SoFi

Imagine you have four credit cards, each with a $5,000 limit, for a total of $20,000. You have a balance of $2,000 on Credit Card A from vacation travel, $1,000 on Credit Card B from buying new car tires, $2,000 on Credit Card C from last holiday season, and $1,000 on Credit Card D from regular monthly bills. Altogether, you owe $6,000. If we calculate that as a percentage, we have your credit card utilization rate: 30%.

In this guide, we’ll focus on credit utilization, determine how much of your credit you should use, and show how credit card utilization affects your credit score and overall financial standing.

What Is a Credit Utilization Ratio?

Your credit utilization ratio is a fancy way of referring to how much of your credit you’re using. Lenders and credit reporting agencies use it as an indicator of how well someone is managing their finances.

A low credit utilization ratio says you live within your means, use credit cards responsibly, and therefore probably manage the rest of your finances well. A high credit utilization hints that your expenses are outpacing your income, a sign that you’re misusing credit cards, and possibly mismanaging the rest of your finances.

The reality of the situation may be different. Perhaps you have temporary cash flow problems due to a job loss. Or you happen to have a pileup of pricey expenses within a short time, such as medical bills, car repairs, and a destination wedding. It happens. That’s why credit utilization is just one factor that goes into calculating your credit score.

Recommended: Types of Personal Loans

How Do You Calculate Your Credit Card Utilization Rate?

In the example above, we saw that if you have $20,000 of credit available to you, and you owe $6,000, your credit utilization rate is 30%. How did we get there? To find out your credit card utilization rate, simply divide your total credit card balances by your total credit line, like this:

Total Balance / Total Credit Line = Utilization Rate

With the numbers from our example, it looks like this:

6,000 / 20,000 = .3 or 30%

Simple, right? You’ve got this.

What Counts as “Good” Credit Card Utilization?

As it turns out, just because you’ve been approved for a $10,000 credit card doesn’t mean it makes financial sense to charge $10,000 worth of rosé and seltzer — even if you know you can pay it off over a couple of months. In fact, you might be shocked to learn how little of your available credit you’re supposed to use.

The general rule is that you should not exceed a 30% credit card utilization rate. That means that in our example, you would not want to use more than $6,000 of your available $20,000 credit. Even though 30% might seem like a small percentage, keeping below that threshold can ensure that your credit score isn’t being dinged for over-utilization.

How Can You Lower Your Credit Card Utilization Ratio?

You can lower your credit utilization ratio by paying down your credit card balances. Ideally, you should pay off your credit card balances in full every billing cycle to avoid paying interest. When that’s not possible, pay off as much of the bill as you can.

Whatever you do, don’t make a habit of paying only the credit card minimum payment suggested on your bill.

When trying to pay down your credit cards, focus on the one with the highest interest rate. That way, you’ll save the most money on interest. Or you can pay off your cards with a personal loan.

In fact, debt consolidation is one of those most common uses for personal loans. A personal loan calculator can show you how much you could save on interest.

Another way to lower your utilization rate is to increase your available credit. Ask your bank to raise your credit card limit. If they agree, your utilization will quickly drop. Also, keep open any cards you don’t use rather than closing the accounts. They’re serving a valuable purpose by contributing to your credit limit, even if you’ve cut up the actual cards.

As you can tell, credit utilization is a nuanced topic. Learn all the ins and outs in our Guide to Lowering Your Credit Card Utilization.

How Does Credit Card Utilization Affect Your Credit Score?

You may be wondering, How much will lowering my credit utilization affect my credit score? Credit card utilization plays a big role in how companies compute your credit score. In fact, about 30% of your credit score is determined by your credit card utilization rate. That means a high credit card utilization rate can adversely affect your credit score. For a deep dive into the topic, check out How Does Credit Utilization Affect Your Credit Score?

How Do You Monitor Your Credit Card Utilization?

Your credit utilization might seem difficult to keep track of. But we live in the 21st century, so it’s actually quite easy to set up account reminders to alert you when you are approaching that 30% credit card utilization mark.

In addition to watching your credit usage, make your best effort to pay your credit card bills on-time each month. Checking your credit score regularly will also help you keep your financial health in check. Although you don’t want to check your score too often, it’s good to keep tabs to make sure the data being reported is accurate.

