woman painting her ceiling

How to Pay for Emergency Home Repairs, So You Can Move on ASAP

You might not like to think about it (and frankly, who does?), but when it comes to owning a home, stuff can and will break. Water pipes burst. Roofs cave in. The list goes on.

While you never know precisely when a big appliance or HVAC (heating, ventilation, and air conditioning) system is going to conk out, most products do have expected lifespans. For instance, a hot water heater or a dishwasher lasts about a decade, while an HVAC unit lasts an average of two decades .

So, it’s smart to have a plan for how you’ll manage financially when something big—the furnace, the roof, the plumbing—needs emergency repair. And yes, it is not if, but when.

Cost of Emergency Home Repairs

Emergency repairs represent some of the biggest expenses that come with home ownership. In 2015, homeowners spent an average of $2,970 on home improvements, with more than half of that amount put toward repairs or replacements , according to the Joint Center for Housing Studies of Harvard University.

Emergency home repair costs range from annoying to hair-raising: Homeowners pay pros an average of $244 to install a new kitchen faucet , while a roof replacement sets them back an average of $7,036 .

Recommended: Use this Home Improvement Cost Calculator to get an idea of how much your next project will cost.

When a home emergency repair hits you, doing nothing until you save the money to cover it is not the best strategy. Untreated home damage can quickly get worse, sending costs, well, through the roof.

Over time, one little leaky pipe can lead to structural damage and mold , for example.

So what do you do when it happens to you? First we’ll look at the not-so-smart ways to tackle unexpected expenses, and then we’ll look at better alternatives.

Dubious Ways to Pay for Repairs

Perform Financial Triage

One way to finance an unexpected emergency is by putting off other payments. Say you have to shell out $3,000 for an emergency plumbing repair. Normally, that $3,000 would go toward your monthly expenses, including your rent, mortgage and/or your student loan payment.

So you might choose to delay paying certain bills if you aren’t charged steep penalties for paying late or skipping a payment. But tread carefully: While skipping payments might mean a penalty of just a small fee, mortgages and credit card companies impose bigger penalties. What’s worse, late payments can hurt your credit score.

Pull out the Plastic

The Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2015 reveals that among people who don’t have the cash reserves to cover even a minor emergency (an unexpected $400 expense), 38% would choose to charge the expense on a credit card, and pay it off over time.

While pulling out the plastic can be an expedient solution in a clutch—especially if the tradesperson won’t do the work without at least a partial payment—it’s not a great idea to leave that debt on your credit card if you can’t pay it off by the end of the billing cycle.

Related: Discover how much interest you are paying on your debt with our Credit Card Interest Rate Calculator.

For example, if you use a credit card with an average annual percentage rate (APR) of 16.5% to pay an electrician $5,000 for emergency rewiring, and only put $100 toward that debt each month, it will take you about five years to pay off, and you’ll pay more than $3,500 in interest . Yikes—that’d be more than half of what you originally charged.

Gamble on Lenders of Last Resort

The Federal Reserve report noted above also found that 16.5% of people faced by a financial hardship, including unexpected expenses, turn to pawn shops, payday lenders, or auto title loans for help.

While lower-income homeowners are more likely to turn to these “alternative financial services,” 9.3% of people earning over $100,000 a year and faced by hardship do the same. But those options can be worse than choosing to pay for expenses with a credit card.

Many so-called ‘risky lenders’ sound good based on their advertising. But the Consumer Financial Protection Bureau (CFPB) has warned consumers to be wary of getting burned by high fees and rates, and of having personal property, like a car, seized. Such loans, according to the CFPB can become “debt traps” for some borrowers.

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Smarter Ways to Pay for Home Repairs

Insurance or Government Help

If there is a chance that the repair is covered by your homeowner’s insurance or your home warranty policy (if you have one), check with those companies first.

If the emergency was caused by a natural disaster, such as an earthquake, you may be eligible for help from the Federal Emergency Management Agency (FEMA).

