Guide to Paying Bills With a Credit Card: Can You Even Do It?

Using a credit card to make a purchase can be a great way to earn rewards like cash back and travel points. Because of these rewards, it can feel tempting to use a credit card for every possible purchase. This raises the question: Can you pay bills with a credit card?

In fact, it is possible to pay bills with a credit card. Keep reading to learn what bills you can pay with a credit card and how using a credit card to pay bills works.

Can You Pay Bills With a Credit Card?

Yes, it is possible to pay certain bills with a credit card. However, using a credit card responsibly is key.

When using a credit card to pay bills, it’s important to make sure doing so won’t cause you to rack up a high balance. Paying bills with a credit card makes the most sense when you can easily pay off your credit card balance in full right away.

If done responsibly, a card holder can earn credit card rewards — like cash back, travel points, and gift cards — for spending on purchases they have to make every month without paying interest. Plus, making regular, on-time payments can help boost your credit score.

Recommended: When Are Credit Card Payments Due

When Should You Not Use a Credit Card to Pay Bills?

As great as the potential to earn rewards is, if someone can’t afford to pay their credit card balance, charging their bills can lead to high interest charges and late fees (which are two ways credit card companies make money).

It also might not make sense to pay bills with a credit card if it leads to paying an extra fee from the merchant (we’ll talk more about how this happens shortly).

Recommended: Can You Buy Crypto With a Credit Card

What Bills Can You Pay With a Credit Card?

There are limitations on which bills you can pay with a credit card. And, as briefly noted earlier, you may owe a fee for using a credit card to pay bills, which could outweigh the benefits earned.

Here are 10 examples of bills you can pay with a credit card, as well as explanations on how paying these bills with a credit card works.

Recommended: What is the Average Credit Card Limit

1. Streaming Services

About 95% of streaming services accept credit card payments to cover the monthly cost of the subscription. To pay this bill with a credit card, all you’ll need to do is enter their credit card number on the streaming service’s website. The card will then automatically get charged each month unless you cancel or suspend your membership.

It’s unlikely any streaming service will charge an extra fee for using a credit card to pay for their subscription.

2. Utilities

Some utilities providers allow credit card payments, so it’s worth investigating this option to determine if it’s accepted. If your utility provider will take a credit card payment, then setting it up is usually as simple as providing your credit card number when you pay your bill online, over the phone, or through the mail. You can often set up autopay as well.

However, watch out for the additional convenience and processing fees that some providers may charge. Higher bills are more likely to offset this fee given the greater earning potential for credit card points or other rewards.

3. Cable

Cable is another bill you can pay with a credit card. To determine how to do so, you’ll want to consult your cable provider. You may be able to enter your credit card number on the online payment portal or provide this information over the phone. Setting up autopay is also usually an option with a credit card.
There is typically no additional processing fee to pay cable bills.

4. Phone

Another bill you might pay with your credit card is your phone bill. You can likely set this up online on your phone provider’s website or by giving them a call. If you’re unsure of how to pay bills with a credit card, simply consult your phone provider.

You’ll typically face no additional processing fees.

5. Internet

Your internet service is another bill that you can cover using your credit card. As with other utilities and services, consult your internet provider if you need assistance getting this set up. In general, however, you can do so through your online payment portal. If you don’t want to go through the legwork each month, you can usually set up autopay with your credit card.

Most internet providers won’t charge an additional processing fee to pay your bill with a credit card, meaning those costs won’t cut into any rewards you earn with a cash back credit card or other type of rewards card.

6. Rent

Most landlords don’t allow credit card payments, but there are third-party solutions that can allow someone to pay their rent with a credit card. This includes services such as Plastiq and PlacePay, which act as intermediaries.

However, you’ll generally pay a convenience charge or other fees. You’ll want to assess whether the benefits of using your credit card to pay rent outweigh the costs.

7. Mortgage

Mortgage servicers generally don’t allow credit card payments. However, there are third-party payment processing services through which you could pay your mortgage. Still, some credit card issuers may prohibit you from paying your mortgage through these services.

In addition to restrictions, you’ll want to look out for processing fees. These could cancel out any rewards you could earn from covering your mortgage with a credit card.

8. Car Loan

Just like mortgage services, most auto lenders also don’t accept credit cards for loan payments. If you do find an auto lender who’s willing to accept a credit card for payment, you’ll likely face a hefty processing fee.

Additionally, credit card interest rates tend to be higher than those of auto loans, so if you’re not confident you could immediately pay off your credit card balance in full, you could simply end up paying a lot more in interest.

Recommended: How to Avoid Interest On a Credit Card

9. Taxes

It is possible to pay some taxes with a credit card. The IRS allows you to pay on its website using a credit card. However, you’ll face a processing fee ranging from 1.87% to 1.98% depending on which payment processor you select. If you opt to pay using an integrated IRS e-file and e-pay service provider, such as TurboTax, your fee could range even higher.

10. Medical Bills

While you can pay medical bills with a credit card, it might not be the most cost-effective option. This is because credit cards can charge high interest and fees, and there’s the potential to damage your credit score. Many medical providers may offer interest-free or low-interest payment plans, or a personal loan could offer a lower rate than a credit card.

If you do think the rewards and convenience of using a credit card is worth the risk, the process of paying bills with a credit card will vary by medical institution. Before charging your medical bills to a credit card, you may want to at least try to negotiate medical bills down.

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

Benefits of Paying Bills With a Credit Card

There are a few key benefits associated with paying bills with a credit card.

1. Ease of Payment

It’s possible to pay a bill with a credit card online or over the phone.

2. Easy to Prove Payment

If a payment dispute arises, paying by credit card is an easy way to keep a paper trail of payments.

