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When you take out a loan, you likely have every intention of repaying it in full. But what if something such as a job loss, an illness, or an injury keeps you from fulfilling your obligation? That’s where loan protection insurance comes in.

Loan protection insurance, also known as credit insurance, is a type of insurance policy designed to cover a borrower’s loan payments if they become unable to make them due to an unforeseen circumstance.

This type of coverage can provide peace of mind — and help protect your credit — in the event of the unexpected. But ​​it comes at a cost, and in some cases, it may not be necessary.

Read on for a closer look at loan protection insurance, including what it is, how it works, what may be excluded from coverage, and whether it’s worth buying.

Loan Protection Insurance Definition

Loan protection insurance is an insurance product that lenders sometimes offer borrowers with certain types of loans, including personal loans. Typically, the insurer will make the loan payments for a set period of time (or up to a predetermined amount) if the policyholder can’t keep up with the obligation because of a covered event.

For example, let’s say you take out a personal loan and opt to purchase credit insurance. If at some point during your repayment term, you lose your job, get into a car accident, or become hospitalized with a serious illness, the insurance can help ensure your debts are paid.

💡 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.

How Does Loan Protection Insurance Work on Personal Loans?

Personal loan protection insurance is designed to help prevent a borrower from defaulting on a personal loan in the event of financial hardship. If a covered event occurs, the insurer agrees to step in and make payments on the loan for a set period of time, typically between 12 and 24 months.

Events that are often covered by personal loan insurance include:

•   Job loss

•   Sickness

•   Accidents

•   Death

What makes credit insurance different from other types of insurance policies is that the payments go to the lender, not the policyholder. Though you’re the one paying the premiums for credit insurance, the payout goes directly to your lender.

Recommended: What Happens If You Default on a Personal Loan?

What Does Loan Protection Insurance Cost?

The cost of loan protection insurance varies widely depending on the insurer, the coverage amount, the length of coverage, your age, the state you live in, and other factors. Typically, the cost is calculated as a percentage of the monthly loan payment, ranging from 1% to 5%. As a result, the larger the loan balance, the more it costs to insure it.

If you’re considering loan protection insurance, you may want to compare the cost of the policy to other types of insurance — such as life insurance, disability insurance, or accident insurance — especially if these types of coverage are offered for free or at a subsidized rate through your employer.

One way you may be able to reduce the cost of loan protection insurance is to pay the premium in a single payment instead of rolling it into your monthly loan payments. Some credit insurers will offer a sizable discount if you’re willing to pay the full cost of the insurance up front.

What Are the Benefits of Loan Protection Insurance?

Loan protection insurance isn’t necessarily the right fit for everyone, but it does offer some advantages (especially if the policy is reasonably priced). Here are some benefits to consider.

Credit Score

If an unexpected hardship occurs and you’re unable to make your loan payments, loan protection insurance could kick in and prevent you from missing payments or defaulting on the loan — and taking a hit to your credit.

Recommended: What Is Considered a Bad Credit Score?

Save Money

Maintaining a strong credit profile can pay off down the line by helping you qualify for loans with lower rates and better terms. This can help you save money and make the cost of the credit insurance worthwhile. Future employers and landlords may also look at your credit when making decisions.

Peace of Mind

Having credit insurance can take some of the pressure off of loan repayment and provide the comfort of knowing that, if something happens that makes you unable to pay your debt, you’ll be protected.

💡 Quick Tip: With lower fixed interest rates on loans of $5K to $100K, a SoFi personal loan for credit card debt can substantially decrease your monthly bills.

Risks of Having Loan Protection

One downside to loan protection insurance is that you might end up paying for something you never use. Here are some other drawbacks to consider.

Cost

Loan protection insurance can be expensive compared to stand-alone disability and life insurance policies. It’s worth assessing what type of coverage you already have and comparing the cost of loan insurance to other types of coverage, such as supplemental disability or life insurance.

Coverage Limitations

There may be limitations on coverage, which could decrease the policy’s usefulness. For example, in some cases, a loan protection policy won’t cover a pre-existing illness or won’t kick in if you take on a part-time job or any freelance work after losing your job.

