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You want to flip a house, but you don’t have enough money for a down payment — and your credit isn’t where it needs to be for a personal loan. Or maybe you’re a small business owner who wants to own a piece of commercial real estate. People who are investing in real estate beyond their primary residence may consider a hard money loan as an option, especially if a traditional mortgage isn’t.

A hard money loan uses the property as collateral. In terms of personal loans, explained, hard money loans tend to lie squarely in the real estate investment and improvement category. They are not offered by a bank, but by either a private company or an individual. A hard money loan may make sense on paper, but because it typically has a shorter term than other types of loans and interest rates can be high, paying back the loan can be challenging. Defaulting on a hard money loan could mean losing the property.

What Is a Hard Money Personal Loan?

A hard money personal loan is a type of personal loan that uses collateral. While a mortgage is also a type of loan that uses property as collateral, a hard money loan is very different.

First of all, a hard money loan doesn’t come from a bank. It comes from a private lender, which may be a company or an individual. The loan will likely have higher interest rates and a shorter payback period than a traditional mortgage.

It can also be a much shorter process to be approved for a hard money loan. While a mortgage may take weeks for approval, it’s not atypical to have cash in hand within a few days of a hard money loan application.

A hard money loan also may be more lenient in terms of credit scores or assets than a traditional loan. This can be beneficial for people who are wanting to flip a house or buy an additional piece of property, who may not have enough assets on paper to be approved for a traditional mortgage, or who need a larger down payment than they have.

How Do Hard Money Personal Loans Work?

Hard money personal loans are often advertised to — and used as a tool for — house flippers, but other people may pursue a hard money personal loan as well.

Let’s say someone wants to buy a house to flip, or a piece of land to use as a rental property. They may still be building their credit, or they may not have enough money for a down payment. They may have been turned down for a mortgage, or they may not want to apply for a mortgage, knowing that it’s a time-intensive process and their finances might not be as strong on paper as they know the bank would like.

In this case, the person might turn to a hard money personal loan. Individuals or private companies may specialize in offering hard money loans, and terms and conditions may vary — one to three years is common, compared to 20 or more years for a mortgage. But the one constant: If you can’t pay back the loan, then you lose the collateral, which would be the property.

Other things to be aware of regarding a hard money personal loan: Interest rates may be high and the loan term is much shorter than a mortgage. This comes with a fair amount of risk.

Pros and Cons of Hard Money Personal Loans

As with any personal loan, it’s important to consider the pros and cons of the loan. It can also be a good idea to consider what-ifs, and how you might pay back the money if the original plan doesn’t work. Here, some pros and cons to think about before applying for a hard money personal loan.

Pros of a hard money personal loan	Cons of a hard money personal loan
Receive money fast	Short loan payback period
Flexibility in terms of credit score and overall financial picture	High interest rates
Can use hard money for whatever you need the money for	Possibility of losing property if you cannot fulfill the terms of the loan

Personal Loans Versus Hard Money Loans

The primary difference between an unsecured personal loan and a hard money loan is that a hard money loan is secured. Both are personal loans, but using collateral for a personal loan means the loan is secured.

Collateral can be anything of value. But in the case of a hard money loan, it’s in the form of property. A personal loan typically does not require collateral. If you were unable to pay back a personal loan, the lender could not take away your house, for example. Both types of personal loans have specific terms and conditions, and both can provide cash relatively quickly. However, many personal loans are backed by a bank.

Hard money loans	Personal loans
Backed by a private individual or company	Backed by a bank
Credit checks and financial picture play a limited role in approval	Credit check plays a large role in approval
Provides cash	Provides cash

Is a Hard Money Personal Loan Right For You?

Hard money personal loans may be an option for certain financial needs. But, as with any personal loan, it’s important to weigh the pros and cons, and consider what-ifs. Questions to ask may include:

•   What other avenues can I follow to raise the money I need?

•   What happens if I don’t pursue this loan?

•   If I do get this loan and plan to do a specific thing with it, what happens if that specific thing doesn’t happen the way I anticipated?

•   Can I afford this loan, including interest?

•   Could I afford this loan if my financial circumstances changed?

These questions can help you assess worst-case scenarios. You also may want to ask your potential lender any questions you have as well.

