If you've been shopping around online looking at houses, you're likely wondering what your budget should be based on the mortgage amount a lender will extend to you. For example, how much of a home loan can you get if you have a fair credit score of 650?
The truth is, your credit score alone isn't enough information to know the loan amount you'll be offered. Lenders will look at your income and employment, DTI ratio, LTV ratio, and more before determining how much money they are willing to lend you.
While a 650 credit score might mean that some lenders deny your application outright, there are a number of loan types you can potentially qualify for with this credit score. In order to determine how much money you'll receive in the form of a home loan, you'll need to incorporate other information like your income, DTI, and more.It's worth noting that the loan amount you're offered by a lender isn't necessarily the same as the amount of home you can afford. In this post, we'll take a look at everything you need to know about how your credit score relates to how much house you can buy.
Your credit score is only one of the factors that impact the loan amount you'll qualify for. For this reason, there's no way to determine precisely how much of a home loan you can receive based solely on the information that you have a 650 credit score.
It's also worth noting that the question "How much of a home loan can I get?" is really the second question you should be asking when you're thinking about buying a house. The more important question is, "How much can I afford?" (A little later in the article, we'll talk about how to determine how to calculate how much home you can afford based on your income and expenses.)
Your credit score is an important factor when it comes to mortgage approval, but it doesn't directly determine the loan amount you'll be extended. Factors like income, employment, debt to income ratio, loan to value ratio, and more will also factor in to determining the amount of money a lender is willing to loan to you.
The reason for this is it isn't at all uncommon for lenders to loan a larger sum of money than you initially expected. Just because a lender is offering to loan you a specific amount of money, this doesn't mean you can afford it.
Lenders are incentivized to loan out money because they make money off of the deal. The number you receive from the lender is not in any way an estimate of how much money you can afford to borrow but rather a description of how much money they're willing to extend.
Having a 650 credit score is only one piece of the puzzle when it comes to how much money you can borrow for a home loan. The truth is, your credit score is more relevant when it comes to your loan pricing (aka the interest rates and fees you're offered.) Let's take a look at the different factors that will influence the mortgage loan amount you are offered.
Lenders will take a look at your income and expenses when determining how much they will offer for a mortgage. Beyond that, they'll also want to know that you are earning a certain income consistently to help reduce the risk that you will default on the loan.
Lenders don't just want to know how much money you're making-- they also need to know what percentage of your income is already going toward debt repayment.
Your debt-to-income ratio (DTI) is a metric that compares your gross monthly income to your monthly debt obligations (such as auto loans, credit card bills, and other debts.) The lower your DTI is, the more financially stable you appear to lenders.
They will usually want your total debts to be 36% or less than the amount of money you take in every month.
Are you wondering whether it's ok to apply for a new credit card when you're planning on buying a house in the near future? Check out our post about whether or not it's ok to open a new card account when you're applying for a mortgage soon.
Another important factor is the way that the appraised value of the property relates to the loan amount. The metric used to determine this is known as the loan-to-value ratio (LTV). The lower your LTV is, the lower risk the lender is taking on.
In most cases, lenders will have a standard for the maximum LTV ratio they are willing to deal with.
Your credit score is an important factor when it comes to getting a home loan. In general, a higher credit score indicates that you are a responsible borrower. This could lead to better loan terms and potentially a higher loan amount.
The type of home loan you're applying for is going to have an impact on the minimum credit score you'll need to qualify for approval. At the same time, there isn't any specific, single credit score that will lead to an automatic mortgage qualification.
Let's take a look at the minimum credit scores for each of the most common types of mortgages.
Conventional loans are offered by commercial banks as well as savings and loan associations. As opposed to FHA, USDA, and VA loans, conventional loans aren't backed or offered by a United States government agency.
Some lenders that offer commercial loans will accept credit scores as low as 620. Each lender will have their own requirements, though, and some might require borrowers will lower credit scores to meet additional criteria for approval.
