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When you’ve maxed out on your card — or reached your credit card spending limit — it can have a negative impact on your finances. Here’s a closer look at what happens if you max out on a credit card and how it can affect your credit score, as well as how to prevent maxing out your card or bounce back if you already have.

When Is a Credit Card Maxed Out?

So, what is a maxed out credit card? Maxing out on a credit card simply means that you’ve reached the credit limit on your credit card. For instance, if you have a $20,000 credit limit on a card, and your balance hits that $20,000 mark, it’s maxed out. As such, you may not be able to put any more purchases on that card.

Recommended: What Is a Charge Card

What Happens If You Max Out Your Credit Card?

There are a number of financial impacts of a maxed-out credit card. For starters, your card will likely get declined if you try to make a purchase. This is because rather than overdrafting a credit card, your credit card is typically just turned down (though in some cases, you could instead face fees for exceeding the limit, and the charge will go through).

Additionally, you could end up paying quite a bit in interest if you can’t pay off your entire statement balance in full. Plus, it could take you a long time to pay off your balance, further increasing the interest you pay over time. Your minimum payment due may also increase, depending on how it’s calculated by your issuer.

A maxed-out credit card also means that your credit score will take a hit. That’s because your credit utilization — how much of your available credit you’re using — makes up 30% of your credit score. If you’re maxing out a credit card, it looks as if you’re overextended financially, which signals to lenders that you’re a risk.

Recommended: When Are Credit Card Payments Due

Guide to Prevent Maxing Out Your Credit Card

To avoid maxing out on your credit card, here are some steps to take:

•  Establish an emergency fund: Without an emergency fund, you’ll likely resort to using your credit card in a pinch, which could lead you to max out your credit card. To avoid ending up in this situation, aim to stash away at least three to six months of living expenses. If that seems like a tall order, start with one month of living expenses, and go from there.

•  Keep tabs on your spending: A golden rule of using a credit card responsibly is to check your credit card statements to monitor usage. Aim to check your balance at least once a week, if not more frequently.

•  Know how much of your credit you’re utilizing: Another of the golden credit card rules is to know what a reasonable balance to keep is and how much of your credit card is being utilized at any given time. For instance, if 30% is the maximum amount you’d like to maintain on your card, and your credit limit is $5,000, then $1,500 is the highest balance you should aim to carry. Many financial experts advise keeping to no more than 30% or, better still, 10% of your credit limit.

•  Request an increase to your credit limit: If you increase your credit limit, it would lower your credit use. However, keep in mind that you also run the risk of racking up a higher credit bill. When considering requesting a credit limit increase, you’ll want to make sure you won’t end up simply spending more.

How Maxed-Out Credit Cards Can Affect Your Credit Score

If you’re wondering if it is bad to max out your credit card, know that it absolutely can have a negative impact on your credit score due to how credit cards work.

When you carry a high balance on a card, it drives up your credit utilization ratio, which can drag down your score. It’s generally recommended to keep the amount of your total credit you’re using at no more than 30%, preferably closer to 10%. If your cards are all maxed out, your ratio is closer to 100%.

However, you can save your score from the negative effects of a maxed-out credit card if you can pay off the balance in full before the statement period closes. If you do this, the maxed-out balance would not get reported to the credit bureaus. That will also help you avoid interest on credit cards.

Tips on Bouncing Back from a Maxed-Out Credit Card

If you’ve hit your credit card spending limit, it is possible to recover. Here are some tips for how to bounce back from what happens when you max out your credit card.

Consider a Balance Transfer Card

Transferring your existing balance to a balance transfer card with a 0% APR interest rate could help you save money on interest. However, you’ll need to have a plan in place to pay off the balance in full before the interest rate kicks in and you’re back in the same place once again. Also note that balance transfer fees may apply, which are generally 3% to 5% of the amount you’re transferring. Also make sure you understand how a balance transfer can impact your credit, as you will likely have a hard inquiry temporarily lowering your score.

Request Help

If you’re really struggling to keep your credit card spending down or are having trouble making payments, consider working with a professional. A credit counselor or nonprofit credit counseling organization can sit down with you to learn about your debt situation and the state of your finances. From there, they can suggest a game plan to help you manage your debt.

Consider Personal Loans

Another way to bounce back from maxing out on a credit card is to take out a personal loan to pay off your credit card debt. This might make sense financially if you qualify for a lower interest rate with the loan than you have on your credit cards. It could also simplify the payment process by rolling all your debts into a single loan.

