit cards and your outstanding balances have somehow ballooned, focus your resources on paying down your credit card debt.

If you have multiple credit cards, try using the snowball method to tackle your debts one by one. Using this method, you’ll focus on paying off the debt with the lowest balance first. When that debt is paid off, roll that payment into the debt with the next highest balance. This provides incentive to continue making payments as you pay off all your debts.

Another alternative to consider is consolidating your credit card debt with a personal loan. This results in one easy-to-manage monthly payment instead of multiple bills with different credit card companies.

This can also help you limit the money you spend on interest. When you take out a personal loan, you can often reduce the interest rate, especially when compared with high-interest credit cards.

Keep Your Credit Score on Track

It may seem difficult while you’re in financial turmoil, but try to keep your credit score from dropping dramatically while you are dealing with the results of your financial mistake.

Do everything in your power to make the minimum monthly payments on your debts, like credit cards, student loans, or mortgages. If you’re having difficulty making payments, contact the respective lenders and see what they might be willing to do to help you.

Try to keep your credit utilization rate low. General financial wisdom is to keep your credit card utilization to 30% of your limit. Lower credit utilization rates suggest that you can use credit responsibly and could lead to higher credit scores.

Find a Side Hustle to Supplement Your Income

It’s time to get proactive. Finding a side hustle to supplement your income could help accelerate your financial recovery. The key is to find a side hustle that works with your schedule, interests, and skills. Are you able to take on a part-time job at a coffee shop? Is there an event space in your town that needs help on the weekends?

Are you a skilled writer, editor, or photographer who can find some freelance gigs? When it comes to side hustles, there are seemingly endless options. Take the time to review your skill set, passions, and interests and see if there is anything you can turn into part-time work. In addition to a bit of extra income, you may surprise yourself with how rewarding you find your new gig.

Start Saving

Now that you’re on your way to financial recovery, stay ahead of the curve and start saving for the future. You never know what the future holds so it’s wise to prepare for the unexpected. If your savings took a serious hit because of a financial mistake, it’s time to fortify your emergency fund so you’re prepared for unplanned expenses.

As you build or rebuild your emergency fund, aim to have three to six months’ worth of living expenses saved. This money should be easily accessible in cash—think: savings account, not 401(k) or IRA—in the event of an emergency. This way you can easily access the money you need to pay off, say, an emergency room visit, without paying any penalties or fees to access your money.

Saving with SoFi Money

Consider opening a SoFi Money® cash management account to start saving for your emergency fund.

You can access your money from anywhere in the world, and with SoFi Money, there are no account fees (subject to change)—that means no account minimums and no overdraft fees.

Ready to save smarter? SoFi Money can help you take control of your emergency fund.

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.
SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank.


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What is a FICO Score?

More specifically, you might wonder, “What is a FICO® Score used for by lenders and why should my score be important to me?”

Well, if you plan to apply for a loan, your potential lender may assess you partially based on your FICO Scores. So, it’s reasonable to wonder how this score is calculated, how (or if) you can improve upon it, and how it differs from other credit scores.

In this post, we’ll share the history of FICO Scores, including how and why it was invented, plus answers to some frequently asked questions on this topic.

At a high level, there are actually multiple credit scores that lenders could use when considering an applicant’s eligibility for a credit card, a personal loan, a mortgage loan, and so forth.

FICO Scores, however, are trademarks created by the Fair Isaac Corporation, and were the first widely-used, commercially-available scores of their type. Put very simply, FICO Scores essentially “compress” a person’s credit history into one algorithmically-determined score.

Because FICO scores (and other ones like it) are based on analytics, rather than human biases, their goal is to make it easier for lenders to make fair lending decisions.

This is a very complex topic, of course, so what we’re about to dive into is meant to be educational only. Always speak with a tax or financial professional if you want or need credit-related financial guidance.

Creation of the FICO Scores

MyFICO.com shares a brief but interesting history of credit and the concept of developing scores to represent someone’s creditworthiness. As far back as 1841, an organization (the Mercantile Agency) collected information about businesses in an attempt to “standardize credit evaluation.” It wasn’t particularly successful, as data collected could be quite biased, including opinions about race, class, and/or gender.

By the 20th century, it was recognized that credit reporting was needed for individuals, too, but early attempts still included demographic information that could be used in discriminatory ways.