That Emergency Fund you Were Smart to Feed

More than half of Americans surveyed for The Role of Emergency Savings in Family Financial Security , a brief published by The Pew Charitable Trusts in 2015, say they could cover an unexpected $2,000 expense using their savings.

If you can say the same, that’s great! But be sure to take steps to replenish the funds quickly. Unfortunately, repairs can come at any time—even one right after another. So you’ll want to be ready. If you are thinking about doing other renovations in addition to your emergency repairs, use SoFi’s Home Project Value Estimator to find out the resale value of your project.

The Bank of Mom and Dad

If you don’t have the savings, asking family members or close friends for a loan might also be an option. Just make sure you pay it back quickly, because a relationship is harder to repair than a leaky roof.

A Personal Loan

Using a home improvement loan may sound like a hassle compared to just whipping out your credit card. But the days of meeting with a banker to fill out a loan application are gone.

Now, you can apply for a personal loan online, upload and sign paperwork digitally, and get funds wired directly to your bank account.

Plus, because personal loans are usually unsecured and based on personal creditworthiness, not collateral, you don’t have to put your car or your home at risk to get the money you need.

With interest rates starting below 5% , and some lenders offering no origination fees, using a personal loan to pay for an emergency repair can be a much less expensive option than using a credit card.

Use SoFi’s Personal Loan Calculator to see how much you might save by going this route.

Awarded Best Personal Loan of 2021 by Forbes.
Low, fixed rates starting at 4.99% APR with Autopay.

Your Home’s Equity

Like a personal loan, either a cash-out refinance or a home equity line of credit (HELOC) can be a healthier way to borrow money than running up a credit card balance.

A cash-out refinance replaces your mortgage with a new one, at a new rate, while a HELOC is a secondary mortgage that you would pay in addition to your original mortgage. A cash-out refinance provides a one-time cash infusion; a HELOC allows you to draw cash over time, which might be helpful if you’re not sure of repair time or costs.

The paperwork for both refis and HELOCs may take longer than with a personal loan, which could be a problem if you need to pay for the repairs right away. And both loans borrow against your home’s equity, which might not be an option if you recently purchased the home. But if you do have equity to tap, consider the pros and cons of each.

The right option for you depends on your personal circumstances. Should a personal loan be the right one, head to SoFi to see what you may qualify for.

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.


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5 Budget-Friendly Ways to Increase the Value of Your Home

Because home prices are expected to continue to slowly rise in many parts of the country, it makes sense that most homeowners would desire to stay put rather than upsize to a new house. Although the grass might look a little greener elsewhere, it’s possible to add value to your current home—even if you’re on a budget.

So, whether you have the cash saved up for home investment, or you are looking to borrow for your next home project, consider these five budget-friendly enhancements:

1. Increase or Replace Your Attic Insulation

We get it: You’re not going to invite friends over to see your new attic insulation.But it’s a wake up call to realize that this project has the No. 1 ROI on Remodeling magazine’s Cost vs. Value report list—a whopping 107.7%.

You’ll not only profit when it’s time to sell, but you’ll also see immediate savings from the ongoing energy efficiency this upgrade provides. A properly insulated attic, combined with sealing air leaks throughout your home, cuts an average of 15% off your energy costs, allowing you to pocket the savings month after month.

Cost: $500 to $1,000 for insulation , depending on the R-value (effectiveness resulting from type, thickness, and density), and $100 to rent the machine that blows in the fiberglass if you’re a DIY type. If you hire a pro, labor will run about $40 to $70 an hour.

Time investment: For an average-size attic, it should take a reasonably skilled DIY-er about four hours to complete the project.

Related: SoFi’s Home Project Value Estimator compares your project type to regional resell data so you can estimate a project return.

2. Treat Yourself to New Window Treatments

The ROI of new vinyl windows, according to Remodeling magazine’s list of “upscale” home improvements, is 73.9%, which is almost 15% more than a kitchen remodel (61.9%) .

