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Beyond making purchases more convenient, credit cards can provide a number of additional and valuable layers of protections. For instance, they can help cover you if you are traveling abroad, buying something pricey or if you were to lose your job or otherwise become unable to pay your bills. Some credit card protections, like travel insurance, are perks of the card included in the annual fee. For others, like credit card payment protection, you may have to opt in and pay an additional fee.

Read on to learn more about the types of credit card protection that are available, how they work, and when they may be worth it.

What Is Credit Card Protection?

Credit cards may offer various forms of protection in their perks and benefits. These protections can help protect your purchases and ensure you don’t pay for charges that aren’t yours.

They can also help you in a dispute with a vendor. For example, if you ordered an item that never made it to you and the merchant won’t give you a refund, you could invoke a credit card chargeback with your credit card company.

Perhaps the most common form of protection associated with the term “credit card protection” is credit card payment protection insurance. This is an insurance plan that you can opt into for a monthly fee that would offer protection if something were to happen that prevented you from paying your bills.

Recommended: Charge Cards Advantages and Disadvantages

Types of Credit Card Protection

Read on for more details on the various forms of credit card protection.

Fraud Protection

One basic benefit of a credit card is typically fraud protection, and this can be why people use credit cards over debit cards or cash. If someone were to steal your credit card number or your physical card, fraud protection shields you from being responsible or liable for charges.

Under the Fair Credit Billing Act (FCBA), creditors cannot “take actions that adversely affect the consumer’s credit standing until an investigation is completed.” This means that all credit card companies will launch an investigation if fraud occurs. During this time, you will not be held liable for the charge in question (though make sure to make your credit card minimum payment so you don’t incur late fees or ding to your credit during the investigation).

Some credit card companies may go beyond that and offer even more fraud protection, including $0 liability. (The FCBA caps liability in case of fraud at $50 if the thief presents the card. The liability is $0 if the card is not physically present, as in the case of someone stealing a credit card number and using it online).

While fraud protection can offer peace of mind, it’s also important to be proactive about recognizing fraud. If you lose your credit card, call your issuer to have the card frozen. And always let your issuer know ASAP if you notice a charge that isn’t yours.

Return Protection

Return protection is another form of purchase protection offered by some credit cards. It allows you to return an item for a set period of time defined in your membership agreement. This return window may offer more leeway than that of the merchant you made the purchase from (for example, 90 days instead of 30 days.)

There may be exclusions to what can and can’t be returned. Further, there also may be a cap on the cost of the item being returned, as well as an annual cap per card, though it depends on how your credit card works specifically.

Price Protection

Have you ever bought something, only to see the item go on sale a week later? That’s where credit card price protection comes in. With this perk, you may be able to receive a refund for the difference in price if you purchased the item with your card.

Generally, it’s your responsibility to track price drops. And your issuer may have certain terms, such as limiting the protection to price drops within a set time period. Price protection also may exclude certain types of purchases, such as tickets to sporting events or concerts.

Purchase Protection

Similar to return protection, purchase protection can help protect you if purchases are lost or damaged or if services aren’t rendered or delivered as expected. Generally, you would bring the issue up with the merchant or service provider. But if they don’t initiate a refund, then you can dispute the charge with your credit card company. This process initiates what’s called a credit card chargeback.

There may be limitations and exceptions to purchase protection. It can be a good idea to talk directly with the merchant before reaching out to your credit card company.

Travel Insurance

Travel insurance can be a big reason to put a trip on a credit card. In fact, some card issuers offer insurance as a perk for using the card.

The specifics of credit card travel insurance depend on the card issuer, but it may include insurance for lost luggage or coverage for trip interruption or cancellation. In general, these insurance policies may not be as comprehensive as a standalone policy, but they can provide some peace of mind when planning a trip.

Car Rental Insurance

Car rental insurance is another type of insurance offered as a credit card perk. If you rent a car with the credit card, the card may provide insurance protection in case of damage. Generally, this includes collision/loss damage waiver coverage.

Car rental insurance through your credit card may allow you to forego the (sometimes pricey) insurance options offered by the car rental agency. However, as with any insurance policy, it’s a good idea to read the fine print to know exactly what is and is not covered.

How Credit Card Protection Works

Most protections are part of the overall perks and benefits of the card. But credit card payment protection is a little bit different. It’s generally an opt-in program that offers protection if you are no longer able to pay your credit card bill. The protection offered can be short term, such as for a life event like a change in employment, or long term, extending for 12 to 24 months in the event of a job loss or hospital stay.

Usually, credit card payment protection carries an additional monthly fee. Also note that payment protection doesn’t let you off the hook from paying the bill down the road. Rather, for a set period of time, your credit card issuer would offer a break on making payments or lower your minimum payments due, as well as pause any fees. Your issuer will continue to report your account in good standing during that time.

Tips to Keep Your Credit Card Safe

Protection programs can give you peace of mind. But losing a credit card or dealing with fraudulent activity can be stressful regardless of what protections you have in place. It can also potentially open the door to identity theft, which could potentially harm your credit.