Hard Money Personal Loan Alternatives

There are potential alternatives to hard money personal loans. Some may require collateral, and others, like a personal loan, may not. Each comes with pros and cons. Your financial situation may also determine which loans you might be eligible for. If you’re building your credit, you may not have access to certain loans.

Credit Cards

If you’re purchasing land or property, you likely need cash. But for other purchases, using a credit card could be an option. If you don’t need a lump sum of money, using the line of credit that a credit card offers may work well for making periodic purchases.

However, credit cards may have high, variable interest rates. Plus, the more of your available credit you use, the higher your credit utilization ratio, which could impact your credit score.

Recommended: What Is A Personal Line of Credit & How Do You Get One?

Personal Loans

Can you buy land with a personal loan? You could. Generally, once you’re approved for a personal loan, you receive money in your account which you can use for whatever you like. Some people use personal loans to pay for renovations or other home improvement projects.

But it could be challenging to get mortgage approval if you were planning on using a personal loan for a down payment, for example. A personal loan may affect mortgage eligibility.

Recommended: Do Personal Loans Affect Getting a Mortgage?

HELOC

A home equity line of credit (HELOC) is a type of revolving debt. For example, if you apply for a HELOC and are approved for $10,000, you can draw up to $10,000. Once that money is paid back, you can draw from it again for the set period of time defined in the terms of the loan.

A HELOC is a popular option for people who are doing home improvement projects. They may not need a lump sum of cash but may have ongoing expenses. Generally, interest rates on a HELOC are variable, not fixed.

Since a HELOC is a loan secured by the borrower’s home, there is a risk of losing the home if the loan is not repaid.

Recommended: How Do Home Equity Lines of Credit Work?

The Takeaway

For some people, hard money personal loans can allow them to realize their real estate goals. But hard money loans typically have high-interest rates and short payback periods, which can make them risky. It can be a good idea to carefully weigh the pros and cons of a hard money loan.

A SoFi Personal Loan may be an alternative to consider. Since unsecured personal loans from SoFi do not require collateral, they could be a good option for those just entering the real estate market. With no fees required, fixed interest rates, and a variety of terms available, there may be a SoFi personal loan to fit your financial needs.

Check your rate on a personal loan from SoFi

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Photo credit: iStock/JLco – Julia Amaral

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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If you’re in a bind and there aren’t many other options available to you, it is possible to get a personal loan for paying rent. This is, of course, if you can get approved for a rental assistance loan with your credit and income.

Before you’d get a loan for rent, you may want to evaluate the costs involved and the pros and cons. Read on to learn more about getting a loan for rent payment.

What Types of Loans Can You Use for Rent Payments?

There are a several different personal loan types that you can obtain for paying rent. These include secured and unsecured personal loans for rent assistance, as well as payday loans and cash advances.

Secured Personal Loans

Secured loans use property as collateral. If the payments on the loan are not made, the lender can take the collateral. Some types of collateral that may be used include cash savings, stocks, a car, a boat, a home, jewelry, fine art, and future paychecks.

Securing a loan with collateral may result in a lower rate, but all conditions are dependent on what the lender is willing to take and what terms they’re willing to offer on a personal loan.

Unsecured Personal Loans

Unsecured personal loans do not secure the loan using collateral. Since the lender has fewer options for recovering the funds lent, these types of loans often come with higher rates and shorter terms.

Payday Loans or Cash Advances

A payday loan, or cash advance loan, is a loan made for a short amount of time for a fee. These fees are usually expensive. Additionally, interest rates are usually steep. Every other option should be explored before you consider emergency loans for rent.

Recommended: How Do Payday Loans Work?

Reasons Why You May Need to Use Loans for Rent

Using a personal loan for rent shouldn’t be done as a matter of course, but you may come across certain scenarios where it may make sense, such as when:

•  You have a short-term financial setback.

•  You’ll soon have the funds to pay the loan back.

•  You have a good to excellent credit score.

•  You can afford to make the monthly payments.

•  Your only other option is a payday loan.

Keep in mind that while there’s a lot you can use a personal loan for, taking one out still involves assuming debt. If you’re not confident you can repay a loan for rent, then it’s worth considering if you have any other options available to cover your rental costs for the month.

What Happens If You Do Not Pay Your Rent?

If you do not pay your rent, your landlord can start eviction proceedings against you. Laws vary from state to state and city to city, but it’s important to pay your rent on time.