And with an average cost of nearly $19,000, the whole kitchen remodel dream may not make your to-do list, but with a much lower average cost, you could consider window treatments that help conserve energy and look sharp, such as plantation shutters.

Cost: Anywhere from $165 to $375 for a standard 3×5 window .

Time investment: You can buy standard-size shutters off the shelf; delivery time for custom special orders can be 4 to 6 weeks. The average DIY installation time will depend on your skill level and the number of windows you want to cover.

3. Focus on Outdoors To Be “In”

From an outdoor kitchen and a built-in fire pit to a brand new deck, enhancing your outside area is in. Sure, it’s easy to picture yourself hosting BBQs on a gorgeous deck on warm summer evenings—but that dream comes at a price. A new deck alone can run you $17,000 for an ROI of 65% .

However, when you let your green thumb and imagination go wild, you’ll be amazed at how you can add value to your home on a budget. In lieu of a deck, create a peaceful bistro area with bricks or pavers, and then add cost-efficient accouterments, such as brightly colored flowers in decorative pots, a small gazebo, a store-bought fire pit, and some party lights. Throw in a $15 bottle of your favorite wine, and your outdoor wonderland is good to go.

Cost: $1,500—give or take. Gazebos run the gamut when it comes to size and price, but you can get one for around $500; $700+ for a 10×10 DIY patio paver kit; $200 for a fire pit; and $100+ for pots and flowers from your local garden center.

Time investment: You can reasonably expect to outfit your outdoor space in a weekend. (Don’t forget to allow 2+ hours to chill that wine.)

Read Next: How to Create a Renovation Plan to Match Your Budget 

4. Refresh the Head Without Taking a Bath

A beautiful bathroom is a must for many homeowners, but it will cost you: The average cost of a bathroom addition is just over $80,000 , and only garners a 57% ROI. Instead of spending big bucks, consider minor upgrades to the existing space. For example, add a double vanity, a new showerhead and faucets, and make old grout look new again with stain to up the luxe factor.

Cost: Expect to pay about $1,000 for a double vanity , and $400 for a new showerhead and faucet. Unless you’re handy, you’ll want to contract these tasks out. Grout stain will set you back only about $20 a bottle, and applying it is something you can easily do yourself.

Time investment: Expect vanity installation to take a full day or more if you have to demo the current vanity and repair walls, tiles, flooring or plumbing before installing. A showerhead and faucet can be replaced in an hour or so, but the grout stain might take a couple of hours, depending on the size of the room.

5. Cook up a Cooler Kitchen

If you’re stuck with outdated appliances or hideous cabinets, a kitchen remodel is likely high on your list of improvements. But increasing home value with a new kitchen can fry your bank account: A full kitchen makeover can run a whopping $122,991, while recouping just over 60% in ROI.

To update for less and wow your kitchen in a weekend, make some wallet-friendly upgrades: fresh paint, a new faucet, updated lighting (upscale pendant lights are a good choice), and new cabinet pulls. Paint tip for a bright kitchen: Check out the Pantone Color of 2017, Greenery .

Cost: Cabinet pulls start at about $2 each, while paint will run $100 to $200 , depending on the type and the square footage of walls and the ceiling. A new faucet can run $100+, depending on style and finish; and pendant lights can be had for $50 or so each. Unless you’re very confident about your plumbing and electrical abilities, hire a pro at about $80 and hour to install your faucet and lights.

Time investment: A DIY painting endeavor depends on the size of your kitchen—and how many friends you get to help! Faucet installation and wiring for new lighting could take up to a day, depending on how handy you are.

The Easy Way to Finance HGTV-Worthy Upgrades

Even budget-friendly home improvements can set you back quite a bit. Use our Home Improvement Cost Calculator to get an idea of how much your project will cost.

If you haven’t set aside the budget to bring more value to your home, you don’t necessarily have to dip into your retirement account or pay less on your student loans each month.

Taking out a personal loan to fund your upgrades can be a savvy financial move, since even small upgrades will pay off both now with a home designed to fit your lifestyle, and in the future through increased resale value.