3. Identity Theft Protection

If either a credit card or someone’s personal information gets stolen, a credit card issuer will pay back some or all of the charges.

4. Autopay

It’s easy to use a credit card to set up autopay for bills so you never accidentally forget to pay them.

5. Can Build Credit History

Given how credit cards work, using a credit card to make payments and then paying that balance off on time and in full can help build your credit score.

6. Earn Rewards

Purchases made with a credit card helps earn cash back and credit card points.

Downsides of Paying Bills With a Credit Card

There are also some downsides to paying bills with a credit card that are worth keeping in mind.

1. May Cost More

Because many bill services charge fees to pay with a credit card, it’s possible to spend more than necessary on processing fees.

2. Can Lead to High-Interest Debt

If someone can’t afford to pay off their credit card balance after using it to pay for bills, they can end up with high-interest debt on their hands.

3. Processing Fees Can Cancel Out Rewards

It’s important to do the math to make sure that the cost of processing fees isn’t canceling out the cash back you’re earning with the purchase.

4. Leads to Another Bill to Pay

Similar to when you pay a credit card with another credit card, paying a bill with a credit card simply leads to another bill to pay. This can cause more hassle than it’s worth.

5. Can Hurt Credit Utilization Ratio

Carrying a higher balance on a credit card can lead to a higher credit utilization ratio, which is damaging to credit scores. One of the common credit card rules is to keep your utilization below 30%, meaning you’re not using more than this percentage of your total available credit at any given time.

Recommended: What is a Charge Card

Guide to Using a Credit Card to Pay Bills

At this point, it’s clear that it is possible to pay some bills with a credit card. The more important question now is not can I pay bills with a credit card, but should you pay bills with a credit card? In short, it depends.

If the bill provider won’t charge a processing fee and the consumer can afford to pay off their credit card balance in full, then paying their bills with a credit card is a great way to earn rewards and build a credit score.

However, in many cases, the processing fee some merchants charge can outweigh the value of cash back or other rewards earned. Not to mention, carrying a credit card balance can lead to incurring expensive interest and fees.

The Takeaway

It is possible to pay some bills with a credit card, but doing so can lead to paying costly processing fees or even accruing interest charges. It’s important to crunch the numbers to see if paying a bill with a credit will result in earning enough rewards to justify any processing fees.

Want to earn more rewards for your everyday purchases? With the SoFi Credit Card, you can earn 2% unlimited cash back rewards when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back when redeemed for a statement credit.1

FAQ

Should I put non-debt bills on a credit card?

If someone can afford to pay off their credit card balance in full and the processing fee they’ll owe isn’t, it can make sense to put a non-debt bill on their credit card. They just have to remember to then pay their credit card bill to avoid owing any fees or interest, which could undercut the potential benefits.

Is it wise to pay monthly bills with a credit card?

Paying monthly bills with a credit card can lead to processing fees in some scenarios. If someone won’t owe a fee, they can benefit from earning cash back by paying their bills with a credit card. This can be a savvy move to make if they can afford to pay off their credit card bill in full each month, thus avoiding interest charges.

Is it better to pay bills with a credit or debit card?

Paying a bill with a credit card can lead to earning rewards, which a debit card can’t offer. However, if you’re worried about handling credit card debt responsibly, you may opt for using a debit card, as this will draw on money you already have in your bank account. With either a debit or credit card, however, you’ll want to look out for fees.

Should I pay off my credit card in full or leave a small balance?

It’s always best to pay off a credit card balance in full if possible before a credit card’s grace period ends. The grace period is the time between when the billing cycle ends and your payment becomes due. You won’t owe interest as long as you pay off your balance in full before the statement due date. Otherwise, you could owe interest charges and fees.

What happens if you pay the full amount on your credit card?

Paying the full amount on a credit card makes it possible to avoid paying interest. After a credit card is paid off in full, the consumer can simply enjoy the rewards they earned by making purchases with their credit card. However, having a $0 balance doesn’t necessarily boost your credit score.

Does paying a bill with a credit card count as a purchase?

Yes, paying a bill with a credit card does count as a purchase. This makes it possible to earn cardholder rewards like cash back when paying bills.


Photo credit: iStock/Damir Khabirov

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

The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
1See Rewards Details at SoFi.com/card/rewards.
Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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19 Common Credit Card Mistakes and Tips for Avoiding Them

Credit cards, when used responsibly, can enhance your financial life, allowing you to build your credit score, earn rewards, and more. Unfortunately, if you’re not careful and make credit card mistakes, using a credit card can have the opposite effect on your financial life.

Here are some of the most common credit card mistakes to avoid, including some specific travel credit card mistakes to watch out for.

Credit Card Mistakes to Avoid

When using your credit card, here are some credit mistakes you could be making — and how you can avoid them by following some basic credit card rules.

Making Late Payments

Payment history is one of the most significant factors in determining your credit score. The more payments you miss, the more your credit score could go down, and it could take a fair amount of time to repair your credit. A late or missed payment can stay on your credit report for up to seven years (unless you can prove it was a credit report mistake).

How to avoid it: Set up automatic payments, or set reminders to help yourself remember when your credit card payment is due.

Making Only Minimum Payments Monthly

While making minimum payments is important to avoid incurring late fees, it won’t allow you to avoid interest charges. In fact, by only making the minimum payment, you’ll end up paying a high amount of interest (assuming you’re not using a card in its 0% introductory period). You also risk getting further into debt if you keep using your credit card, and it could take years to pay off your balance in full.

How to avoid it: Budget carefully so you can pay off more than the minimum amount due or ideally, the entire balance off each month.