The Takeaway

If you’ve hit your spending limit on your credit cards, it can negatively impact your credit score and translate to paying more in interest over time. While it’s best to avoid, should you max out on your cards, there are ways to recover and rebuild your credit.

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

FAQ

What happens if I max out my credit card but pay in full?

If you max out your credit card but pay off your balance in full before the statement period ends, your credit utilization ratio won’t be impacted. In turn, it won’t have a negative impact on your score.

Can I still use my card after reaching the credit limit?

After you’ve reached the credit limit on your card, you generally won’t be able to make purchases on it. Your card won’t go through, and transactions will be declined. In some cases, however, your transaction may go through and you’ll instead owe a fee.

Is it bad to max out your credit card?

Hitting the spending limit on your credit card can have a negative financial impact. First, it can bump up your credit utilization ratio, which can bring down your credit score. It also could equate to a higher monthly minimum payment, and more interest paid over time. Plus, you likely won’t be able to put any more purchases on that card.

How can maxing out your credit card affect your credit score?

When you hit the spending limit on a card and don’t pay it off before the statement period ends, it impacts your credit utilization ratio, which makes up 30% of your credit score. In turn, your credit score will take a hit. On the flip side, decreasing the balances on your card can help build your score by lowering your credit utilization.

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Photo credit: iStock/nensuria

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 .

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Credit card points are a common incentive for cardholders to actively make purchases on a rewards credit card. Once earned, cardholders can use credit card points toward a redemption option they find worthwhile. This can include travel or a purchase credit toward a good or service.

Read on to learn more about how credit card points work, including how to get and how to use credit card points.

What Are Credit Card Points?

Credit card points are one of many different credit card rewards that card issuers offer to consumers through a rewards program. For instance, a program might offer you two points for every dollar you spend on the card, which you could then redeem for use once you’ve accumulated a certain amount of points.

Points act as a form of currency within a credit card rewards program, designed to entice cardholders into maintaining spending activity on the card. Some reward programs for credit cards are also co-branded to encourage loyalty to a particular brand.

How Do Credit Card Points Work?

Understanding how credit card points work ultimately comes down to knowing how to earn points on credit cards — and then how to redeem them.

Earning Points on Credit Cards

There are a number of ways to earn points on your rewards credit card account:

•   Everyday purchases: Using a card as your primary payment method for your routine expenses is one way to earn points. Depending on your preferences and the features of other rewards cards in your wallet, you might choose to put purchases, like your morning coffee, groceries, rideshare expenses, and more on the card.

You might also choose to dedicate certain spending categories to a rewards card that offers bonus points toward that purchase. For example, if your rewards card offers 5X points when using your card at the supermarket, you might decide to use the card for grocery costs only.

•   Shopping with credit card partners: Part of finding the right card for you is researching whether the credit card partners with brands and services that you already shop with. For example, some cards partner with ride-sharing services, like Lyft, and offer bonus points for every Lyft purchase put on the card.

Note that some card issuers require you to pre-register for this type of bonus point incentive. You might have to link your rewards card to your Lyft account in order to receive bonus point credit for ride costs, for instance.

•   Sign-up bonuses: If you’re expecting a costly upcoming expense, like a medical bill or home repair, a common strategy to earn credit card points quickly is finding a competitive credit card bonus offer. Sign-up bonuses typically offer a promotional bulk quantity of points after you spend a minimum amount on the card within the first few months of opening the account.

Putting your large purchase on a new card accelerates your point earnings, but make sure you can pay your monthly statements in full to avoid interest charges — one of the important credit card rules to abide by in general. If you allow your balance to roll over into the next month, it can cut into the value of a sign-up points bonus.

•   Referral points: When you refer a friend to your rewards credit card program, some card issuers offer a referral bonus. Typically, you’ll receive a referral bonus reward, and your friend also receives bonus points if they meet certain spending requirements on their new card. Referral points vary by credit card, but it’s another option for cardholders who want to earn points on credit cards while giving friends a bonus perk, too.

Redeeming Points on Credit Cards

You can redeem credit card points in various ways. Common options to redeem credit card rewards points, depending on your card’s redemption choices, include:

•   Flights

•   Hotel stays

•   Car rentals

•   Statement credits

•   Cash back

•   Gift cards

•   Merchandise

•   Online retailers

•   Special experiences

•   Charitable donations

Redemption typically takes place through the card issuer’s app or website, or through the issuer’s dedicated rewards program website.

Types of Credit Card Rewards

Credit cards offer different types of rewards options. The common “currencies” are points, miles, and cash back.