If you know you’re going to have trouble paying rent, dig out your lease agreement and find out if you have a grace period, what the late fees are going to be, and who to contact if you need to pay late. It’s possible your landlord may offer grace and delay eviction proceedings if they’re aware of your situation.

Is It a Good Idea to Use Personal Loans for Rent Payments?

Generally, experts advise against using a personal loan for paying rent. Ideally, you should have an emergency fund that can cover these essential costs if something unexpected arises.

However, if you’ve decided this is your best course of action, there are some positive aspects to obtaining loans for rent over other potential options. Of course, there are downsides to take into account as well.

Recommended: How to Start an Emergency Fund

Pros of Using Loans for Rent Payments

Personal loans are known for their flexibility and versatility. Here are some of the upsides of turning to a personal loan for paying rent.

Potentially Competitive Loan Terms

A personal loan can come with competitive terms. If you’ve kept your credit in good shape, you may be able to qualify for a low-interest rate with low fees and a reasonable repayment term. Your credit score doesn’t have to be perfect to be approved for a personal loan, but a score higher than 670 may increase your personal loan approval chances.

Recommended: How to Get Approved for a Personal Loan 

Accessibility

Personal loans are known for being very flexible. Borrowers can use them for a wide variety of purposes. For instance, you can use a personal loan for debt consolidation or to cover home renovations, an upcoming vacation, or even rent, among a number of other things. Plus, personal loans offer quick access to funds — sometimes even the same day you apply.

Possible Improvements to Credit Score

If you pay back your loan on time, having a personal loan could improve your credit score. It could also boost your credit mix, another factor that impacts your credit score.

Affordability

The interest rate on a personal loan is usually more affordable than paying interest on a credit card. Your landlord may not even be able to take a credit card payment.

Cons of Using Loans for Rent Payments

Using a personal loan to pay rent generally isn’t recommended unless it’s a last resort. There are a number of negatives you’ll encounter.

Additional Fees

Personal loans aren’t free. You may have to pay an upfront fee to take out the loan, not to mention late fees if you miss a payment or even prepayment penalties if you pay in advance.

Possible Harm to Credit Score

Your credit score will drop if you miss a payment on your loan. A lower credit score will decrease your ability to qualify for future loans on things like auto loans and mortgages.

Interest Rates

If you’re having trouble making your rent payment, other areas of your financial life may have taken a hit. This could mean the interest rate you’re given for a personal loan will be less than ideal. Even if you’ve been able to maintain great credit, you’ll still need to pay interest on a loan for rent.

Increased Debt

Personal loans add debt to your bottom line. You’ll pay more over time by financing your rent payment into a loan. If you’re experiencing financial woes, adding a loan payment on top of what you’re going through may not be a good option.

More Personal Loan Tips

It’s possible to obtain a personal loan for a wide range of possibilities, including paying rent. However, it’s important to weigh the pros and cons of getting a loan for rent before you do so. You’ll owe fees and interest, and you could harm your credit score if you’re not timely about repayment. But if it’s your last resort, a loan for rent is an available option.

If you do decide to get a personal loan — whether for covering rent or another purpose, such as debt consolidation — it’s important to shop around to find competitive offers. SoFi personal loans, for instance, have no fees required and low interest rates.

To learn more and find your rate, take a look at the options for a personal loan today.

FAQs

Are you able to use loans for rent payments?

Yes, you can use loans for rent payments. You may want to examine all your options before you do, though. Personal loans carry fees and interest, and if you miss payments, you can drag down your credit score.

Is it hard to get a loan for rent payments?

It can be hard to get a loan if you have no credit history or a low income. A lender will analyze your credit score, history, and income to determine what amount you can afford to borrow and on what terms.

What type of loan is good for rent payments?

Personal loans are a very flexible means to pay for a number of things, including rent. Payday loans or cash advance loans are very expensive ways to make rent payments, and generally should be avoided.

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Photo credit: iStock/nortonrsx

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.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

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There are many different types of loans. And when you need money quickly, it can be challenging to assess the pros and cons of different options. It can also be challenging to assess which loans are right for you if you’re still building credit.