That’s why it’s smart to set up some smart security behaviors. Read on for some tips for how to keep your credit card safe.

Practice Credit Card Protection From Day One

When you’ve applied for a credit card, keep an eye out for the card to arrive in the mail. It should come in between five and 14 days; your issuer may provide a timeline.

If you don’t receive your card within that time period, call your issuer. They will issue you a new one. And as soon as you do get your card, follow the steps to set it up for use.

Keep Your Account Number Private

Don’t write down your credit card account number, expiration date, and CVV. Don’t share this information with anyone else. Also consider whether or not you want to save payment information online. While it can be convenient, it could leave your information vulnerable. If you are using your credit card to make a payment, make sure that you are doing so through an encrypted service.

Keep Your Information Current

Make sure that the email address, mailing address, and telephone number on file with your credit card issuer are up to date. By doing so, you will be aware of any communication between you and your card issuer. Further, this will prevent a new card from being delivered to the wrong address.

Be Careful With Your Receipts

While federal law prohibits how much credit card information is on receipts, this may not be true in other countries. If you’re traveling abroad, it may make sense to be even more mindful about how you dispose of receipts. Don’t leave them lying around.

Secure Your Devices and Networks

Being mindful of how and when you use your credit card online can help you avoid fraud. Using your own network, rather than public wifi, can be one security step. It can also be helpful to check that a website uses encryption for payment and that it’s a secure site.

Protect Yourself Online

When you’re using a credit card for payment, it’s important to be cyber-savvy. Credit card scams to try to obtain your information or your credit card number are not uncommon.

You’ll want to be on the lookout for phishing attempts. If a merchant or bank asks you to email your credit card number, call the merchant directly. Know that banks will never ask for sensitive information over email. Also be on the lookout for requests to “verify” your information via email or text. Again, these may well be scams designed to get your account information.

Additionally, pay attention to any odd links, misspellings (such as Citii for Citi), or emails that include a link. Instead of following the link within the email, consider manually typing in the URL of a website.

Check Your Account Often

It can be good to get in the habit of regularly checking your credit card balance. Doing so a few times a week, instead of just waiting for a statement to come out, can alert you to fraud as soon as it happens. And remember, a fraudster could steal your information even if your physical card has always been in your possession.

Report Lost Cards and Fraudulent Activity Right Away

If you see something odd on your credit card balance, let your card issuer know right away. The same goes if you can’t find your credit card.

Even if you’re 99% sure your card is somewhere in your house or car, it can be a wise idea to contact your card issuer. In some cases, they can freeze your card. This means that you’ll be able to unfreeze it once you’ve found it, without getting a new card and a new card number.

Recommended: When Are Credit Card Payments Due?

What Does Credit Card Payment Protection Cover?

In general, credit card payment protection insurance has restrictions regarding when it applies, and it may require documentation.

Some reasons you may be able to request long-term credit card payment protection may include:

•   Job loss

•   Disability

•   Hospitalization

•   Death of a child, spouse, or domestic partner

•   Leave of absence (for family or child care, or for military duty)

•   Federal or state disaster

Meanwhile, you may be able to get short-term protection for the following reasons:

•   Marriage

•   Divorce

•   Graduation

•   Childbirth

•   Adoption

•   Retirement

•   New job

•   A move to a new residence

Situations that may not qualify for payment protection include incarceration or voluntarily leaving your job, such as to pursue higher education.

Pros and Cons of Payment Protection

Whether payment protection is right for you depends on some variables. The opt-in program usually costs an additional fee. Plus, while paying your full balance each month is ideal, you could potentially pay the credit card minimum payment if you were going through hard times to keep your account in good standing, though your annual percentage rate (APR) would still apply.

In many cases, it may make sense to focus on bringing down your balance so your minimum payment is relatively low. That way, if the worst were to happen, you might still have enough room in your budget to manage minimum payments.

Is Credit Card Payment Protection Worth It?

Weighing the pros and cons of credit card payment can help you assess whether it makes sense for you. If you carry a very high balance and are in the process of paying it down, payment protection may give you peace of mind — especially if you don’t have a good APR for a credit card. But keep in mind that you could potentially switch to minimum payments during a hard time and still maintain your payment history.

To decide if credit card payment protection is right for you, it’s important to read the fine print and assess how these credit card fees would impact your overall financial outlook. Also take into consideration your current financial situation, your savings account balance, and the general stability and security of your job and lifestyle.

Credit Card Protection Scams and How to Avoid Them

As credit cards offer protection, scammers see opportunities — and these can be tailored, beyond just credit card skimming. There are several credit card protection scams that may target card holders, including:

•   Phone scams offering loss protection for a fee. Some scammers have been calling people and telling them they may be liable for charges beyond $50 on their credit card. They then try to get people to buy loss protection and insurance programs. If you get this call, know that credit cards include fraud protection at no additional fee — plus, your liability is limited to $50 by law. Call your credit card company if you have any questions about its fraud protection programs.

