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A credit card’s annual percentage rate (APR) represents the cost of borrowing money from a lender, typically stated as an annual interest rate. Thus, the APR on a credit card is an important number to know before charging a purchase — especially if you plan on carrying a balance on your credit card account.

Read on to learn more about credit card APRs and how they are determined.

What Is a Credit Card’s APR?

A credit card’s APR refers to the annualized cost of using your credit card to borrow funds. When an individual charges a purchase from a merchant that accepts credit card payments, they’re actually borrowing money from the credit card issuer. The credit card issuer pays the merchant, and the cardholder pays the credit card issuer based on the terms of their credit card agreement.

Depending on the type of transaction and when it’s paid back, some purchases may be subject to interest given how credit cards work. For instance, the purchase APR applies to any balance remaining after the statement due date. Interest is determined based on the credit card’s APR.

How Is APR Determined?

Because actual interest charges are calculated based on the credit card APR, it’s a good idea to get familiar with how APR is determined.

An integral part of how a credit card works, credit card APR is not a set rate that’s the same for every credit card and credit card holder. Rather, the interest rate on a credit card will depend on a number of factors, such as the cardholder’s credit score, what type of credit card it is (for example, whether it’s a rewards card or a card for people with low credit ratings), how the card is being used, and the current economic conditions (such as the prime rate).

In the U.S., the average credit card interest rate is currently 22.25%, per the most recent data released by the Federal Reserve. High interest rates have even prompted recent calls for credit card interest rate caps, though opinions on the potential impact of credit card caps are under debate.

That being said, there is a great deal of variance in APRs. A good APR for a credit card is one that results in the lowest interest charges — which means the lower, the better.

💡 Quick Tip: Credit card interest caps have become a hot topic, as the total U.S. credit card balance continues to rise. Balances on high-interest credit cards can be carried for years with no principal reduction. A SoFi personal loan for credit card debt may significantly reduce your timeline, however, and could save you money in interest payments.

Types of Credit Card APR

The concept of charging interest on borrowed money is not unique to credit cards. From car loans to mortgages, all types of loans have an interest rate attached. But one way credit card APR differs from the interest rates on some other lending products is that the interest charges on credit card transactions may vary depending on the type of transaction a cardholder makes.

Understanding the different types of credit card APRs can help an individual better anticipate actual interest costs before they apply for a credit card. Here are some common types of APR on credit card purchases.

Introductory APR or Promotional APR

It’s not uncommon to see credit card offers touting no interest — though it’s important to note that 0% APR is not usually a permanent credit card feature.

•   If a credit card offers an “introductory” or “promotional” APR, that generally means that the rate offered is only applied for a limited time. After that, the interest reverts to another (typically higher) APR.

•   How interest is applied to an introductory or promotional APR period will depend on the specific wording of the offer. For example, if a credit card offers a zero-interest promotional period (“0% APR for X months”), that means no interest is charged during that specified offer period. These periods are typically between six and 18 months.

Once the offer period ends and the APR reverts to the standard rate, interest is only charged on any outstanding balances from the date the promotional period ended. (Other terms, such as always making the credit card minimum payment by the due date, may also apply in order for the promotional rate to be valid.)

•   A promotional APR that defers interest doesn’t work in quite the same way. With deferred interest, the promotional or introductory rate only applies if the balance is paid in full by the end of the offer period. But interest on any remaining balance will be calculated based on the date of purchase, not the end of the offer period.

That’s why it’s important to be mindful of whether your spending is within your budget, even if it is technically within your credit card limit.

While the specifics of a promotional or introductory APR offer should be clearly spelled out in the terms and conditions, one way to spot such an offer is to look out for conditions — for example, “no interest if paid in full within 12 months.”

Recommended: 10 Advantages of Credit Cards

Cash Advance APR

It may be possible to draw cash from a credit card at an ATM or using convenience checks. However, credit card cash advances are often subject to a different (usually higher) APR and may begin to accrue interest starting from the transaction date.

Balance Transfer APR

Some credit cards may offer a lower APR rate for balances transferred from higher APR cards, which can be helpful if you’re looking to pay off high-interest debt. The balance transfer APR will usually only apply on a promotional or temporary basis, as noted above.

Purchase APR

This is the standard APR that is applied to most regular purchases charged to a credit card. It applies on any balance that remains after the statement due date. This is why, even if you’re disputing a credit card charge, for instance, it’s smart to pay off as much of your balance as you can to avoid interest accruing.

Penalty APR

Just as it sounds, penalty APR is a penalty fee. It’s higher than the regular purchase APR and kicks in as a result of payments that are more than 60 days late. The terms associated with penalty APR are disclosed in the credit card agreement.