May Not Be Necessary

If your main concern is protecting your family from being liable for your debt should you become unable to pay, know that most loans that are only in your name (and don’t have a guarantor or cosigner) cannot require your family to make your loan payment if you’re unable to. If you’re not worried about loan default (and potentially losing your assets to creditors), loan protection insurance may not be worth it.

Recommended: Am I Responsible for My Spouse’s Debt?

Common Reasons for Being Refused Loan Protection

Because there are different types of loan protection insurance and policies can differ from one company to the next, it’s important to review the reasons your policy might not pay out when you make a claim. Here’s a look at some common reasons why claims can be refused.

Part-Time Employment

If you lose your job but take on part-time work to make ends meet, a credit insurance policy may not kick in, and you’ll still need to cover your loan payments.

Pre-Existing Medical Conditions

If you are unable to work because of an illness, an injury, or another condition that existed before you purchased the policy, your claim could be refused. It’s important to understand which health conditions may not be covered under the policy before you sign up.

Short-Term Employment

If you lose your job because it was a short-term employment contract, you likely won’t qualify for a credit insurance payout, since the work was expected to end at that time.

Self-Employment

Self-employed workers might be able to make a claim if they become sick or disabled, but not if they lose the work that provides their income.

Being Able to Work Another Type of Job

If you lose your income due to an inability to continue your current job (say, due to an injury), but you are able to work another type of job, a loan protection policy may not pick up your loan payments.

Recommended: Personal Loan Modification: Is It Possible?

Is Loan Protection Insurance Required?

Loan protection insurance is optional. It’s illegal for a lender to force you to buy the policy in exchange for approving your loan. If you’re securing your personal loan with collateral (such as a car or some other asset), you may be required to insure that property, but you don’t have to insure it through the lender’s policy.

If you believe that your lender incorrectly told you that you wouldn’t be approved unless you purchased loan protection insurance, you can submit a complaint to your state attorney general, state insurance commissioner, or the Federal Trade Commission.

Recommended: Does Loan Purpose Matter?

The Takeaway

Loan protection insurance offers borrowers a way to continue making their loan payments and protect their credit scores in the event of an unexpected financial hardship. These policies are available for different types of lending products, including auto loans, mortgages, personal loans, and credit cards.

However, this protection comes at a cost, and some hardships are excluded from coverage. In many cases, short-term or long-term disability insurance policies may offer more cost-effective protection for a loss of income. So be sure to do your research and read the fine print on all costs and exclusions before you agree to loan protection insurance.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Can you get protection on a personal loan?

Yes. Loan protection insurance is available for several types of loans, including personal loans. Some lenders also offer hardship assistance programs for borrowers who run into trouble making payments due to unexpected circumstances.

What is loan protection insurance?

Loan protection insurance is a type of insurance designed to help protect you from defaulting on a loan due to an emergency, loss of income, or unexpected change in circumstances. If a covered event (such as a job loss, an accident, or an illness) occurs, the insurance would make payments on the loan for a predetermined period of time.

Why should you get personal loan protection insurance?

Personal loan protection insurance can provide peace of mind that, if you run into financial difficulty, you won’t default on your loan. Avoiding a loan default can help prevent negative financial consequences and damage to your credit. However, these policies can be costly and typically include several exclusions. Other types of insurance, such as disability or accident insurance, may be more cost-effective.

Photo credit: iStock/akinbostanci

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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.

SOPL-Q126-032

Both Buy Now, Pay Later (BNPL) and credit cards are both ways to spread out the payment for a purchase over time, but they have a few key differences. Buy Now, Pay Later plans typically have a specific number of payments that are determined up front. You’ll often pay a portion at the time of purchase, and then make regular payments over time, often with zero interest.

In contrast, when you pay with a credit card, you may not have to make any payment immediately. Instead, the credit card company will send you a monthly statement. You’ll likely need to make at least a minimum payment and will owe interest on any remaining balance. As long as you continue to make at least the minimum payments, there’s no limit to how long you can take to repay your purchase, but interest will continue to accrue.

