credit card Archives | Page 20 of 40

Mar

2023

Credit Builder Loan vs Secured Credit Card: Which Is Better for You?

If you’re trying to build your credit, you may encounter a bit of a Catch-22: You likely need a good credit history to successfully apply for credit. But how do you do that if you don’t have credit?

Fortunately, products like credit builder loans and secured credit cards can help you build a favorable credit profile if you’re still at the beginning of your journey. Deciding which of these financial products is best will depend on your immediate financial needs and how much cash you have available to put down for a security deposit.

Read on to learn more, including:

• What is a credit builder loan?

• How does a credit builder loan work?

• What are the pros and cons of credit builder loans?

• What is a secured credit card?

• How does a secured credit card work?

• What are the pros and cons of secured credit cards?

• Which is better of a secured credit card vs. a credit builder loan?

What Is a Secured Credit Card?

Secured credit cards vs. unsecured credit cards may look the same, but they work a little differently.

Instead of setting a credit limit determined by your credit history, secured cards require a cash security deposit. The amount of your deposit is usually the same as your limit.

You can think of it this way: Rather than allowing you to borrow money, the credit issuer is essentially allowing you to spend money you already have. It may sound as if it doesn’t offer any benefit, but remember: This gives you the opportunity to build your credit.

How Secured Credit Cards Work

When you apply for a secured credit card, you’ll provide your basic demographic information along with a cash security deposit to the card issuer. This deposit will usually be at least $200 or $300 and could be more; say, $1,000 or $2,500.

The deposit amount will likely serve as your working credit limit, though you may want to use the card sparingly. Perhaps you swipe or tap it often enough to keep it open and for the credit bureaus to see your positive credit behavior, such as paying in full and on time each month.

Because the cash deposit works as collateral, lowering the risk for the card issuer, you may be able to successfully apply for a secured credit card with a lower credit score or possibly even no credit at all. The same issuer might even automatically review the account to see if it merits a switch to an unsecured card.

Recommended: How to Apply for a Credit Card

Secured Credit Card’s Effect on Credit

Secured credit cards offer you the opportunity to build positive credit history, since your balance, payments, and other information will be passed to the credit bureaus. And because the credit limits are generally lower, it’s a lot harder to fall into a serious debt spiral with a secured credit card than it is with an unsecured one.

Pros and Cons of Secured Credit Cards

Like any financial option, secured credit cards have both pros and cons to consider.

Pros of secured credit cards:

• It’s a readily available way for those with poor or non-existent credit history to begin building their credit with a low cash deposit.

• You gain the ability to use the funds immediately while still building credit over time.

• You may gain some potential credit card benefits, such as fraud protection and credit card rewards, like cash back.

Cons of secured credit cards:

• You must have the cash deposit available, and it can be in your best interest not to use the entire amount once you have the credit card. That means some of your money is tied up on the card.

• Interest and penalties may apply if you aren’t able to keep your balance low or paid off in full each month.

• Card issuers do still run a hard credit inquiry when you apply, which can negatively impact your credit in the short term.

What Are Credit Builder Loans?

Credit builder loans are another option for people looking to build their credit. They work a little differently than a traditional loan does. Rather than receiving the money you’ve applied for right away, you’ll get the money later, after you’ve repaid the full amount.

How Do Credit Builder Loans Work?

Applying for a credit builder loan is a lot like applying for any other unsecured or secured personal loan. You’ll provide a variety of information, including details about your existing monthly expenses and income, as part of the approval process. (The lender may or may not run a credit check or look into your banking history.)

These loans are typically for relatively small amounts of $300 to $1,000. The term is likely to be between six and 24 months; rates will vary.

If you’re approved, the bank will create a savings account or certificate of deposit (CD) in the amount of the loan. The money is held there rather than paid out to you, and you repay the debt over time. It’s only when you’ve successfully completed repayment that the money be disbursed to you (sometimes including accrued interest).

In this way, it’s kind of like an enforced savings plan: You could slowly put money away into a savings account yourself, but taking out a credit builder loan keeps you accountable.

Plus, your payments are reported to the credit bureaus, which means you have the opportunity to build your credit history and credit report in the meantime. Win-win!

Note: Credit builder loans may not be available at your financial institution. If that’s the case, check credit unions, CDFIs (Community Development Financial Institutions), and online lenders.

Credit Builder Loan’s Effect on Credit

The loan company will report your on-time payments to the credit bureaus, which can help you build your credit. This can make it a lot easier to take out other loans in the future.

Of course, if you fail to pay on time or default, a credit builder loan could have a negative effect on your credit.

Pros and Cons of Credit Builder Loans

Credit builder loans also have both positives and negatives to consider.

Pros of credit builder loans:

• They are available to people with low or no credit.

• They may not require a hard credit inquiry.

• They can help people build credit without risking going into credit card debt.

Cons of Credit Builder loans:

• You won’t have access to the funds until after you’ve paid the loan off. Credit builder loans might not be right for those who have immediate financial needs.

• There may be a nonrefundable fee for taking out the loan.

• These loans can be difficult to find.

Credit Builder Loans vs Secured Credit Cards

Which of these two credit-building options might be right for you? The answer depends on your circumstances, but this table might prove helpful in comparing the options.

Credit Builder Loans	Secured Credit Cards
Your money will be locked up until you pay off the loan	You’ll have immediate access to funds but not the full amount of the deposit
May come with a one-time fee, but doesn’t pose the financial risk of revolving debt	Can be easy to accrue interest, late fees, and other penalties
Required cash security deposit can be as low as a few hundred dollars	Required cash security deposit can be as low as a few hundred dollars
Available to those with poor or non-existent credit	Available to those with poor or non-existent credit
Can help build credit history over time	Can help build credit history over time

Is a Secured Credit Card or Credit Builder Loan Right for You?