•   Scams claiming your account has been compromised. In this case, the scammer will ask you to provide personal details, such as your credit card number, claiming your account has been compromised. Don’t ever give sensitive credit information over text or via email. If someone calls claiming to be your credit card company, call the company directly from the number on the back of the card. Scammers can mask their true phone number and make it appear as if they are legit.

•   Fraudulent text alerts. Scammers also may send text messages asking for your CVV number on a credit card to “fix” a security problem or “verify” or “update” your account. A real credit card company would never ask for this information nor send text messages like this.

•   Fake account protection offers. Any account protection should come directly from your credit card company, not from a third party. If you receive these offers, don’t take them up on it.

The Takeaway

Credit card protection can be one of the great benefits of using a credit card. While some credit card protections are standard, including fraud protection, it can be helpful to consider what protection offers are most important to you before paying for additional services.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

Are there limits to credit card payment protection?

There may be limits on what qualifies for credit card payment protection, and your issuer may need to see proof of hardship. Further, there may be a time limit on how long credit card payment protection is offered.

Is there a time limit on credit card payment protection?

Generally, issuers have a time limit for credit card protection policies. These vary between issuers, but may be as short as several months or as long as two years, depending on the circumstances.

Should I get credit card payment protection insurance?

Credit card protection insurance may incur an additional fee, unlike other protection options offered as part of your overall perks and benefits within your card. That fee can add to your balance. If your credit card balance is at or near $0, credit card payment protection insurance may not be necessary.

Photo credit: iStock/9dreamstudio

SoFi Credit Cards are 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.

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.

SOCC-Q425-009

The concept of a credit card can be dated back to the early and mid-1900s. There were actually a number of early iterations of what is used today as a credit card. Over the decades, these financial tools have evolved, and variations have multiplied.

Read on to learn about the major milestones in the history of credit cards and how this payment method came to be so popular, as well as what the future holds.

Invention of Credit Cards

There were several precursors to the modern version of the credit card. Credit card history can be traced back to 1914, when Western Union rolled out the idea of “Metal Money.” These metal plates were granted to a handful of customers and allowed them to push back payment until a later date.

The next version of credit cards was introduced in 1946, when New York City banker John Biggins introduced the Charg-it card. These charge cards were usable within a two-block radius of Biggins’ bank. Purchases made by customers were forwarded to his bank account, and merchants were reimbursed at a later date.

Recommended: Charge Cards Advantages and Disadvantages

When Were Credit Cards First Used?

Here’s an overview of which types of credit cards were used when, from the first store card to the first international card.

First “Use Now, Pay Later” Cards

The Diners Club Card was the first card that gained widespread use. The idea for the card arose when businessman Frank McNamara misplaced his wallet and couldn’t pay for dinner at a New York City restaurant. The good news is that his wife was there to cover the tab.

In 1950, McNamara returned to the same restaurant with his business partner, Ralph Schneider, where he used a cardboard card to pay the bill. That card was the Diners Club Card, and the dinner became known as the “First Supper.”

First Bank Cards

In 1958, American Express developed its first credit card that was made of cardboard. The next year, the plastic credit card was developed and released.

Also in 1958, Bank of America mailed its credit card to certain segments of the market in California, where it was based. The bank offered a pre-approved limit of $300 to 60,000 customers in Fresno.

Then, in 1966, Bank of America’s BankAmericard became the U.S.’s first general-use credit card, meaning more places would accept credit card payments with it.

First Interbank Cards

In 1966, a cluster of California banks joined together to form the Interbank Card Association (ITC). The ITC soon launched the nation’s second major bank card. Initially called the Interbank card and later the Master Charge, this card was renamed Mastercard in 1979.

First International Cards

The credit card soon went international, with Diners Club laying claim to being the first international credit card. It’s said to have become the first globally accepted charge card in 1953 when businesses in Cuba, Mexico, and Canada began accepting payments from customers with Diners Club cards.

And in 1970, Bank of America rolled its BankAmericard on a global scale, prompting the formation of the International Bankcard Company (IBANCO).

Regulation and Litigation

Over the decades, credit cards have undergone several rounds of regulation. Here’s a look at some of the major regulatory milestones in the history of credit cards:

1970:

•   The Fair Credit Reporting Act was passed to regulate the collection, access, and use of data concerning consumer credit reports.

•   Also this year, the Unsolicited Credit Card Act was introduced. It prohibited credit card issuers from sending credit cards to customers who didn’t request them.

1974:

•   The Fair Credit Billing Act of 1974 was created to protect consumers from unfair credit billing practices. For instance, it stated that consumers have the right to dispute unauthorized charges, charges made due to errors, and charges when goods weren’t delivered and services not rendered.

•   The Equal Credit Opportunity Act (ECOA) was passed as well. This prevented lenders from discriminating against credit card applicants based on gender, race, age, religion, marital status, national origin, and whether you receive benefits from a public assistance program. It also specified that a lender can’t charge higher fees or a higher than average credit card interest rate for any of those reasons.