Many loans require a credit check, and your credit score may affect the interest rate and terms you are able to qualify for when borrowing a loan. But what if you have no credit or bad credit? There may be other loans available outside of personal loans from banks. Income-based loans, which evaluate your income as a primary deciding factor, may be an option to consider. These loans could give you the cash you need but may have considerations. Here is what to know about loans based on income.

Recommended: 11 Types of Personal Loans & Their Differences

How Does a Loan Based on Income Work?

Personal loans can be used to pay for nearly any expense. In addition to the flexibility for use of funds, other advantages of personal loans include convenience, competitive rates, and quick turnaround times. Though lenders often evaluate an applicant’s credit history in order to make lending decisions.

Loans based on income are also called income-based loans. Instead of focusing on an applicant’s credit score and history, like many personal loan applications, these loans may factor your income into account. While “income-based loans” and “loans based on income” are terms you may see when researching personal loans, these are primarily marketing terms. The companies who use these may be using income as a method of evaluating loan applications, making them an option for borrowers looking for no credit check loans.

A loan based on income depends upon the terms of the loan. Often, the lender may ask for proof of income, which may be a W-2 or paystub. You’ll need to share personal information on the loan application, such as your address and social security number. But unlike a traditional personal loan, the evaluation may not include a credit check.

Because the lender isn’t considering credit, the terms of the loan may be different from a traditional personal loan from the bank. For example, the loan may have a very high interest rate or require collateral. Collateral is when you, as a borrower, put up something tangible to back the loan in case you were unable to pay back the loan. This might be something like your car or even your house.

Whether a loan requires collateral determines whether it is a secured or unsecured loan. Both options may be part of an income-based personal loan.

Recommended: Using Collateral on a Personal Loan

Secured Loan

A secured loan is a loan that requires the borrower to put up collateral. These loans can take several forms:

Pawn loan. A pawn shop loan is where you put an item of value up as collateral, such as jewelry or electronics, in exchange for the loan. In addition to collateral, you’ll also have to pay the loan back with interest. If you are unable to do so, the pawn shop will then own the collateral and may sell it. Pawn loans can also be an option for those looking for no bank account loans.

Title loan. If you own your vehicle, you may be able to take out a loan for the valued amount of your car. In a title loan, you physically keep possession of your car, but the lender can hold the title of your vehicle. Interest rates for this type of loan can be very high — up to an APR equivalent of 300% — and can be risky. After all, if your income depends on your ability to drive to work, losing ownership of your car may mean that your ability to work is in jeopardy, too.

Home equity loan. If you own your home, you can borrow against the value of your home’s equity through different types of loans, including cash-out refinance, a home equity line of credit (HELOC) or a fixed-rate home equity loan. These types of loans can require a relatively lengthy approval process, and may not be appropriate if you need cash quickly, or if you need a relatively small loan.

💡 Learn more about home equity lines of credit

Unsecured loan?

An unsecured loan does not require collateral. For this reason, this type of loan can feel “riskier” to the lender. If you do not pay back the loan, the process to get back their money will take a long time, involve the legal system, and may be fruitless if you declare bankruptcy.

That’s why lenders may require a more extensive application, including performing a credit check on the potential borrower. If you, as a borrower, know that your credit history is limited or you are still building your credit, you may have fewer personal loan options, especially when it comes to unsecured loans.

Still, there may be some available. Knowing the pros and cons, reading the fine print, and having a clear plan for how to pay back the loan can be important in assessing which one is the right one for you.

Payday Loans

One common type of loan that might be accessible for people with no or bad credit is a payday loan. This is usually a short-term, high-cost loan that is due on your next payday. Typically, payday loans are relatively small (generally under $500) and some states may have a limit as to how much people can borrow.

Payday loans are, like their name, due on your next payday or when you next get income. A payday loan typically has a relatively high-interest rate or fees as well. To ensure your loan is paid back, the lender may ask for a postdated check or money order. One of the problems with payday loans is that they can lead to a cycle of borrowing. While you have cash in hand, how will you make sure you can pay back the payday loan and cover expenses?

Recommended: Payday Loans, Explained – How Do They Work?

Alternatives to Loans Based on Income

If you need money quickly, you may have more options available. These could include:

Using a credit card or credit line. If you have access to credit, utilizing a credit card or credit line could help you through a rough financial patch. But because interest rates can be high, having a plan to pay back what you borrowed or taking advantage of a card with a low APR could be an option to consider.