Looking to make more substantial upgrades? No problem—a low-interest SoFi personal loan can help you add value to your home without straining your wallet.

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.


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A History of Credit (and How to Manage Yours Better)

Alfred Bloomingdale, Diners Club developer and grandson of the famous department store founder, once said , “The day will come when the plastic card will make money obsolete.” At the time, this might have sounded futuristic, but today 62% of Americans think society will become cashless in their lifetimes, with all purchases made electronically.

So how did we get to a place where cash is on the way out, and credit is everywhere? The origin of the credit card, and its subsequent rise, can help explain the current credit landscape, and lend powerful insight into how to control your own credit today.

The Origins of Credit

Here’s how the story goes: Businessman Frank McNamara was having dinner at a New York City restaurant in 1949 when he realized he forgot his wallet. Rather than dine and dash, he came clean and asked if he could sign for the meal and pay later.

Though some say this legendary dinner never happened, everyone agrees McNamara founded Diners Club, the world’s first multipurpose charge card , in 1950. McNamara sold Diners Club memberships to friends and acquaintances willing to pay $3 for the “sign now, pay later” privilege at participating restaurants and hotels.

Related: Psychologists Explain How Money Matters Affect The Mind

Until that point, only individual stores extended credit to customers. If you couldn’t pay for, say, a dress or a new suit at the general store—and the owner knew you were good for the money—you could run up a tab and pay cash later. But the Diners Club card provided the benefit of credit at multiple locations instead of just one establishment.

And Then Came the “Big Four”

Of course, future entrepreneurs and banks wouldn’t let Diners Club monopolize the charge and credit market for long. Eventually, other cards came on the scene—most notably Visa, Mastercard, American Express, and Discover.

Visa . In 1958, Bank of America issued the BankAmericard—the first true credit card—to customers in California. While the original Diners Club card required payment in full at the end of each month, BankAmericard users could pay off purchases over time. In 1976, BankAmericard became Visa.

Fun fact: Visa is pronounced the same in every language—ideal for a now global corporation.

Mastercard . BankAmericard got a run for its money when a group of banks joined forces in 1966 to create the Interbank Card Association (ICA). In 1969, ICA created Master Charge: The Interbank Card, which became Mastercard in 1979.

Fun fact: Mastercard was the first payment card issued in the People’s Republic of China.

American Express . The American Express Company has been around since 1850, but it didn’t issue its first charge card until 1958. Like Diners Club, the American Express card had to be paid in full each month. That changed in 1987 with the introduction of the Optima card—the first true credit card by American Express.

Fun fact: Elvis Presley was one of the earliest American Express card members.

Discover . Discover is the newest major credit card network on the scene. Sears launched the Discover card in 1986, distinguishing it from the pack by charging no annual fees and offering higher credit limits than other cards at the time.

Discover was also the innovator of cash rewards on credit card purchases—back in 1986. At that time, Discover cardholders could earn rewards of up to 1% cash back on all purchases.

Fun fact: Discover Financial Services purchased Diners Club International in 2008.

How Credit Cards Have Changed Over Time

A lot has changed since McNamara’s legendary dinner. Take a look at some of the biggest shifts in the credit industry:

The Ubiquity of Credit

In the early decades, credit was curbed by restrictive interstate banking laws. But credit’s big breakthrough came in 1978, when the Supreme Court ruled to allow nationally chartered banks to charge out-of-state customers the interest rate set in the bank’s home state.

Credit expanded as a result, and today, the average American credit card holder has nearly four cards .

The Evolution of Fees

When Diners Club began, it made money by charging stores a 7% fee on all transactions. Today, credit card companies charge interest on debt, too, so they make money when you don’t pay your bill in full. Also, Diners Club used to charge nominal membership fees, but by the 1980s, many credit card companies eliminated annual fees to stay competitive.