1977:

•   The Fair Debt Collection Practices Act was introduced to prevent debt collectors from using deceptive, unfair, or abusive practices when collecting debt that is in default and handled by debt collectors. It limited calls from such agencies to between the hours of 8am to 9pm and prohibited contact at an unusual time or place. In addition, it specified that if you’re represented by a debt attorney, the debt collector must stop calling you and reach out to your attorney instead.

2009:

•   The CARD Act boosted consumer protection by “establishing fair and transparent practices related to the extension of credit.” It prohibits credit card issuers from offering credit without first gauging the consumer’s ability to pay. Additionally, it introduced special rules when it comes to extending credit to consumers under the age of 21. The CARD act also limits the amount of upfront fees an issuers can charge during the first year after an account is opened, as well as the instances that issuers can charge penalty fees.

Technological Evolution of Credit Cards

Here are some of the main technological milestones and changes of credit cards throughout their history:

1969: Magnetic Stripe

Credit card networks and banks started rolling out cards with the magnetic stripe, which became widely adopted. While it’s on the verge of being phased out, consumers still use magnetic stripe for payment today.

2004: Contactless Credit Cards

Contactless credit was used for the first time in 2004. They started to become more popular in 2008, when major credit card networks (including Visa, Mastercard, and American Express) started offering their own versions of contactless cards.

2010: Chip Cards

Pin-and-chip technology made its way to America in 2010. This credit card chip technology offers greater security than magnetic cards, which can be copied. These days, the majority of credit cards in America have EMV (which stands for Europay, Mastercard, and Visa) chips.

2011: Mobile Wallets

In 2011, Google introduced the first mobile wallets, and Apple followed in its footsteps in 2012. In 2014, Apple Pay was released, followed by Android and Samsung Pay in 2015. As mobile wallets are stored on your smartphone, they can grant greater security than physical cards, which can more easily be lost or stolen. Plus, smartphones have security features, such as fingerprint recognition and passcodes, which can provide higher levels of security.

How Do Credit Cards Work?

Credit cards are a tangible card that you can use to make purchases. If you’re wondering how credit cards work, they’re a type of revolving loan, which means that you can tap into your line of credit at any given time. You can borrow funds up to your credit limit, which is set when you apply. Your line of credit gets depleted when you make transactions, and it gets replenished when you pay back what you owe.

Here are some more details on how credit cards work:

•  Credit cards have an interest rate, expressed as annual percentage rate (APR). This represents how much interest you pay during an entire year and includes any fees and other charges along with the interest rate. You’ll only pay interest if you have a remaining balance after your payment due date. When you pay the full balance that you owe on your card, your balance is zero, and you will not owe interest.

•  If you pay more than you owe, or if a merchant issues you a refund for an amount larger than your total balance, then you have a negative balance on your credit card.

•  Credit cards may also come with perks, such as rewards points and cash back. Cardholders may also enjoy additional benefits like travel insurance and discounts at select merchants.

•  Credit cards also have built-in security features, such as pin-and-chip technology, fraud monitoring, and a three-digit CVV number on a credit card.

In terms of how to apply for a credit card, you’ll first want to know your credit score, as this will indicate which cards you may be eligible for. You may consider applying for preapproval to determine your odds of getting approved. When you’ve compared your credit card options and decided which one is right for you, then you can apply in an app, online, over the phone, or through the mail.

Credit Cards and Credit Scores

Credit cards can have a major impact on your credit score. For one, your account activity is reported to the three major credit bureaus: Equifax®, Experian®, and TransUnion®.

Making on-time credit card minimum payments can help build your credit, as payment history makes up 35% of your FICO® consumer credit score. On the flipside, making late payments can drag down your score.

You’ll also want to keep an eye on how much of a balance you rack up relative to your total amount of credit available (aka your credit limit). Your credit utilization ratio, which measures how much of your available credit has been used, accounts for 30% of your score. It’s generally recommended to keep your credit utilization below 30% (10% is even better) to avoid adverse effects to your credit score.

Other factors related to how your credit card can impact your score include:

•  The length of your credit history, which makes up 15% of your score

•  Your mix of different credit types, which accounts for 10% of your credit score (having more types is better)

•  Having a longer credit history, meaning accounts open for longer, can help build your score

•  Not applying for too much new credit is also a way to build your credit score. Too many hard credit inquiries related to new lines of credit can make it seem as if you are more of a risk.

Types of Credit Cards

Today, there are a number of different types of credit cards to choose from. Take a look at the different types of credit cards available.

Rewards Cards

Rewards cards feature a way to earn rewards through travel miles, cash back, or points. You usually collect rewards when you make purchases. For example, you may earn one point for every dollar spent and/or a multiple of that for certain types of purchases or ones made at specific retailers.

You usually can redeem the rewards you earn in different ways, such as on travel accommodations, airline tickets, gift cards, merchandise, or as credit toward your balance statement.