The Takeaway

Your credit card utilization ratio is the sum of all your credit card balances divided by the sum of your credit limits. Credit reporting agencies recommend keeping your ratio at 30% or below. Higher ratios can hurt your credit, since credit utilization accounts for 30% of your credit score.

To lower your utilization rate, simply pay down your credit card balances. And think twice before closing a credit card you no longer use. You might also consider consolidating your credit card debt with a personal loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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.

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPL-Q424-057

The main difference between a soft vs. hard credit check is that each hard check can knock a few points off your credit score, whereas soft checks don’t affect your score. Both hard and soft checks pull the same financial data but for different purposes. Hard checks are typically done when you apply for a loan or credit card; soft checks are conducted for most other purposes, such as pre-screening for credit card offers.

It’s important for consumers to understand this difference because too many hard checks — also known as hard pulls and hard inquiries — can significantly lower your credit score. This in turn can hurt your chances of getting the best offers on credit cards and loans. Keep reading to learn more about credit checks and how to prevent unnecessary hard checks of your credit file.

What Is a Soft Credit Inquiry?

A soft inquiry is when a person or company accesses your credit as part of a background check. They will be able to look at:

•   The number and type of all your credit accounts

•   Credit card balances

•   Loan balances

•   Payment history for revolving credit (credit cards and home equity lines of credit)

•   Payment history for installment loans (auto loans, mortgages, student loans, and personal loans)

•   Accounts gone to collections

•   Tax liens and other public records

Soft inquiries are not used during loan or credit card applications, and do not require the consumer’s permission or involvement. Reasons for a soft check can include:

•   Employment pre-screening

•   Rental applications

•   Insurance evaluations

•   Pre-screening for financial offers by mail

•   Loan prequalification

•   Checking your own credit file

•   When you’re shopping personal loan interest rates or credit cards

Soft credit checks do not affect your credit score, no matter how often they take place. Some soft checks appear on your credit report, but not all — you may never find out they took place.

When they are listed, you might see language like “inquiries that do not affect your credit rating,” along with the name of the requester and the date of the inquiry. Only the consumer can see soft inquiries on their report; creditors cannot.

Recommended: Does Applying for Credit Cards Hurt Your Credit Score?

What Is a Hard Credit Inquiry?

A hard credit inquiry typically takes place when you apply for credit, such as loans or credit cards, and give permission for the lender or creditor to pull your credit file. As with a soft credit pull, the lender will look at the financial information listed above.

Each hard pull may lower your credit score — but typically by less than five points, according to FICO® Score. All hard inquiries appear on your credit report. While they stay there for about two years, they stop affecting your credit score after 12 months.

Not all loans require a hard credit inquiry — but consider that a red flag. Some small local lenders may offer short-term, high-interest, unsecured personal loans. Borrowers must show proof of income via a recent paycheck, but no credit check is required. The risks of these “payday loans” are so great that many states have outlawed them.

Avoiding Hard Credit Inquiries

Consumers should carefully consider if they really need new credit before applying for an account that requires a hard credit check.

For example, department stores and some chains like to entice you to apply for their store credit card by offering a generous discount on your purchase as you’re checking out. In that situation, ask yourself if it’s worth a credit score hit (albeit a small one).

Another way to minimize hard inquiries is to ask which type of credit check a company intends to run. If, for example, a cable company usually requires a hard credit inquiry to open an account, you might ask if a hard pull can be avoided. Other situations where there may be some flexibility include:

•   Rental applications

•   Leasing a car

•   New utility accounts

•   Requesting a higher credit limit on an existing account

Disputing Inaccurate Hard Inquiries

A good financial rule of thumb is to review your credit reports every year to check for common credit report errors and signs of identity theft. You can access your credit reports from the three consumer credit bureaus (Equifax, Experian, and TransUnion) for free at AnnualCreditReport.com.

To check for inaccurate hard inquiries, look for a section on your credit report with any of these labels:

•   Credit inquiries

•   Hard inquiries

•   Regular inquiries

•   Requests viewed by others

You can dispute hard inquiries and remove them from your credit reports under certain circumstances: if you didn’t apply for a new credit account, you didn’t give permission for the inquiry, or the inquiry was added by mistake.