The Advent of Rewards

The ’80s also brought tangible rewards for using credit cards instead of cash. Discover pioneered cash rewards, allowing cardholders get a percentage back on purchases charged. And in 1989, Citibank made a deal with American Airlines to give consumers reward points to use for future flights.

Today, consumers continue to use credit card rewards programs to earn cash or points for future purchases, including travel. In fact, more than 80% of credit card users have rewards programs associated with their cards.

How Different Cultures Pay for Things

Credit may be king in the United States, but other countries have varying relationships with money based on their unique culture, history, and economy.

While 67% of Americans and 81% of Canadians have at least one credit card, less than half of the people in Australia, Austria, France, and Germany have one credit card to their name. Outside of North America, people rely on debit cards far more than credit cards for electronic payment.

What’s more, in places like Austria and Germany, cash is actually the preferred method of payment —and they have packed wallets to prove it. It’s typical for Germans to carry more than $120 in their wallets, and for Austrians to hold nearly $150. Americans, on the other hand, usually carry less than $75 in cash.

Why Germans Pay Cash for Almost Everything

Believe it or not, a whopping 82% of all transactions in Germany are conducted in cash, compared to 46% of transactions in the United States. Why the reluctance to pay with plastic? For some, using cash makes it easier to keep track of money and spending. Cash also helps maintain anonymity and privacy—after all, you can’t track a cash-paying customer the same way you can trail credit card purchases.

But Germany’s preference for cash (and related fear of debt) probably has more to do with history than anything else. Remember, the World Wars wreaked havoc on the country’s economy. When Germans were forced to convert their reichsmarks to the new deutsche marks in 1948, they lost 93% of their savings . Painful memories like that tend to linger, influencing attitudes toward money in general.

How to Control Your Credit

Across all cultures, credit is a powerful tool that must be managed wisely. Here are some ways to control your credit to make it work for you.

Building Your Credit From the Ground up

It might sound enticing to pay for everything in cash (and thus stay out of debt), but most of us don’t have the cash flow to pay for college, buy a car, and purchase a home outright. Besides, even if you do have the cash to buy everything you need right now, when the day comes to apply for a loan, you’ll need a solid credit history to qualify.

(In the old days, lending was much more subjective .) If you’ve never had a single credit card or loan, your credit history is minimal, which means you pose a higher risk to lenders. In that way it pays to borrow, as long as you do so responsibly—spend less than you earn and pay your bills on time, every time.

It Pays to Pre-Finance

Of course, credit cards aren’t the only way to pay for purchases and build a strong debt payment history. Pre-financing (getting access to a sum of money in advance of a purchase), such as taking out a personal loan, is another option. When you apply for a loan, you’re requesting a specific amount of money from a lender and agreeing to repay that loan over a predetermined period of time.

Credit cards work differently. When you pay on credit, the credit card network (e.g., Visa) pays the merchant (e.g., Home Depot) for your purchases, and you pay the network back for your purchases each month. If you don’t pay your balance in full, you’ll be charged interest on future payments.

Recommended: Personal Loans – The Key Ingredient to Navigating Life’s Ups and Downs Like a Boss

Between the two options, pre-financing offers the benefit of lower interest rates and shorter loan terms, helping you get out of debt quicker. After all, if you don’t have a system in place to pay off purchases in a reasonable time frame, credit card debt can haunt you for a long time.

Think about it: If you’ve racked up $15,000 in credit card debt at an interest rate of 17%, and make a payment of $250 each month, it will take you 134 months (11+ years) to pay off your debt—debt that includes more than $18,000 in interest, by the way.

The Skinny on Credit Scores

Whenever you borrow money via a personal loan or use your credit card, your lenders and creditors send details of those transactions to national credit bureaus (Equifax, Experian, and TransUnion). That information is then used to assess your creditworthiness, which is expressed as a three-digit credit score that represents the risk you pose to lenders.

The higher your credit score, the less risky you are in their eyes. FICO scores are the ones used most often in lending decisions in the United States, with scores typically ranging from 300 (poor) to 850 (exceptional).