It was the 1970 Fair Credit Reporting Act (FCRA) that ushered in the beginning of today’s credit reporting. The purpose of the FCRA is to promote the accuracy, fairness, and privacy of information in consumer reporting agencies’ files. This is also when it became codified that negative credit information should be deleted after a certain time period had passed (seven to 10 years, typically).

In 1975, the first modern credit bureau was created: Equifax. Then, Experian and TransUnion formed, and these are today’s top three credit reporting agencies. But a problem still existed—and that was how to use information listed in a credit report in an efficient, fair, and unbiased way.

So, in the 1980s, credit bureaus began to work with Fair, Isaac, and Company, a tech firm founded in 1956. The result was FICO Scores and, although the algorithm has evolved over the years, the basic formula used at the inception is similar to what’s used today.

Is the FICO Score the Same as a Credit Score?

These two terms— FICO scores and credit scores—are often used interchangeably. More accurately, though, is that a FICO score is one type of credit score, the one most often used by lenders when making their decisions. There are in fact multiple types of credit scores, with each of them using analytics to create a rating that illustrates a person’s creditworthiness.

Some credit scores can be referred to as “educational ” ones, meaning they aren’t used often by lenders, but they can help consumers get a handle on how good their credit would likely be considered by a lender.

Scores provided by TransUnion and Equifax, for example, are considered to be educational credit scores. VantageScores is an example of another type of credit score that is used by lenders.

Want to find out what your credit score is?
Check out SoFi’s credit score monitoring
tool in the SoFi app!

How is a FICO Score Determined and What is the Credit Rating Scale?

There are five main components of your base score , with differing weights. They are:

•  Payment history: 35%

•  Amounts owed: 30%

•  Length of credit history: 15%

•  Credit mix: 10%

•  New credit: 10%

These percentages demonstrate how about two-thirds of your base FICO scores depend upon managing the amount of debt you have and making your monthly payments on time.

Now that you know how your base score is calculated, it’s important to understand the credit rating scale used. FICO’s base scores run from 300 to 850; the higher the score, the better the credit rating. And here are the ranges used:

•  Exceptional: 800-850

•  Very Good: 740-799

•  Good: 670-739

•  Fair: 580-669

•  Poor: 300-579

Interestingly enough, your base FICO Scores may vary slightly, even if your creditworthiness doesn’t fluctuate. That’s because it depends upon which of the three credit bureaus supplied the information for the calculation.

Here’s one more twist. FICO states that 90% of the country’s top lenders use their scores. Having said that, Forbes.com notes that the company has developed 60 different variations of its score since 2011.

For example, they’ve developed industry-specific scores , such as one specifically for auto loans (FICO® Auto Scores), others for credit card applications (FICO® Bankcard Scores and FICO Score 8) and multiple ones for mortgage lenders. Industry-specific FICO scores range from 250-900, compared to 300-850 range for base scores.

Boosting Your FICO Scores

Because the majority of your score is based upon the amount of debt you have and how timely you are when making payments, here are a few tips that could help boost your credit score:

•  Create payment reminders, since paying debt on time plays one of the biggest roles in credit scores. Perhaps your bank can send a reminder or maybe you could enroll in automatic payments.

•  Help reduce your overall amount of debt by coming up with a payment plan; MyFico.com recommends paying down your highest interest account first, while continuing to make minimum payments on everything else.

•  If you miss a payment, you could focus on getting current as quickly as you can and stay that way. Older credit problems, according to MyFico.com, have less of an impact than newer ones.

•  If you ever struggle to make a payment, you could try contacting your creditors and/or seeing a legitimate credit counselor for help. The MyFico site also notes that seeking assistance from a counselor will not hurt your FICO scores.

Here are a couple more quick tips, also from MyFico.com:

•  Keep balances low on revolving credit

•  Pay off debt; don’t just move it around

•  Don’t close credit cards to try to raise your scores

•  Don’t open credit cards that you don’t need

•  If fairly new to having credit, don’t open too many accounts too quickly

Personal Loan at SoFi

If it makes sense for you to apply for a personal loan, either for a major purchase or to consolidate high-interest credit card debt, know that SoFi offers low interest rates. Plus, we don’t charge any fees—that means no origination or prepayment fees.

Applying for your personal loan online is fast, easy, and convenient! Check your rate today.

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.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.