That said, under federal law, certain organizations with a “specific, legitimate purpose” can access your credit file without written permission. They include:

•   Government agencies, usually in the context of licensing or benefits applications

•   Collection agencies

•   Insurance companies, when certain restrictions are met

•   Entities that have a court order, as in child support hearings

Even so, if you didn’t give permission for a hard credit pull, it’s worth filing a dispute to request that the credit check be removed from your report.

Consumers may dispute hard inquiries online through AnnualCreditReport.com, or by writing to the individual credit reporting agencies.

Hard Credit Checks and Your Credit Scores

As mentioned, hard inquiries appear on your credit report, and each hard pull may lower your credit score by five points or less. Here we’ll go into a bit more detail.

Why Hard Inquiries Matter

Multiple hard inquiries within a short time frame can do significant damage to your credit score. It could potentially be enough to move you from the Good credit range down to the merely Fair. Someone in a Fair credit range can pay substantially more over a lifetime in interest and fees than someone with a Good score or higher.

How Many Points Will a Hard Inquiry Cost You?

As noted above, each hard pull can lower your credit score by less than five points. One or two hard inquiries per year may not matter, especially if you’re not planning on applying for a loan.

If you’re rate shopping for a particular type of loan, such as a mortgage or auto loan, keep in mind that multiple hard credit checks within a specific period (often several weeks) for the same purpose are usually counted as one inquiry by credit scoring companies. However, this is not the case with hard pulls for credit card applications.

How Long Do Inquiries Stay On Your Credit?

Hard inquiries stay on your credit report for two years. While they’re on your credit report, they are visible to anyone who checks your credit. But their impact on your credit score typically lasts less than 12 months.

Soft inquiries may remain on your credit report for one or two years, but only you can see them.

The Takeaway

Soft credit inquiries do not affect a credit score, while hard credit inquiries may cost you a few points. In both cases, individuals or businesses pull information from your credit reports. Checking your own credit report counts as a soft pull, as do most other situations where the consumer hasn’t given written permission. Hard pulls are typically done only when you’re applying for a loan or new credit account.

Many lenders allow you to “prequalify” for a loan without running a hard credit check. This allows you to shop rates without risking any impact to your credit.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOPL-Q324-025

Broadly speaking, the best way to build credit is actually quite straightforward: Be the kind of borrower you’d want to lend to. While that might sound simple, it isn’t always second nature to know exactly how to go about doing that. For instance, you might know it’s critical to make payments on time, but you might not be aware that it’s important to keep your unused credit cards open.

If you’re setting out on your journey toward building credit, here’s a rundown on how to build credit, with 10 strategies you can stick to.

Strategies for Building Credit

1. Acquire Credit

Perhaps the first crucial step in how to build credit is to acquire credit accounts. For someone who does not have a credit history of their own, getting a co-signer or becoming an authorized user on an established cardholder’s account can help you get started. You might also consider a secured credit card or applying for a credit card designed specifically for students. Or you can look into a credit-builder loan.

In the long run, however, you’ll be in a much stronger position if you can borrow in your name alone. Establishing credit of your own can make it easier to borrow in the future for such things as an auto loan, a personal loan, or even a mortgage.

2. Pay Bills Consistently and On Time

Timely payments are crucial, and making at least the minimum payment each month on a revolving credit line can make a positive impact on your credit score.

That’s because payment history makes a bigger impact on a person’s credit score than anything else. A borrower’s credit score summarizes their health and strength as a borrower, and payment history makes up 35% of that score on a credit rating scale. So the most important rule of credit is this: Don’t miss payments.

Many lenders will actually allow you to customize due dates so they line up with pay dates, and most let you set up automatic payments from a checking or savings account. Take the time to find what works for you to make your payments in a timely fashion.

Recommended: When Are Credit Card Payments Due?

3. Manage Your Credit Utilization Rate

The further away a person is from hitting their credit limit, the healthier their credit score will be, in most circumstances. A borrower’s debt-to-credit ratio, also known as the credit utilization rate, should ideally be no more than 30%. Higher utilization rates can negatively affect a person’s credit score.