Depending on your specific financial circumstances, either of these products might be a valuable way to enhance or establish your credit. Both are relatively easy to access for those with imperfect financial histories. Although both require an up-front cash deposit, the deposit may only be a few hundred dollars.

If you need to use your money right away, a secured credit card may make more sense; you’ll be able to use your credit card to pay bills and cover other expenses.

A credit builder loan, on the other hand, ties up your money for a longer period of time, but comes with less risk of paying large amounts of interest on revolving debt.

The Takeaway

Credit builder loans and secured credit cards make it possible to create a favorable credit history. A credit builder loan may be a better option for those who have more cash available, whereas a secured credit card helps build credit while (responsibly) spending.

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

FAQ

What is the difference between a credit builder loan and a secured credit card?

A credit builder loan is a loan that disburses money to the borrower only once the entire amount has been paid to the bank. A secured credit card is a credit card that requires a cash deposit to open. Both of these strategies require an up-front cash investment, but they also give people with poor or nonexistent credit the opportunity to build positive credit history and improve their credit score.

Which is better for building credit: a loan or a credit card?

Both loans and credit cards can build credit over time if the borrower makes their payments on-time and in full. However, both can also pose risk if the borrower is unable to keep up with repayment. Deciding whether to get a credit builder loan or a secured credit card may depend on how soon you need access to your cash.

What is one disadvantage of a credit builder loan?

When you take out a credit builder loan, you won’t have access to the money you’re applying for until the loan’s term is up, which may be as long as 24 months. That means credit builder loans might not be right for people with short-term financial needs to take care of.

Photo credit: iStock/staticnak1983

Mar

2023

Does Adding Your Spouse to a Credit Card Affect Your Credit?

By Jackie Lam | Credit, credit card, Family Finances | Comments Off

While credit scores and credit histories don’t merge when you get married, there are some scenarios when your spouse’s credit can impact yours, and vice versa. That said, you may wonder if your union spells good or bad news for your credit. Your three-digit credit score can be an important factor in borrowing money at the best possible rate, among other aspects of your financial life.

So, in a world where many people are trying to establish their credit scores, how might adding a spouse to a credit card build credit? Could it wind up bringing both of you down? Adding your spouse as a co-borrower can indeed have an impact depending on how responsibly you use a particular financial product. And beyond being added to a credit card, there are ways that you and your beloved might team up to build credit.

Read on to take a closer look at this situation, including:

• If I add my spouse to my credit card, will it help their credit?

• Does adding your spouse as a co-borrower affect my credit?

• What are some ways to help my spouse build credit?

Can Adding Your Spouse as a Co-Borrower Affect Your Credit Score?

Co-borrowing for a mortgage, car loan, personal loan, or credit card with your significant other may impact your credit score. These are major financial moves, and here are the ripple effects they may trigger:

• If you’re applying jointly from the get-go, and your spouse has the lower of the two credit scores, it could hinder the approval of your application or lead to lower loan amounts and less favorable rates and terms.

• If, however, you have the lower credit score between the two of you, adding your spouse as a co-borrower can boost your odds of getting approved. Plus, it might enhance the amount, rates, and terms for that line of credit or loan for which you are applying.

• Keep in mind that when you apply as co-borrowers or add your spouse as a co-borrower on a credit card or line of financing, you are legally bound to manage the account, and you’re both financially responsible. That means you’re both on the hook for making payments on the credit or loan, no matter who did the spending.

• Payment history on the account will be reported to the credit bureaus on both your respective credit profiles. If payments are missed or late, it will negatively impact both your credit scores. And if you stay on top of payments, it can help you both build credit from scratch. This holds true whether you are both initially applying as co-borrowers or whether one spouse adds the other as a co-borrower.

How Can Cosigning Affect Your Credit Score?

So does adding a spouse to a credit card affect your credit score? As you’ll see, just as there are pros and cons of joint bank accounts and other shared financial arrangements, so too can cosigning have upsides and downsides.

• If you’re adding your spouse as an authorized user on your card, it won’t immediately impact your credit. Nor will the credit card issuer be required to run a credit check on your spouse.

• However, when you cosign on a credit card or loan (that is, become a co-borrower), both parties are responsible for making payments. If one struggles financially, falls behind on payments, or the account goes into collection, both individuals are legally on the hook to make those payments.

• If the above situation occurs, it will most likely hurt the credit of both parties. Conversely, if the account holders stay on top of their payments, it can help build credit.

10 Ways in Which You Can Help Your Spouse Build Credit

Adding your significant other as an authorized user to your credit card or signing up to be a loan or credit card cosigner aren’t the only ways your spouse can build credit. Here, 10 other tactics to consider.

1. Authorized User

As mentioned, adding an authorized user to your credit card account doesn’t impact your credit in the slightest. And if you practice responsible credit card use and habits, your spouse, as an authorized user on your card, could benefit.

Worth noting: It’s not just your spouse who can be added to your account. You could add a friend, family member, or employee as an authorized user to your account. Depending on the credit card issuer, you may be able to add multiple people.

For instance, the SoFi credit card allows you to add up to five authorized users. Plus, having others make purchases on your credit card can help you earn rewards.

2. Secured Credit Card

Your spouse might build credit via a secured credit card. These cards may look like a conventional card but they work differently and give the lender an additional layer of security. You put down a refundable deposit, which is usually the same amount as your credit limit. For instance, if you put down $250, that is your credit limit is $250. If you’re new to credit and building credit from scratch, these cards can be helpful if used responsibly because activity is reported to the credit bureaus.