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10 Tips to Help Break The Debt Cycle

Just like visiting the dentist or having your car towed, the debt cycle can add unwanted stress to your life.
Taking on some debt can be beneficial, allowing you to invest in your future by getting a college education or buying a home. But every debt you borrow will eventually need to be repaid. In some cases, the repayment process can seem daunting.

Mortgages, student loans, and car loans can add up to a considerable portion of your monthly expenses. Add in credit card debt and unexpected financial emergencies, and it could feel like your debt is ever-growing. But don’t fear, with a few tips and some strategic planning, you can organize your finances and help to break the debt cycle for good.

Avoiding Credit Cards

Credit cards can be a great tool to earn rewards points and track your spending, but only if you are paying them off in full every billing cycle. Credit cards can make it easy to spend money you don’t have, since you don’t feel the immediate effects of the money leaving your account or the cash leaving your hand.

You don’t have to cancel your cards, since that may negatively impact your credit score . You can store them somewhere you won’t have easy access to them, or even cut them up so you’re not tempted to use them. If you’ve been using your credit cards to pay for your daily expenses and not paying the bill at the end of the month, it may be time to review your spending and see if there are places you can cut back.

Considering Interest Before Charging Purchases

When you’re shopping it can be easy to get swept up in finding a great deal and put it on a credit card. Before you do, you may want to pause and think about what it might cost you in interest.

If you aren’t able to pay off your credit card bill at the end of the month, your sweet deal could end up costing you a lot more than what you originally paid for it.

Before you swipe your card, consider taking the time to evaluate the purchase, the price, and what it may cost you in interest for as long as it will sit on your credit card. You can use a tool like our credit card interest calculator to estimate how much interest you will pay on your credit card debt.

Revisiting Your Shopping Habits

It might be time to take a look at your shopping and spending habits. You can start by reviewing how much money you are spending each month on things like food, clothes, and entertainment. Be honest with yourself and see if there is any opportunity for you to cut back.

One way to create more structure when you hit the store is to shop with a list. While your top of mind association may be grocery shopping, being prepared with a list doesn’t have to apply to just that. Planning ahead could help you save money in all areas of spending.

When shopping for the holidays, birthdays, or other events, set a list of what you plan to buy and a budget to match. This can help you get exactly what you need without going overboard.

Differentiating Between Wants and Needs

Is that new pair of shoes a want or a need? Latest video game? A night out on the town? As you’re trying to get ahead of the debt cycle, you might want to evaluate your wants against your needs. For example, before you make a purchase, carefully think about whether you need it, or if it’s just a want. If it’s something you can live without, maybe holding off is wiser.

Breaking out of a long-term debt cycle requires discipline and determination. While skipping out on wardrobe upgrades or the newest tech gadgets now can seem like a huge sacrifice, when you start making headway on your debt repayment, odds are you’ll feel the reward.

Saving an Emergency Fund

One of the biggest reasons people fall into the debt cycle is their failure to plan ahead. You can’t predict the future, but you can do your best to prepare for it. For example, say your car breaks down and you’re unable to pay for repairs upfront.

Deferring the cost on your credit card can send you deeper into the debt cycle. On the other hand, having an emergency fund on hand can help you prepare for unexpected costs and events.

If you don’t have anything saved up, you can try starting with a windfall—like a bonus at work or your tax refund. You can put this money in a dedicated emergency fund savings account (or another cash equivalent, if you prefer).

Need a place to put your emergency fund? Learn more about opening a SoFi Money cash management account.

Then each week, you can try to save a specified amount of money in your emergency fund. Even saving just $10, $15, or $20 a week can help you be more prepared when a financial emergency strikes. It can be good to aim to save somewhere between three and six months’ worth of living expenses in your emergency fund.

Reviewing Your Credit Card Statements and Setting a Budget

Credit card debt prevents many people from breaking the debt cycle. Taking action by printing out your credit card statements and reviewing them closely can be a great first step toward getting credit card debt under control. You can also make note of your expenses and see exactly where all of your money is going.

Are you spending hundreds of dollars a month on take-out? Have you been giving in to the convenience of Amazon Prime? Are there a few subscriptions you enrolled in but have since stopped using? Be honest with yourself as you review your spending habits. Note any areas where you can adjust or cut back your spending.

After you’ve had a reality check on your spending, you might want to set up a new budget. You can start by tallying your monthly income and your monthly expenses. Don’t forget to include saving in your budget and set up new limits for your discretionary spending.