Your credit score comprises five categories, and each one has an impact:

•   Payment history: Late or missed payments drag down your score.

•   Amounts owed: High balances can hurt you; maxing out your credit cards is even more damaging.

•   Length of credit history: A long history can increase your score.

•   Credit mix in use: A healthy mix of credit cards, student loans, a mortgage loan, etc., can boost your score.
•   New credit: Opening several credit accounts in a short period of time can damage your score.

The Difference Three Digits can Make

Your credit score counts for a lot. It often helps creditors and lenders determine approval for credit, as well as the interest rate you’ll have to pay once you’re approved.

Typically, the higher your score, the lower the interest rate you’ll receive. Unfortunately, the reverse is also true, and the difference can be more than you bargained for. When it comes to car loans, for instance, a low score typically increases the cost of a $20,000, 60-month loan by more than $5,000 .

Giving Your Score a Boost

If your credit score isn’t where you want it to be, there’s good news: Scores aren’t set in stone. Try these tips to improve yours:

Do's and Don'ts of Credit Cards

Getting out of Credit Card Debt With a Personal Loan

Sometimes the problem is bigger than a low credit score. Unfortunately, some people get so deep into debt that it’s hard to find a way out on their own. But there’s good news on that front, too.

A personal loan allows you to consolidate high-interest credit card debt into one low-interest loan with a fixed monthly payment. (We’re not kidding about high interest: Currently, the average annual percentage rate for variable-rate credit cards is 16.38% .)

And, instead of transferring your debt to another credit card, you can get a loan that charges zero origination or balance-transfer fees. It’s no wonder refinancing your credit card debt with a personal loan is a smart financial move.

Related: Check out our Credit Card Interest Calculator to see how much interest you are paying on your credit card debt.

Plus, even if your score isn’t an accurate portrayal of how financially responsible you are, you might still qualify for a loan. SoFi, for example, looks at more than just your credit score, considering your employment history, debt payment record, and cash flow, too.

Clearly, credit cards have been a significant part of culture for most of our lives—and that’s not necessarily a bad thing, or bound to change any time soon. When managed effectively, credit cards are valuable tools to help you pay for the things you need and to sustain the life you want.

If you feel weighed down by credit card debt, it’s not too late to eliminate the burden—simply start taking steps to control your credit, rather than letting it control you.

Check your rate for a personal loan to consolidate high-interest credit card debt, and then share this article with others who would love to learn how to manage their credit better.

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


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How a Personal Loan Can Boost Your Credit Score

Having a good credit score is one of the most essential steps to financial success. With a good credit score, you can get better rates on your mortgage, you can find better places to rent, and you’ll save thousands of dollars in interest on future loans.

Many people understand the importance of establishing a good credit score but are not sure how to start building their credit. Below are a few important factors that can impact credit score, tips on how to manage your score, and reasons why securing a personal loan can be a great way to improve those key inputs to building your credit.

The Age of Your Credit History

Future lenders and creditors will evaluate a person’s credit history to see if he or she has a track record of paying loans back on schedule. The longer your track record of paying back loans, the less of a risk for payment you will be to future lenders.

Since the age of your credit history is a factor in your credit score, it is important to start building your credit early. If you don’t have much of a credit history yet, a personal loan is a great way to start developing one. As long as you make your payments on time, you should see your credit score start to rise.

Your Credit Utilization Ratio

One of the most damaging factors to your credit score is a large debt-to-credit ratio, also called your credit utilization rate. This ratio is simple: how much do you currently owe, divided by the total credit available to you. Credit cards offer a good example: if you have a monthly limit of $10,000, and typically carry a balance of $9,000 on your card in a month, your utilization ratio would be 90%.

A large debt-to-credit ratio indicates to future lenders that you routinely use too much of your available credit. According to myFICO , the group with the highest credit scores uses only 7% of their available credit on average. So if you’re stuck using 50%, 75% or even 99% of your available credit monthly, your credit score will likely take a hit. A lower credit score can make new borrowing even more expensive.