Read on for more on the differences between Buy Now, Pay Later vs. credit cards.

What Is BNPL (Buy Now, Pay Later)?

Buy Now, Pay Later is a type of installment loan that allows customers to purchase something online and pay for it over time. In recent years, Buy Now, Pay Later programs have experienced significant growth.

Typically, BNPL companies allow you to split up a purchase into a set number of smaller payments (typically four), often without any interest. You make one initial payment — often 25% — and then be required to make a series of installment payments until your purchase is paid off.

BNPL services often do not do hard credit checks when you apply, making them an option for consumers with limited or poor credit. However, missed payments may be reported to the credit bureaus, and being even one day late on a payment can lead to hefty fees.

Recommended: When Are Credit Card Payments Due?

Pros and Cons of Buy Now, Pay Later

Buy Now, Pay Later comes with benefits and drawbacks. Here’s how they stack up:

What Is a Credit Card?

A credit card is a type of revolving credit that allows you to make charges against your line of credit.

When you apply for a credit card, the issuer will do a hard pull on your credit. If approved, you’ll be given a specific credit limit that is the maximum amount you can borrow. As you borrow against that limit when using a credit card, your available credit is reduced. Similarly, it’s replenished when you make payments.

Each month, you’ll get a statement listing all of the charges you made that month, plus any outstanding balance from the prior month. If you pay off your balance in full, you won’t be charged any interest due to how credit cards work. However, if you pay less than the full amount, you’ll owe interest on any remaining balance.

Pros and Cons of Credit Cards

Credit cards can serve as a useful financial tool when you use them responsibly and adhere to credit card rules. However, they also have the potential to cause harm. Here are some pros and cons of using credit cards:

Difference Between Buy Now, Pay Later and Credit Cards

While Buy Now, Pay Later plans and credit cards have some similarities, they have a few key differences. Here’s a look at BNPL vs. credit cards

What Is a Buy Now, Pay Later Credit Card?

Traditionally, Buy Now, Pay Later plans are offered by companies that are not traditional credit card companies. However, some credit card issuers are starting to offer credit cards with Buy Now, Pay Later features available.

With these Buy Now, Pay Later credit cards, you can combine some of the benefits of both options. You can use your credit card like you normally would (including earning rewards) and then identify larger purchases that you’d like to pay for over time with the Buy Now, Pay later card feature. This feature may charge a fixed monthly fee and/or interest at a lower rate than what’s typically charged on balances.

Pros and Cons of Buy Now Pay Later Credit Cards

Using the BNPL feature on a credit offers both advantages and disadvantages. Here are some to keep in mind:

Recommended: How to Avoid Interest On a Credit Card

The Takeaway

The choice between Buy Now, Pay Later (BNPL) and credit cards ultimately depends on your financial goals and spending habits. BNPL offers a quick, interest-free installment option for smaller purchases, often without a hard credit check, but lacks rewards and credit-building potential. Credit cards provide revolving credit, rewards, and the ability to build credit history, but carry the risk of high interest if the balance isn’t paid in full. Consider how each option aligns with your budget and debt management strategy before choosing the best fit for your purchase.

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

Is Buy Now, Pay Later better than a credit card?

Buy Now, Pay Later and credit cards can both be the right answer depending on your specific situation, so it’s hard to say that one is better than the other for every scenario. Buy Now, Pay Later can be a good option if you want to finance a purchase over a fixed period of time with no or low interest and fees.

Will BNPL affect my credit score?

Generally speaking, Buy Now, Pay Later (BNPL) plans do not impact your credit score as long as you make your payments on time. However, if you do not fulfill your BNPL contract, your outstanding debt may be reported to the credit bureaus, which could have a negative impact on your credit score.

Will BNPL replace the use of credit cards?

It is unlikely that Buy Now, Pay Later (BNPL) will fully replace credit cards. While BNPL has grown significantly, it primarily caters to smaller, short-term installment payments, often for specific online purchases. Credit cards offer revolving credit, greater acceptance across retailers, the ability to build credit history, and features like rewards programs that BNPL often lacks. Additionally, many credit card issuers are now integrating BNPL features, blurring the lines. Both options serve different, yet sometimes overlapping, financial needs and are expected to coexist in the consumer payment landscape.