3. Joint Credit Account

Joint credit cards are held in two people’s names, with two people being able to make charges and liable for the debts. If you sign up for a joint credit card, you can build both of your credit scores, provided you stay on top of your payments. (Of course, if you fall behind, both of your credit scores would likely dip.) However, these accounts can be a challenge to find; most lenders prefer extending credit to a single individual.

Recommended: Is a Joint Bank Account Right for You?

4. Applying for a Small Loan

If you’re looking for a financing option to help build credit, consider a loan with a small amount. That way, you gain the benefit of establishing credit, plus the debt repayment will be manageable and you can pay it off quicker. You might look at credit unions and online lenders, where personal loans are available for $250 and up.

5. Applying for a Credit Builder Loan

A credit builder loan is a short-term personal loan created with the primary intention of helping someone establish credit. Typically, you borrow a low sum generally up to $1,000, with repayment terms from six to 24 months. In this kind of loan, the funds aren’t disbursed to you when you are approved. Rather, they are typically placed in an interest-earning savings account or CD for you while you make payments. You might think of it as a structured savings plan. At the end of the term, the money plus any interest is yours, and your payment history is reported to the credit bureaus, hopefully building your score.

6. Applying for a Secured Personal Loan

A secured personal loan works in a similar fashion to an unsecured loan. You receive a single lump sum upfront and are responsible for monthly payments. But you’ll need to back up it with a valuable asset, such as a home or car. Should you struggle with keeping up with payments, the lender will be able to collect on your collateral to pay back the loan. Again, this is a way to build a credit score if you handle the repayment responsibly.

Secured personal loans usually have less stringent credit requirements, so are easier to get approved for when you’re new to credit.

7. Reviewing Credit Reports Together

It may not be as fun as heading out to try the new ramen place, but making a date to review one another’s credit reports together can be a valuable use of a couple of hours. It can help you spot errors to be corrected by contacting the credit bureau. It can also allow you to brainstorm together about ways to optimize your respective credit scores. You can order free reports from each of the three credit bureaus at AnnualCreditReport.com .

For instance, maybe your partner has a history of late or missed payments. In that case, they can build their score by staying on-time with their payments. And perhaps you realize your credit card balance is growing rapidly and you need to investigate debt consolidation to remedy the situation.

8. Engaging in Money Management Discussions

Just as you might discuss your dreams for exotic travel and starting a family, you and your mate should hash out financial goals and how money management plays into helping you achieve your aspirations. You can tackle such issues as whether to have joint bank accounts vs separate bank accounts in marriage, prioritizing your financial plans, and more.

You might also both read financial blogs or listen to podcasts to boost your financial literacy.

9. Get Educated About Credit

About that reading and education: It can also be wise to drill down on the basic rules of credit and how to use credit responsibly. In turn, this learning might be able to help you establish credit with greater ease and more quickly.

10. Establishing and Sticking to Budgets

Your credit score can reflect how well you are handling your inflow and outflow of funds. As you contemplate your credit, take a look at how you can better allocate funds to pay down debt and pay bills on time.

If you’re not sure where to start, consider popular budgeting methods such as the 50-30-20 rule, the zero-sum budget, and the envelope system.

The Takeaway

Credit files are built individually, and getting married won’t combine your credit scores and profiles. However, if you want to help your spouse build credit or establish your own, there are smart moves you can make. Options can include credit builder loans, secured credit cards, and secured personal loans.

As you build good credit and move ahead with your financial life, picking the right credit card is an important decision. The SoFi Credit Card can be a terrific option, with 2% cash back rewards on every eligible purchase. Plus, you’ll enjoy free credit monitoring and our app that makes it easy to check your balance and pay bills.

The SoFi Credit Card: The smart, simple way to pay.

FAQ

Will adding my spouse to my credit card build our credit?

Adding your significant other as an authorized user can help build their credit if you both use the account responsibly.

Does my spouse affect my credit score?

Your credit score is tracked and reported individually. So your spouse’s financial behaviors and credit history won’t impact yours. But if you apply for a line of credit or loan jointly, then your respective credit scores can impact getting approved for loan and what terms and rates you’ll get.

What happens if I have a good credit score, but my spouse doesn’t?

If you have a solid credit score and your spouse doesn’t, when you apply as co-borrowers on a line of credit or loan (such as a personal loan, car loan, or mortgage), the spouse with the lower credit score could gain access to more favorable perks.

On the flip side, if your spouse has a poor credit score, it could hurt the odds of you getting approved for financing or credit with the best terms and rates — or you might get denied outright.

Photo credit: iStock/PeopleImages

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.

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.

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 Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

SOCC0123012

Mar

2023

When Is the Best Time to Book Summer Travel?

By Dan Miller | Budgeting & Goals, credit card, Money & Life | Comments Off

The summer months are one of the most popular times to travel. Families with young children are often locked into summer travel due to school schedules. Even some adults have work schedules that make summer the most convenient time to travel. The upshot: Without proper planning, summer travel can be crowded, chaotic, and expensive.

While there isn’t a magic “best” time to book summer travel, there are a few things that can help ensure smooth sailing.

Things to Keep in Mind When Booking Summer Travel

For many top destinations, summertime is considered the peak season, when availability is at its lowest and prices are at their highest. If your timing is flexible, traveling during “shoulder” season (between peak and off-peak) can be easier.

You’ll also want to consider whether you’re willing to travel during special events or holidays like the 4th of July, Memorial Day, Labor Day, etc. Although it’s tempting to take advantage of a long holiday weekend, that’s what millions of other travelers will also be doing. You’ll find that it’s cheaper and less stressful traveling on a non-holiday weekend. And if you are traveling with pets, make sure your destination is pet-friendly and explore if there are any pet fees for where you are staying.