Borrowing from friends or family. Sometimes, a loan from a friend or family member can be more flexible than borrowing from a lender. It can be a good idea to consider drafting an agreement, even if it’s relatively informal, regarding expectations, any interest agreements, and other conditions.

Selling things. Selling things you may not need may help you raise cash quickly. Using local online marketplaces can be a quick way to unload things you’re not using and raise money.

Starting a side hustle. While it can take time to onboard onto a new job, applying for part-time jobs could be a potential long-term strategy to access more money. In the short-term, informal jobs such as babysitting, tutoring, or other work could help you raise the cash you need.

Recommended: Family Loans: Borrowing From & Lending to Family

The Takeaway

Finding yourself in a financial lurch can be scary. But taking the time to weigh pros and cons of options may be helpful in choosing a sustainable path forward. Understanding the benefits and risks of loans based on income can help you assess whether this type of loan makes sense for your current financial circumstances.

SoFi offers personal loans with competitive interest rates for qualifying borrowers. Some loans may be eligible for same-day funding.

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Photo credit: iStock/Khosrork

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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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Paying down debt can be an important financial priority, but should you use your savings in order to do so? While it can be tempting to throw your full efforts into paying off debt, maintaining a healthy savings account for emergencies and saving for retirement are also important financial goals.

Continue reading for more information on why it may not always make sense to use savings to pay off debt and ideas and strategies to help you expedite your debt repayment without sacrificing your savings account.

The Case Against Using Savings to Pay Off Debt

Emptying your savings account to pay off debt could cause you to rely on credit cards to cover expenses, which has the potential to create a cycle of debt. Think of it this way — it can be much harder to get yourself out of debt if you keep using credit cards to cover unexpected costs.

Consider creating a plan to pay off high interest debt while maintaining or building your emergency fund. This way, you’ll be better prepared to deal with unexpected expenses — like a trip to the emergency room.

How to Start Paying Off Debt Without Dipping Into Your Savings

First off, if you do not have an established emergency fund, consider crafting a budget that will allow you to build one while you simultaneously focus on paying down debt. The exact size of your emergency fund will depend on your personal expenses and income. A general rule of thumb suggests saving between three and six months worth of living expenses in an emergency savings account. Having this available to you can help you avoid taking on additional debt if you encounter unforeseen expenses.

Make a Budget

Now’s the time to update or make a budget from scratch. Understanding your spending vs. income is essential to help you pay off your debt and avoid going into further debt. Review all of your expenses and sources of income and figure out how to allocate your income across debt payments, while still allowing you to save for your future.

Establish a Debt Payoff Strategy

Review each of your debts. Make note of the amount owed and interest rates. This is important to create a full picture for how much you owe. Then, pick a debt pay-off strategy that will work for you. Popular debt payoff strategies include:

•   The Snowball Method. For this method, list debts from smallest balance to largest — ignoring the interest rates. While making minimum payments on all debts, all extra payments should go toward the smallest debt. As the debts are paid off, move to the next largest debt until all debts are paid off.

•   The Avalanche Method. Similarly to the snowball method, this debt payoff strategy focuses on paying off debts with high-interest rates first. By focusing extra payments on the highest interest rate debts, this strategy helps minimize the amount of interest you pay, which might save you money in the long term.

•   The Fireball Method. This strategy combines both the Avalanche and Snowball methods. Individuals group their debts into good or bad categories. Good debt is considered debts that help build net worth and generally have an interest rate of 7% or less. While making the minimum payments on all accounts, the Fireball focuses on paying the highest interest loan with the smallest balance first.

Different people may prefer one strategy over another, the key is to select something that works best with your debts, income, and financial personality.

Recommended: Explaining the Snowball Method of Paying Down Debt

Consider Debt Consolidation

If you have debt with a variety of lenders, one option is to consider consolidating your debt with a personal loan. Instead of making multiple payments across lenders you’ll instead have just one payment for your personal loan. One common use for personal loans include consolidating credit card debt. Because credit card debt generally has a high interest rate, consolidating it into a lower-interest personal loan can potentially lower the amount of money owed in interest during debt-payoff.

There are a couple different types of personal loans. For example personal loans can be secured or unsecured and may have either a fixed or variable interest rate. To find the best personal loan for you, review the options available at a few different lenders.