In general, you'll be more likely to qualify for a conventional mortgage the higher your credit score is. Some lenders that offer conventional loans will accept applications with credit scores as low as 620. However, they often also have additional requirements that borrowers need to meet when their credit score is this low, such as a larger down payment or a higher income.
FHA loans are guaranteed by the Federal Housing Administration. Geared towards individuals that can only put down small down payments and have lower credit scores, FHA loans are a popular choice for first-time home buyers.
It is possible to qualify for an FHA loan with a credit score as low as 500 to 579 if you can put 10% down.
Borrowers can potentially qualify with a credit score as low as 500 to 579 if they are willing and able to make a 10% down payment. If your credit score is 580 or higher, you might be able to qualify for an FHA loan with only a 3.5% downpayment.
Another government-backed loan, these loans are backed by the U.S. Department of Agriculture. Designed for borrowers with low- to moderate-income in rural parts of the U.S., you usually need at least a 640 credit score to be approved.
You will typically need at least a 640 credit score to be approved for a USDA loan, but lenders could potentially be willing to extend a home loan to a borrower with a lower credit score if they meet additional criteria.
It's possible that you could get a USDA loan with a score lower than 640, depending on what the lender finds when they take a closer look at your credit profile.
Veterans and active military personnel along with their families can apply for these loans which are backed by the U.S. Department of Veterans Affairs.
The U.S. Department of Veterans Affairs does not set a minimum credit score required to receive a VA loan. However, individual lenders can have their own requirements. Typically, at least a 620 credit score is necessary.
There's no minimum credit score needed in order to qualify for a VA loan set by the government. That being said, these are government-backed loans that are actually financed by lenders that will likely have a minimum credit score. The minimum required score for VA loans is often around 620.
To learn more about the requirements for a loan from the Department of Veterans Affairs, check out our post about the minimum VA loan requirements in 2023.
Jumbo loans are loans that exceed the lending limits for conforming loans as dictated by Fannie Mae and Freddie Mac. In most counties in the country, according to the Consumer Financial Protection Bureau, the loan must be $726,200 or less in order to qualify for a conforming loan. In high-cost-of-living areas, however, the loan amount can be as high as $1,089,300 to be able to get a conforming loan.
To be approved for a jumbo loan, you usually need a credit score of at least 700 or higher. Since lenders are taking on more risk by lending out such a large sum of money, they are incentivized to ensure borrowers have a strong credit profile.
When you're taking out a jumbo loan, it means you're buying a home that is more expensive than the typical abode. For this reason, lenders usually require a much higher credit score than for conventional or government-backed loans. The lender is taking on additional risk when they extend such a large loan to a borrower, so they want the borrower's credit score to indicate responsible credit habits.
Jumbo loans are the only loans on our list that you might not qualify for based on your credit score alone if you have a 650. In most cases, jumbo loan lenders require that borrowers have a credit score of 700 or higher.
Your credit score will have a big impact on the rates you are offered by a lender. This is because rates are assigned based on the lender's assessment of how risky you are as a borrower.
The worse your credit score, the less appealing rates and terms you'll be offered. The better your credit score, the better rates and terms you'll be offered.
You most likely won't be able to get the best available interest rates for a mortgage with a 650 credit score. 650 is considered a fair score-- it's not "poor," but it's not "good" either.
The national average FICO score in the U.S. is 710. A 650 is also considered a fair score in the VantageScore scoring model. However, most mortgage lenders use the FICO model, so this is the more relevant system in relation to mortgage rates and terms.
Some lenders might deny a mortgage application completely based on a credit score of 650. For many lenders, though, your credit score might not disqualify you out the gate. A 650 is sufficient for FHA, VA, and USDA government-backed mortgages.
The national average interest rate for a $250k mortgage on a 30-year fixed schedule for individuals with credit scores between 640 and 659 is, as of August 2023, 7.836%, according to FICO's Loan Savings Calculator. This means paying $400,128 in interest over the life of the loan.