Recommended: What is a Charge Card

Misunderstanding Credit Card Interest

Interest is a key part of what a credit card is, but the way credit card interest is charged can be confusing. A credit card can have a few different annual percentage rates (APR) depending on the type of transaction, including on purchases, cash advances, and balance transfers.

The bottom line: To avoid incurring interest on new credit card purchases, make sure to pay off your balance in full each month. You’ll owe interest on any amount you carry over.

How to avoid it: Check your credit card agreement to understand how interest is charged, and aim to pay off your balance in full to avoid incurring interest.

Recommended: How to Avoid Interest On a Credit Card

Ignoring Your Credit Card Agreement

Credit card agreements contain important details like fees, your credit limit, and other important terms you’ll benefit from knowing. Ignoring credit card terms could lead to nasty surprises, like fees you didn’t anticipate paying.

How to avoid it: Set aside time to read your credit card agreement, and contact your credit card issuer if you have any questions about how credit cards work.

Neglecting Your Monthly Statement

It might seem like a slog, but reading your monthly statement is important to staying on top of your credit card account. For starters, it includes a plethora of important information, such as your statement balance, the amount of your minimum payment owed, and your payment due date. Plus, regularly reviewing your credit card statement can ensure you quickly spot any signs of fraud.

How to avoid it: Set reminders to look at your monthly statement to see how much you owe, and make sure to dispute any transactions you didn’t approve.

Recommended: When Are Credit Card Payments Due

Getting Close to Your Credit Limit

Your credit limit is the amount that you can charge your card. If you get close to hitting your limit, it could hurt your credit score because you’ll have a higher credit utilization ratio. This ratio compares your balance to your available credit, and the higher it is, the more adversely it could affect your score.

How to avoid it: Monitor your balance to ensure you’re not close to your limit — ideally, you’re only using up to 30% of what’s available to you.

Recommended: What is the Average Credit Card Limit

Applying for Multiple Credit Cards at Once

Each time you apply for a new credit card, lenders will conduct a hard inquiry, which tends to temporarily lower your credit score. While this dip might not make a huge difference, applying for multiple accounts could cause lenders to take pause, and possibly give them the wrong impression as to why you want so many new cards.

How to avoid it: Get pre-approved for a credit card before applying to see your chances of getting approved before submitting a full application.

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

Applying Without Comparing Credit Cards

There are many benefits and features that come with credit cards, and without comparing them, you may not end up opening a card that’s not the right fit. By shopping around and exploring different credit card rewards, you’ll ensure you understand your options and get the most competitive choice available to you.

How to avoid it: Take the time to think about the features you want the most from a credit card and do some research to narrow down your choices before applying.

Canceling Your Card on a Whim

Canceling a credit card could mean the issuer will require you to pay off your entire balance with interest. Plus, it could affect your credit utilization ratio since it will lower your overall credit limit. It also could shorten the length of your credit history, which is another factor used when calculating credit scores.

How to avoid it: Consider the consequences of canceling your credit card, and make sure to pay off the entire balance before you do so.

Not Reporting Lost or Stolen Credit Cards Instantly

The longer you go without reporting a lost or stolen credit card, the more likely you’ll be responsible for fraudulent changes that show up. Some credit card companies waive all fraudulent charges (or up to $50) as long as you’re quick to report.

How to avoid it: As soon as you notice your card missing, report it to your credit card company, and then continue to monitor your statements for any fraudulent charges.

Loaning Your Credit Card

When you give your credit card to someone else to use, you’re still responsible for the charges made on it. If the person you lent your credit card to doesn’t pay you back, then you’re stuck with the bill. The same applies with an authorized user on a credit card — you’re the one ultimately responsible for paying even if you didn’t make the charges yourself.

How to avoid it: Don’t let anyone borrow your card, and if you do, ask them to pay you upfront for the changes they intend to make.

Travel Credit Card Mistakes to Avoid

In addition to the mistakes above, take care to avoid these particular mistakes if you have a travel rewards credit card.

Recommended: Can You Buy Crypto With a Credit Card

Overspending

To earn welcome or bonus offers, credit card companies typically require you to spend a minimum amount within a certain period of time. If you don’t plan ahead properly, you could end up making unnecessary purchases and racking up charges you can’t afford to pay off.

How to avoid it: Have a plan for how you’ll meet the minimum spending requirements, such as by timing a big purchase you need to make with opening a new card.

Underspending

On the opposite spectrum, opening a new credit card and not meeting the minimum spend requirements could mean you’re disqualified from earning the welcome bonus. This would mean passing up a big benefit of getting the card.

How to avoid it: Review your spending habits before opening a credit card to ensure you can meet the card’s minimum spending requirements.

Spending Points vs. Paying a Low Cash Price

Redeeming your credit card points is fine (it’s free!), but spending them on low-value rewards may be a waste. For example, you might be able to nab a flight or hotel at a much lower price in cash than you’d get if you used points for the purchase.

How to avoid it: Research reward redemption options to ensure you maximize the value from the points you’ve earned.

Not Using Your Benefits

Travel credit cards can offer other perks, such as annual credits toward travel and free stays at hotels. However, you’ll typically need to take advantage of them within a year, and they won’t roll over. In other words, if you don’t use these benefits in time, they’ll go wasted.

How to avoid it: Read your credit card agreement to see what additional benefits you can take advantage of.

Losing Your Points

Some points earned through rewards programs expire. In other cases, you’ll automatically lose your points when you decide to cancel your credit card.

How to avoid it: Use up your points before canceling your card, or check if they expire and make sure to use them up in time.

Failing to Transfer Points

Most card issuers allow you to transfer points to travel partners like airlines and hotels. This can offer a greater value for your points compared to what you’d get through the card issuer’s travel portal.