When to Book Flights for Summer

When to book flights depends on whether you’re looking to book domestic or international flights.

(One way families can afford to travel more is by choosing a closer destination where you can drive instead of fly.)

Recommended: Apply for a Rewards Credit Card

Domestic Flights

For domestic summer travel, keep an eye on flights for several months before your planned trip. Many travel booking sites allow you to see historical prices for certain dates and routes. That can help you determine if the current price is higher or lower than average.

Before you book any flights, make sure you understand the change or cancellation policy for your ticket, and whether it’ll cost you to rebook.

International Flights

Booking international flights for summer travel can be tricky. Usually, you’ll want to book an international flight sooner than a similar domestic flight. If you wait until the last minute, you could see the price rise dramatically. Not having booked a flight may also cause problems with your visa, should one be required for the country you’re visiting.

Booking Hotels for Summer: Advance vs Last-Minute

Deciding whether to book your hotel for summer travel in advance or at the last minute depends on your personal preference. If you’re a planner, you may want to lock down your itinerary by booking your hotel early. However, you may be able to save money on hotels by waiting until closer to your travel dates.

You can try to capture the best of both worlds by booking early and then regularly monitoring your reservation. Many hotels allow free cancellations on reservations until only a few days before check-in. So you can reserve in advance, and then if the price goes down, just cancel your booking and book again at the lower price. Using credit card miles or cash back can be another way to save money on your hotel booking.

How Far in Advance to Book Rental Cars for Summer

If you are renting a car for your summer travel, you can often use the same trick. It is common for many car rental places to offer the ability to book your rental car and pay at the counter. This form of book now pay later travel allows you to lock in a low rate for your rental car and then cancel and rebook if the price goes down afterward.

When to Book a Summer Cruise

Prices for cruises vary drastically based on a number of factors. The time of year, the cruise’s duration, your cabin choice, and how soon the cruise departs can all play a role in determining how much you’ll pay.

Prices for cruises may be low several months before departure and gradually rise, but it’s also common for cruise lines to offer “last-minute” specials to fill rooms that might otherwise go empty. If your life situation is such that you can decide to cruise at the drop of a hat, you may be able to pick up a cheap summer cruise.

Best Time to Book Tours, Sites, and Activities for Summer

It can be hard to book various activities for your trips until you have firm flights and hotels booked. But once you know for sure where you’ll be and when, you can start booking tours, events, and activities. It’s generally a good idea to book these sooner rather than later, since preferred dates and times can fill up fast. Keep your travel fund stocked, so you have enough money in your budget to do everything on your bucket list.

The Takeaway

The summer months are some of the most popular times for travel, due to work and school schedules. But traveling to places everyone else wants to go when everyone else wants to go there will often lead to high prices and less availability. Being as flexible as you can with both your destination and travel dates can help.

Another good summer travel tip is to book cancellable reservations. Then you can regularly monitor prices and rebook if your plans change.

FAQ

When is the best time to book a trip?

Prices and availability vary based on the destination and season. Your best bet is likely to book as early as you can to ensure you get the flight, hotel, and activities you want. If prices come down, you can always cancel and rebook. Just make sure you understand the change/cancellation policies.

What is the cheapest month to travel in the summer?

If your heart is set on a summer vacation but your budget is tight, you’ll get more for your money by traveling during the “shoulder season” — in early or late summer. Travel in September can be especially nice, because the crowds have dispersed and the weather is still summery (but no longer sweltering). If you’re heading to a summer resort town, just make sure that your favorite haunts — restaurants, activities, etc — don’t shut down after Labor Day weekend.

When is the best time to buy airline tickets to Europe 2023?

If you’re flying from North America, book your European airline tickets as early as possible. More people are expected to travel in 2023 than in previous years. That means flights may book up more quickly, and prices rise. Unlike with domestic travel, you likely won’t find many last minute deals to Europe.

Photo credit: iStock/gradyreese

Mar

2023

Apply for a Credit Card and Get Approved: Step-By-Step Guide

Apply for a Credit Card: Step-By-Step Guide

By Alyssa Schwartz | Credit, credit card, Family Finances | Comments Off

A credit card can be a useful tool for managing your money. But before tapping into the benefits, the first thing to know is how to get a credit card. There are some requirements, and some tips that can help when it comes to getting approved.

Here’s the lowdown on the key things to know to apply for a credit card — and most importantly, to get approved for a credit card.

What to Consider When Applying for a Credit Card

Before you worry about how to get a credit card, it’s helpful to first understand what a credit card is. As the first word in its name suggests, a credit card is a line of credit, which is a type of flexible loan that enables you to borrow money up to a fixed limit.

When an individual charges a transaction at a business that accepts credit card payments, the credit card company pays the merchant. The cardholder must then pay back the credit card company by a designated date. Otherwise, they’ll incur interest charges.

This basic premise of how credit cards work means the card company is taking a risk when extending credit to any individual. They assess that risk via an application that determines not only whether the individual gets approved for a credit card, but also factors like their credit card limit and annual percentage rate (APR) on a credit card.

Before applying, there are some important considerations that can help improve your chances of getting approved for a credit card.

Learn About the Terms Associated with Your Credit Card

Evaluating different credit cards can feel overwhelming for a newbie, so it’s a good idea to get familiar with some basic credit card terms that are common across all credit cards. Here are some common terms you might run into in a credit card application and as you begin to use your new card:

• Balance: Your balance is the amount of money you owe on your credit card. This can include purchases (even paying taxes with credit card) as well as any fees, balance transfers, and cash advances.