Review the application requirements with your chosen lender. Having the required documentation ready can streamline the application process and hopefully, get your personal loan approved. During the application process lenders evaluate factors including your income and credit history, among other considerations, to make their lending decisions.

How to Reduce Spending to Pay Off Debt Quicker

Reducing your spending can make more room in your budget for debt payments. Making overpayments can help speed up debt payoff, but it can be challenging to amend your spending habits. To lower your spending, take an honest look at your current expenses and spending habits. Review your budget and credit card statements to see where your money is going.

Think seriously about your needs vs. your wants. Start making spending cuts in the wants category, for example reducing the amount of takeout you order, limiting streaming services, or other indulgences.

For less luxurious expenses like internet or your cell phone bill, call your service provider and see if they are willing to negotiate with you or evaluate if you are able to switch to a less expensive plan.

If you’ve already got a tight budget, the alternative is to increase your revenue stream. Consider a side hustle to boost your income and funnel that additional money toward debt payments. You may even be able to find a side gig that allows you to make money from home.

Paying Off Debt the Smart Way

It can be tempting to throw your savings at debt to avoid racking up expensive interest charges. But draining your savings account — or failing to save at all — in favor of debt payoff might not be a smart strategy. With little or no savings, you’ll be less prepared for any emergency expenses in the future, which could lead to even more debt. Consider building your savings while paying off debt by creating a budget, cutting your expenses or boosting your income, and finding (and sticking to) a debt repayment strategy.

One option worth considering is using a personal loan to consolidate your debt. Using a personal loan to pay off debt may sound counter-intuitive at first, by securing a personal loan with a more competitive interest rate than your existing debts, you could lower the amount you spend in interest. To see how using a personal loan to consolidate your debt might benefit you, take a look at SoFi’s personal loan calculator.

If you are looking at borrowing a personal loan, consider SoFi.

SoFi offers competitive interest rates and some borrowers may qualify for same-day funding.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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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The credit limit on a credit card is the maximum amount you can spend before needing to repay it. You can request a credit limit increase, but credit card issuers sometimes automatically increase the credit limit of those who have improved their credit scores or who have shown to manage credit well. But is a higher spending limit a good thing? It may not be for everyone’s financial situation. Here’s how to know if your credit card spending limit is too high.

How Does My Credit Card Spending Limit Work?

Credit cards are a form of revolving debt, which means that there is an upper spending limit, but the credit can be repaid and used again. It revolves between being available to use, being unavailable because it’s being used, and being available to use again after it’s been repaid.

A credit card issuer typically bases the credit limit on factors such as the applicant’s credit score, income, credit history, debt-to-income ratio, and others. However, every credit card company is different in what it considers and how much emphasis it places on each component.

There may be multiple types of credit limits on the same credit card, e.g., a daily spending limit or cash advance limit.

Why Your Credit Card Issuer Increased Your Spending Limit

Your spending limit isn’t set in stone, though. Even if you haven’t specifically requested a credit limit increase, your credit card issuer may automatically increase the credit limit on your card.

There are various reasons this might happen.

•   Your credit has improved, resulting in a higher credit score.

•   Your income has increased.

•   The credit card issuer wants to retain you as a customer by offering a higher credit limit.

By increasing your credit card spending limit, the credit card issuer may have hopes that you’ll carry a balance on your card.

One stream of revenue for them is interest charges and fees. If you carry a balance, rather than paying your balance in full each month, you’ll be charged interest on the outstanding amount. And if you fail to make at least the minimum payment due or pay the bill late, you’ll likely be charged a late fee.

Both interest charges and fees are then added to the balance due on the next statement, and themselves incur interest. Essentially, you’ll be paying interest on interest.

Pros of a High Credit Card Spending Limit

For some people, and for their financial needs or goals, there may be practical reasons for having a high credit card spending limit.

•   It can be helpful in an emergency situation. Even if you’ve accumulated an emergency fund or rainy day fund, there might be instances when you need more than that. For instance, if your refrigerator suddenly stops working, you’ll probably want to replace it sooner rather than later. Large appliances can cost several thousand dollars to purchase and have installed.