How to avoid it: Before booking travel, check whether it’s more valuable to book through the card issuer’s travel portal or by transferring points instead.

Not Understanding Credit Card Bonus Categories

Many travel credit cards offer bonus points if you spend in certain categories. These bonus rewards tend to vary for different cards. Not understanding what each card offers could result in losing out on earning extra points.

How to avoid it: Read through the terms and conditions of each travel credit card you own to ensure you’re maximizing your earnings.

Redeeming Points at Low Value

Not all points are created equal. You might not get the same value from your travel points if you redeem them for a gift card as opposed to with partner hotels or airlines, for instance.

How to avoid it: Do your research on how best to redeem your rewards for your credit card to get the most value.

Apply for the SoFi Credit Card Today

If you’re looking for a rewards card to make the most of, consider the SoFi credit card. SoFi cardholders earn 2% unlimited cash back rewards when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back rewards when redeemed for a statement credit.1 Plus, for a limited time, new credit card holders who also sign up for a SoFi Checking and Savings with direct deposit can start earning 3% cash back rewards on all eligible credit card purchases for 365 days*. Offer ends 12/31/22.

FAQ

What are some of the most common credit card mistakes?

Some of the most common credit card mistakes include not paying on time, only making the minimum payment, and not understanding the terms of your credit card agreement.

What credit card mistakes can damage my credit?

Major factors that can damage your credit include late or missed payments, having a high credit utilization ratio, and having too many new credit inquiries. Making all of these mistakes can lead to damage to your credit.

Can problems arise from not using my credit history?

Having a lack of credit history could make it harder to qualify for loans. Or, you may only qualify for ones with higher interest rates.


Photo credit: iStock/Mikolette

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

The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
1See Rewards Details at SoFi.com/card/rewards.
You will need to maintain a qualifying Direct Deposit every month with SoFi Checking and Savings in order to continue to receive this promotional cash back rate. Qualifying Direct Deposits are defined as deposits from enrolled member’s employer, payroll, or benefits provider via ACH deposit. Deposits that are not from an employer (such as check deposits; P2P transfers such as from PayPal or Venmo, etc.; merchant transactions such as from PayPal, Stripe, Square, etc.; and bank ACH transfers not from employers) do not qualify for this promotion. A maximum of 36,000 rewards points can be earned from this limited-time offer. After the promotional period ends or once you have earned the maximum points offered by this promotion, your cash back earning rate will revert back to 2%. 36,000 rewards points are worth $360 when redeemed into SoFi Checking and Savings, SoFi Money, SoFi Invest, Crypto, SoFi Personal Loan, SoFi Private Student Loan or Student Loan Refinance and are worth $180 when redeemed as a SoFi Credit Card statement credit.

Promotion Period: 4/5/2022-12/31/2022. SoFi reserves the right to exclude any Member from participating in the Program for any reason, including suspected fraud, misuse, or if suspicious activities are observed. SoFi also reserves the right to stop or make changes to the Program at any time.

Eligible Participants: All new members who apply and get approved for the SoFi Credit Card, open a SoFi Checking and Savings account, and set up Direct Deposit transactions ("Direct Deposit") into their SoFi Checking and Savings account during the promotion period are eligible. All existing SoFi Credit Card members who set up Direct Deposit into a SoFi Checking & Savings account during the promotion period are eligible. All existing SoFi members who have already enrolled in Direct Deposit into a SoFi Checking & Savings account prior to the promotion period, and who apply and get approved for a SoFi Credit Card during the promotion period are eligible. Existing SoFi members who already have the SoFi Credit Card and previously set up Direct Deposit through SoFi Money or SoFi Checking & Savings are not eligible for this promotion.

New SoFi Checking and Savings customers and existing Checking and Savings customers without direct deposit are eligible to earn a cash bonus when they set up direct deposits of at least $1,000 over a consecutive 30-day period. Cash bonus will be based on the total amount of direct deposit. Entry into the Program will be available 4/5/22 to 5/31/22. Full terms at sofi.com/banking. SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC.

SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.

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Cash vs. Credit Card: Key Differences to Know

Despite the saying, “cash is king,” there are pros and cons to using cash over credit cards in everyday transactions. Likewise, credit cards have their own share of advantages and disadvantages when it comes to making purchases.

Here’s what you need to consider when choosing cash vs. credit cards, and when you might opt for using one method of payment over the other.

Defining Cash and Credit Cards

Cash is the legal tender — whether coins, paper bills, or other notes — that you can exchange for goods and services. According to Merriam-Webster, cash is considered “ready money” in that you actually own the value of the cash and can use it immediately during a transaction.

Credit cards, on the other hand, can also be used to purchase goods and services. However, you’re borrowing the funds from a third party (i.e. a bank) to make your purchase today, with the promise that you’ll pay the credit card balance back later.

When to Consider Using Cash

Deciding whether to use cash vs. credit depends on your purchasing situation and preferences. Situations when paying with cash is preferred might include:

•   Buying goods or services from merchants who only accept cash

•   When your credit or income doesn’t qualify for a credit card

•   Limiting your spending to a specific amount

•   Keeping your personal information private during a transaction

•   Avoiding credit card-related fees

•   Avoiding credit card debt

You can also use cash to grow your money through an interest-bearing deposit account, instead of spending it. If you’d like to build your savings fund, you can only do so using cash.

Recommended: How to Avoid Interest On a Credit Card

Benefits of Using Cash

Since cash represents the monetary value you actually have, it makes budgeting simple. If you have $100 in cash to spend for the weekend, for instance, you’re focused to make careful decisions in how you spend that finite cash amount. After you’ve depleted your cash, you can’t make additional purchases until you have more cash.