• Balance transfer: A balance transfer is when you move money from one credit card to another credit card, ideally one with a lower APR. This can allow you to pay off your debt more easily, though you’ll often pay a balance transfer fee to move over the balance.

• Billing cycle: A credit card billing cycle is the period of time between the regular statements you receive from your credit card company. Usually, billing cycles occur on a monthly basis.

• CVV: The card verification value, or CVV number on a credit card, is a three- to four-digit number that appears on a physical credit card. It serves as an additional layer of security in transactions that occur over the phone or online.

• Expiration date: A credit card expiration date represents when a credit card is valid until. Usually shown as a month and a year, you can use your credit card up until the last date of that month in that year.

• Late fee: The late fee is a charge you’ll incur if you miss making at least your minimum payment by your payment due date. To avoid this fee, it’s important to alway pay on time, even if you’re in the midst of disputing a credit card charge, for instance.

• Minimum payment: The credit card minimum payment is the least amount you must pay each month on your outstanding balance. This can be a flat amount or a percentage of your outstanding balance.

• Purchase APR: The APR for purchases represents the total annual cost of borrowing money through purchases made with your credit card. This APR applies only on remaining balances after the statement due date.

Decide on the Type of Credit Card You Need

There are a number of different types of credit cards out there that can serve different needs. For instance, there are:

• Travel rewards credit cards

• Cashback credit cards

• Credit-building credit cards

• Balance transfer credit cards

While most of the above types of cards are unsecured credit cards, meaning no deposit is required, there are also secured credit cards. These do require a deposit, though they may also be more accessible to those with limited or low credit.

Different types of cards offer different benefits, and they may also vary when it comes to things like annual fees or average credit card limits.

There may also be differences in the requirements for getting approved. It’s not so much a question of how old you have to be to get a credit card — rather, different cards may have varying requirements for minimum income or credit score needed to qualify.

Before applying, it’s a good idea to do some comparison shopping to find a card that not only fits your needs but also that you’re eligible for.

Check Your Credit Score

Your credit score is a number that indicates the likelihood that you’ll repay a debt. It’s based on your credit history, and banks use it as a tool for evaluating credit card applications and deciding whether to approve them.

Here are some common factors that can affect your credit score:

• Payment history, including on-time payments, missed payments, and having an account sent to collections

• Credit utilization, or how much one owes relative to their total available revolving credit

• Length of credit history

• Types of credit accounts

• Recent activity, such as applying for or opening new accounts

Generally, the higher an individual’s credit score, the more creditworthy they’re considered. If using the FICO scoring model, here’s a general breakdown of what various scores mean:

• Less than 580: Poor

• 580-669: Fair

• 670-739: Good

• 740-799: Very good

• 800+: Exceptional

It’s a good idea for an individual to know their score and their chances of getting approved before applying for a credit card. The minimum credit score for a credit card will vary depending on the type of card it is.

For example, rewards credit cards, which come with big perks, tend to require a good credit score. But some types of credit cards, such as secured credit cards, may be more accessible to those with lower credit scores because they pose a lesser risk to lenders. This can make the latter category more appealing if, for instance, you’re getting your first credit card.

It’s worth noting that pulling one’s own credit information is considered a “soft inquiry” and does not reduce their credit score. When you apply for a new credit card, however, it will generate a “hard inquiry,” which can lower your credit score temporarily.

Where to Apply for a Credit Card

Credit cards are offered through banks, credit unions, retailers, airlines, colleges and universities, and a host of other institutions. This means that there are a variety of places where one can apply for a credit card — and often a number of ways to apply.

You can apply for a credit card in person, such as at a bank branch or retail location. Or, you may apply over the phone. Most credit card issuers also offer online applications, which add convenience to the process.

How to Apply for a Credit Card in 3 Steps

Ideally, by the time you sit down to actually apply for a credit card, you’ll have done the necessary homework to determine if you should get a credit card. This includes checking your credit score and potentially getting preapproved (though more on that later).

1. Gather the Necessary Information

The application process will be easier — and likely quicker — if you’re prepared. This means gathering any necessary documentation (more on what you’ll usually need in the next section) and having reverent information on hand, such as your income and Social Security number.

2. Fill Out and Submit an Application

Next, it’s time to fill out the application. There are a few ways you can do this: online, over the phone, or through the mail. It’s generally quickest to complete an application online.

You’ll need to fill in the requested fields and upload (or make copies of) any necessary documents. Once you submit your application, you should hear back within a few weeks at the most — sometimes, you’ll hear back almost the same day.

3. Be Ready for the Credit Impact and Repayment

As you wait for your credit card to arrive in the mail, you should take stock of the recent hit you took to your credit from the hard inquiry. It’s generally advised to avoid applying for multiple credit cards or loans within a short period of time to minimize the credit impact.

Also start to consider your strategy for how you’ll repay your credit card balance once you start swiping. Consider setting up automatic payments from your bank account each month to make sure you’re not late, or you might set a reminder on your phone or in your calendar.

What Do You Need to Apply for a Credit Card?

While application requirements will depend on the credit card issuer, what you need to apply for a credit card generally includes:

• Annual income

• Address and length of time at that address

• Date of birth

• Phone number

• Social Security number

• Employment status and sources of income

• Financial accounts and/or assets

• Financial liabilities

• Country of citizenship and residence

Credit Card Preapproval and Prequalification

Getting prequalified or preapproved for a credit card means you’ve been prescreened for a credit card and meet at least some of the eligibility requirements. The two terms can be used interchangeably, though preapproval might carry slightly more weight in terms of your odds of eventual approval.

You’ll still need to go through the formal application to get approved for a credit card though, as neither preapproval or prequalification means you’ve been approved. The formal application process will involve a hard inquiry, whereas prequalification and preapproval generally only involve soft inquiries.