Recommended: What Is a Credit Report?

The Takeaway

While credit cards can be a useful tool for managing cash flow (and even earning rewards and perks), it’s important to understand the costs involved. This includes understanding how credit card interest works and how credit card APR applies to credit card balances. Credit card APRs can vary widely, and it can be important to know what rate applies when so you can use your 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

What does the APR not include?

Although the interest rate and when it’s applied may vary depending on the type of transaction, APR typically applies to any funds that are drawn from one’s credit card.

Do you pay credit card APR monthly?

Whether APR is charged depends on the type of transaction and when it’s paid off. For regular purchases, there is no credit card APR at all so long as the balance is paid in full by the statement due date.

Is APR based on current balance?

Like other types of interest, APR is a percentage of the balance owed on a credit card. How APR is applied to various types of purchases and when interest begins to accrue typically depends on the type of transaction and is detailed in the credit card agreement. Most regular balances only begin to accrue interest if any amount is remaining after the statement due date.

What happens if you pay more than the minimum balance on your credit card each month?

Purchase APR typically is applied to any balance remaining after the statement due date. By paying more than the minimum balance, an individual will reduce the amount of funds that are subject to interest.

Photo credit: iStock/Eva-Katalin

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

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If a debt goes unpaid for long enough, it can eventually end up with a collection agency. That’s when the aggressive phone calls and letters usually start. Hearing from a debt collector can feel stressful, overwhelming, and even scary. However, it doesn’t have to be. Understanding how debt collection agencies work — and what your rights are — can help you navigate a difficult situation with more confidence and less panic.

Below, we break down what collection agencies actually do, how they’re different from debt buyers, what steps you should take if you’re contacted, and how this process can affect your credit.

How Does Debt Collection Work?

Debt collection is the process of pursuing payment on overdue debts. Having a “debt in collections” means the original creditor (such as a credit card company, an auto lender, or a utility) has sent the debt to a third-party person or agency to collect it.

Typically, a debt doesn’t go to collections if you miss one payment. If nonpayment goes on for a while (typically 90 to 180 days), however, the original creditor may decide to give up trying to collect from you and write the debt off as a loss. This process is known as a charge-off. At that point, they will usually do one of two things: assign the debt to a third-party debt collection agency or sell it to a debt buyer.

Once the debt is transferred or sold, the collection process intensifies. You may start receiving letters, phone calls, or emails from the debt collector. Their goal is to recover as much of the debt as possible, either in full, through a payment plan, or via a negotiated settlement.

💡 Quick Tip: Everyone’s talking about capping credit card interest rates. But it’s easy to swap high-interest debt for a lower-interest personal loan. SoFi credit card consolidation loans are so popular because they’re cheaper, safer, and more transparent.

What Is a Debt Collector?

A debt collector is any individual or company whose primary job is to recover money owed on delinquent accounts. They might be part of a collection agency, a law firm specializing in collections, or an in-house department of the original creditor.

Under the Fair Debt Collection Practices Act, debt settlement companies are required to follow strict guidelines when contacting consumers. They are prohibited from using abusive, deceptive, or unfair practices. For example, they can’t call before 8 a.m. or after 9 p.m., harass you, or misrepresent themselves.

Recommended: What Is the Difference Between Personal Loan vs Credit Card Debt?

What Do Collection Agencies Do?

Collection agencies work on behalf of creditors to recover unpaid debts. Generally the way they make money is by receiving a percentage — usually between 25% and 50% — of the amount they recover. Commissions tend to be on the higher end of that range for older debts, since they are more difficult to collect.

Collection agencies can — and do — use a variety of tactics to recover funds, including:

•  Calling you at home or work

•  Sending letters, text, or emails

•  Contacting you through social media

•  Showing up at your front door

•  Contacting your friends and family to confirm your contact information (they can’t do this more than once, however, or reveal why they need the information)

•  Take you to court to recover a past-due debt

When dealing with collections, it’s important to keep in mind that there is a statute of limitations on debt. Collectors generally have between three to six years to file a lawsuit over old debts (the timeline varies by where you live and type of debt). The clock starts when your debt was first recorded delinquent. After the statute of limitations ends, a collection agency cannot legally sue you for the debt. They can, however, still hound you for the money.

How Is This Different from a Debt Buyer?

A debt buyer doesn’t work for the creditor like a debt collection agency does. They buy debts that have been charged off by creditors, sometimes buying a collection of old debts from a single creditor. How much these collectors pay for debt varies but it can be as little as a few cents on the dollar.