Reward Points

You can earn credit card points by making purchases on your rewards card. Some credit card products offer a flat rate per dollar spent on your card, while others offer bonus points toward a spending category.

For example, a card might offer tiered bonus points at a rate of 5 points per dollar at restaurants, 3 points per dollar toward every gasoline purchase, and 1 point per dollar on everything else.

Miles

Miles are a common reward unit that’s typically used among travel credit cards and airline-branded rewards cards. Depending on the mileage rewards program, you’ll typically earn bonus miles when charging travel-related expenses on your rewards credit card. Some credit cards also let you earn miles on non-travel purchases at a lower mile-per-dollar rate.

This type of credit card reward is ideal for regular travelers who often fly to their destination and are interested in using credit card rewards to travel for less. If you prefer flying on a specific airline, a branded rewards credit card can help you earn miles toward a future flight, in addition to other redemption options, like hotel stays or goods. General rewards mileage cards can be redeemed in a similar way, but it’s not restricted to a particular carrier.

Cash Back

Credit cards that offer cash back rewards let you earn a percentage of cash back based on the amount you spend. This can typically be redeemed as statement credit to reduce how much you owe on your monthly credit card bill, which can be part of using credit cards responsibly. Or it can be redeemed as cash sent directly to you. Some cash back credit cards let you redeem cash back rewards as credit toward a purchase through one of the issuer’s partners.

If you’re not an avid traveler, a cash back card can be a straightforward option to earn and redeem rewards. Many card issuers offer a flat-rate rewards model that offers an easy-to-remember cash-back percentage on all card purchases.

How Much Are Credit Card Points Worth?

The value of each credit card point is generally worth 1 cent. However, reward valuations vary between credit card reward programs and can also differ based on how you choose to redeem them.

For example, your credit card points could be worth 1 cent when you redeem them for cash or gift cards, but worth 1.25 cents when you redeem them for travel-related options, such as flights or dining. Keep in mind that these amounts can vary widely, so it’s important to understand the terms and conditions of your credit card.

Recommended: Tips for Using a Credit Card Responsibly

Getting the Most of Your Credit Card Points

Below are a few helpful ways to maximize your credit card points:

•   Stay on top of bonus categories. Some rewards credit cards offer rotating bonus spending categories that temporarily increase the points you can earn per dollar spent on the card. These types of cards often require you to “enroll” in the bonus category, so familiarize yourself with your card’s bonus calendar.

•   Be aware of bonus limits. Read the rules of your rewards program, including thresholds on the maximum dollar amount that’s eligible for bonus rewards.

•   Calculate if the annual fee is worth it. Before signing up for a rewards credit card, review your spending habits over the last year. Note the spending categories and amounts you’ve spent. Based on this information, calculate whether the card’s rewards program and benefits — like TSA PreCheck credit and other perks — exceed the annual fee you’d spend each year.

The Takeaway

Accruing credit card points, miles, or cash back can be worthwhile as long as you use your card responsibly and select a rewards card that fits your lifestyle. Before putting your earned rewards toward a high-dollar purchase, or applying earned cash rewards to your monthly statement, keep your objective in mind.

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

FAQ

Do credit card points expire?

Typically, credit card points don’t expire. However, your points might expire if your credit card account is closed, falls into bad standing, or after a period of inactivity. Different cards have varying rewards program terms and conditions, so check with your card issuer to see if your credit card points have an expiration timeline.

Do credit cards with rewards have higher interest rates?

Rewards credit cards tend to have higher interest rates compared to regular credit cards. Cardholders with a positive credit history and strong credit score generally qualify for lower interest rates compared to those with a low credit score.

What is the use of earning reward points on my credit card?

Earning rewards points on your credit card allows you to get something in exchange for the spending you do with your credit card. For example, depending on your rewards program, you can redeem credit card points as a cash back reward or put them toward future travel or other purchases.

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Photo credit: iStock/stefanamer

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.

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Whether you’re renting a car to use while on vacation or because your usual vehicle is temporarily out of commission, you might have been asked if you’d like to purchase additional car rental protection. If you paid for your car rental reservation using a credit card, your card may already offer some form of rental protection. However, not all credit cards offer this benefit, and those that do provide varying car rental insurance benefits.

Learning the requirements and limits of your credit card’s car rental insurance coverage — if any at all — can help you make an informed decision when booking or picking up your car rental.

What Is Credit Card Rental Car Insurance?