Photo credit: iStock/RgStudio

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.

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.

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 .

SOCC-Q126-007

A statute of limitations is a state law that limits the period during which a creditor or debt collector can bring action in court to enforce a contract, such as a loan agreement or note. This means a creditor may not be allowed to sue a borrower in court to force them to pay a debt after the period has expired.

However, the statute of limitations on debt isn’t a wait-it-out solution that simply erases debt once it’s been owed for a few years. There may still be consequences to failing to pay back debts once the statute of limitations for debts has expired — and statutes of limitations don’t apply to some debts, including federal student loans. Here’s what you should know about statutes of limitations on debt.

What Is The Statute of Limitations on Debt?

Essentially, a statute of limitations on debt puts a time restriction on how long a creditor or debt collector is able to sue a borrower in state court to enforce the loan agreement and force them to repay the outstanding debts. In practice, this means that if a borrower chooses not to pay a debt, after the statute of limitation runs out, the creditor or debt collector doesn’t have a legal remedy to force them to pay.

To be clear, just because the statute of limitations has expired, it doesn’t mean that the borrower no longer owes the money, even though it does mean that the lender may not be able to take them to court for non-payment. The borrower will continue to owe the money borrowed, and their non-payment could be reported to the credit bureaus. It would then remain on their credit report for as long as allowed under the applicable credit reporting time limit. (For further evidence of how long debt can stick around, you might consider what happens to credit card debt when you die.)

Statutes of limitations don’t apply to all debts. They don’t, for example, apply to federal student loans. Federal student loans that are in default may be collected through wage or tax refund garnishment without a court order.

How Long Until a Debt Expires?

The length of the statute of limitations is determined by state law. State statutes of limitations on debt typically vary from three years to more than 10 years, depending on the type of debt and when the contract was entered into.

Figuring out exactly which state’s laws your debt falls under isn’t always as simple as you might imagine. The applicable statute of limitations may be determined by the state you live in, the state you lived in when you first took on the debt, or even the state where the lender or debt collector is located. The lender may even have included a clause in the contract you signed mandating that the debt is governed by a specific state’s laws.

One commonality in every state’s statutes of limitations on debt is that the “clock” does not start ticking until the borrower’s last activity on the relevant account. Say, for example, that you made a payment on a credit card two years ago and then entered into a payment plan with the debt collector last year but never made any subsequent payments. In that case, the statute of limitations clock would start on the date that you entered into the payment plan.

In this example, simply entering into a payment plan counts as “activity” on the account. This can make it confusing to determine if the statute of limitations has expired on your old debts, especially if you haven’t made a payment in a long time.

It may be possible to find out what the statute of limitations is by contacting the lender or debt collector and asking for verification of the debt. Remember that agreeing to make a payment, entering a payment plan, or otherwise taking any action on the account — including simply acknowledging the debt — may restart the statute of limitations.

After the statute of limitations on the debt has expired, the debt is considered time-barred.

Types of Debt

As mentioned, the length of the statute of limitations on debt can vary depending on the type of debt it is. To know which timeline applies, it helps to understand the different types of debt.

Written Contract

A written contract is an agreement that is signed in writing by both you and the creditor. This contract must include the terms of the loan, such as how much the loan is for and how much monthly payments are.

Oral Contract

An oral contract is bound by verbal agreement — there is no written contract involved. In other words, you said you would pay back the money, but did not sign any paperwork.

Promissory Notes

Promissory notes are written agreements in which you agree to pay back the amount of money by a certain date, in agreed upon installments and at a set interest rate. Examples of promissory notes are student loan agreements and mortgages.

Open-Ended Accounts

Open-ended accounts include credit cards and lines of credit. With an open-ended account, you can repeatedly borrow funds up to the agreed upon credit limit. Upon repayment, you can then borrow money again.