Because debt collectors own the debt, they generally have more freedom to negotiate than collection agencies that are merely collecting on someone else’s behalf. Also because they often pay so little for debt, any recovery can represent a profit.

Like debt collection agencies, debt buyers sometimes use aggressive tactics to collect a debt. However, they are subject to the same state and federal laws designed to protect borrowers from harassment.

Recommended: Credit Card Debt Collection: What Is It and How Does It Work?

How to Deal With a Debt in Collections

Finding out that a debt is in collections can be alarming. However, taking deliberate, informed steps can help protect your finances and your rights.

Verify the Debt

Before paying anything, it’s important to always verify the debt. Debt collectors are required by law to send you a debt validation notice within five days of contacting you. This notice should include:

•  The debt collector’s name and address

•  The name of the creditor

•  The amount owed

•  What to do if you don’t think it’s your debt

•  Your debt collection rights

If you’re unsure about the validity of the debt or the amount, send a written request for verification within 30 days. This forces the agency to provide documentation proving the debt is legitimate. If the debt is not valid, you can dispute it with the collector.

Negotiate a Payment Plan or Settlement

If the debt is legitimate, consider negotiating. Many collectors are willing to accept a lump-sum settlement for less than the full balance, especially if they purchased the debt cheaply. Alternatively, you might be able to arrange a payment plan that fits your budget.

When negotiating, be sure to consider your financial situation and avoid agreeing to any terms you can’t realistically meet. Once you sign off on a payment plan or make a payment on old debt, it restarts the clock on the statute of limitations.

Get Agreements in Writing

Before sending any money to a collection agency, make sure you have a written agreement that outlines the terms. This document should specify the amount to be paid, the payment schedule, and whether the agency will report the account as “paid in full” or “settled” to credit bureaus.

Getting agreements in writing protects you from future disputes and ensures you have proof of compliance.

How Does a Debt in Collections Affect Your Credit?

Missed payments on a debt already negatively impact your credit profile. When a debt goes into collections, the situation typically worsens.

When the original creditor decides to stop trying to collect on your debt and closes your account, the charge-off goes on your credit report. Once the debt goes to collections and the debt collector sends you a notice, the collector will create a new collection account, which also lands on your credit report.

Both the charge-off and the collection account are negative entries, and can cause an immediate drop in your credit scores of 50 to 100 points, possibly more.

While paying the debt collector will not remove the collection account from your credit report, it’s generally a good idea to do so. For one reason, some newer credit scoring models ignore collection accounts with a zero balance. Potential lenders also tend to view paid-off collection accounts more favorably when they check your credit report as part of a credit application. On top of that, you’ll no longer be harassed by the debt collection company.

Alternatives to Debt Collection Agencies

You can avoid having debt land in collections by taking steps to manage and pay down existing debt. Here are some strategies to consider.

Consumer Credit Counseling Services

Nonprofit credit counseling agencies offer free or low-cost services to help you gain better control of your finances. You can often get counseling, budgeting advice, and credit education from a certified counselor free of charge.

For an added fee, a counselor can also set up a debt management plan. This means they will negotiate with creditors on your behalf to lower your interest rates and fees and establish a payment plan that works for you. They then consolidate your payments into one monthly amount. You make a single payment to the counseling agency, which distributes the funds to your creditors.

Debt Settlement

If you’re more than 90 days past due on a debt and suffering financial hardship, you might consider debt settlement, also known as debt relief. This is a strategy where you negotiate with your creditors to lower your debt in return for one lump sum payment. You can try this yourself or hire a debt settlement company, though the latter often charges high fees and may not guarantee success.

Just keep in mind that settling a debt can negatively affect your credit file, since settled accounts stay on your credit report for up to seven years. However, for those overwhelmed by debt, it may be preferable to ongoing collections or bankruptcy.

Debt Consolidation

Debt consolidation involves combining multiple debts — typically high-interest debts like credit card balances — into a single loan or credit account. The main goal with this debt payoff strategy is to simplify repayment and potentially lower the interest rate or monthly payments. Some common ways to consolidate debt include:

•   Debt consolidation loans: These are essentially personal loans that are used to pay off other debts and rates tend to be lower than credit cards.

•   Balance transfer credit cards: These are credit cards that let you move balances from others cards; some offer a 0% introductory rate.

•   Home equity loans or lines of credit: This involves borrowing against your home equity to pay off debts.

Before you consolidate debt, it’s important to look closely at rates and any added fees to make sure the move will be cost effective.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.