Low-Interest Cards

As the name suggests, low-interest cards feature a low APR. Having a card with a low APR can certainly benefit you if you carry a credit card balance or plan to use your card to make a large purchase, as you may be able to save money on interest.

When looking for low-interest credit cards, you usually need to have a strong credit score to qualify.

Credit-Building Cards

If you have a short credit history or less-than-stellar credit score, a credit-building card can help positively impact your credit. As payments made on a secured credit card are reported to the three major credit bureaus, using your card can help build your credit as long as you stay on top of your payments.

While these cards are more accessible than many other credit cards out there, they also tend to have higher interest rates and fees. They may also offer a lower credit card limit.

Secured Credit Cards

If you have a low credit score, you might also look into a secured credit card, in which you put down cash, which becomes your credit card limit. Use these cards responsibly, and you may be able to graduate to a standard credit card.

Recommended: When Are Credit Card Payments Due?

The Future of Credit Cards

As demonstrated in the past few decades, credit card technology is constantly evolving to meet the needs and demands of consumers. The next time you reach your credit card expiration date, you could see an updated product in the mail.

It’s expected that contactless payments, which increased in popularity during the pandemic, will continue to proliferate. In the future, it may even become possible to make payments via voice command tools. Wearable payments, such as paying for goods and services with payment technology that’s embedded in a wristband, ring, or keychain, is another avenue being explored.

Additionally, the security protocols used in credit cards will continue to evolve. It’s anticipated that magnetic stripe cards will soon fall by the wayside and be replaced by biometric cards, which use fingerprints and chip technology to enhance security.

The Takeaway

As you can see from learning the history of credit cards, a lot has changed since the payment method was first introduced. Credit cards remain as popular a payment method as ever, and it’s expected they’ll continue to evolve as technology and consumer needs shift. One thing that probably won’t change is the importance of understanding how credit cards work, what your card agreement’s fine print says, and how to use these cards responsibly.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

Who invented credit cards?

There were several early iterations of credit cards, so it’s difficult to pin down exactly who invented credit cards. The credit may go to businessman Frank McNamara and his business partner Ralph Schneider, who invented the Diners Club Card.

How were credit cards first used?

While the concept of paying by credit can be traced back to ancient civilizations, the first modern day example of paying with a credit card was the Diners Club card, which could be used at restaurants. However, this card had one major difference between modern credit cards: You had to pay off the balance in full each month.

What was the first type of credit card?

The first type of credit card was most likely the Diners Club card, introduced in 1950. It was the first credit card that could be used at multiple establishments.

Photo credit: iStock/DoubleAnti

SoFi Credit Cards are 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.

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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOCC-Q425-008

The minimum wage is the lowest hourly wage under the law that an employer can pay employees. The current minimum wage in the U.S. is $7.25 an hour, and it’s been the same rate since 2009. The question of whether to raise the minimum wage is a matter of great debate.

There are a number of pros and cons of raising the minimum wage. For example, advocates say that increasing the minimum wage could help low-wage hourly workers make ends meet and keep up with inflation. Some proponents also believe that raising the minimum wage could increase consumer spending and strengthen employee retention and morale.

But opponents point to cons of raising the minimum wage, including potentially increasing the cost of living overall, reducing opportunities for inexperienced workers, and triggering more unemployment.

Read on to learn more about the pros and cons of increasing the minimum wage and potential effect it could have on the economy — and your finances.

What Is the Federal Minimum Wage in 2025?

The federal minimum wage in 2025 is $7.25 per hour. The last time the minimum wage increased was on July 24, 2009, when it grew from $6.55 an hour to $7.25. That was part of a three-phase increase enacted by Congress in 2007.

Tipped employees (like waiters) have a different minimum wage called the tipped minimum wage. The current federal tipped minimum wage is $2.13 an hour, as long as the worker’s tips make up the difference between that and the standard minimum wage.

Similar to the differences in the average salary by state, some states have their own minimum wage laws with a higher (or lower) starting wage than the federal minimum. In such states, employers must pay the higher of the two minimum wages.

Here are some minimum wage fast facts:

•   The state with the highest current minimum wage is Washington, where the rate is $16.66 per hour. Washington state’s minimum wage is expected to increase in 2026 (the amount of the increase has not yet been announced). Although it’s not a state, Washington, D.C. currently has the highest minimum wage in the country — $17.95 an hour as of July 1, 2025.

•   There are 67 cities and counties with minimum wages higher than their state’s minimum wages. Of these, the city of Burien, Washington, currently has the highest wage at $21.16 per hour for employees of large employers (those with more than 500 employees).

•   Three states — Georgia, Oklahoma, and Wyoming — have minimum wages that are lower than the federal minimum. But by law, employees in those states must be paid the federal minimum wage.

•   About 21 million US workers make less than $15 per hour, according to the most recent data (from 2023).

•   While the minimum wage has been stagnant since 2009, inflation has not. The spending power of $7.25 in 2009 is equivalent to $10.92 today. This means that $7.25 can buy today about 66% of what it could buy in 2009, which can impact the cost of living.