Statute of Limitations on Debt Collection

Each state has its own statute of limitations on debt collection. Here’s a breakdown of the varying timelines by state:

Statutes of limitations on certain old debts may prevent creditors or debt collectors from suing you to recover what you owe. However, it’s important to realize that debt statutes of limitations don’t protect you from creditors or debt collectors continuing to attempt to collect payments on the time-barred debt, such as in the case of credit card default. Remember, you still owe that money, whether or not the debt is time-barred. The statute of limitations merely prevents a lender or debt collector from pursuing legal action against you indefinitely.

Debt collectors may continue to contact you about your debt. But under the Fair Debt Collection Practices Act, debt collectors cannot sue or threaten to sue you for a time-barred debt. (Note that this act applies only to debt collectors and not to the original lenders.)

Some debt collectors, however, may still try to take you to court on a time-barred debt. If you receive notice of a lawsuit about a debt you believe is time-barred, you may wish to consult an attorney about your legal rights and resolution strategies.

Disputing Time-Barred Debt With Debt Collectors

If a debt collector is contacting you to attempt to collect on a debt that you know is time-barred and you don’t intend to pay the debt, you can request that the debt collector stop contacting you.

One option is to write a letter stating that the debt is time-barred and you no longer wish to be contacted about the money owed. If you’re unsure, it may be possible to state that you would like to dispute the debt and want verification that the debt is not time-barred. If the debt is sold to another debt collector, it may be necessary to repeat this process with the new collection agency.

Remember, even though a collector can’t force you to pay the debt once the statute of limitations expires, there may still be consequences for non-payment. For one, your original creditor may continue to contact you through the mail and by phone.

Additionally, most unpaid debts can be listed on your credit report for seven years, which may negatively affect your credit score. That means that failing to pay a debt may impact your ability to buy a car, rent a house, or take out new credit cards, even if that debt is time-barred.

Statute of Limitations on Student Loan Debt

Statutes of limitations don’t apply to federal student loan debt. If you default on your federal student loan, your wages or tax refunds may be garnished.

If you have federal student loan debt, you may consider managing your student loans through consolidating or refinancing. This can help you decrease your loan term or secure a lower interest rate.

Borrowers who hold only federal student loans may be able to consolidate their student loans with the federal government to simplify their payments.

Those with a combination of both private and federal student loans might consider student loan refinancing to get a new interest rate and/or loan term. Depending on an individual’s financial circumstances, refinancing can potentially result in a lower monthly payment (though it may also mean paying more in interest over the life of the loan).

All borrowers with federal loans should keep in mind that refinancing federal loans can mean relinquishing certain federal benefits, like forbearance and income-based repayment options.

Statute of Limitations on Credit Card Debt

The statute of limitations on credit card debts can generally range anywhere from three years to 10 years, depending on the state. However, the laws in the state in which you live aren’t necessarily what dictates your credit card statute of limitations. Many of the top credit card issuers name a specific state whose laws apply in the credit card agreement.

How Long Does the Statute of Limitations on Credit Card Debt Last?

Here’s a look at how long can credit card debt be collected through court proceedings for each state in the U.S.:

Effects of the Statute of Limitations on Your Credit Report

The statute of limitations on credit card debt doesn’t have an impact on what appears on your credit report. Even if the credit card statute of limitations has passed, your debt can still appear on your credit report, underscoring the importance of using a credit card responsibly.

Unpaid debts typically remain on your credit report for seven years, during which time they’ll negatively impact your credit (though its effect can wane over time). So, for instance, if the state laws of Delaware apply to your credit card debt, your statute of limitations would be three years. Your unpaid debt would remain on your credit report for another four years after that period elapsed.

This is why it’s important to consider solutions, such as negotiating credit card debt settlement or credit card debt forgiveness, rather than just waiting for the clock to run out.

How to Know If a Debt Is Time-Barred

To determine if a debt is time-barred — meaning the statute of limitations has passed — the first step is figuring out the last date of activity on the account. This generally means your last payment on the account, though in some cases it can even include a promise to make a payment, such as saying you’d soon work on paying off $10,000 in credit card debt.

You can find out when you made your last payment on the account by pulling your credit report, which you can access at no cost weekly at AnnualCreditReport.com.