Bankruptcy as a Last Resort

Personal bankruptcy is a legal process designed to provide relief for people facing severe financial difficulties who are unable to repay their debts. There are two main types for individuals:

•   Chapter 7: This allows you to discharge most types of unsecured debt, such as credit card balances and medical bills, but you must first liquidate non-exempt assets to repay as much of the debt as possible.

•   Chapter 13: This allows you to restructure your debt under a new repayment plan that usually spans three to five years.

Keep in mind that bankruptcy has serious long-term credit consequences. It stays on your credit report for seven to 10 years (seven for Chapter 13 and 10 for Chapter 7), making future borrowing more difficult.

The Takeaway

If you’ve gotten a phone call or letter from a debt collector, it’s important to understand how debt collection agencies work and how to handle debt in collections. Ignoring a collector won’t make the debt go away. Instead, it’s better to gather as much information as possible to make informed decisions.

If you’re struggling with multiple high-interest debts, keep in mind that there are options available to help regain control of your finances.

Credit cards have an average APR of 20%–25%, and your balance can sit for years with almost no principal reduction. Personal loan interest rates average 12%, with a guaranteed payoff date in 2 to 7 years. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. See your rate in minutes.

FAQ

What rights do you have when dealing with a collection agency?

When dealing with a collection agency, you have rights under the Fair Debt Collection Practices Act. Collectors must treat you fairly and cannot harass, threaten, or lie to you. They must identify themselves, provide proof of the debt if requested, and cannot contact you at inconvenient times (such as before 8 a.m. or after 9 p.m.). You also have the right to request all communication in writing and to dispute the debt within 30 days of first contact.

Can a debt collector sue you or garnish wages?

Yes, a debt collector can sue you for unpaid debt. If they win the lawsuit, they may obtain a court judgment allowing wage garnishment. However, collectors must notify you and give you a chance to respond. State and federal laws also limit how much a creditor can garnish from your wages. Always respond to legal notices promptly, and consider speaking with an attorney or credit counselor if you’re being sued over a debt.

How do you remove a collection from your credit report?

To remove a collection from your credit report, start by checking if it’s accurate. If it’s incorrect or too old (over seven years), you can dispute it with the credit bureau. For valid collections you’ve paid, you might request a “goodwill deletion” after you’ve paid it. This involves calling or writing to the collection agency and asking to have the account deleted as a gesture of goodwill. They don’t have to comply, but they might.

Does paying off collections improve your credit score?

It might. Some credit scoring models consider accounts in collections, even if they are paid. However, newer FICO and VantageScore models ignore paid collections, which means paying them off can be beneficial. Regardless, settling or paying off collections looks better to lenders and can help you qualify for credit in the future. It also prevents further action, like lawsuits. Always ask for a written confirmation of payment or settlement.

What’s the difference between a debt collector and a debt buyer?

A debt collector is a company hired by a creditor to collect money on their behalf. They don’t own the debt but earn a fee or commission for collecting payment. A debt buyer, on the other hand, purchases delinquent debts from original creditors, often for pennies on the dollar, and then owns the debt outright. Your rights remain the same under both.

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

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Revolving credit is a flexible type of borrowing that allows you to access money as you need it (up to predetermined limit), repay some or all of the balance, and then borrow again. Unlike a one-time loan, revolving credit becomes available again — or “revolves” — as you pay it back. This makes it a convenient option for covering ongoing expenses or handling emergencies.

Common examples of revolving credit include credit cards, personal lines of credit, and home equity lines of credit (HELOCs). Understanding how revolving credit works, how it compares to other types of debt, and how to use it responsibly can help you avoid high-interest debt traps and maintain a healthy credit profile.

How Revolving Credit Works

When you open a revolving credit account, your lender sets a credit limit, which is the maximum amount you can borrow at any given time. You can use all or part of this limit, and you only pay interest on the amount you borrow, not the entire limit.

As you make payments, your available credit increases. For example, if your credit limit is $5,000 and you spend $1,000, you’ll have $4,000 in available credit. If you pay back the $1,000, your available credit goes back up to $5,000.

Revolving credit accounts usually require a minimum monthly payment to keep the account in good standing. If you carry a balance from one statement period to the next, you’ll pay interest on your balance. Annual percentage rates (APRs) vary but can be steep for credit cards.

💡 Quick Tip: There is a lot of debate around credit card interest caps. For consumers carrying high-interest credit card balances, however, one of the shortest paths to debt relief is switching to a lower-interest personal loan. With a SoFi credit card consolidation loan, every payment brings you closer to financial freedom.