Additionally, cash provides some convenience despite its additional physical bulkiness in your wallet. For merchants, the benefit of cash vs. credit cards is that they save money on credit card processing fees. To avoid this, some merchants only accept cash payments, while others offer a nominal discount as an incentive for customers to pay using cash.

Cash can also widely be used by any consumer, regardless of their credit score. This makes cash a more accessible payment method for everyday purchases. It also doesn’t contain any of your personal data, so if a private and untraceable purchase is important to you, cash is beneficial.

Recommended: When Are Credit Card Payments Due

Drawbacks of Using Cash

The biggest drawback to using cash vs. credit, however, is that it caps your buying power to only the amount of cash you have. Although this can be a benefit as mentioned above when you’re on a budget, it can restrict your ability to make larger purchases today.

For example, if your car unexpectedly needs a repair that costs $800, but you only have $500 in cash to pay upfront, you’ll have to make a tough decision. You might be forced to shop around for a cheaper car repair shop, spend time negotiating a lower price with the current mechanic, or possibly wait on the repair until you have the additional funds necessary. All of this can cost you extra time, and possibly earning potential if you rely on your car to drive to work.

Aside from fixed purchasing power, physical cash is harder to trace between transactions. Your personal information isn’t tied to cash bills in your pocket. This means that if you lose it or it gets stolen, and it’s used by someone else, it’s harder to get back.

When You Might Consider Using a Credit Card

There are many use cases for credit cards, if you qualify for one. Some situations when a credit card might make sense include:

•   Making a larger purchase now and paying it off later

•   Breaking down a large purchase into smaller installment payments

•   Earning points, miles, or cash back on purchases using a rewards credit card

•   Unlocking additional purchase protections

•   Building your credit profile

Recommended: Can You Buy Crypto With a Credit Card

Benefits of Using a Credit Card

Using a credit card as a payment method for daily transactions offers various benefits when managed responsibly. For example, if you don’t have enough cash for a purchase, a credit card lets you buy it now and pay it back the following month.

You can also choose to take out a credit card cash advance (though typically at a higher APR than your standard purchase APR), or even send money with a credit card.

With a credit card, you get to choose how you’ll repay your purchases, whether in full when your billing statement is due, or incrementally over multiple months. The caveat is that letting a balance roll over to the next month incurs interest charges.

Since all credit card activity is reported to the credit bureaus, on-time payments and other factors can be favorable to building your credit history and credit score. A high credit score can help you qualify for competitive interest rates and terms on other consumer credit products, like other credit cards and loans.

Credit cards also offer benefits and rewards that cash doesn’t provide. Rewards credit cards let you earn points or miles that you can then redeem for travel, cash back, gift cards, merchandise, special experiences, and more.

Different credit cards can also offer benefits like travel cancellation protection, warranty insurance, and more. For example, some cards feature purchase protection, which replaces an item that was lost, stolen, or damaged, if it was purchased using the card.

Another major perk when using a credit card is that it limits your liability when unauthorized or fraudulent purchases or activity occurs on your account. Depending on when you report the unusual activity, you might only be liable for up to $50 of those charges. Some credit cards even have zero-liability policies.

Recommended: What is a Charge Card

Drawbacks of Using a Credit Card

Interest charges, expressed as an annual percentage rate (APR), are one of the biggest disadvantages to using credit vs. cash. With how credit card payments work, unless you make full, on-time credit card payments each month, interest charges will likely apply to balances that roll over from one month to the next.

If you roll over a balance, you’ll not only pay more money toward your purchases, but your outstanding debt can snowball quickly. This can prove financially damaging to your everyday finances and to your credit if you fall behind on payments while amassing growing debt.

Certain credit cards also incur annual fees for the privilege of using them. This is money that you’ll pay out-of-pocket upfront. With a credit card, you can also incur other fees, such as foreign transaction fees, late payment fees, balance transfer fees, and more.

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

Is Using a Debit Card the Same Thing as Using Cash?

Using a debit card is similar to using cash. In fact, one of the biggest differences between a credit card and debit card is that debit cards draw funds from the cash that you already have in your personal checking or savings account. Still, a debit card provides the convenience of swiping or tapping a card on a payment processing machine, like a credit card, to process a digital transaction between your bank and the merchant’s bank.

However, debit cards carry many of the same disadvantages as cash. For one, a debit card limits your purchasing power to the amount that’s in your checking or savings account. Additionally, debit cards don’t offer the same level of protection against unauthorized or fraudulent activity as credit cards do.

Recommended: What is the Average Credit Card Limit

Understanding Your Spending Habits Is Key to Picking Which to Use

Taking stock of your buying habits can help you decide whether cash vs. credit is a better option for you. When considering these two payment options, think about the following:

•   How much do you spend each month?

•   How much discretionary income do you have?

•   Where do you typically make purchases — online or in a brick-and-mortar store?

•   Do you tend to overspend or stay within a budget that you can afford?

•   If you’re thinking about a credit card, what’s your goal?

By answering these questions, you will likely be able to tell which payment method will be more convenient for you. For instance, if you’re trying to curb your spending, then cash might be the better bet, given how credit cards work. On the other hand, if you’re primarily an online shopper or you’re trying to build your credit history, a credit card could be worth exploring.

The Takeaway

Cash helps you contain your spending to the money you actually own. This can potentially limit the amount of debt you’d take on through credit. It can also offer convenience when it comes to shopping through cash-only merchants. The caveat is the risk you’re taking on if the cash is lost or stolen since it can be difficult to get back.