Once you have that information in hand, you can take a look at state statutes of limitation laws. Keep in mind that it might not be your state’s laws that apply. If you’re looking for the statute of limitations for credit card debt, for instance, check your credit card’s terms and conditions to see which state’s laws apply.

Figuring out all of the relevant information isn’t always easy. If you’re unsure or have any questions, consider contacting a debt collections lawyer, who should be able to assist with answers to all your credit card debt questions.

What to Do If You Are Sued Over a Time-Barred Debt

Even if you know a debt is time-barred, it’s important to take action if you’re sued over it. You’ll need to verify that the statute of limitations has indeed passed, and you’ll need to come forward with that information. It may be helpful to work with an attorney to help you respond appropriately and avoid any missteps.

If you do end up going to court, it’s critical to show up. The judge will dismiss your case as long as you can prove that the debt is indeed time-barred. However, if you don’t show up, you will lose the case.

How to Verify Whether You Owe the Debt

If you’re not sure whether a debt you’ve been contacted about is yours, you can ask the debt collector for verification. Request the debt collector’s name, the company’s name, address and phone number, and a professional license number. Also ask that the company mail you a debt validation notice, which will include the name of the creditor seeking payment and the amount you owe. This notice must be sent within five days of when the debt collector contacted you.

If, upon receiving the validation notice, you do not recognize the debt is yours, you can send the debt collector a letter of dispute. You must do so within 30 days.

The Takeaway

Statutes of limitations on debt create limits for how long debt collectors are able to sue borrowers in a court of law. These limits vary by state but are often between three to 10 or more years. Once the statute of limitations on a debt has expired, the debt is considered time-barred. However, any action the borrower takes on the account has the potential to restart the statute of limitations clock.

While borrowing money can leave you in a stressful situation where you’re waiting for the clock to run out, it can also help you build your credit profile and access new financial opportunities.

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

Do I still owe a debt after the statute of limitations has passed?

Yes. The statute of limitations passing simply means that the creditor cannot take legal action to recoup the debt. Your debt will still remain, and it can continue to affect your credit.

Can a debt collector contact me after the statute of limitations has passed?

Yes, a debt collector can still contact you after the statute of limitations on debt passes as there isn’t a statute of limitations on debt collection. However, you do have the right to request that they stop contacting you. You can make this request by sending a cease communications letter.

Additionally, if you believe the contact is in violation of provisions in the Fair Debt Collection Practices Act — such as if they are harassing or threatening you — then you can file a complaint by contacting your local attorney general’s office, the Federal Trade Commission, or the Consumer Financial Protection Bureau.

When does the statute of limitations commence?

The clock starts ticking on the statute of limitations on the last date of activity on the account. This generally means your last payment on the account, but it also could be when you last used the account, entered into a payment agreement, or made a promise to make a payment.

After the statute of limitations has passed, how do I remove debt from my credit report?

Even if the statute of limitations has already passed, debt will remain on your credit report for seven years. At this point, it should automatically drop off your report. If, for some reason, it does not, then you can dispute the information with the credit bureau.

What state’s laws on statute of limitations apply if I incur credit card debt in one state, then move to another state?

If you’re unsure of what the statute of limitations on credit card debt is, the first thing to do is to check your credit card agreement. Which state you live in may not have an impact, as many credit card companies dictate in the credit card agreement which state court will preside.

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 .

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

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SOCC-Q126-046

A credit card’s grace period is the length of time between the end of a billing cycle and when your payment is due. During this period, which is usually about three weeks, you can pay off the balance without incurring interest or late fees. If you don’t pay your full statement balance by the due date, however, your grace period expires and you’ll owe interest on your balance, as well any new purchases you make.

Below, we take a look at how grace periods on credit cards work and how you can take full advantage of them.

What Is the Grace Period on a Credit Card?

Credit cards allow you to borrow money over the course of a one-month billing cycle, during which you may not need to pay interest. The end of your credit card billing cycle is also called your statement date. That’s when your monthly credit card statement (aka your bill) is generated and available online. Unless you’ve signed up for paperless billing, it will also be mailed to you. Credit card payments are due on the payment due date, about three weeks later. The time in between these dates is what’s known as the grace period.