Paying revolving credit lines in full each month can have a positive impact on your credit score because doing so essentially lowers your credit utilization rate. Additionally, keeping tabs on your credit utilization rate before continuing to swipe is key to using a credit card wisely.

4. Keep Unused Credit Cards Open

Lenders want to see accounts maintained in good standing for a long time. As such, a credit history looks better when it has a solid number of accounts in good standing that have been open for a while. When debt accounts are closed, that history ends, and eventually closed accounts drop off your credit report entirely.

To keep this from happening, avoid closing old credit cards, even if you’re not using them anymore. You might consider using these accounts to automate a few bills, like car insurance or a monthly subscription account, to avoid account closure due to inactivity.

5. Diversify Your Credit Mix

Having a diverse mix of credit products can also have a positive impact on a person’s credit, accounting for 10% of a credit score calculation.

Opening at least one credit card is a good step for most borrowers. Using a personal loan to finance a large purchase with a relatively low interest rate, and paying off that personal loan on time, can also have a positive impact on a person’s credit. Student loan refinancing can be another way to diversify your credit mix, while potentially lowering your interest rate.

However, while having a mix of credit can help your standing as a borrower, it’s not a good idea to open a line of credit that’s not needed just to increase your mix of credit types. Instead, stick to applying only for credit you actually need and that you’re confident you can afford to pay off.

6. Check Your Credit Report

It’s recommended to check your credit reports from the three major credit bureaus at least once a year. Doing a regular review of your reports is a good way to monitor your overall credit health and understand the impacts of different activities. It’s also important to make sure that everything listed in your credit report is accurate, and to flag any errors or fraudulent activity.

Where Can You Track Your Credit Score?

You can get a free copy of your credit report every 12 months from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Request your copy online by visiting AnnualCreditReport.com. Note that you can also request a copy anytime you experience an adverse action based on your credit report (like being denied for a loan), among other circumstances.

Checking your credit score is even easier. While it’s not included in your credit report, you can get your current score from your credit card company, financial institution, or on a loan statement. Another option is to use a free credit score service or site. If you’re tracking changes to your credit score, it’s helpful to know how often your credit score updates and then check in accordingly.

7. Limit Credit Applications

When making major life changes, like starting a job, getting married, or having children, sometimes multiple lines of credit might be helpful to get through it all. Financial institutions understand that, but they also know that, historically, people who borrow a lot of money at once from multiple sources tend to have more difficulty paying them back. Spreading out credit applications over time whenever possible typically has a lower impact on an overall credit score.

Recommended: What Is the Average Credit Card Limit?

8. Avoid Overspending

Perhaps one of the most effective ways to ensure you keep building your credit in the right direction is to only spend what you can afford to pay off. This will help you more easily maintain a lower credit utilization rate, and it can prevent you from racking up a balance and falling into a debt spiral.

Plus, if you pay off your balance in full each month, as opposed to only making the minimum payment, you can avoid incurring interest charges. This is a perk that’s foundational to what a credit card is.

9. Get Credit For Other Bills You Pay

If you’re early in your credit building journey, it can help to get credit for other payments you’re making on time, such as your rent payment, utility bills, or even streaming services fees. For instance, Experian Boost adds on-time payments in other accounts to your Experian credit report. There are also a plethora of rent-reporting services out there that will report your timely rent payments to the credit bureaus.

10. Pay Off Any Existing Debt

Another important strategy toward building credit is to pay down any debt you may currently have. Especially important when it comes to the time it takes to repair credit, saying goodbye to existing debt allows you to lower your credit utilization rate, which in turn builds your credit score. There are a number of tactics out there for paying off debt, from a debt consolidation loan to a balance transfer credit card.

What Is a “Good” Credit Score?

A “good” credit score is considered within the range of 670 to 739 under the FICO Score, the credit scoring model most commonly used by lenders. “Very good” is considered anywhere from 740 to 799, while “exceptional” is 800 and above.

Keep in mind, however, that these exact credit score ranges can vary a bit from model to model. For instance, in the VantageScore^® range, a score of 661 to 780 is considered “good.” In general though, anything in the upper 600s is generally within the range of a “good” credit score.

How Long Does it Take to Build Your Credit Score?

According to Experian, one of the three major credit bureaus, it generally takes around three to six months of data to generate an initial credit score.