Meanwhile, credit cards offer you peace of mind if your card is lost or stolen. They provide greater protection against unauthorized activity, including fraudulent payments. However, access to borrowed funds puts you at risk for getting deeper into debt if you’re unable to repay your balance on time each month. With responsible borrowing habits, however, credit cards can be a handy way to make purchases.

If you want the convenience and protection of using a credit card, consider a card that offers you cash-back rewards on every purchase. With the SoFi Credit Card, cardholders earn 2% unlimited cash back rewards when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back rewards when redeemed for a statement credit.1

See if you qualify for a SoFi credit card!

FAQ

Which is better when traveling, cash or credit?

When traveling, credit cards are a safer option to carry than cash. It can be difficult and near impossible to trace and verify whether lost or stolen cash belongs to you. If a credit card is lost or stolen, the card issuer can freeze new transactions on the account, and your maximum liability for fraudulent charges is $50, or nothing at all.

Are credit cards safer than cash?

Yes, credit cards are safer than cash. Credit cards reduce your liability in the event of unauthorized or fraudulent activity.

What is the difference between cash and credit cards?

Cash is a physical currency and liquid asset that provides you with purchasing power. When you use cash toward a purchase, you don’t owe that amount to another entity. Conversely, a credit card is a physical tool that lets you increase your purchasing power using borrowed money. You’ll need to repay purchases made to your credit card, possibly plus interest charges.

Cash or credit, which is more convenient?

Whether cash or credit is more convenient is subjective. For example, while many merchants accept credit cards, some only accept cash payments. However, as more businesses accept digital payments and transition to cashless transactions, a credit card might be more convenient.


Photo credit: iStock/Ridofranz

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

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

Imagine if you went to the bank to withdraw money and were told none was available. That frightening scenario is one of the main reasons why financial institutions must have bank reserves. These reserves are a percentage of its total deposits set aside to fulfill withdrawal requests.

These funds comply with regulations and can also provide a layer of trust for account holders. They guarantee that there is always a certain amount of cash on deposit, so the scenario mentioned above doesn’t happen. No one wants to ever withdraw some cash and be left empty-handed.

As a consumer with a bank account, it can be important to understand the role bank reserves play in the financial system and the economy. Read on to learn:

•   What is a bank reserve?

•   How do bank reserves work?

•   How were banking reserves developed?

•   What are the different types of bank reserves?

•   How much money do banks need to keep in reserve?

What Are Bank Reserves?

Bank reserves are the minimum deposits held by a financial institution. The central bank of each country decides what these minimum amounts must be. For example, in the United States, the Federal Reserve determines all bank reserve requirements for U.S. financial institutions. In India, as you might guess, the Reserve Bank of India determines the bank reserves for that country’s financial institutions.

The bank reserve requirements are in place to ensure the financial institution has enough cash to meet financial obligations such as consumer withdrawals. It also ensures that financial institutions can weather historical market volatility (that is, economic ups and downs).

Bank reserve requirements are typically a percentage of the total bank deposit amounts determined by the Federal Reserve Board of Governors. Financial institutions can hold their cash reserves in a vault on their property, with the regional Federal Reserve Bank, or a combination of both. This way, the financial insulation will have enough accessible funds to support their operational needs while letting the remaining reserves earn interest at a Federal Reserve Bank.

How Do Bank Reserves Work?

Now that you know what reserves are, you’re likely wondering how these reserves work. Simply put, they guarantee that a certain amount of cash is kept in a financial institution’s vault.

Suppose you need to withdraw $5,000 to purchase a new car. You understand savings account withdrawal limits at your bank and the amount you need is within the guidelines, so you head to your local branch. When you arrive, you’re told they don’t have enough money in their vault to meet your request. This is what life could be like without bank reserves. The thought of not being able to withdraw your own money might be upsetting, worrisome, and deeply inconvenient. To prevent this kind of situation is exactly why banks must have a certain percentage of cash on hand.

In addition to ensuring consumers have access to their money, bank reserves also can aid in energizing the economy, so it keeps running. For example, suppose a bank has $10 million in deposits, and the Federal Reserve requires 3% liquidity. In this case, the bank will need to keep $300,000 in its vault, but it can lend the remaining $9.7 million to other consumers via loans or mortgages. Consumers can use this money to buy homes and cars or even send their children to college. The interest on those loans is a way that the bank earns money and stays in business.

Bank reserves are vital in helping the economy control money supply, interest rates, and the implementation of what is known as monetary policy. When the reserve requirements change, it says a lot about the economy’s direction. For example, when reserve requirements are low, banks have more opportunity to lend since more capital is at their disposal. Thus, when the money supply is plentiful, interest rates decrease. Conversely, when reserve requirements are high, less money circulates, and interest rates rise.

During inflationary periods, the Federal Reserve may increase reserved requirements to ensure the economy doesn’t combust. Essentially, by decreasing the money supply and increasing interest rates, it can slow down the rate of investments.

Recommended: Understanding Fractional Reserve Banking

Types of Bank Reserves

There are two types of bank reserves: required reserves and excess reserves. The required reserves are the percentage of deposits the institution must have in cash holdings and deposit balances to abide by the regulations of the Federal Reserve. Excess reserves are the amount over the required reserve amount that the institution holds.

Excess reserves can provide a larger safety net for the financial institution and enhance liquidity. It can also contribute to a higher credit rating for institutions. On the other hand, excess reserves can also result in losing the opportunity to invest the funds to yield higher returns. In other words, since the extra money is sitting in cash, it will not generate the same returns it might yield by lending or investing in the market.

Recommended: What Is Quantitative Easing?

Ready for a Better Banking Experience?