During this time, you won’t be charged any interest on the purchases that you made during the billing cycle. However, because of how credit card payments work, you must pay off your credit card’s statement balance in full by your payment due date in order to avoid interest payments. At the very least, you must make your minimum payment, and you’ll then owe interest on whatever balance you carry into the next month.

How Credit Card Billing Cycles and Grace Periods Work

Credit card issuers are not legally required to offer a grace period. However, many of them do. If an issuer does choose to offer a grace period, it must be at least 21 days.

If your card offers a grace period and you pay your full statement balance by the due date, you can avoid paying interest on your purchases. In addition, the grace period renews for the next billing cycle. If you pay the next cycle’s bill in full by the due date, it renews again. If you continue this pattern, you can avoid paying interest on your credit card.

Limits on Credit Card Grace Periods

Credit card grace periods typically only apply to purchases. That means if you’ve used your credit card to get a cash advance at an ATM, for example, you’ll have to start paying interest on the date of the cash advance transaction.

It’s also important to note that grace periods aren’t guaranteed. If you don’t pay your full statement balance by the due date, you lose your grace period and will be charged interest on the unpaid portion of the balance. You will also be charged interest on any purchases you make in the new billing cycle starting on the date each purchase is made.

Recommended: Tips for Using a Credit Card Responsibly

How Long Is the Typical Grace Period for a Credit Card?

Grace periods generally last at least 21 days and up to 25 days. Some card issuers may offer a promotional grace period when you first get your card, which can be as long as 55 days.

You can find out how long your grace period is by reviewing your monthly billing statement. The statement will list the “closing date” (when the billing cycle ends) and the “payment due date”. The time between these dates is your grace period. You can also find out how long your grace period is by checking your original cardholder agreement. The length of your grace period should be listed alongside fees and your annual percentage rate (APR). You can also call your credit card company and ask them directly.

What Types of Transactions Are Eligible for Credit Card Grace Periods?

Generally only purchase transactions are eligible for the credit card grace period. Cash advances — which allow you to borrow a certain amount of money against your line of credit — typically are not eligible. They will start accruing interest the day you make the transaction.

Similarly, if you transfer a balance from one credit card to another, you’ll start to accrue interest on that balance immediately. The only exception is if you have a balance transfer credit card with a 0% introductory rate for a period of time. If you pay off the balance during that period, you won’t owe interest. However, interest will accrue on whatever remains of your balance at the end of that period.

Taking Maximum Advantage of Your Credit Card’s Grace Period

To take full advantage of your credit card’s grace period, you might time any large purchases you need to make for just after your statement closing date, which is right at the beginning of the new billing cycle.

For example, if your statement closes on the 15th and you buy a large item on the 16th, that purchase won’t appear on a bill until the next closing date (roughly 30 days later). You then have the standard 21 to 25 day grace period to pay that bill, effectively giving you nearly two months of interest-free borrowing.

If you always pay your statement balance by the due date, you can extend your grace period indefinitely.

Can You Lose Your Credit Card’s Grace Period?

Yes, you can lose your credit card grace period if you don’t make on-time payments in full each month by the payment due date. If you lose your grace period, you’ll be charged interest on the remaining portion of your balance. In the new billing cycle, you’ll also owe interest on any new purchases on the day the transaction takes place. This can trap you in an expensive cycle of debt that can be hard to get out of.

Fortunately, card issuers will typically restore your grace period once you’ve paid your full statement balance for one or two billing cycles.

The Takeaway

Your credit card grace period is an important tool that can save you money on interest if you pay off your statement balance in full each month. If you don’t pay your balance in full each month, you could lose this privilege temporarily. This means you’d end up owing interest on your remaining balance and any new purchases.

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FAQ

What is the grace period for credit card payments after the due date?

Credit card grace periods occur before the payment due date. Payments made after that date are considered late. After the due date, cardholders will owe interest on their balance. Further, they may lose their grace period until they can pay their balance off in full for one or two months.