Still, preapproval or prequalification can be a good way to suss out potential credit card options and likelihood of getting approved before you move forward with an application and risk the impact to your credit.

What Happens If Your Application Is Turned Down?

Getting turned down for a credit card is indeed disappointing. When a credit card application is declined, you have the right to know why. You can request details about your application in the form of an adverse action letter, which includes the reason for the denial, details about your credit score, and notice of the right to dispute the accuracy of information provided by the credit reporting agency.

This can serve as helpful context for understanding why an application was declined. It can also help in determining what the appropriate next steps are for improving one’s chances of approval, if and when you apply for another credit card. For instance, you may consider applying for a credit card that has less stringent credit requirements, or you may take steps to improve your credit score and try again at a later date.

Secured and Prepaid Credit Cards

If you were turned down for a credit card, you might take some steps to improve your credit before trying again, or you might consider other options. Two alternatives you might look into are secured credit cards and prepaid credit cards.

With a secured credit card, you put down a deposit, which serves as collateral and usually acts as the card’s credit limit. Because there’s collateral there for the credit card issuer to fall back on if you fail to make your payments, secured credit cards are generally easier to get approved to than the more traditional, secured credit cards.

Prepaid debit cards don’t let you work on building your credit, as you’re not actually borrowing funds. Rather, you load the card with funds that you can then use in person or online. This can offer some of the convenience that a credit card offers over cash, without the application and approval process.

The Takeaway

Applying for a credit card can be a simple three-step process of gathering the required details, submitting an application, and handling the likely credit impact. You will probably have many options when selecting a card, so take your time to find the right fit.

FAQ

How do I choose a credit card?

Choosing a credit card is a personal decision that depends on your needs, preferences, financial habits, and eligibility. Before applying for a credit card that appears to fit your needs, it’s a good idea to check your credit score and any other requirements, such as minimum income, to improve your chances of getting approved.

How long does it take to get a credit card?

The length of time it takes to get a credit card can depend on a number of factors, including the eligibility requirements and how an application is submitted. Some online credit card applications offer fast or even instant approval, although it can take some additional time for the credit card to arrive in the mail.

Does your credit get pulled when applying for a credit card?

Generally, a credit card company will do a hard credit inquiry before extending final approval. However, there may be some scenarios where a credit card issuer may only do a soft inquiry, such as if an individual has been preapproved for a credit card or already has a banking relationship with the credit card issuer.

What are the requirements needed to get a credit card?

The requirements to get a credit card will typically vary from card to card. However, you’ll generally need to provide information on your annual income, your employment status, and your current debt obligations. Your creditworthiness also comes into play, though credit score requirements will differ depending on the card.

Can you get a credit card with no credit history?

It is possible to get a credit card with no credit history, though your options may be more limited. You may have an easier time getting approved for a secured credit card or a basic, no-frills credit card.

Photo credit: iStock/Dome Studio

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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 .

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.

SOCC0222003

Mar

2023

How Do Credit Cards Work? Beginner’s Guide

How Does a Credit Card Work: In-Depth Explanation

By Jason Steele | Credit, credit card | Comments Off

There are millions of credit card accounts in the United States alone, and it’s estimated that 84% of adults in the U.S. have at least one credit card. Yet, many people don’t have a firm grasp on the basics of what a credit card is and how credit cards work.

If you have a credit card account, or plan on ever using one, it’s important to understand the fundamentals of credit cards. This ranges from what a credit card is to how credit card interest works to how credit cards relate to credit scores.

What Is a Credit Card?

A credit card is a type of payment card that is used to access a revolving line of credit.

Credit cards differ from other types of loans in that they offer a physical payment card that is used to make purchases. Traditionally, credit cards are made of plastic, but an increasing number of credit card issuers now offer metal cards, usually for their premium accounts that offer travel rewards.

But a credit card account is much more than a plastic or metal payment card. A credit card account is a powerful financial tool that can serve many purposes. For starters, it can be a secure and convenient method of payment anywhere that accepts credit card payments. It also can be used to borrow money in a cash advance or to complete a balance transfer.

Additionally, credit cards can offer valuable rewards, such as cash back and travel rewards like points or miles. Cardholder benefits can also include purchase protection and travel insurance policies.

If used responsibly, a credit card can help you to build your credit score and history, which can open up new borrowing opportunities. Of course, credit cards can also damage your credit when used irresponsibly. If you rack up debt on your credit card, it can be hard to get it paid off and back in the clear (here, for instance, is what happens to credit card debt when you die).

How Do Credit Cards Work?

Credit cards offer a line of credit that you can use for a variety of purposes, including making purchases, completing balance transfers, and taking out cash advances. You can borrow up to your credit limit, and you’ll owe at least the minimum payment each month.

You can apply for a credit card from any one of hundreds of credit card issuers in the U.S. Card issuers include national, regional, and local banks, as well as credit unions of all sizes. Card issuers will approve an application based on the credit history and credit score of the applicant, among other factors.

There are credit cards designed for people with nearly every credit profile, from those who have excellent credit to those with no credit history or serious credit problems. As with any loan, those with the highest credit score will receive the most competitive terms and benefits.

Once approved, you’ll likely receive a credit limit that represents the most you can borrow using the card. Whether your limit is above or below average credit card limit depends on a variety of factors, including your payment history and income.

The credit card is then mailed to the account holder and must be activated before use. You can activate a credit card online or over the phone. So long as your account remains in good standing, it will be valid until the credit card expiration date.