By comparison, raising your 650 credit score by only 10 points to 660 could bump you up to receiving a 7.406% interest rate. Though this might seem like a small change, it means paying more than $25k less in interest over the life of the loan.
Before I sign off, let's take a closer look at some of the most commonly asked questions about home loans and credit scores.
When your credit score is less than perfect, but you know that you are a responsible borrower, you can be left in a pretty frustrating scenario. The truth is, though, that lenders use credit scores as a way to understand how you have handled loans and personal finance in the past.
Credit risk is a major concern for lenders, and understandably so. In most instances, a person that has a higher credit score isn't as risky of a borrower as someone that has a low credit score.
In general, the lower your credit score, the harder it will be to get a mortgage. That being said, most people with a 620 credit score or higher will at least be considered for a conventional loan. When it comes to government-backed loans, borrowers can potentially have a credit score in the low 500s and still be approved.
Of course, the worse your credit score is, the more risk the lender believes they are taking on. For this reason, you will pay more in interest and fees the lower your score is compared to those with perfect credit. The super low rates you see advertised by mortgage lenders are typically only applicable to people with the best credit scores-- 740 or higher.
There are a number of options available for people that have fair credit, including:
If you're interested in buying a mobile home and your credit has seen better days, make sure you check out our post about buying a mobile home with bad credit.
Improving your credit score before you apply for a mortgage can increase your chances of approval and help you receive better rates and terms.
If you're interested in boosting your score before getting a home loan, there are a few steps you'll want to take:
As mentioned earlier in the article, the amount of money that you're able to borrow isn't necessarily the same as how much you can afford to borrow.
It's best not to assume that the mortgage lending industry is operating with your best interest in mind. When a lender determines that you're a qualified borrower, they will often approve you for the largest amount of money they think you can afford. However, the amount of money they offer can, oftentimes, be a bit generous.
It's important to take your current and future needs into account when calculating how much house you can afford. One rule of thumb people use is the 28% rule. This can help you determine the home loan amount you can responsibly take on. The idea here is that you shouldn't be paying more than 28% of your pre-tax monthly income toward your mortgage payments.
Here are some considerations to keep in mind and tactics you can use when trying to decide how much house you can afford:
A 650 credit score is considered a fair score in the FICO scoring model. This is better than poor but less than good. Some mortgage lenders might disqualify your loan application based on your credit score. However, there are several home loan options for people with a fair credit score.
You can't determine the home loan amount you'll be offered solely using your credit score. Other elements need to be taken into account, including your:
If you are approved for a loan, your credit score will significantly impact the rates and terms you are offered. A lower credit score can mean paying a lot more in total over the life of the loan. For this reason alone, it can be well worth the effort to start building and improving your credit before you apply for a mortgage.
Are you trying to increase your credit score in order to improve your chances of getting the best possible loan terms? Check out our Credit Building Tips blog for more resources to help you along the way.
If you missed a credit card payment, you aren't alone. According to a recent survey, nearly 60% of Americans have missed a payment at least once. If you're aiming to have excellent credit, but you forgot to pay your bill, you might be wondering: Can you have a 700 credit score with late payments?
Unfortunately, there isn't a simple answer to this question.
If you have one more late payments on your credit report, it's going to negatively impact your credit score. How much it drops your score will depend on a number of different factors-- the higher your score starts out, the more the derogatory mark will hurt.It is possible to rebuild your credit score when you've missed payments, but it will take time. Let's take a look at what you need to know about how missed payments impact your credit score and how you can potentially achieve a 700 credit score even when you have late payments.
The biggest factor that impacts your credit score is on-time payments. This means that even missing one single payment can hurt your score.
If your credit is otherwise pristine, a 30-day late payment can lead to your credit score dropping by as much as 100 points. On the other hand, if you miss a payment but your credit is already in pretty rough shape, it won't have as significant of an impact on your score. That being said, it can still do some damage.
Late payments must be at least 30 days past due before creditors can report them to the credit bureaus according to federal law.