Accelerating Your Repayments

If you’re paying off debt, one way to speed up your repayment is paying more than the monthly minimum. Making additional payments on your debt each month could not only help you eliminate your debt more quickly, it could also potentially reduce the money you spend in interest in the long term. Even just $25 a week could have an impact on your repayment.

There are a couple of debt repayment strategies that could help get you back on track. First, there is the debt snowball method. This method encourages you to start focusing on your smallest debt, regardless of the interest rate. While making the monthly minimum payments on all of your debts, you would throw as much extra money as possible toward the smallest debt.

Once it’s paid off, you’d take the minimum payment you were paying on that first debt and add it to the minimum payment on your next-smallest debt. Repeat the process and let the snowball work its magic. While this method may not reduce the money you spend in interest, the rewarding feeling of seeing your debt dwindle could encourage you to stick with your repayment plan.

Another debt repayment strategy is the debt avalanche, or debt-stacking method. Unlike the snowball method, which is structured around behavior and motivation, the avalanche method is about streamlining your debt repayment so that you save the most money on interest. It can require more discipline, but keeping track of how much you are saving in interest can be a great motivator.

With the debt avalanche method, you would make a list of all your debts by order of interest rate, highest to lowest. While making your minimum monthly payments on all the debts, “attack” the highest interest rate loan with as many extra payments as you can. For extra motivation, you can use an extra payment loan calculator to keep track of how much you’re saving in interest.

Living within Your Means

With all the fancy gadgets, cutting-edge technology, constant advertisements, and the rise of social media, it can be easy to get swept up in having the best and fanciest of everything. But living in debt to sustain that can ultimately add stress to your life. You can rise above this by living within your means.

Conventional wisdom is pretty straightforward: don’t borrow more than you can afford. Before you borrow, review your budget and understand how much you can realistically afford to spend on a given item.Then stick with what you already determined you can pay.

Getting a Side Hustle

Another great way to help end the debt cycle: find some extra income by getting a side hustle. You could u money you earn from your new side gig to make extra payments on your debts. Not sure where to start? Sometimes it’s a straightforward as taking a look at your skills and interests and seeing where you may be able to find an extra job or make some passive income.

There could be a ton of different opportunities to find a side hustle that fits your skills and works with your current schedule.

From driving for a rideshare to freelancing as an editor, or even selling your crafts at an online marketplace, with a little legwork, you could find a side job that you love, while also speeding up your debt repayment.

Consolidating Credit Card Debt with a Personal Loan

If you’re currently living in debt, it can feel like there is no way out—but with some strategic planning and a bit of discipline, you may be able to get out from under it. One option to help you repay your debt is a consolidation loan.

A debt consolidation loan is type personal loan you could use to consolidate other sources of debt, such as credit card debt. If you’re repaying a number of high-interest debts, a consolidation loan could help you get your repayment plan on track, and lower your overall interest rate which could reduce the amount you spend in interest, depending on your loan term.

When you take out a debt consolidation loan with SoFi, there are no origination fees or prepayment penalties. If you’re ready to see how a debt consolidation loan from SoFi can help you break the cycle of debt, you can apply easily online and get a rate quote in less than two minutes.

Learn more about SoFi personal loans today!

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.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Neither SoFi nor its affiliates is a bank.
SoFi MoneyTM is offered through SoFi Securities, LLC, member FINRA / SIPC . Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.


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Why Consolidate Debt Before Buying a Home

As adults, we tend to bounce from one big financial quest to the next. We need money to buy a car, to go to college, to own a home, which usually means we have to keep asking for loans.

You’d expect it would get easier as you go, but sometimes it doesn’t, especially if you’ve made mistakes along the way. Unfortunately, your missteps could keep you from qualifying for a mortgage—the Mount Everest of money-borrowing pursuits. If you’ve buried yourself in credit card and other debt, it’s crucial to get clear before you can move forward.

Consolidating Credit Card Debt Before a Mortgage Approval

Your credit card debt and mortgage approval can sometimes go hand in hand. Mortgage lenders want to know that you can afford to pay back the loan they’re offering, so they’re going to be curious about what you already owe others. While every lender is different, they’ll typically look at what you earn every month versus what you’ll be paying for your home and other debt obligations.

Even if you have a good credit score and a debt-to-income ratio of 43% or less, high credit card debt payments could still make it difficult for you to pay a mortgage.