What Is the Purpose of the Minimum Wage?

The federal minimum wage was created in the late 1930s as part of the recovery effort after the Great Depression. At the time, Congress found that low wages in certain industries were causing one-third of the population of the U.S. to be “ill-nourished, ill-clad, and ill-housed.”

As part of President Franklin D. Roosevelt’s New Deal program, the Fair Labor Standards Act (FSLA) of 1938 officially established the first minimum wage of $0.25 an hour. The FSLA also created the 40-hour work week, banned child labor, and mandated overtime pay.

The minimum wage was gradually increased to $0.40 an hour in 1945. It has been raised 22 times since then, with the last increase taking place in 2009, as noted above.

Recommended: Salary vs. Hourly Pay

The Argument for Raising the Minimum Wage

Increasing the minimum wage could be beneficial for low-wage workers and the labor market, proponents say. These are some of the potential benefits of raising the minimum wage.

Pro: Boosting Consumer Purchasing Power Amidst Inflation

Even without minimum wage increases, inflation has been on a rollercoaster ride over the last several years. At the end of 2019, inflation was 2.3%. By December 2023, it was 3.4%. In August 2025, inflation was 2.9%. That means today, the average American family is likely paying more for the average cost of groceries, among other expenses, than they were six years ago.

The Raise the Wage Act of 2025 was introduced in Congress in April of 2025 to raise the minimum wage to $17 an hour by 2028. The goal of the Act is to give American workers a raise and more buying power to make ends meet. As of September 2025, the Act has not been voted on.

While raising the minimum wage will not necessarily beat inflation, earning more money could make it easier for lower-income families to afford basic necessities.

Pro: Reducing Poverty and Income Inequality

Data from the Bureau of Labor Statistics shows that low-wage earners spend a larger portion of their budget than higher-wage earners on immediate daily needs like food, shelter, transportation, and medical care. Raising the minimum wage could give these workers more money to spend on other things, including discretionary items such as eating out, travel, and streaming services.

Increased consumer spending helps stimulate the economy. It’s a positive economic indicator reflecting consumer confidence in the market, and it typically creates more revenue for businesses.

Pro: Improving Employee Retention in a Competitive Labor Market

According to a study by researchers at the Kellogg School of Management at Northwestern University, workers with a higher minimum wage tend to work harder and are more productive. Not only that, earning a higher wage could be an incentive for workers to stay with a company longer, which can help reduce turnover.

That’s generally considered beneficial since employee turnover is expensive. Replacing an employee with a new candidate can cost about 50% of the worker’s salary or possibly more, according to the HR firm G&A Partners. In that case, it could make more financial sense for a business to pay an employee a better salary to keep them on staff, rather than recruiting and training a new worker to replace them.

The Argument Against Raising the Minimum Wage

Increasing the minimum wage could lead to higher prices and unemployment, opponents say. These are some of the possible cons of raising the minimum wage.

Con: Potentially Increasing Prices for Consumers

If business owners have to raise the minimum wage they pay workers, they would likely raise the prices of their products and services to help pay for the higher labor costs. As employers pass the higher costs along to their customers, consumers will end up paying more for the things they buy. That means their dollars won’t go as far as they used to, which could contribute to inflation.

Con: Risking Job Losses, Especially for Small Businesses

The increased labor costs of a higher minimum wage could be substantial. If the minimum wage increased to, say, $15 an hour, businesses would suddenly need to give raises to everyone making less than that.

But not all companies can afford that. Small businesses that have a slim profit margin could struggle in particular. Restaurants, for example, operate at a 3% to 9% profit margin. Increasing labor costs could shrink (or eliminate) their margins, meaning they might have to let go of some staff or even go out of business.

Con: Could Accelerate a Shift Toward Automation

Employees without specialized skills often work some minimum wage jobs to earn what might be considered entry-level salaries. But as employers are forced to pay workers more, companies might invest in automated technology or artificial intelligence (AI) to do these jobs.

According to one recent survey, approximately 30% of hiring managers said they would use automation or AI if the minimum wage was raised. This could make it more challenging for unskilled laborers to find work; other workers could lose their jobs to automation or AI. They might then have to go on unemployment or try to rely on popular side hustles to try to earn a living and pay their bills.

What Is the Predicted Economic Impact of a Federal Minimum Wage Increase?

There are differing views on how raising the federal minimum might impact the economy. An analysis by the Economic Policy Institute (EPI) found that the $17 an hour minimum wage increase proposed by the Raise the Wage Act of 2025, would provide an additional $70 billion dollars each year in wages to the lowest-paid workers in the U.S. The average worker in this category would make an additional $3,200 a year, the EPI estimates.

However, according to the Congressional Budget Office (CBO), which has also examined the potential impact of the Raise the Wage Act, while the wages and family income of many low-paid workers would likely increase with a higher federal minimum wage, for other families, income would fall due to business owners absorbing the cost of higher wages among other reasons. Overall, the CBO says the number of families in poverty would likely decrease.