Revolving Debt vs. Installment Debt

Revolving debt is different from installment debt (or non-revolving credit) in a few key ways:

•   Structure: Installment loans (like mortgages, personal loans, or auto loans) give you a lump sum upfront, which you repay in fixed monthly installments over a set term. Revolving credit allows you to continuously borrow and repay within your credit limit.

•   Repayment: Installment loans have fixed payment schedules and, in some cases, there may be a prepayment penalty. Revolving accounts offer variable payments depending on your balance.

•   Interest rates: Revolving credit often has higher interest rates than installment loans, especially unsecured revolving accounts like credit cards.

•   Usage flexibility: Revolving credit is generally more flexible than installment debt, since it lets you borrow as needed without reapplying for a loan. Also, some installment loans are only approved for a specific purpose, such as a car loan or mortgage.

Both types of debt can be useful tools. Which one is a better fit will depend on your borrowing needs. Revolving credit can be a good option for short-term or variable expenses, while installment debt is generally better for large, fixed purchases.

Recommended: Revolving Credit vs Line of Credit

Secured vs. Unsecured Debt

Revolving credit can be either secured or unsecured:

•   Secured revolving credit: With this type of credit, you must pledge an asset as collateral to guarantee repayment. If you fail to make payments according to the loan agreement, the lender has the right to seize and sell the collateral to recover their losses. Examples of secured revolving credit include a HELOC (backed by your home) and a secured credit card (backed by a savings account). Secured revolving accounts often have lower interest rates due to reduced risk to the lender.

•   Unsecured revolving credit: An unsecured debt is not backed by collateral. If you fail to repay the debt, the lender cannot automatically seize a specific asset (like your house or car) to recover their losses. Instead, they rely on your promise to pay. Most credit cards and personal lines of credit are unsecured. Because lenders take on more risk, interest rates on unsecured debts tend to be higher than they are on secured debts.

Types of Revolving Credit

Here’s a look at some of the most popular types of revolving credit.

Credit Cards

You can use a credit card to make purchases, pay bills, or withdraw cash up to your credit limit. If you pay your balance in full each month, you can generally avoid interest charges. If you carry a balance, on the other hand, interest will accrue, often at rates above 20% APR. Credit cards may also offer rewards, cash back, or other perks, making them a potentially valuable financial tool when managed well.

Personal Lines of Credit

A personal line of credit is similar to a credit card but with a few key differences. For one, they typically have a draw period and a repayment period. During the draw period (often two to five years), you can access your credit line and use the funds for virtually any purpose. When you make payments during this period, you free up funds to borrow again. At the end of the draw period, you’ll begin the repayment period. During this period, you no longer have access to the line of credit and must pay off the balance in full.

Home Equity Lines of Credit (HELOCs)

A HELOC is a revolving line of credit secured by your home’s equity, and your home is used as collateral for the credit line. During your draw period (often 10 years), you can borrow up to your credit limit as needed. As you repay your balance, the funds are available to borrow again. After the draw period, you enter the repayment period (usually 20 years).

HELOCs typically have lower interest rates than unsecured revolving credit because they’re backed by collateral. They are often used for home improvements, emergency expenses, or consolidating higher-interest debt. However, because your home is at risk if you default, they require careful consideration.

How Revolving Debt Can Affect Your Credit Score

Revolving credit can have both positive and negative impacts on your credit profile. Here’s a breakdown of the key factors involved in calculating your credit score and how revolving credit can impact each of them:

•   Credit utilization ratio: Your credit utilization ratio measures how much of your available credit you’re using on your credit cards and other lines of credit and is expressed as a percentage. A high utilization (above 30%) can negatively influence your credit file, while keeping it low can have a positive influence.

•   Payment history: Making regular, on-time payments on a revolving credit account adds positive information to your payment history. Late or missed payments, on the hand, can do significant credit damage.

•   Length of credit history: Lenders often view a longer history of responsible credit management as a positive indicator of your creditworthiness. Keeping revolving accounts open and in good standing over many years can have a favorable impact on your credit profile.

•   Credit mix: Your credit mix describes the different types of credit accounts you have. A healthy mix of revolving and installment accounts can positively influence your credit.

Bottom line: If you max out your credit limits or fall behind on your payments, revolving credit can adversely impact your credit. However, if you consistently pay on time and keep your credit utilization ratio low, a revolving credit account can benefit your credit file over time.

Tips for Managing Revolving Debt

If you’re struggling to manage credit card (or other revolving credit) balances, these strategies can help you get ahead of your debt and potentially save money on interest.