Credit cards typically come with a high interest rate and as long as you don’t pay your balance off in full every payment cycle, interest can continuously compound.

Taking out a personal loan to consolidate your credit cards is a way to help break the debt cycle. While you’ll then have to take out a personal loan, the interest rate may be lower than your credit cards, and personal loans usually offer fixed interest rates.

Think of it as your borrowing base camp—a personal loan can help you catch your breath and get your finances in order before you move on in your quest for a mortgage.

Using a Personal Loan To Consolidate Debt

Let’s get into more detail about how it all works:

You’ll combine the credit card debt into one manageable bill with a single payment due date. That means you’ll no longer have to worry about multiple payment due dates (or what will happen to the interest rates attached to those accounts if you don’t make your payments on time).

You may also qualify for a lower interest rate. The average interest rate on credit cards hovers around 16%, which is pretty hefty. Or maybe you accepted a higher rate on a new card a while ago when you needed it to build your credit and never got the rate adjusted. If you have a good credit record, a consistent job history, and a solid income, you may be able to bring your interest rate down with a personal loan.

Those high interest rates might be the very reason you got into trouble in the first place. Perhaps you aren’t an over-spender or maybe you just got into the habit of paying the minimum on your credit cards each month, figuring you’d catch up “someday.”

And it wasn’t until you started thinking about purchasing a home that you realized you’re on thin ice. With a lower interest rate and just one bill, you could help set yourself up for success with a better chance of staying on top of your debt.

Having the balance of one or more of your credit cards near the credit limit may negatively affect your credit score. Credit utilization is one of five major factors that help determine your credit score (along with payment history, the age of the credit, credit mix, and the number of recent credit inquiries).

Credit Card ConsolidationCredit Card Consolidation

Credit utilization is a comparison between the amount of credit you have available to you (your account limits) and what you’re actually using (your balances). If your credit utilization is high, a lender might see you as more of a risk, and the ratio can impact up to 30% of your credit score . Paying off your credit cards —and keeping them paid off—may help you boost your credit score.

Being on firmer footing with debt also could boost your savings sense. You’re probably going to want to get home-loan-ready one careful step at a time, and knowing you’re doing something about your debt might inspire you to make other savvy moves, like spending less and saving more.

If you reduce your monthly debt payments with a consolidation loan, you could put that extra money toward the down payment you’ll need for your new home. And putting down more up front will ultimately mean you own more of your house—and have a smaller mortgage.

Using a personal loan to lower the amount you’re required to pay on your debt each month may help improve that statistic lenders lean so hard on: the debt-to-income ratio.

Lenders may conclude that those with higher debt-to-income could have more difficulty paying their mortgage. You may seem like a safer bet in the eyes of a lender with a lower debt-to-income ratio.

Understandably, they just don’t want the risk, so why give them an excuse to turn you down? Your consolidation loan won’t magically make your debt disappear, but by paying regularly on your personal loan, you can get a better grip on your debt load and eventually improve your credit profile.

You might find you don’t even need those credit cards anymore—at least not as many or not so often. Maybe when you were starting out on your own, you used credit to get by when times were tight. Now that you’re earning more money and your finances are more in order, that’s hopefully not true anymore.

You might find yourself chopping up some of those extra cards. After all, if your personal loan comes with a lower monthly payment, you’ll likely have more cash in your pocket to pay for the small stuff.

Other Options For Knocking Down Debt

If you think you have the resources and discipline to knock down your credit card balances on your own within six months or so, you probably don’t need to bother with a loan.

Or you might want to look into using a balance transfer card—that is, if you think you can focus on paying it off within the required timeline to take advantage of the low interest rate…and you can resist the temptation to keep charging.

But, if it feels as though your debt is becoming a slippery slope, and consolidation would help you set up a new and better payment structure for getting rid of it, you may want to consider a personal loan.

Every situation is different, but you can use SoFi’s personal loan calculator to get an idea of where you’d stand, or you can look at some payment examples. You also can check out SoFi’s other benefits, including our Unemployment Protection program for members.

Consolidating debt before buying a home can be a wise first step. And if all goes as planned, when you’re ready to purchase that home, you could decide to apply for a mortgage loan through SoFi.

Take control of your credit card debt with a SoFi personal loan today.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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.
SoFi Mortgages are not available in all states. Products and terms may vary from those advertised on this site. See SoFi.com/eligibility-criteria#eligibility-mortgage for details.


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