Consolidating credit card debt through a new personal loan can be one of the best ways to improve your utilization rate, because you’ll have additional credit in the form of the new personal loan. Of course, you’ll need to avoid charging up balances on your credit cards again.

A lower utilization ratio can lead to an improved credit score. On top of that, because a personal loan is an installment loan (meaning that it is repaid over time with a set number of scheduled payments), a structured payback timeframe can help some people stick to paying back the loan more quickly, thereby lowering your future utilization ratio.

Since most credit cards usually have very high interest rates, your monthly obligations under a personal loan will typically be lower than carrying the balance on your card. If you can lower the rates you’re paying, you’ll pay less interest over the life of the loan, too.

Adding Different Types of Credit

An additional factor that can impact your credit rating is your mix of different types of credit, such as credit cards, student loans and mortgage loans. In general, your credit rating will benefit from a healthy mix of different kinds of debt on your credit report.

You want both revolving debt (like credit cards or lines of credit), as well as installment debt like a personal loan. If you currently only have credit cards, adding a personal loan to your credit mix can go a long way in establishing multiple types of credit and boosting your credit score.

Personal loans have many obvious direct benefits – access to cash, predictable payments, lowering interest rates – but their secondary impact on your credit score can be meaningful for your borrowing future.

If you find a personal loan that works for you and you believe that you can make your payments on time, getting a personal loan can help you improve your credit score and your financial future. For more information on how to budget for a personal loan, take a look at our personal loan calculator.

To learn more about how a personal loan can help improve your financial situation, check your own rate for a SoFi Personal Loan.

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


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How Student Loans Affect Your Credit Score​: 7 Essential FAQs

Got student loans? We’ve got you covered with our Student Loan Smarts blog series. Our expert tips and hacks will help you save money, pay off loans sooner, and stress less about student loan debt. Read the other posts in the series to get all the info you need to make intelligent decisions about your student loans.

Student loans are the ultimate double-edged swords. Invest wisely in your education, and those loans should pay off in the form of higher income over time. But if you mismanage student loan debt, your credit score could suffer—and that could have a big impact on your financial future.

As a student loan lender, we get a lot of great questions about how student loans affect credit score. Here are the top seven.

1. Do I need a good credit score to take out a student loan?

The answer depends on whether you’re talking about federal or private student loans.

Federal loans don’t take credit scores into account, which is why mosevery borrower gets the same interest rate regardless of financial profile. However, federal PLUS loans do require that borrowers not have an adverse credit history , which is defined by FinAid as “being more than 90 days late on any debt, or having any Title IV debt within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or write-off.”

Related: 5 Tips for Getting the Lowest Rate When Refinancing Student Loans

For private lenders, your credit score is usually a key factor in determining not only student loan approval, but also the attached interest rate. In other words, the better your score, the better your rate. But SoFi does things a bit differently—our non-traditional underwriting process looks beyond your credit score to take into account factors such as education and career. This allows us to provide competitive interest rates on student loan refinancing.

2. Which credit scores do lenders use?

Most private student loan lenders use FICO credit scores to determine whether to extend credit and at what interest rate. Since FICO is used widely throughout the lending industry, including by mortgage, auto loan, and credit card providers, it gives lenders an apples-to-apples comparison of potential borrowers.

3. How is my credit score calculated?

Unfortunately, how FICO calculates your credit score is kind of a black box. While the various factors and weightings
used in the calculation are publicly available on FICO’s website, its algorithm is proprietary, which means that no one can predict exactly how a specific financial event will affect your score. For example, a late payment will likely reduce your score, but by how many points is anyone’s guess.

That said, there are generally three key ways to improve your credit score : pay bills on time, keep credit card balances low, and reduce the amount of debt you owe.

4. How does a late student loan payment affect my credit score?

Making payments on time is obviously important, but what you might not realize is exactly how damaging it is to not pay on time. Even if your credit history is pristine, it only takes one 30-days past due report to cause a material change in your score. Whether you were short on cash or just simply forgot, the FICO algorithm doesn’t distinguish—and the result is the same.