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History of Bank Reserves

Reserve requirements first came about in 1863 during the passing of the National Bank Act. This act intended to create a national banking system and currency so money could flow easily throughout the country. At this time, banks had to hold at least 25% reserves of both loans and deposits. Bank reserves were necessary to ensure financial institutions had liquidity and money could continue circulating freely throughout the nation.

But despite the efforts to establish a robust banking system, banking troubles continued. Finally, after the panic of 1907, the government intervened. In 1913, Congress passed the Federal Reserve Act to address banking turmoil. The central bank was created to balance competing interests and foster a healthy banking system.

Initially, the Federal Reserve acted as a last resort and a liquidity grantor when the banks faced trouble. During the 1920s, the Federal Reserve’s role expanded to playing a proactive role in the economy by influencing the credit conditions of the nation.

After the Great Depression, a landmark in the history of U.S. recessions and depressions, the Banking Act of 1935 was passed to reform the structure of the Federal Reserve once again. As part of this act, the Federal Open Market Committee (FOMC) was born to oversee all monetary policy.

How the 2008 Crisis Impacted Bank Reserves

Prior to the global financial crisis of 2008, financial institutions didn’t earn interest on excess reserves held at a Federal Reserve Bank.

However, after October 2008, the Federal Reserve was granted the right to pay interest to banks with excess reserves. This encourages banks to keep more of their reserves. The Board of Governors establishes the interest on reserve balances (IORB rate). As of June 2022, the IORB was 1.65%.

Then, after the recession subsided in 2009, the Federal Reserve turned its attention to reform to avoid similar economic disasters in the future.

Recommended: Federal Reserve Interest Rates, Explained

How Much Money Do Banks Need to Keep in Reserve?

During the pandemic, reserve requirements dropped to 0%. This reduced requirement is intended to encourage banks to lend more and stimulate the economy. Thus, it would help needy families whose finances were impacted by COVID-19.

Prior to this revision, banks with between $16.9 to $127.5 million in deposits were required to have 3% in reserves, whereas banks over this amount had to have at least 10% in bank reserves.

Recommended: Investing During a Recession

What Is Liquidity Cover Ratio (LCR)?

Bank reserve requirements aside, financial institutions want to ensure they have enough liquidity to satisfy the short-term financial obligations if an economic crisis occurs. This way, they know they will be able to weather a crisis and not face complete bankruptcy. Therefore, financial institutions use the Liquidity Coverage Ratio (LCR) to prevent financial devastation resulting from a crisis.

The LCR helps financial institutions decide how much money they should have based on their assets and liabilities. To calculate the LCR, banks use the following formula:

(Liquid Assets / Total Cash Outflows) X 100 = LCR

Liquid assets can include cash and liquid assets that convert to cash within five business days. Cash flows include interbank loans, deposits, and 90-day maturity bonds.

The minimum LCR should be 100% or 1:1, though this can be hard to achieve. If the LCR is noticeably lower than this amount, the bank may have liquidity concerns and put the bank’s assets at risk.

The Takeaway

Financial institutions must have a certain amount of cash on hand, referred to as bank reserves. These assets are usually kept in a vault on the bank’s property or with a regional Federal Reserve Bank. These cash reserves ensure financial institutions can support consumer withdrawals and withstand a financial crisis.

Bank reserves build confidence. So can a bank that puts its customers’ needs first. That’s what SoFi does, helping its account holders grow their money faster. When you open a new bank account with direct deposit, you’ll earn an amazing 2.00% APY and pay no account fees at all. With SoFi’s Checking and Savings, you’ll spend, save, and earn interest in one place, so it’s super convenient, too.

Let your money work for you with SoFi!

FAQ

Are bank reserves assets or liabilities?

Bank reserves are considered an asset since they’re an item the bank owns. Other bank assets can include loans and securities.

How are bank reserves calculated?

Bank reserve requirements are calculated as a percentage of the institution’s deposits. So, if the reserve requirement is 3% for banks with $10 million in deposits, the bank would have to hold $300,000 in its reserves.

Where do banks keep their reserves?

Financial institutions usually keep a certain amount of their cash reserves in a vault to meet operational needs. The remaining amount may be kept at Federal Reserve Banks so the balance can generate interest.


Photo credit: iStock/Diy13

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Guide to Electronic Checks (E-Checks)

From cash to credit cards to payment apps to cashiers checks, there’s no shortage of ways to make payments these days. One option that’s falling somewhat out of fashion? Paper checks. One modern alternative is to use an electronic check, which functions similarly to an old-school check but is managed completely digitally.

What is an electronic check? Keep reading to learn more about how this popular payment method works, including:

•   What is an electronic check or e-check?

•   How does an electronic check work?

•   What are the pros and cons of e-checks?

•   How do electronic checks differ from credit card payments and wire transfers?

•   Are e-checks safer than traditional checks?

What Is an Electronic Check?

An electronic check (also known as an e-check) serves the same purpose as a traditional paper check but works digitally. When someone uses an electronic check, the amount they wrote the check for will be withdrawn from their (the payer’s) checking account and will be transferred via ACH network to be deposited into the payee’s checking account.

The ACH (Automated Clearing House) network is an electronic network that U.S. financial institutions utilize to make payments digitally—eliminating the need for paper checks.

Recommended: How to Verify a Check Before Depositing It

How Does an Electronic Check Work?

An electronic check works in much the same way as a traditional paper check. It’s possible to use electronic checks to make a variety of purchases and payments online. Someone can use an electronic check to make significant recurring payments such as their monthly rent or loan payments. It’s fairly common for businesses to make it possible to make purchases using an electronic check. Here’s why: This method helps them avoid the processing fees required to accept credit card or debit card transactions. This is especially popular with small businesses who are hit harder by these fees.