But higher wages would likely cause some employers to employ fewer workers, the CBO says. That could result in more unemployed and jobless workers.

How a Changing Minimum Wage Could Affect Your Personal Finances

Beyond the potential impact to the economy, a higher minimum wage could have an effect on individuals’ finances as well — including yours.

For example, an increase in spending by low-wage workers can drive up demand for goods and services and help stimulate the economy and boost economic growth. Employees already making more than the minimum wage might even see their own earnings increase if employers feel pressure to compensate them as well.

But prices may go up as businesses try to offset higher labor costs. That means you might pay more for the things you buy. Employers may also hire fewer workers or make reductions in workforce. And they might also outsource or automate more jobs, which could negatively impact many individuals’ employment opportunities and result in more unemployment.

Fortunately, there are some steps you can take to help protect your own bottom line. Here are some strategies to consider.

Reduce expenses where you can. Take a look at the cost of living in your city or town. Is it reasonable? Or are housing prices and grocery prices more expensive in your locale? Those living in the most affordable cities might find that their dollars go farther. Even relocating a few towns over to one with a lower cost of living might help you save money.

Give your savings a boost. Let’s say you have a goal of saving up for a downpayment on a house, or establishing an emergency fund. One step you might want to consider is opening a high-yield savings account. These accounts have higher interest rates than traditional bank accounts, which could help your savings grow.

Make it simple. Automating your finances can make it easier to save. With direct deposit, for example, your paycheck will go right into your bank account — without you even having to think about it. You might even be able to get your money in there faster. For example, by setting up direct deposit to your SoFi checking and savings account, you can get an early paycheck.

The Takeaway

The original intention for creating a federal minimum wage was to enable workers to have a standard of living that would improve and maintain their health and well-being. However, today’s minimum wage of $7.25 an hour has not risen since 2009. Increasing the minimum wage has a number of potential benefits, but there are possible negative economic effects to minimum wage increases as well.

While the debate over this complex issue will likely continue, remember that you have control over your own finances. Establishing financial goals, and setting up a plan to save for them, can help you manage your money.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Why are state minimum wages different?

In general, states are able to enact laws that differ from federal laws according to their state needs. Many states with a higher cost of living, like California and Washington, have increased their minimum wage to roughly double the federal minimum. If a state’s minimum wage differs from the federal minimum wage, employers must pay the higher of the two rates.

Who benefits from a minimum wage increase?

Low-income workers can potentially benefit from a minimum wage cost, according to proponents of raising the minimum wage. That’s because earning a higher wage could give them more money to spend on things beyond basic needs like food, shelter, and medical care. For example, they could spend more on such discretionary items such as eating out, and streaming services. This kind of increased consumer spending might, in turn, stimulate the economy.

Does increasing the minimum wage affect cost of living?

It’s possible that increasing the minimum wage could raise the cost of living. This might happen if employers raise prices on the items or services they sell to help cover the cost of higher wages for employees. Higher prices, in turn, may cause inflation to rise, which means that dollars won’t go as far as they used to.

What state has the highest minimum wage?

The state with the highest minimum wage is Washington state, where the state minimum wage is currently $16.66 per hour, and it’s expected to increase in 2026. Although it’s not a state, Washington, D.C. has the highest minimum wage overall of $17.95 an hour.

What might be an opportunity cost of raising the minimum wage?

One possible opportunity cost of raising the minimum wage is that employers might reduce their labor force and lay off workers to help pay for the increased cost of higher wages. They might also automate certain jobs, which could result in more unemployment.

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SOBNK-Q325-108

Since private student loans are held by a private bank or lender, you can’t refinance private student loans to federal loans.

The reverse, however, is possible. You can refinance private and federal student loans into a new private student loan with a new, ideally lower, interest rate. When you refinance federal student loans, it’s important to understand you lose access to federal benefits and protections.

Here’s what to know about why you can’t convert private student loans to federal loans, how you can combine both into a new refinanced loan, and how to make the choice that’s right for you.

Transferring Private Student Loans to Federal Loans

It isn’t possible to refinance private student loans to federal loans since private loans can only be held and owned by private financial institutions. Your federal student loans, on the other hand, can be converted into a private loan.

Although private and federal loans serve the same purpose — to finance your education — they differ in significant ways. One of the biggest distinctions is that private loans are not eligible for federal programs and benefits.

Recommended: Types of Federal Student Loans

How to Combine Private and Federal Student Loans

While there’s no way you can refinance private student loans to federal loans, the reverse is possible: You can convert a federal loan to a private loan to combine your federal and private student debt into a new private loan.

Refinancing

You can combine federal and private student debt by refinancing your federal student loans into a private loan. Refinancing is offered by a private lender and requires a credit check. This repayment option lets you refinance existing federal loans, private student loans, or a combination of both into a new private student loan.

The new refinancing lender pays your original loan(s) in full and creates one refinanced student loan for the total amount it paid on your behalf. Over time, you’ll repay your new lender your principal refinance amount, plus interest charges.