Rental car insurance through a credit card is also called an “Auto Rental Collision Damage Waiver.” It generally states that if a rental car that was purchased using the card sustains damage due to an automobile collision or theft, you can file a reimbursement claim through your credit card issuer.

This might include a range of damage, from a smashed window due to theft to a car accident involving another vehicle. An Auto Rental Collision Damage Waiver typically covers damage-related costs of the vehicle itself, but it doesn’t cover stolen personal items resulting from the theft, like a laptop, or costs related to bodily injury.

Understanding Your Credit Card’s Coverage for Rentals

Not all credit card car rental insurance terms offer the same level of coverage. For example, some credit card rental car insurance only kicks in after your personal auto insurance coverage and with reimbursement limitations.

Credit card car insurance generally falls into one of two categories: primary or secondary coverage.

Primary Coverage

Certain issuers offer credit card rental car insurance as primary coverage. Primary coverage means that, in the event of damage or theft, you can file a claim directly through the card issuer for reimbursement. You’re not required to file a claim through other insurance sources, like your personal auto insurance company, before the primary credit card car rental insurance benefit applies.

Secondary Coverage

Unlike primary coverage, secondary coverage rental car insurance protection through a credit card offers supplemental reimbursement. With secondary coverage, you’ll first need to file a claim through your personal insurance coverage policy or other sources, such as supplemental insurance through the rental company.

What if you’ve reached your maximum reimbursement through other insurance sources, but you have a remaining reimbursable amount? In this scenario, your credit card rental car insurance benefit can then be used to claim the remaining amount.

Recommended: How Much Auto Insurance Do You Need?

How Does Credit Card Rental Insurance Work?

If you’re renting a car using a credit card that offers rental insurance benefits, you’ll need to follow certain steps to claim a reimbursement. Requirements might vary slightly between card issuers, but below are the general steps you can expect to follow:

1.    Use a credit card with rental insurance protection. The first question you’ll need to answer is, does my credit card cover rental car insurance? If it does, put the entire cost of the rental on your credit card. Keep that card on file with the rental company in case any eligible damage occurs.

2.    Opt out of the car rental company’s collision insurance coverage. If you purchase coverage through the rental company, that becomes the primary source of coverage instead of your credit card issuer.

3.    Pay for damages out-of-pocket. If an incident occurs involving the rental vehicle, your credit card will be charged. You’ll then file a reimbursement claim for the amount of any applicable repair costs through your credit card rental car insurance coverage. Some card issuers allow claim payments to go directly to the rental company, upon request.

4.    Maintain documentation. This includes police reports, if available, as well as rental receipts, damage charges from the car rental agency to your credit card, towing receipts, and any other documentation or proof of expenses as a result of the incident.

5.    Submit your claim ASAP. File an Auto Rental Collision Damage reimbursement claim as soon as possible, as it can take weeks to settle a claim. If your card issuer’s benefits administrator reaches out for additional information or documents, submit those details within their designated timeline to avoid issues or possible denial of your claim.

Questions to Ask Your Credit Card Issuer

In addition to learning what your own car insurance covers, it’s important to know your credit card’s rules around its Auto Rental Collision Damage Waiver benefit. If you’re unclear about how your card can protect you while using a rental car, contact your issuer’s customer support number. Here are some important questions to ask:

•   Does the rental car insurance benefit offer primary or secondary coverage? The answer to this question can help you choose the best payment option to use for your next rental car. It will also give you a sense of what to expect if you need to file a claim.

•   What is included and not included in the coverage? In addition to reimbursements for damage, you’ll want to know if the card’s rental car insurance covers loss-of-use charges from the rental company, for example. Be clear on what isn’t eligible for reimbursement, too.

•   What are the coverage timelines? Depending on your credit card issuer, the number of days when your rental coverage is in effect might be limited.

•   Are there any countries in which the coverage is ineligible? Rental car insurance coverage might not be offered if the incident occurred in certain countries.

•   What do I need to do to ensure I’m covered? Ask what you can do on your end to ensure your rental car is covered by the credit card’s insurance benefit. This may include putting the entire purchase on the card, declining supplemental rental insurance coverage from the rental company, or other requirements stipulated by your insurer.

•   What’s the process for filing a claim? Knowing how to swiftly file a claim after an incident can offer some peace of mind during an already stressful situation.

Recommended: When Are Credit Card Payments Due

Guide to Choosing the Right Credit Card for Car Rental Insurance

If you have multiple credit cards in your rotation that offer differing levels of credit card car insurance protection, consider using the card that offers primary coverage. This helps you avoid the added step of going through your own auto insurance company before being able to successfully file a claim through the card issuer.