Once activated, the card can be used to make purchases from any one of the millions of merchants that accept credit cards. Each card is part of a payment network, with the most popular payment networks being Visa, Mastercard, American Express, and Discover. When you make a payment, the payment network authenticates the transaction using your card’s account number and other security features, such as the CVV number on a credit card.

Every month, you’ll receive a statement from the card issuer at the end of each billing cycle. The statement will show the charges and credits that have been made to your account, along with any fees and interest changes being assessed.

Your credit card statement will also show your balance, minimum payment due, and payment due date. It’s your choice whether to pay your minimum balance, your entire statement balance, or any amount in between. Keep in mind that you will owe interest on any balance that’s not paid back.

If you don’t make a payment of at least the minimum balance on or before the due date, then you’ll usually incur a late fee. And if you pay more than your balance, you’ll have a negative balance on your credit card.

Credit Card Fees

There are a number of potential fees that credit card holders may run into. For example, some credit cards charge an annual fee, and there are other fees that some card issuers can impose, such as foreign transaction fees, balance transfer fees, and cash advance fees. Cardholders may also incur a late fee if they don’t pay at least the minimum due by their statement due date.

Often, however, you can take steps to curb credit card fees, such as not taking out a cash advance or making your payments on-time. For a charge like an annual fee, cardholders will need to assess whether a card’s benefits outweigh that cost.

3 Common Types of Credit Cards

There are a number of different kinds of credit cards out there to choose from. Here’s a look at some of the more popular types.

Rewards Credit Cards

As the name suggests, rewards credit cards offer rewards for spending in the form of miles, cash back, or points — a rewards guide for credit cards can give you the full rundown of options. Cardholders may earn a flat amount of cash back across all purchases, or they may earn varying amounts in different categories like gas or groceries.

The downside of these perks is that rewards credit cards tend to have higher annual percentage rates (APRs), so you’ll want to make sure to pay off your full balance each month.

Balance Transfer Credit Cards

Balance transfer cards allow you to move over your existing debt to the card. Ideally, this new card will have a lower interest rate, and often they’ll offer a lower promotional rate that can be as low as 0% APR. However, keep in mind that this promo rate only lasts for a certain period of time — after that, the card’s standard APR will kick back in.

Secured Credit Cards

If you’re new to credit or trying to rebuild, a secured credit card can be a good option. Generally, when we talk about credit cards, the default is an unsecured credit card, meaning no collateral is involved. With a secured credit card, you’ll need to make a deposit. This amount will generally serve as the card’s credit limit.

This deposit gives the credit card issuer something to fall back on if the cardholder fails to pay the amount they owe. But if you’re responsible and get upgraded to a secured credit card, or if you simply close your account in good standing, you’ll get the deposit back.

How Does Credit Card Interest Work?

The charges you make to your credit card are a loan, and just like a car loan or a home loan, you can expect to pay interest on your outstanding credit card balance.

That being said, nearly all credit cards offer an interest-free grace period. This is the time between the end of your billing period and the credit card payment due date, typically 21 or 25 days after the statement closing date. If you pay your entire statement balance before the payment due date, then the credit card company or issuer will waive your interest charges for that billing period.

If you choose not to pay your entire statement balance in full, then you’ll be charged interest based on your account’s average daily balance. The amount of interest you’re charged depends on your APR, or annual percentage rate. The card issuer will divide this number by 365 (the number of days in the year) to come to a daily percentage rate that’s then applied to your account each day.

As an example, if you had an APR of 15.99%, your daily interest rate that the card issuer would apply to your account each day would be around 0.04%.

Recommended: Average Credit Card Interest Rates

Credit Cards vs Debit Cards

Although they look almost identical, much differs between debit cards vs. credit cards. Really, the only thing that debit cards and credit cards truly have in common is that they’re both payment cards. They both belong to a payment network, and you can use them to make purchases.

With a debit card, however, you can only spend the funds you’ve already deposited in the checking account associated with the card. Any spending done using your debit card is drawn directly from the linked account. Because debit cards aren’t a loan, your use of a debit card won’t have any effect on your credit, positive or negative.

But since it isn’t a loan, you also won’t be charged interest with a debit card, nor will you need to make a minimum monthly payment. You will, however, need to make sure you have sufficient funds in your linked account before using your debit card.

Another key difference between credit cards vs. debit cards is that credit card users are protected by the Fair Credit Billing Act of 1974. This offers robust protections to prevent cardholders from being held responsible for fraud or billing errors. Debit card transactions are subject to less powerful government protections.

Lastly, debit cards rarely offer rewards for spending. They also don’t usually feature any of the travel insurance or purchase protection policies often found on credit cards. You likely won’t be on the hook for an annual fee with a debit card, which is a fee that some credit card issuers do charge, though you could face overdraft fees if you spend more than what’s in your account.

To recap, here’s an overview of the differences between credit cards and debit cards:

	Credit cards	Debit cards
Can be used to make purchases	Yes	Yes
Can be used to borrow money	Yes	No
Must deposit money before you can make a purchase	No	Yes
Must make a minimum monthly payment	Yes	No
Can provide purchase protection and travel insurance benefits	Often	Rarely
Can offer rewards for purchases	Often	Rarely
Can help or hurt your credit	Yes	No
Can use to withdraw money	Yes, with a cash advance	Yes

Pros and Cons of Using Credit Cards

Beyond knowing what a credit card is, it’s important to familiarize yourself with the pros and cons of credit cards. That way, you can better determine if using one is right for your financial situation.