What happens if you are one day late on a credit card payment?

Being one day late on a credit card payment typically triggers a late fee and the potential the loss of your grace period, meaning you’ll owe interest on your balance. However, it shouldn’t negatively impact your credit. Credit card issuers typically only report late payments to credit bureaus once they are at least 30 days past due.

What is the typical grace period for a credit card?

A credit card grace period is the interest-free window between the statement closing date and the payment due date, which is typically 21 to 25 days. Some issuers may offer a longer promotional grace period, sometimes up to 55 days, when you first open the account. You can confirm the exact length of your card’s grace period by checking your monthly billing statement and looking at the time frame between the statement closing date and the payment due date. You can also find this information in your original cardholder agreement or by contacting your credit card company directly.

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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 a result, you may not be able to put any more purchases on that 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 any additional purchases. Unless you’ve opted into over-limit transactions, you can’t overdraft a credit card — your card will simply be turned down. If you have opted into over-limit transactions, you’ll be able to make additional transactions, but this will likely trigger fees.

If you max out your credit card and can’t pay it off quickly, you’ll also face interest charges. With high double-digit rates, unpaid balances accrue significant interest, making the debt harder to pay down. Your minimum payment due may also increase, depending on how it’s calculated by your issuer.

In addition, a maxed-out credit card can negatively impact your credit. That’s because your credit utilization — how much of your available credit you’re using — is a significant factor in 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 review your credit card transactions and balance regularly — ideally weekly. This can help you monitor your spending, ensure you’re staying on budget, and manage your credit utilization ratio (preferably keeping it under 30%).

•   Request an increase to your credit limit: If you can increase your credit limit, it would automatically lower your credit utilization. While this can benefit your credit profile, it also allows you to run 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

As mentioned, carrying a high balance on your credit card 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, credit card issuers typically only report to the credit bureaus once a month, typically at the end of your billing cycle. If you can pay off your high balance before the statement period closes, maxing out your card may not have any impact on your credit.

Tips on Bouncing Back from a Maxed-Out Credit Card

If you’ve hit your credit card spending limit, it’s possible to recover. Here are some tips for how to bounce back from maxing out your credit card.

Consider a Balance Transfer Card

Transferring your existing balance to a balance transfer card with a 0% annual percentage rate (APR) 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 zero introductory rate ends. Otherwise, you’ll find yourself back in a similar place.

Keep in mind that balance transfer fees — generally 3% to 5% of the amount you’re transferring — may apply. In addition, 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 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

While maxing out a credit card can feel overwhelming, understanding the potential consequences — like a higher credit utilization ratio, increased interest charges, and a drop in your credit score — is the first step toward regaining control. By adopting responsible spending habits, building an emergency fund, and exploring options like balance transfer cards or personal loans for consolidation, you can effectively manage your debt and get your finances back on solid ground.

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

Maxing out a credit card can temporarily damage your credit score, even if you pay it off in full. This is because issuers often report high usage to bureaus before the payment is made. High utilization signals financial risk, which may temporarily lower your score. However, once payment is made, a lower, updated balance will be reported in the next reporting cycle.

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

You generally cannot use your card after reaching your credit limit. Credit card issuers will typically decline any further transactions to prevent you from exceeding your limit. If you opted in for “over-limit” transactions, however, you might be allowed to make a purchase that pushes you over the limit, but this will typically incur a fee from the issuer.

Is it bad to max out your credit card?

It’s generally not a good idea to max out your credit card. One key reason is the negative impact on your credit utilization ratio, which is how much of your available credit you are using. A high utilization ratio signals to lenders that you may be a high-risk borrower and, as a result, it can negatively impact your credit. In addition, a maxed-out card can also lead to higher interest charges.

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

Maxing out your credit card can negatively affect your credit primarily through your credit utilization ratio. Your credit utilization ratio is the amount of credit you’re using divided by your total available credit. When your card is maxed out, this ratio approaches 100%, which signals high financial risk to lenders. A general rule of thumb is to keep credit utilization below 30%, and ideally closer to 10%, to maintain a healthy credit profile.

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SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

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

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