Overall, a student loan refinance can help you combine multiple loans into a single loan at a new rate and potentially better terms. It also results in one monthly payment. Depending on your credit score and other qualifying factors, it might help you access a lower interest rate.

Be aware that since a refinanced federal loan is no longer a part of the federal student loan system, you’re giving up federal benefits and protections if you refinance a federal student loan.

Recommended: Guide to Refinancing Private Student Loans

Consolidating

Federal student loans can be combined, or consolidated, through the federal Direct Loan program. With a Direct Consolidation Loan, your federal loans are combined into a single new loan with a new interest rate that’s an average of all of your existing federal loan rates, rounded up to the nearest eighth of a percent.

Some reasons to consolidate your federal loans include simplifying your payments and qualifying for federal student loan programs such as income-driven repayment plans or Public Service Loan Forgiveness (if your existing federal loans weren’t eligible for these programs to begin with).

Private loans are not eligible for federal loan consolidation. As mentioned earlier, you can only combine federal and private student loans together when you refinance your loans into a new private loan.

Recommended: How and When to Combine Federal and Private Student Loans

Benefits of Federal Student Loans

Although converting your federal student loans into a private loan might have its advantages, there are serious caveats to consider before moving forward. Ultimately, refinancing federal loans through a private lender means you’ll lose access to valuable federal benefits and protections.

Debt Forgiveness

A major benefit that federal student loans offer is access to student debt forgiveness and cancellation. Depending on your personal situation, you might be able to have a large portion of your federal student debt forgiven.

Some programs offered for federal loans include:

•  Public Service Loan Forgiveness (PSLF). Borrowers who work full-time for a government entity or not-for-profit organization might be eligible for loan forgiveness. While working for a qualified employer, you must enroll in an income-driven repayment plan and make 120 qualifying payments toward your federal loans. Afterward, your remaining federal loan balance is forgiven.

•  Teacher Loan Forgiveness (TLF). Under TLF, educators who work full-time at an approved low-income school or service agency can earn up to $17,500 in forgiveness. You must agree to a five-year service contract and meet other requirements.

•  Perkins Loan Cancellation. If you have eligible Perkins Loans, you might be eligible for loan cancellation or discharge, depending on your employment service or unique circumstances.

Recommended: Trump’s Changes to PSLF: What Borrowers Need to Know

Income-Driven Repayment

Federal student loan borrowers who are struggling to afford their standard 10-year monthly payments can explore one of the Department of Education’s income-driven repayment (IDR) plans.

Each repayment plan calculates your monthly payment based on a percentage of your discretionary income and your family size. Some borrowers under an IDR plan may qualify for a $0 per month payment.

However, under Trump’s One Big Beautiful Bill, three of the four income-driven repayment plans will end on July 1, 2028. Borrowers must switch to the one remaining plan, the Income-Based Repayment (IBR) plan, or the new Repayment Assistance Plan (RAP).

Guaranteed Postponement

You might suddenly be hit with financial hardship, like being temporarily unemployed or experiencing an accident that inhibits your ability to make payments. In this stressful situation, federal student loans provide the option to request payment deferment or forbearance.

These federal protections pause your federal student loan payment requirement without penalty. During this time, interest still accrues and is added to your principal balance.

You’re ultimately responsible for repaying it back, as well as any interest that capitalizes when payments resume. However, this guaranteed postponement offers financial relief during difficult times.

Some private loans may offer deferment or forbearance options during times of financial hardship, but the options vary by lender.

For new loans taken out after July 1, 2027, economic hardship and unemployment deferment will no longer be available for federal student loans.

How Private and Federal Student Loans Differ

To decide whether refinancing your federal loans into a private loan makes sense for you, it’s important to know how private student loans vs. federal student loans differ.

Recommended: Private vs. Federal Student Loans

The Takeaway

Refinancing private student loans to federal loans is unfortunately not possible. You can, however, refinance federal student loans to a private student loan. Before refinancing a federal student loan, though, decide whether you might need to leverage government benefits, like income-driven repayment or loan forgiveness programs. You’ll lose these useful benefits by refinancing all of your federal loans.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Is it possible to change private student loans to federal?

No, there is no way to change private student loans to federal loans. However, you can refinance your private and federal loans together, ideally to qualify for a lower rate or better loan terms. If you go this route, you will be changing your federal student loan(s) into a private loan.

Is it possible to change federal student loans to private?

Yes, you can change a federal student loan to a private student loan through refinancing. A private refinance lender will pay off your original federal loan, and you’ll have to make payments to your new private lender for the principal balance, plus interest. Changing your federal student loans to a private loan, however, will mean you lose access to federal repayment plans, forgiveness programs, and other protections.

How can you combine private and federal student loans?

You can combine private student loans and federal student loans with a refinance student loan. Student loan refinancing is provided by a private lender, so any federal loans you refinance will become private and you’ll lose the government benefits and protections you had under the federal loan system.

Photo credit: iStock/YayaErnst

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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.