The next factor for consideration is coverage amounts. Your maximum reimbursement amount will vary between insurance coverages, so be mindful about how high or low this limit is. Also, pay attention to the exclusions for coverage, including ineligible countries, activities (e.g. off-roading in the rental vehicle), and restrictions on vehicle type.

Other Ways Your Card Can Protect You When You Travel

When a credit card is used responsibly, it can offer many travel-related benefits. In addition to rental car insurance coverage, some credit cards provide protection for lost luggage expenses and trip interruptions.

Credit card travel insurance is especially useful if your travel plans are canceled due to reasons like severe weather or illness.

Keep in mind that many premium travel credit cards will have higher credit score requirements, which is another reason why good credit is important if you’re interested in accessing these benefits.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

The Takeaway

If your credit card covers rental car insurance, in many cases you can decline the duplicative car rental company’s offer for collision coverage. However, it’s worth learning whether your credit card car rental insurance coverage is primary or secondary and what its coverage limits are in case you need to file a claim

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

FAQ

Do you need a credit card to rent a car?

No, you generally do not need a credit card to rent a car through many national car rental companies, like Enterprise, Hertz, and Avis. Major car rental companies often accept a debit card to secure your rental. Depending on the rental company, your debit card may need to have the logo of a credit network, such as Visa, MasterCard, Discover, or American Express.

Do all credit cards have car rental insurance?

No, not all credit cards provide car rental insurance benefits. However, many credit cards offer this protection to some extent, whether as a primary or secondary coverage. If you’re interested in accessing this benefit, make sure to familiarize yourself with which credit cards cover rental car insurance.

How do I know if my card comes with primary or secondary insurance?

You can refer to your credit card’s terms and conditions to learn whether your credit card offers car rental insurance protection and, if it does, whether it’s primary or secondary coverage. You can also contact the customer support phone number listed on the back of your credit card to speak to a representative about your specific card’s car rental insurance benefits.

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Photo credit: iStock/g-stockstudio

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.

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Financial gurus, your money-savvy friend, and personal finance books and articles all say the same thing: You need a budget. Why? Because without any guardrails to guide your spending decisions, you can end up overspending (and, in turn, running up debt). You may also find it difficult to reach important financial goals, such as building an emergency fund, going on vacation, or buying a home.

The main characteristics of any budget are estimates of how much money you’ll make and how much you’ll spend over a certain period of time, typically a month. Trouble is, it can be hard to predict every expense that may come up in a given month. That can make it hard to know what to include in your budget. But don’t give up — read on. What follows are eight key components of a successful and realistic budget.

The Importance of Budgeting

While a budget may sound restrictive, it’s really nothing more than a plan for how you will spend your money. Why bother making one? Here’s a look at some of the benefits of putting together a basic budget:

•   Lets you know if you’re spending more than, less than, or about the same as you’re earning each month.

•   Gives you a birds-eye view at where exactly your money is going each month.

•   Helps you avoid spending more than you have or want to spend.

•   Alerts you to subscriptions or services you’re paying for but may no longer need.

•   Ensures you stay on top of debt payments.

•   Allows you to make adjustments in your spending and saving so you can align your financial habits to reach your goals.

•   Can prevent you from going into debt should there be an unexpected, emergency expense or if you get laid off

•   Helps you feel more secures and less stressed about money

💡 Quick Tip: Want to save more, spend smarter? Let your bank manage the basics. It’s surprisingly easy, and secure, when you open an online bank account.

Key Characteristics That Make a Budget Successful

While there are many ways you can approach managing your money, all budgeting styles share some of the same key elements. Let’s take a look at the main characteristics of a budget that can help you stay on track and boost your overall financial wellbeing.

Emergency Funds

The bedrock of any type of budget is an emergency fund. Without a cash reserve set aside specifically for unplanned expenses or financial emergencies, any bump in the road — say a car repair, trip to the ER, or a loss of income — can force you to run up credit card debt. This can lead to a debt spiral that can take months, potentially years, to recover from.

A general rule of thumb is to keep three to six months’ worth of basic living expenses in a separate savings account earmarked for emergencies. If you’re self-employed or work seasonally, however, you might want to aim for six or 12 months of expenses to feel secure and protected.

Recommended: Where to Keep Emergency Funds

Irregular Expenses

When creating a budget, you likely won’t overlook your recurring monthly expenses, such as rent, utility bills, and food. What’s easy to forget about are your one-off and irregular expenses.