Budget Strategies

Making some shifts in your budget can help you pay down your balances systematically. Two strategies to consider:

•   The debt avalanche: This method focuses on paying off the debt with the highest interest rate first, while making minimum payments on the rest. Once the highest-rate debt is cleared, you target the next-highest, and so on. This minimizes total interest paid and can save you money over time.

•   The debt snowball: Here, you target the debt with the smallest balance first, regardless of interest rate. After paying off the smallest debt, you apply its payment amount to the next smallest, and so on. This approach provides quick wins, which can boost motivation and momentum.

Debt Consolidation

If you have multiple high-interest debts, consider consolidating them into a single loan, such as a personal loan, with a lower interest rate. This can simplify repayment and potentially reduce interest costs. An online debt consolidation calculator can help you determine how much you could potentially save by taking out a personal loan and using it to pay down your current balances.

💡 Quick Tip: Some personal loan lenders can release your funds as quickly as the same day your loan is approved.

Balance Transfer

A balance transfer involves moving your revolving debt from one credit card to another card that has a lower or 0% introductory APR. This can save money on interest, but be mindful of transfer fees and the length of the promotional period.

Credit Counseling

Working with a nonprofit credit counseling agency can be a good way to get free or low cost help with managing revolving debt. A certified counselor can help create a debt management plan, negotiate lower interest rates, and provide education on responsible credit use. This can be a good option if you’re struggling but want to avoid more damaging solutions like bankruptcy or settlement.

Debt Settlement

If you’re struggling with high-interest revolving debt and have exhausted other solutions, you might consider debt settlement. This involves negotiating with creditors, typically through a third-part debt settlement company, to accept less than the full amount owed. While this can reduce your total debt, it typically hurts your credit and should only be considered as a last resort before bankruptcy.

The Takeaway

Revolving credit offers flexibility and convenience, which can make it a handy tool for managing expenses and building credit. However, its easy access and potentially high interest rates mean it can also become a financial burden if mismanaged.

By understanding the differences between revolving and installment debt, knowing the types of revolving credit available, and following sound debt management practices, you can make revolving credit work for — and not against — your financial health.

Credit cards have an average APR of 20%–25%, and your balance can sit for years with almost no principal reduction. Personal loan interest rates average 12%, with a guaranteed payoff date in 2 to 7 years. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. See your rate in minutes.

FAQ

Are revolving credit and revolving debt the same thing?

Revolving credit and revolving debt generally refer to the same thing — a type of debt where you can draw funds as needed, repay the money, and then borrow it again. This differs from installment debt, where you borrow a fixed sum of money and agree to pay it back over a set period through regular, fixed payments. Revolving credit or debt comes with credit limits and typically has variable interest rates. With this type of credit, you only pay interest on what you borrow, not the entire credit line.

Does revolving debt hurt your credit score?

Revolving debt can affect your credit in positive and negative ways, depending how it’s managed. If you carry large balances or max out cards, it will increase your credit utilization rate (how much available credit you’re using) and suggest higher credit risk to lenders. Missing payments or paying late can also negatively impact your credit file. However, if you keep credit utilization low and make on-time payments consistently, having revolving debt can strengthen your credit profile over time.

How can I reduce my revolving debt quickly?

To reduce revolving debt quickly, focus on paying more than the minimum each month and target high-interest balances first (the avalanche method) to save on interest. You can also try the snowball method — paying off smaller debts first — for quicker wins. Another option is to consolidate balances with a lower-interest personal loan or a balance transfer card with a 0% annual percentage rate (APR). This can reduce costs and help speed repayment.

What is a good credit utilization ratio for revolving accounts?

A good credit utilization ratio is generally below 30%, meaning you’re using less than 30% of your total available credit. For example, if your combined credit limit is $10,000, you’ll want to try to keep balances under $3,000. Credit scoring models often reward lower usage because it signals responsible credit management and less risk of default.

Can you have too much revolving credit?

Yes, it’s possible to have too much revolving credit. While a high credit limit offers a potential safety net and might positively impact your credit file (by lowering your credit utilization ratio), it also comes with some potential downsides. One is that having access to multiple open credit lines can tempt overspending. Another is that lenders may view high credit limits as a potential risk, since you could potentially utilize all that credit. This could make it harder to qualify for loans and credit with favorable terms in the future.

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

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

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

The Case Against Using Savings to Pay Off Debt

While it can feel satisfying to watch your debt balance drop, using savings to achieve that can come with unintended consequences. It’s important to weigh the risks before depleting your savings for the sake of faster debt repayment.