Credit card issuers typically don’t report account activity until the end of the first billing cycle, so it’s worth waiting a month or two before you check in on the status of your score. If you’re anxious to ensure your activity counts, it’s also a good idea to check with your issuer to make sure they report to the credit bureaus.

What Can You Do with “Good” Credit?

The importance of having good credit can’t be overstated. By building credit, you’ll have easier access to borrowing opportunities in the future, whether that’s an auto loan for a new car or a mortgage for a new home. A better credit score also allows you to secure better terms, such as lower interest rates and a higher borrowing capacity.

The Takeaway

As you can see, there are a number of ways to build credit. First and foremost, you’ll want to make sure you’re following the tenets of responsible credit usage, as these are arguably the best ways to build credit. From there, you can consider additional credit building strategies, such as ensuring that your on-time rent and utility payments count.

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

FAQ

How long does it take to build credit?

Once you open your first credit account, it generally takes around three to six months to start building a credit score.

How do I establish credit with no credit history?

There are several ways to establish credit if you have no credit history. Some strategies to explore include becoming an authorized user on a friend or family member’s credit card account, applying for a secured credit card, applying for a retail card, taking out a credit-builder loan, and reporting your on-time rent and utility payments to the credit bureaus.

How can I improve my credit as quickly as possible?

Though it takes time to repair or build credit, there are some steps you can take. For starters, work on paying down credit cards with high balances. And be sure to pay your bills on time, every time. If you’re having trouble keeping track of due dates, consider setting up autopay or calendar reminders for yourself.

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 .

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOCC-Q324-001

The credit limit on a credit card is the maximum amount you can spend before needing to repay it. A high credit card spending limit can provide spending power to people who can pay off their debt on time and not incur too much in the way of interest charges and fees. However, for people who use a high credit card spending limit as permission to overspend, there can be problems.

You can request a credit limit increase, but credit card issuers sometimes automatically increase the credit limit of those who have shown they can 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. However, 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, and debt-to-income ratio. However, every credit card company differs in which factors 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.

How much is typical? The current credit card limit for the average American is almost $30,000. However, it’s worth noting, it doesn’t mean you should spend the full amount of your limit.

In fact, you may want to spend no more than 30% of your limit to maintain your financial wellness and to help build your credit score. In fact, many financial experts suggest a credit utilization of 10%. That would mean that if, say, your credit limit was $30,000, you would only carry a balance of $3,000.

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, due to 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 (below 30% or closer to 10% is best).

•   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, as mentioned above.

•   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 several points (say, between five and 10) 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.

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.

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

FAQ

What’s the average credit card limit?

Currently, the average credit card limit is close to $30,000.

Can a spending limit be too high?

Depending on your financial situation, a spending limit could be too high. If that high limit encourages you to overspend and carry a high level of debt at a high interest rate, it could be problematic.

Is it bad to use 50% of your credit limit?

Financial experts recommend that you use no more than 30% of your credit limit, preferably close to 10%. Going higher than that can negatively impact your credit score and your financial health.

Photo credit: iStock/mixetto

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 .

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

SOCC-Q224-1917333-V1

One factor lenders look at during loan processing is the applicant’s credit score. It’s a good idea to review your own credit reports before applying for a loan to see if there are any errors that can be corrected and possibly increase your credit score, if needed.

If your credit score is not as high as you’d like it to be, it may seem counterintuitive to consider taking on debt to increase it. But it’s a method that has some merit. Making timely payments on a personal loan may have a positive effect on a person’s credit score. Let’s take a look at what factors go into calculating a credit score and how taking out a personal loan can affect it.

Do Personal Loans Help Build Credit?

If a borrower makes on-time, regular payments on a personal loan — or any loan, for that matter — that information will typically be reflected in their credit history and can be one way to build credit. It’s a good idea to ask the lender if they report payment history to the three major credit bureaus: Experian, Equifax, and TransUnion. If the lender doesn’t report the information, it won’t affect the borrower’s credit positively or negatively.


💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.

When Does a Personal Loan Help You Build Credit?