This means that you can still avoid a late payment showing up on your credit report if you are still within the 30 day period after the due date. While you will most likely incur a late fee, you can save your credit score from a damaging drop by paying before this crucial 30-day mark.
The information that appears on your credit report is very important because it is used to calculate your credit scores. Your payment history is the most significant factor in your credit score, so you really want to avoid late payment marks showing up on your report if possible.
When you miss a payment, and it shows up on your credit report, it will most likely stay on your credit report for seven years. If a particular account is still open after seven years have passed, only that one late payment will be removed.
In general, it will be very difficult to have a 700 credit score if your report has late payments. This is particularly true if the late payment marks are new. As time goes on and you practice good credit habits, derogatory marks on your credit report are less harmful to your score.
The better your score was, to begin with, the more of a drop you will experience when a late payment appears on your report. That being said, if you started off with a perfect credit score of 850 or a near-perfect score of 800 and your score dropped by 100 points after a late payment, you could still have a 700 or higher score.
There are a number of factors that are used to calculate your credit score, including:
More than any other single factor, making your debt payments on time every single month will benefit your credit scores. Your score can be harmed substantially by just one 30-day late payment.
Things only get worse after the 30-day mark. If your payment continues to go unpaid for 60, 90, 120, 150, or 180 days, your credit score will likely be significantly damaged. At some point along the way, it will likely be sent to collections which will add additional derogatory marks to your account.
Missing a credit card payment can be incredibly frustrating, particularly if you had the money to pay but simply forgot to settle the bill.
If you are aiming for a 700 credit score and you have a number of late payments on your credit report, you're going to need to try and build your credit back up over time.
Depending on how high your score was to start with and how severe your missed payment marks are, it can take months or even years to get your credit score back to what it was. However, with diligence and organization you can build your credit back up after late payments.
Let's take a look at the steps you can take to increase your credit score after you've missed one or more credit card payments.
Did you just miss a payment in the last few days? Has it been less than 30 days since the due date? You can take steps now to ensure that your credit isn't damaged by the late payment, but time is of the essence.
There are two things you can do here; you can either:
Credit card companies are ultimately motivated to work with their customers to help them get back on schedule with their payments. They will sometimes even have hardship programs to help people that are struggling financially, even if they aren't advertised on their website.
If you have missed payments on a number of different accounts at once, it can feel like a lot to manage all of the communications with different credit card issuers. You might find that working with a non-profit credit counseling agency helps you take all the necessary steps to get back on track.
Going forward, you'll want to make sure that you pay all of your credit card and debt bills on time. Even if you only focus on this and none of the other tips on this list, you'll be putting your attention toward the single most significant influence on your credit score.
Spending within your means is an essential component of responsible credit usage. This can be difficult, particularly if you've recently dealt with a job loss, unexpected expense, or other financial hardship.
If possible, though, one of the most important things you can do is avoid getting into more debt.
Your credit utilization ratio is another big factor in your credit score. This is the ratio between how much credit you have access to and how much of that credit you are using.
For example:
One of the ways that your score can drop after a missed payment is that a credit card issuer could choose to lower your credit limit. This increases your credit utilization ratio and negatively impacts your credit score.
Consider taking steps to chip away at your debt. There are a number of popular methods for debt repayment, including:
If your credit is seriously damaged or you have a very limited credit history, either getting a secured credit card or a credit-builder loan can help you rebuild trust with creditors.
A secured credit card requires a deposit upfront. Usually, your credit limit will be the amount of money you deposited. Since you've made this deposit, extending credit to you is much less risky to the creditor.
A credit-builder loan is another way that you can illustrate your ability to make payments on time and borrow money responsibly.
Another tactic you can use to build your credit back up after a missed payment is to become an authorized user on someone else's credit account. Usually, this will be a family member or a trusted friend that has a strong history of on-time payments.
Regularly checking your credit report can help you ensure that you're on track to bring your credit score back up to a healthy level. Free credit reports are available at AnnualCreditReport.com, the only federally authorized site for receiving your credit reports.