•   Having a high credit limit while using a small percentage of it can lower your credit utilization rate. Your credit utilization rate is the relationship between your spending limit and your balance at any given time. If your limit is $10,000, and your balance is $1,500, your credit utilization is 15%. Generally, the lower your credit utilization rate, the better.

•   If you have a rewards credit card, having a higher spending limit on it could mean reaping greater rewards, whether that’s cash back, miles, or another type of reward. Being financially able to pay the account balance in full each month is key to making the most of this strategy.

Cons of a High Credit Card Spending Limit

As attractive as the benefits might sound, there can be drawbacks to having a high credit card spending limit.

•   You might be tempted to spend because you can, even if you can’t pay your credit card balance in full at the end of the billing period. This will result in purchase interest charges being added to the unpaid balance, and interest will accrue on this new, larger balance. It can become a debt cycle for some people.

•   Having a high credit limit and using a large percentage of it can increase your credit utilization rate. This rate is one of the most important factors in the calculation of your credit score — it accounts for 30% of your FICO® Score, and is considered “extremely influential” to your VantageScore®. It’s generally recommended to keep your credit utilization rate to 30% or less.

•   Requesting an increase in your credit card spending limit could cause your credit score to decrease slightly. The credit card issuer might do a hard credit inquiry into your credit report, which can mean a ding of a few points to your credit score, depending on your overall credit. It’s usually a temporary drop, but if you’re planning to apply for a loan or other type of credit, it could make a difference in the interest rate you’re offered.

What Happens if You Go Over Your Spending Limit

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) put consumer protections against unfair credit card practices into place. One of the stipulations in this Act is that credit card issuers cannot charge an over-the-limit fee unless the card holder opts into an agreement for charges above the credit limit to be paid.

If you choose not to opt in to this agreement, any charges you try to make that exceed your credit card spending limit will be denied.

If you do opt in, the excess charges will be paid, but the credit card issuer may charge a fee for covering the overage amount. Generally, the first-time fee can be up to $25. If you exceed your spending limit a second time within six months, you could be charged up to $35. The fee can’t be larger than the amount you went over your credit limit by, though. So, if you charge a purchase that’s $100, but you only have $90 of available credit, the over-limit fee would be $10.

Before you opt in to an agreement like this, the credit card issuer must tell you what potential fees there might be. They must also provide you with confirmation that you opted in.

If you opted in to an over-the-limit agreement, but no longer want it, you can opt out at any time by contacting your credit card issuer’s customer service department.

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

Taking Control of Credit Card Debt

A higher spending limit can be a good thing if it’s used responsibly. Looking for a credit card that has more favorable rewards or offers perks that your current credit cards don’t have could be a good option for managing your debt.

The SoFi Credit Card may be one to explore. Its cash-back rewards could go toward debt payments, helping you pay down your debt. 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.

If you’re struggling with credit card debt and a higher credit card spending limit is not an option for your financial situation or comfort level, another possible option could be to consolidate high-interest credit card debt with a personal loan.

With a credit card consolidation loan, all your balances are merged into one new loan with just one monthly payment and one interest rate instead of several. This new interest rate could end up being lower than the rates on your current individual credit cards, which could lower your monthly debt payment. Also, a personal loan is installment debt, which means there will be a payment end date. Credit cards are revolving debt with no firm end date.

The Takeaway

A higher credit card spending limit may or may not be a positive thing, depending on your financial situation. You may have requested a credit limit increase or your credit card issuer may have automatically increased your spending limit because of factors such as an improved credit score or increased income, among others. But if the amount of credit you’ve been approved for results in poor financial decision making or increased debt, your credit card spending limit may be too high.

Multiple high-interest credit cards could be consolidated into one new personal loan. A SoFi Personal Loan is a fixed-rate loan with interest rates that may be lower than the rates on your current credit cards.

Transferring multiple balances to a credit card that has more favorable rewards or offers perks that your current credit cards don’t have could be another option for managing your debt.

The SoFi Credit Card may be one to explore. Its cash-back rewards could go toward debt payments, helping you pay down your debt. 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

Learn more about the SoFi Credit Card

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¹See Rewards Details at SoFi.com/card/rewards.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

The SoFi Credit Card is issued by SoFi Bank, N.A. 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.

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

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

SoFi cardholders earn 2% unlimited cash back rewards when redeemed to save, invest, a statement credit, or pay down eligible SoFi debt.

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