To set up an accurate budget, you’ll want to be sure to jot down any annual or seasonal expenses you anticipate, such as membership dues, holiday gifts, insurance payments, car and registration fees, or kid’s camp expenses. Scanning through your monthly checking account statements for a year should help you suss out your irregular expenses.

To adequately account for these expenses, determine the annual cost, divide by 12, and build that amount into your monthly budget. You may want to transfer that money into a separate account so you can pay those expenses when they’re due.

Recommended: What Are the Average Monthly Expenses for One Person?

Repaying Debt

For a budget to be successful, you want to make sure you’re accounting for debt repayment, including minimum monthly payments and (if you’re carrying high-interest debt) additional payments. The 50/30/20 budgeting rule, for example, recommends putting 50% of your money take-home income toward needs (including minimum debt payments), 30% toward wants, and 20% toward savings and debt repayment beyond the minimum.

Once you’ve paid off your balances, the money you were spending on debt/interest each month can now go towards other goals, such as a vacation, large-ticket purchase, or down payment on a house.

Recommended: See how your money is categorized using the 50/30/20 Budget Calculator.

Monthly Savings

Even if you tend to live paycheck to paycheck, a key element of a budget is putting at least something into savings each month. For example, with the “pay yourself first” approach to budgeting, you set up a recurring transfer from your checking account into your savings account on the same day each month, ideally right after you get paid.

Once you’ve fully funded your emergency saving account, you can funnel this extra money into a high-yield savings account to work towards your short-term savings goals.

And it’s fine to start small. If you save $20 a week, in a year you’ll have accumulated $1,040. If you commit to the 52-week savings challenge, where you save $1 the first week, $2 the second week, and so forth for an entire year, you’ll have stashed away $1,378 by week 52.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

Accurate Monthly Income

Without knowing exactly how much money hits your bank account each month, you won’t be able to allocate your funds accordingly and create an accurate budget. Besides your paycheck, you’ll want to factor in any other income streams, such as freelance work, government benefits, alimony, or child support.

If you’re self-employed and your income varies from month to month, determining your monthly income can be a bit trickier. One solution is to use your lowest monthly income over the past year as your baseline income (minus any taxes you will owe). This gives you a margin of safety, since you will likely make more than that.

Money for Vacations and Free Time

While it’s important to save for an emergency fund and pay off your debt, a key component of budgeting is money for fun and leisure. Without it, you likely won’t stick to your budget at all.

Think about what activities bring you the most joy and offer the most value in your life. What hobbies would you like to invest more time, energy, and resources in? Where would you like to vacation next? From there, you can set some “fun” savings goals. Consider how much you will need and when you want to reach your goal to determine how much to set aside for fun each month.

Recommended: 15 Creative Ways to Save Money

Retirement

Retirement might seem far off but failing to start saving early can put you in a tough predicament later on. Thanks to compound interest — the interest earned on your initial savings and the reinvested earnings — it’s much easier to amass a comfortable nest egg when you start early. Even if you’re still paying off your student loans, retirement is an important element of a budget that can make a huge difference in your future.

If you work for a traditional employer, you likely have a company 401(k) you are eligible to participate in. If your employer offers a company match, it’s wise to contribute at least up to match — otherwise you’re leaving free money on the table.

Realistic Goals

While many people don’t write down specific goals when creating a budget, this is actually an important element of budgeting. By setting realistic goals, such as building an emergency fund, saving for a downpayment on a car or a home, getting out of debt, or saving for retirement, you can begin to find ways to save for those goals and track your progress towards achieving them.

Having specific and realistic money goals can give you the motivation to take control of your spending. It also gives all the money that comes into your account a purpose.

Keep in mind, though, that goals and budgets are ever-evolving. When changes arise in your situation, you can tweak your goals accordingly. For instance, maybe you suffered a financial setback. In that case, you might want to put your foot off the pedal on aggressively paying off debt, and focus on replenishing your emergency fund.

Tips on Starting a Budget

If the idea of creating a budget feels overwhelming, here are some stimple steps that help jump start the process.

•   Determine your after-tax income. If you get a regular paycheck, the amount you receive is probably just that, but if you have automatic deductions, such as 401(k) contributions or health and life insurance, you’ll want to add those back in to give yourself an accurate picture of your earnings.

•   Tally your monthly expenses. You can scan your bank and credit card statements for the past three to six months to get an idea of what you typically spend each month and on what. You can then make a list of spending categories, how much (on average) you spend on each per month, and then break down those expenses into two main categories: “needs” and “wants.”