While you usually can only get each of your credit reports for free once a year, you can get a free weekly credit report from each bureau until the end of 2023.
Missing a credit card payment can be incredibly frustrating. In most cases, the worst thing you can do is avoid the issue and do nothing at all. It can be surprisingly costly to miss a payment when you consider all of the potential consequences, including:
The longer your bill goes unpaid, the worse the situation gets. Let's take a look at what you should do when you realize that you didn't pay your credit card bill before the due date.
If possible, you'll want to pay at least the minimum payment on the account ASAP. When you pay the minimum after the due date but before 30 days have passed, it likely won't show up on your credit report. This means that your credit score doesn't have to suffer directly from the missed payment.
That being said, understanding the schedules that credit card companies use to report accounts to the credit bureaus can be pretty complicated. For this reason, it's a good idea to pay as soon as possible and not wait until day 29.
Once the due date has come and gone and you haven't made a payment, there will be two charges that will most likely show up on your account. The first is a late fee, and the second is interest on the balance.
If you simply made a mistake in not paying your bill, pay at least the minimum right away and then call the credit card company. You can explain to them that it was an innocent mistake.
While you're on the phone, take this opportunity to see if the late fee can be waived. You might even be able to have the interest charges removed if you can pay off the balance in full. While it doesn't hurt to ask these questions, remember that credit card companies are in no way obligated to comply.
Once you have cleared up your current missed payment, the next step is to make sure that it never happens again.
Many credit card companies will waive late fees on the first missed payment, but they likely won't keep granting you this privilege again and again. Since on-time payments are the most important factor in your credit score, you'll want to set up a system that ensures you never miss another payment.
One thing you can do is set up autopay. This is very convenient, but you need to make sure that there will be sufficient funds in the bank account that autopay is linked with. Otherwise, you could either end up overdrawing your bank account or having your payment rejected, which could leave you with another late payment.
If you miss a credit card payment and are able to pay at least the minimum before the issuer reports to the credit bureau, the worst-case scenario is that you'll be stuck with a late fee and additional interest.
Once the credit card issuer has reported your late payment to the credit bureaus, you're most likely going to see your credit score drop. If you have a 30-day late payment on your credit report, it can be tempting to think it's not worth dealing with it since it's already damaged your credit.
The reality is that the situation will only continue to get worse if you ignore it. You'll keep getting additional negative marks on your credit report for every additional 30-day period that goes by.
At a certain point, the credit card company will likely charge off the account and send it to a debt collector. Though this is an accounting tactic that companies use that indicates they don't expect to recoup the debt, this does not mean you aren't still responsible for paying what you owe. Instead, debt collectors will start contacting you.
Having a debt sent to collections will add another negative mark to your credit report. As you can see, the consequences of missing even one payment can really start to add up-- the best thing to do is to pay what you owe as quickly as possible.
A credit score of 700 is considered "good" when using both the FICO and VantageScore credit scoring models. According to FICO, 16.4% of consumers had credit scores that fell within the range of 700 to 749 in 2021.
There are a number of reasons you might want to shoot for a credit score of 700 or higher. Here are some of the benefits you can expect to receive if you can improve your credit to a score of 700.
While there are a number of factors lenders take into account when determining whether or not you will qualify for a mortgage, a 700 credit score is good enough to buy a house with the most common loan options. You might even be able to get a jumbo loan for a pricier house with a 700 credit score.
The rates you receive with a 700 credit score will be much more appealing than if you had a lower score. This can save you a lot of money in interest over the life of the loan.
You'll have a much easier time being approved for a car loan with a 700 credit score than you will with a fair or poor credit score. You'll also find that the rates are much more favorable with a 700 credit score than with lower scores.
You should be able to find a wide variety of credit card options with a 700 credit score. When you're looking for new cards to apply to, you'll want to keep an eye on the required minimum credit score. Applying for new credit accounts can temporarily reduce your score by a few points, so it's a good idea to check the requirements before applying.