To start, notable upsides of using credit cards include:

• Easy and convenient to use

• Robust consumer protections

• Possible access to rewards and other benefits

• Ability to avoid interest by paying off monthly balance in full

• Potential to build credit through responsible usage

However, also keep these drawbacks of using credit cards in mind:

• Higher interest rates than other types of debt

• Temptation to overspend

• Easy to rack up debt

• Various fees may apply

• Possible to harm credit through irresponsible usage

How to Compare Credit Cards

Since there are hundreds of credit card issuers, and each issuer can offer numerous individual credit card products, it can be a challenge to compare credit cards and choose the one that’s right for your needs. But just like purchasing a car or a pair of shoes, you can quickly narrow down your choices by excluding the options that you aren’t eligible for or that clearly aren’t right for you.

Start by considering your credit history and score, and focus only on the cards that seem like they align with your credit profile. You can then narrow it down to cards that have the features and benefits you value the most. This can include having a low interest rate, offering rewards, or providing valuable cardholder benefits. You may also value a card that has low fees or that’s offered by a bank or credit union that you already have a relationship with.

Once you’ve narrowed down your options to a few cards, compare their interest rates and fees, as well as their rewards and benefits. You can find credit card reviews online in addition to user feedback that can help you make your final decision.

Important Credit Card Terms

One of the challenges to understanding how credit cards and credit card payments work is understanding all of the jargon. Here’s a small glossary of important credit card terms to help you to get started:

• Annual fee: Some credit cards charge an annual fee that users must pay to have an account. However, there are many credit cards that don’t have an annual fee, though these cards typically offer fewer rewards and benefits than those that do.

• APR: This stands for annual percentage rate. The APR on a credit card measures its interest rate and fees calculated on an annualized basis. A lower rate is better for credit card users than a higher rate.

• Balance transfer: Most credit cards offer the option to transfer a balance from another credit card. The card issuer pays off the existing balance and creates a new balance on your account, nearly always imposing a balance transfer fee.

• Card issuer: This is the bank or credit union that issues the card to the cardholder. The card issuer the company that issues statements and that you make payments to.

• Cash advance: When you use your credit card to receive cash from an ATM, it’s considered a cash advance. Credit card cash advances are usually subject to a much higher interest rate and additional fees.

• Chargeback: When you’ve been billed for goods or services you never received or that weren’t delivered as described, you have the right to dispute a credit card charge, which is called a credit card chargeback. When you do so, you’ll receive a temporary credit that will become permanent if the card issuer decides the dispute in your favor.

• Due date: This is the date you must make at least the credit card minimum payment. By law, the due date must be on the same day of the month, every month. Most credit cards have a due date that’s 21 or 25 days after the statement closing date.

• Payment network: Every credit card participates in a payment network that facilitates each transaction between the merchant and the card issuer. The most common payment networks are Visa, Mastercard, American Express, and Discover. Some store charge cards don’t belong to a payment network, so they can only be used to make purchases from that store.

• Penalty interest rate: This is a separate, higher interest that can apply to a credit card account when the account holder fails to make their minimum payment on time.

• Statement closing date: This is the last day of a credit card account’s monthly billing cycle. At the end of this day, the statement is generated either on paper or electronically, or both. This is the day on which all the purchases, payments, fees, and interest are calculated.

Credit Cards and Credit Scores

There’s a lot of interplay between credit cards and your credit score.

For starters, when you apply for a new credit card, that will affect your score. This is because the application results in a hard inquiry to your credit file. This will temporarily ding your score, and it will remain on your credit report for two years, though the effects on your credit don’t last as long.

Further, how you use your credit card can impact your credit score — either positively or negatively. Having a credit card could increase your credit mix, for instance. Or, closing a longstanding credit card account may shorten the age of your accounts, resulting in a negative impact to your score.

Making timely payments is key to maintaining a healthy credit score, as is keeping a low credit utilization rate (the amount of your overall available credit you’re currently using). If you max out your credit card or miss payments, that won’t bode well for your credit score. Conversely, staying on top of payments can be a great step toward building your credit.

The Takeaway

Credit cards work by giving the account holder access to a line of credit. You can borrow against it up to your credit limit, whether for purchases and cash advances. You’ll then need to pay back the amount you borrowed, plus interest, which is typically considered to be a high rate vs. other forms of credit. For this reason, it’s important to spend responsibly with a credit card.

FAQ

How does a person shop for a credit card?

To shop for a credit card, start by looking at your credit score to determine what cards you may be able to qualify for. Then, decide what kind of card is best for your needs, such as a card that has a low interest rate, one that will allow you to build credit, or a card that offers rewards. Finally, compare similar products from competing card issuers to assess which is the most competitive offer available to you.

Can I use my credit card abroad?

Yes, most credit card payment networks are available in most countries. As long as you visit a merchant that accepts cards from the same payment network that your card belongs to, then you’ll be able to make a purchase.

How do you use a credit card as a beginner?

If you’re new to credit and working to build your score, you’ll want to make sure you’re as responsible with your card as possible. Pay your bill on time, and aim to pay in full if you can to avoid interest charges. Use very little of your credit limit — ideally no more than 30%. And make sure to regularly review your credit card statements and your credit report. But don’t let any of that scare you away from using your card either — it’s important to regularly use your card for small purchases to get your credit profile built up.

How do credit cards work in simple terms?

Credit cards offer access to a line of credit. You can borrow against that, up to your credit limit, for a variety of purposes, including purchases and cash advances. You’ll then need to pay back the amount you borrowed.

How do payments on a credit card work?

At the end of each billing cycle, you’ll receive a credit card statement letting you know your credit card balance, minimum payment due, and the statement due date. You’ll then need to make at least the minimum payment by the statement due date to avoid late fees and other consequences. If you pay off your full balance, however, you’ll avoid incurring interest charges. Otherwise, interest will start to accrue on the balance you carry over.

Photo credit: iStock/Katya_Havok

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

SOCC0323006