Emergency Funds Provide Financial Security

One of the key arguments for not using savings to pay off debt is the importance of maintaining emergency savings. An emergency fund — typically three to six months’ worth of living expenses — provides a crucial financial cushion in the event of job loss, unexpected medical bills, or an urgent car or home repair. Without that buffer, you might be forced to run up high-interest credit card debt to get by, negating the benefits of having paid off previous debt.

💡 Quick Tip: Everyone’s talking about capping credit card interest rates. But it’s easy to swap high-interest debt for a lower-interest personal loan. SoFi credit card consolidation loans are so popular because they’re cheaper, safer, and more transparent.

Opportunity Cost of Using Savings

Using your savings to pay off debt means missing out on the opportunity to invest that money or let it earn interest in a high-yield savings account. This is especially relevant with low-interest debt, such as federal student loans, certain car loans, or mortgage balances. If you could earn more interest or investment returns than what you’re paying on your debt, paying off the debt early could potentially cost you money in the long run.

Every financial decision has an opportunity cost. It’s important to consider whether your money might be better utilized elsewhere.

When to Prioritize Paying Off Debt

In some situations, however, it could make sense to pay off debt rather than save money. Here are some scenarios where you may want to use your savings to pay off debt.

High-Interest Debt

Credit card debt is notorious for high interest rates. As of May 2025, the average credit card annual percentage rate (APR) was 22.25% Given the steep cost of these debts, it can be smart to prioritize paying off credit card debt over saving. The interest accruing can quickly outpace any gains from savings or investing, so tackling high-interest debt should usually be a top priority.

Source of Stress

Debt isn’t just a financial burden; it’s often an emotional one too. If your debt causes anxiety, sleep loss, or tension in your relationships, that emotional toll is worth considering. Prioritizing debt repayment to relieve stress and improve mental well-being can be just as valuable as financial gains.

Limiting Financial Flexibility

High debt payments can limit your cash flow and force you to delay important life goals, like owning a home, getting married, going back to school, or starting a family. For example, a high debt-to-income ratio can hinder your ability to qualify for favorable mortgage rates or even a mortgage at all. By paying off debt, you free up money in your budget that can later be redirected towards other goals.

When to Prioritize Saving

While paying down debt is important, there are also compelling reasons to focus on building your savings, especially if your debt isn’t urgent or costly.

Low-Interest Debt

If your debt comes with a relatively low interest rate, there may be less urgency to pay it off early. For example, if your mortgage has a 3.5% interest rate, and your retirement investments earn an average of 7%, you’re likely better off contributing to your retirement than accelerating debt payments.

In these cases, the debt is manageable and might even come with tax advantages. This gives you room to prioritize saving and investing instead.

Access to 401(k) Employer Match

If your employer offers a 401(k) match and you’re not contributing enough to get the full match, you’re essentially leaving free money on the table. A 100% match up to 6% of your salary, for example, is an immediate 100% return on investment. That’s far more than you’d save by paying off most debts faster.

In nearly every case, it makes sense to contribute enough to receive the full match before prioritizing additional debt payments.

No Emergency Savings

If you don’t have an emergency fund, it’s wise to build one before aggressively attacking your debt. Without savings, you’re vulnerable to any financial disruption, which could force you into more debt. Establishing a modest emergency fund — say $500 to $1,000 to start — can prevent future financial setbacks and give you some breathing room.

How to Start Paying Off Debt Without Dipping Into Your Savings

You don’t necessarily need to choose between savings and debt repayment — you can do both. Here’s how to get started on your debt without draining your savings account.

Make a Budget

Creating a budget is a crucial step towards effectively paying off debt — and the process is easier than it sounds. Simply gather the last several months of financial statements and use them to calculate your average monthly income and spending.

If you find that, on average, your spending is close to (or higher) than your earnings, you’ll want to find places to cut back. First look for monthly expenses you can cut completely, such as steaming services you rarely watch or membership to a gym you rarely use. Then consider ways to trim discretionary spending, such as eating out less, avoiding impulse purchases, and finding cheaper entertainment options. Any funds you free up can then be funneled towards debt repayment.

Establish a Debt Payoff Strategy

“Focus on paying off one debt at a time,” advises Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “If you spread your money out over many debt payments, your progress may not be as fast as you want. But by focusing on one goal at a time, you can see success sooner, and that can keep your motivation up.”

Two popular debt paydown strategies to consider:

•   Debt snowball: With this approach, you put extra money towards the debt with the smallest balance, while making minimum payments on all the other debts. When that debt is paid off, you move to the next-smalled debt, and so on until all debts are paid off. This method can deliver early wins and help keep you motivated to continue tackling your debt.