•   Make adjustments. If your average monthly income is less than your average monthly spending (meaning you are going backwards) or is about the same (meaning you aren’t saving anything), you’ll want to look for places to cut back. You likely find it easier to cut back spending in your “wants” categories, such as cooking a few more times a week (and getting take-out less often) or cutting the cord on cable and opting for cheaper streaming services.

•   Choose a budgeting plan. Once you’ve done the basics, you can take it a step further by selecting a budgeting plan. Any budget must cover all of your needs, some of your wants and — this is key — savings for emergencies and the future. The 50/30/20 budget (mentioned above) often works well for beginners. But there are many different types of budget — including the envelope system and zero-based budget. You might choose a budgeting app, such as YNAB or Goodbudget, to automate the process.

Banking With SoFi

Knowing exactly what elements go into a successful budget can help you create a spending plan that’s in step with your goals and help you do a lot more with the money you have.

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.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

How do I stick to a budget?

The best way to stick to a budget is to never spend more than you have. Running up high-interest debt can be a vicious cycle that is tough to get out of. You also end up spending a lot more on your purchases than if you have held off and saved up.

If you can’t afford something you want right now, it’s generally a good idea to put it off until you can. If you want to go on vacation or buy new furniture, for example, plan for it and save regularly so it doesn’t throw off your budget.

What is the best budgeting method?

The best budgeting method is the one you’re most likely to stick with. If you prefer to not worry so much about where you’re spending each dollar, you might prefer the 50/30/20 budget. If you like to get granular with your spending, then a zero-sum budget might be a good choice.

What are the benefits of budgeting?

Budgeting is a tool that helps ensure you’re spending your money in a way that aligns with your priorities. If you simply spend here and there without any type of plan, you can end up spending on things you don’t care all that much about, and never saving up enough for the things that you do — such as buying a car, going on vacation, or putting a downpayment on home.

Budgeting also helps ensure you can pay all your bills, have a cushion for the unexpected, and avoid running up expensive debt.

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Photo credit: iStock/AndreyPopov

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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.

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Card skimmers are small devices that fit into credit card readers (say, at a gas station or outside ATM) and snag your card information. This can then be used to steal your credentials and commit identity theft.

Unfortunately, credit card fraud is all too common, totaling more than 426,000 instances in the most recent year studied. These skimmers, installed by would-be criminals, contribute to this figure. Here’s another indicator of how pervasive skimmers are: The FBI reports that financial institutions and consumers lose more than $1 billion per year to this practice.

To help protect yourself against theft, keep reading to learn what credit card skimmers are, how to spot a credit card skimmer, and what to do if your credit card is skimmed.

What Is a Credit Card Skimmer?

Credit card skimming is a form of theft that occurs when someone installs a small electronic device, known as a credit card skimmer, into a card reader. This device can read and collect information from a credit card when someone makes a purchase. The skimmer does this by reading the magnetic strip on a debit or credit card, which provides the full name on the credit card as well as the credit card number and credit card expiration date.

Credit card skimmers have been around for almost a decade. They are most commonly attached to gas station pumps, ATMs, and other types of machines that accept payments from both secured and unsecured credit cards as well as debit cards.

Identifying Credit Card Skimmers

Knowing how to check for credit card skimmers is a great way to protect against potential theft. Especially when using an outdoor payment machine like a gas pump or ATM, take a look at the card reader for signs of a credit card skimmer. See if the card reader is sticking out at an angle or looks any different from other nearby card readers. Also check if the card reader is loose or the keypad is unusually bulky.

When skimmers first came into play, it was easier to spot a credit card skimmer as the card reader often appeared to be tampered with or wiggled when used. Today, skimmers can fit snugly over the scanner, which makes it much harder to tell if something is amiss.

In the instance that all seems well with the card scanner at a gas station, double check the pump. If a gas pump is open, unlocked, has had the tamper-evident security tape altered or removed, or anything else seems amiss, it’s a good idea to use a different pump.

If possible, it’s best to use a credit card pump that has an encrypted credit card reader. Ideally, use one that has the illuminated green lock symbol near the credit card reader — this symbolizes that it’s been encrypted.

What Happens When a Credit Card Is Skimmed

When a credit card skimmer reads a magnetic strip on the back of a credit or debit card, it can obtain the cardholder’s full name, credit card number, and the credit card expiration date. Sometimes, scammers add a small camera into the equation in order to watch someone enter their PIN number when using a debit card. Really, one of the few things that’s safe is the CVV number on a credit card, which is why it’s so important to keep this secure.