Recommended: How to Choose Between Variable and Fixed Rate Student Loans

So, if you have trouble remembering to make your payments, set up an automatic payment plan; most lenders will give you a small discount on your interest rate for doing so. When you know you can’t make a payment on time, talk to your lender or loan servicer right away.

Most federal loan lenders and some private lenders offer loan deferment and/or forbearance , allowing you to temporarily suspend payments, which will minimize the impact on your credit score. But remember, there’s absolutely nothing your lender can do to help if you don’t return their calls.

5. Will shopping around for a better student loan interest rate hurt my credit score?

We hear this question a lot from grad school borrowers and those refinancing student loans to get the best interest rate possible on a private loan.

One factor that can be a red flag for FICO is the number of inquiries it receives from lenders wanting to see your credit report. In other words, if it looks like you apply for more credit often, it could negatively impact your score. But the good news is that FICO attempts to distinguish between a request for a single loan and a request for many new credit lines. As long as you rate-shop in a concentrated period of time, you should be okay.

If you really want to avoid inquiry overload, do your homework before applying for a loan. Private lenders typically list online the range of rates they offer, as well as general eligibility criteria. Researching that info will give you a good idea of whether you’ll qualify before you formally apply.

Also, be sure ask lenders if they can tell you the interest rate you would receive without doing a “hard” credit pull, which might affect your score. You can’t get a loan without an eventual inquiry, but this service allows you to compare interest rates worry-free before applying for a loan.

6. Will refinancing student loans help my credit?

Refinancing student loans at a lower interest rate can have an indirect positive impact on your credit. For example, refinancing may lower your monthly payments, making it less likely you’ll miss or be late with a payment.

And if you refinance federal loans with a private lender (in effect, turn your federal loans into a private loan), rest assured that credit bureaus don’t view these two types of loans any differently.

7. Will paying off student loans too quickly damage my credit?

Some people reason that because education debt is “good debt,” FICO must view it more favorably than other types of debt. And because credit scores can be improved by having open accounts that are paid on time, they think that paying off a student loan early might actually work against their score. But, while there’s no definitive answer to this question (remember: black box), there are a few things to keep in mind before buying into this belief.

Read Next: Student Loan APR Vs. Interest Rate – 5 Essential FAQs

First, FICO doesn’t see your student loan debt as being good or bad. In fact, the agency doesn’t distinguish it from any other type of installment debt, such as mortgage or auto loan debt. Incidentally, while installment debt is different from revolving debt (like credit card debt), it’s generally better to have positive track records with both of types of loans .

Second, it’s true that FICO likes to see how you manage your debt. So, if you have an open account in good standing, that could help your score—but the impact would likely be small. And closing any account satisfactorily is generally a positive thing for your credit, so that could help your score, too.

Bottom line: Instead of worrying about how prematurely paying off your student loan will impact your credit score, consider the potential trade-offs. For example, how much extra interest are you paying by leaving the account open? Also, a high loan balance may make it harder to qualify for new loans—something to think about when it comes time to buy a home.

Take Care of Your Credit Score

Credit is a powerful tool that can allow you to do a lot of great things, but if you’re not careful, it can hold you back. For many people, student loans represent their first experience carrying a large debt load, which means mistakes are almost inevitable. The most important thing you can do is learn how to take good care of your credit score—and eventually, it will take care of you, too.

Here at SoFi we want to help you through your student loan journey. We’ve created a student loan help center to give you the resources you need to find the best strategy to pay off your student loans.

Are you paying off your student loans? Learn more about student loan refinancing with SoFi.

Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.
SoFi Lending Corp. or an affiliate is licensed by the Department of Business Oversight under the California Financing Law, license number 6054612. NMLS #1121636. Terms, conditions, and state restrictions apply; see SoFi.com/eligibility.
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.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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