•   Debt avalanche: Here, you put extra money towards the debt with the highest interest rate, while paying the minimum on the rest. When that debt is paid off, you move on to the debt with the next-highest rate, and so on. This strategy helps minimize the amount of interest you pay, which can help you save money in the long term.

Consider Debt Consolidation

If you have multiple high-interest debts, you might consider using a personal loan to pay off your balances, a payoff strategy known as debt consolidation. Personal loans for debt consolidation typically have fixed interest rates, so your payments remain the same for the term of the loan. Rates also tend to be lower than credit cards. In addition, debt consolidating simplifies repayment by rolling multiple payments into one.

However, debt consolidation generally only makes sense if you can qualify for a rate that’s lower than what you’re currently paying on your debt balances. Before going this route, it’s helpful to use an online debt consolidation calculator to see exactly how much you can save by consolidating debt with a personal loan.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.

Look Into Balance Transfer

Another way to pay down credit card debt faster is by doing a balance transfer. This strategy involves moving debt from one or more credit cards to another, ideally with a lower or 0% introductory interest rate. This temporary reduction in the APR allows more of your monthly payments to go towards the principal, helping you pay down debt faster and potentially saving you money on interest charges.

Just keep in mind that if you can’t pay off your balance during the promotional period, you’ll be back to paying high rates again. Also these cards often charge a transfer fee, typically 3% to 5% of the transferred amount, which adds to your costs.

The Takeaway

So should you pay off debt or save money? The answer is that it depends. If you have at least a starter emergency fund and high-interest debt, it may make sense to prioritize paying your balances down, either through an avalanche or snowball plan, debt consolidation, or a balance transfer.

However, if you have debt with a very low interest rate, access to an employer 401(k) match program, and/or no emergency savings, you may want to prioritize savings over debt repayment.

Ultimately, the smartest path forward often involves doing both: saving and paying down debt in tandem, based on your individual situation and future goals. This hybrid strategy can help put you on a path to long-term financial health.

Whether or not you agree that credit card interest rates should be capped, one thing is undeniable: Credit cards are keeping people in debt because the math is stacked against you. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. SoFi offers lower fixed rates and same-day funding for qualified applicants. See your rate in minutes.

FAQ

Why is it risky to use savings to pay off debt?

Using savings to pay off debt can be risky because it leaves you without a financial cushion for emergencies. If unexpected expenses arise, like a medical bill or car repair, you may need to rely on high-interest credit again, putting you back in debt. Also if your savings are in a high-yield account or investment, withdrawing them could mean missing out on compound interest and future growth. It’s important to weigh the long-term impact before using savings to eliminate debt.

Which debt should I pay off first?

It’s generally best to start with high-interest debt, like credit cards, because they cost you the most over time. This strategy, known as the “avalanche method,” can reduce the total interest you’ll pay. Alternatively, you might choose to pay off the smallest balances first. Known as the “snowball method,” this approach provides quick wins, which can help boost motivation. The best game plan for you will depend on your personality and financial goals.

How much should I have saved?

A good rule of thumb is to have three to six months’ worth of living expenses saved in an emergency fund. This provides a safety net in case of job loss, medical emergencies, or unexpected costs. Your exact savings goal may vary based on your income stability, family size, and existing obligations. If you’re just starting out, aim for at least $1,000 to cover small emergencies, then build toward a more substantial reserve while balancing other financial goals like debt repayment.

Are personal loans a good alternative to using savings?

Personal loans can be a viable alternative to using savings to pay down debt, especially if you can secure a lower interest rate than your current debt carries. However, loans add to your overall debt load and come with fees and interest. Using savings avoids interest, but could leave you vulnerable if emergencies arise, so it’s important to weigh your options carefully.

How do I balance saving and paying off debt at the same time?

Balancing saving and debt repayment involves setting clear priorities and budgeting effectively. Start by building a small emergency fund (e.g., $500-$1,000) while making minimum payments on all debts. Then, focus on aggressively paying down high-interest debt while still contributing modestly to savings. Once high-interest debt is reduced, you can shift more income toward savings. The goal is to avoid future debt by preparing for emergencies and long-term financial goals.

Should I use my savings to pay off credit card debt?

Using savings to pay off credit card debt can make sense if the debt carries high interest and your savings exceed your emergency needs. Since credit cards often charge upwards of 20% interest, paying them off can save you money long term. However, you should keep a basic emergency fund — typically $1,000 or more — so you don’t fall back into debt when unexpected expenses arise. If your savings are limited, consider a blended approach — pay down some debt while maintaining a small safety net.

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