Once the thief has this information in hand, they can use the card anywhere that accepts credit card payments. They may have access to the cardholder’s bank account and could steal their identity. Or the thief can sell the information on the dark web.

Recommended: 10 Common Credit Card Scams and How to Avoid Them

Protecting Yourself From Credit Card Skimmers

If you’re old enough to get a credit card, it’s critical to know how to use it responsibly and safely. Here’s a few tips to keep in mind to avoid falling prey to credit card skimmers.

Use NFC or Supervised ATMs

To help avoid coming into contact with a card skimmer, try to use payment terminals that are supervised by security cameras or skip using the card reader altogether and make a Near Field Communication(NFC) payment. NFC payments are secure transactions made with a smartphone, allowing you to avoid swiping your card at all.

Check and Recheck the Keypad

When it comes to how to spot a credit card skimmer, remember to check the keypad for any signs of tampering. These days, it’s a bit harder to identify when a keypad has a skimmer on it, but if anything seems amiss, use another payment machine or go inside the gas station or bank to make a transaction or withdrawal.

Don’t Leave Your Card Unattended

Whenever possible, make a transaction or withdrawal inside of a gas station or bank. The odds of a criminal accessing inside payment terminals with a clerk watching are much lower compared to outside payment terminals. It only takes criminals a few seconds to add a skimmer to an outside payment terminal where no one is watching.

Just like taking the time to compare the APRs on credit cards, spending a few extra minutes going inside to buy gas or take out cash can pay off. It could help you avoid countless hours of dealing with identity theft as a result of credit card skimming.

Use Credit Cards With a Chip

If you’re familiar with what a credit card is, you’ll know that most credit cards today come with a “chip” that allows consumers to make payments without actually swiping their credit card. With an EMV chip, it’s possible to simply tap a credit card instead of swiping it to make a payment, which helps avoid credit card skimming. If you have a card that is old-school and lacks a chip, you might ask the issuer if an updated version is available.

Be Vigilant

If someone does need to use an outdoor ATM or gas pump, use one that is close to the building and preferably in the line of sight of an attendant, security guard, or security cameras. The more hidden a payment terminal is, the more likely it is that there is a credit skimmer placed on it. Also make sure to be aware of your surroundings when using any exterior payment terminals.

Sign Up for Credit and Debt Alerts

One way to catch fraud is to sign up for alerts that send a notification any time a purchase is made with the card. After all, it’s unlikely a fraudster’s activity will result in a negative balance on a credit card.

By receiving an alert right when a purchase is made, you can confirm whether or not you made it. If you believe an unauthorized purchase was made, contact your bank or credit card issuer immediately.

Check Your Account Regularly

To be extra vigilant, double-check debit and credit card statements frequently to make sure that no unauthorized charges slipped through the cracks. It can be easier to stay on top of charges if you check in throughout the month rather than waiting until you receive your credit card statement and being shocked that you’re almost at your credit card limit due to unauthorized spending.

Can You Get a Refund if Your Card Gets Skimmed?

If you realize your credit card or debit card has been skimmed, check in with your bank or credit card issuer about next steps. You should also put a freeze on your credit report to ensure that the fraudsters aren’t applying for new credit cards in your name. In some cases, you may need to file a police report.

The credit card issuer or bank will have fraud protections in place and should refund you for any money lost. These protections are an important part of how credit cards work. Still, the sooner you cancel the cards and stop the fraud, the better. Most top credit cards have zero-liability policies that will refund the full amount of the fraudulent charges. If they don’t, the maximum liability anyone has as a consumer is $50.

The Takeaway

Skimmers, small devices that fit over credit card readers, are unfortunately a common way that financial credentials can be stolen and unauthorized charges or identity theft enacted. These are especially common at gas station pumps and outside ATMs. With a debit card, consumers aren’t entitled to as much protection regarding theft, so it’s helpful to use a credit card whenever making purchases at an outdoor payment terminal that’s vulnerable to skimmers. Still, it’s important to know how to spot credit card skimmers so you can hopefully avoid them.

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

FAQ

What does a credit card skimmer do?

Credit card skimmers illegally collect information from credit and debit cards. Skimmers are typically attached to outside payment terminals like ATMs or gas stations.

Are card skimmers illegal?

Yes, credit card skimmers are illegal. This is why credit card issuers are creating new technology like chips to help make purchases more secure.

How common is credit card skimming?

Credit card skimming is all too common. The FBI reports that it costs financial institutions and consumers more than $1 billion per year.

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Photo credit: iStock/greyj

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.

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