Someone who doesn’t have much of a credit history or wants to improve their credit score because they understand the importance of good credit might wonder if a personal loan will build credit. It certainly can be one method to do so, but only if handled responsibly. A personal loan to build credit can be an effective tool if the payments are made regularly and on time.

The terms “credit” and “credit score,” while closely related, are not the same. Generally, when the term “credit” is used, it’s referring to a credit report, which is a summary of a person’s financial history. The information contained in a credit report is what affects your credit score. So, while the two are different, they’re used together in lending and other credit matters.

To find financial areas needing improvement, you can review your credit report for individual elements that figure into the calculation of your credit score. Credit score updates can happen every 30 to 45 days, depending on when lenders report payment information to the credit bureaus, and small fluctuations are normal.

Recommended: 11 Types of Personal Loans

Your Payment History

The way you handle debt is the most important factor in determining your credit score. It accounts for 35% of a person’s FICO® Score. How you’ve repaid — or not repaid — debt in the past is considered a good indicator of how likely you are to repay future debt and is something lenders look at closely.

Missing payments or late payments on a personal loan might hurt your credit score.

Your Credit Utilization Ratio

Second only to payment history, having a large debt-to-credit ratio, also called your credit utilization ratio, can damage your credit score. It accounts for 30% of the total FICO Score and takes into account both revolving debt (e.g., credit cards) and installment debt (e.g., personal loans).

This ratio is calculated by dividing how much you currently owe 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 each billing period, your utilization ratio would be 90%.

The Age of Your Credit History

Since the age of your credit history is a factor in your credit score, the ideal situation is to start building credit early. That’s not always feasible, though. If you don’t have much of a credit history yet, a personal loan to build credit can be useful.

As long as the loan’s payment history is positive, the longer a loan is listed on your credit report, the more likely it is to have a positive effect on your credit score.

Adding Different Types of Credit

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

Having both revolving debt, like credit cards or lines of credit, as well as installment debt, such as a personal loan, can have a positive effect on your credit score if you’re making regular, on-time payments on the debts.

If you currently have only credit cards, adding a personal loan to your credit mix can go a long way in establishing multiple types of credit and potentially boosting your credit score.

Recommended: Personal Lines of Credit vs Credit Cards

When Doesn’t a Personal Loan Help You Build Credit?

We’ve covered some of the ways a personal loan can help build credit, but there are situations in which a personal loan might have a negative effect on your credit.

Late Payments

Making late payments on any type of debt, including a personal loan intended to build credit, will likely have the opposite effect. Lenders place a great deal of importance on a person’s payment history. If a lender sees a lot of late or missed payments on your credit report, they are probably more likely to see you as a credit risk.

Short-Term Loan

Short-term loans can be predatory loans. They are meant to help someone make ends meet until their next paycheck, but they can be next to impossible to actually pay off because of the extraordinarily high interest rates typically charged.

Lenders of these types of loans may not report payments to the credit bureaus, essentially negating any effect your responsible repayment might have. If you’re thinking of taking out a personal loan to improve your credit score, a short-term loan is probably not the best option.


💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

The Takeaway

Personal loans have many direct benefits, such as access to cash, predictable payments, and consolidating high-interest debts. But can a personal loan help you build credit? Possibly. A loan’s secondary impact on your credit score can be meaningful for your borrowing future. Making your personal loan payments on time may help you improve your credit score and your future borrowing options.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

Do personal loans raise credit scores?

If repaid on time with regular payments, a personal loan is one financial tool that might have a positive effect on a person’s credit score. There are a variety of factors that go into the calculation of a credit score, though, and it’s wise to pay attention to all of them.

How long does it take to build credit with a personal loan?

Building credit means building a history, which doesn’t happen overnight. It might take about six months to see results from diligently making on-time personal loan payments.

Is taking out a personal loan bad for credit?

Taking on new debt can have a temporary negative effect on your credit score. But over time, as long as you make regular, on-time payments, a personal loan has the potential to help your overall creditworthiness.

Which types of personal loans typically help build credit?

There are many different types of personal loans you can use to build up your credit. If you have no credit history, you may want to explore a credit builder loan or secured credit card. Both can help you establish a positive credit profile. But keep in mind, the type of loan you take out is not as important as how you manage the debt.

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.

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 .

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

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.

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.

SOPL-Q224-1839842-V1