It can take about three to five days for an electronic check to process. Why does it take so long? To start, the funds have to be verified as actually being available to make the purchase and then need to be cleared by the ACH. Next, the funds have to be deposited and made available to the recipient so they can withdraw the funds from their bank account.

There are two main ways a consumer can use an electronic check. These are the options, which are slightly different but achieve the same result:

•   Fill out an online payment form with information such as checking account number (whether you have a standard or a premium checking account), payment amount, and bank routing number. The payer will then submit the payment to the payee, thereby authorizing them to withdraw the check amount from the payer’s checking account.

•   Complete an automated online process that involves inputting payment information and bank account information and then authorizing the payment.

Processing Electronic Checks

Processing an electronic check works is similar to processing a paper check. It may move along faster (you don’t mail an e-check, for instance), while eliminating the use of paper which leads to waste. The exact processing time will vary, depending on the institutions involved; funds might be made available the next day, or (as noted above) it might take a few days for the payment to clear. Paper checks typically take two days or somewhat longer to clear.

These are the steps that occur to process an electronic check:

•   Approve authorization. The payer needs to authorize the payee to complete the transaction. Usually this is done over a recorded phone call, an online payment form, or a signed order form.

•   Set up payment. Once the purchase is authorized, the payee can add the payment information included on the electronic check and form into their online payment processing software. If the payer wants to set up a recurring payment, they can specify what that recurring payment schedule is.

•   Finalize and submit payments. After all required information is added to the payment software, the payee can submit the payment and begin the ACH transaction process.

•   Deposit the funds. The payment will be withdrawn from the payer’s bank account and deposited into the payee’s account. At this point, the payer should receive a payment receipt confirming the payment went through.

Recommended: How to Balance Your Account Monthly

Advantages of E-Checks

These are some of the advantages associated with electronic checks.

•   Electronic checks are usually protected by more security measures than paper checks like multi-factor authentication, digital signatures, and multiple forms of digital encryption which helps protect against hackers.

•   It’s unlikely that the payment amount can be altered or changed like on a paper check (by adding extra zeros).

•   Electronic checks are likely less expensive than paper checks as the payer doesn’t have to pay to order them, buy stamps to mail them, or spend gas money to drive and deliver them to the payee. Fees for a business to process electronic checks are also cheaper and only costs about $0.10 compared to $1 for paper checks. (Worth noting: Sometimes, there may be fees for cashing a paper check for consumers as well.)

•   There can be less work involved to deposit the check on the payee’s side since the payment goes through digitally.

•   This payment method may process a bit faster than paying by paper checks (although a paper check known as a cashiers check typically pays very quickly).

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning up to 2.00% APY on your cash!


Disadvantages of E-Checks

There are not many disadvantages associated with electronic checks, but some people may be concerned about these issues.

•   Hackers may try to gain access to them.

•   Not all merchants may accept them (although many do).

•   Paper checks can be signed over to someone else, which can in some situations make them more convenient than an e-check.

Another point to consider: If you are the kind of person who likes to write checks to yourself or to cash, you probably can’t do this with electronic checks.

E-Checks vs Credit Card Payments

Electronic checks and credit card payments can feel similar since they are both cashless and don’t require you to write a paper check to process a payment. However, they do function differently.

•   An electronic check pulls funds from a checking account, while a credit card payment means the payer borrows money to make a purchase. That also means a payer who uses an e-check avoids interest charges if they are the type to carry a balance on their credit card.

•   While electronic checks rely on the ACH to process payments, credit cards use credit card networks for their processing.

•   Making payments with a credit card can lead to earning rewards like travel points and cash back. Electronic checks typically don’t earn any rewards.

Recommended: What Is a Second-Chance Checking Account?

E-Checks vs Wire Transfers

Electronic checks and wire transfers may sound similar, but they function differently. Here are some ways they differ:

•   A wire transfer electronically transfers funds from one bank account to another, but doesn’t use an ACH network to do so.

•   Electronic checks are usually cheaper than a wire transfer, which can cost as much as $50 in some situations.

•   Wire transfers may process faster than electronic checks. If a wire transfer involves two accounts at the same institution, funds can arrive within hours.

Are E-Checks Safer than Traditional Checks?

As noted above, electronic checks are seen as a more secure option than paper checks as there are more protections in place surrounding them. Because electronic checks are created and processed without “hard copies,” there are less opportunities for the check to be stolen, lost, or altered fraudulently.

Banking With SoFi

Electronic checks are an easy and convenient payment method. As a bonus, e-checks can process faster than paper ones and are usually more secure. These can be good reasons to use these financial tools and enjoy more efficient, less stressful banking.

Which is also what SoFi is all about. When you open an online bank account with direct deposit with SoFi, you’ll pay no fees and enjoy a terrific 2.00% APY. Those two factors mean your money could grow faster with us. Plus we make everything about banking, from opening an account to transferring funds, convenient.

Bank smarter with SoFi.

FAQ

How do you pay with an electronic check?

There are two main ways to pay with an electronic check: Either by filling out an online payment form or completing an automated online process. Both of these options are typically secure payment methods.

How do I send an electronic check?

Typically, you would either fill out an online payment form with your banking information and the payment amount or complete an online process and input your payment information and bank account information. In both cases, you, the payer, needs to authorize the payee to process the payment.

Can you get scammed with e-checks?

E-checks are usually viewed as a safer payment option than a paper check. The process involves fewer gaps in which fraud can occur. Also, there isn’t the opportunity for an electronic check to become lost or stolen, the way a paper one might. There are also additional security measures in place to help prevent digital fraud with e-checks.


Photo credit: iStock/kazuma seki

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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