Just like with the other loans listed here, good credit will help you get more favorable interest rates and terms. However, your rates will be even better if you can bump yourself up into the exceptional credit category.
If you have late payments on your credit report, it can take some time to rebuild your credit score up to 700 or higher. While it is theoretically possible to have a 700 credit score with late payments, not paying your bills on time is the number one way to hurt your credit. In fact, your score can drop as much as 100 points with just one missed payment.
There is no set rule for how many points you'll lose on your credit score when you have a late payment. Ideally, you can make the payment before the credit card issuer reports it to the credit bureau in order to avoid any impact on your score. If it does show up on your credit report, you will generally experience a larger drop in your score the higher it was to start with.
Learning the ropes of the credit system can feel like a lot at first. If you already have a less-than-ideal credit report, you might feel like you're shut out from the best financial opportunities. The truth is, though, that with diligence, attention, and organization, you can work to rebuild your score over time.
Are you searching for resources to help you as you continue on your credit-building journey? If so, make sure you head over to our Credit Building Tips blog for more articles and guides.
Applying for a credit card and using it responsibly can give you the ability to finance purchases, build a credit history, and earn rewards like cash back and airline miles. The amount of money you're allowed to spend on a credit card is known as your credit limit. If you have a $30,000 salary, what's your credit card limit going to be?
Unfortunately, there isn't one simple answer to this question. Some sources state that most credit card issuers try to keep a consumer's total credit limit between 25% and 100% of their income. However, there are lots of factors that go into calculating your credit limit.
Credit card issuers will look at your income, debt-to-income ratio, employment history, credit score, and more when determining your credit limit.Let's take a closer look at what you need to know about calculating credit limits to give you a better sense of what to expect when you apply for your next card.
While your income is one of the factors that a credit card issuer will look at when determining your credit limit, it is only one piece of the puzzle. For this reason, there is no specific formula you can use to determine the credit card limit you'll be offered based solely on your salary.
When credit card companies are underwriting a line of credit, they want to make sure the income and assets of the borrower will allow them to pay back what they spend while incorporating their existing debt and liabilities.
While all issuers have their own policies and procedures, credit card companies will often base your credit limit based on their calculation of the minimum monthly payment you will be able to make.
According to the Motley Fool, credit card companies typically keep consumers' credit limits somewhere between 25% to 100% of their annual income. Of course, this is a huge range.
Two people that both earn $30,000 a year can have vastly different credit limits. If one has a strong credit history and a low debt-to-income ratio while the other has poor credit and a high debt-to-income ratio, the first person will likely receive a higher credit limit than the second.
Each credit card company uses its own particular formula for determining the credit limit they extend to consumers. However, there are a number of factors that are typically taken into account whenever someone applies for a new credit card account.
When determining your credit limit, most credit card issuers will take a look at your income. They do this to help better understand your ability to repay debt obligations.
Credit card issuers won't be able to find your income on your credit report, so they will typically ask for this information on the application.
When you're applying for loans like home or auto loans, lenders might require that you verify the income you listed. It is possible that a credit card company could ask that you provide verification for your income, but this is incredibly rare.
Credit card applications will also ask how long you've been employed and who your employer is. Your employment status is a relevant factor because credit card companies want to know if you receive regular income that can be used to pay back your debts.
Of course, how much money you bring in every month is only a part of the equation. Credit card companies also want to know how much money you owe monthly in the form of debt obligations.
There are a number of different common types of debt, including:
The precise dollar amount of money you owe each month is looked at in relation to your income. This is known as your DTI ratio (debt-to-income ratio).
Your debt-to-income ratio (DTI) is the sum of all of your monthly debt payment obligations divided by your pre-tax (gross) monthly income. The higher your DTI, the more of your income is going to make debt payments and the riskier you appear to lenders.
The higher your DTI ratio is, the more difficult it will presumably be for you to make regular payments toward a new account. This means that a person with a lower salary and proportionately less debt could, in theory, receive a higher credit limit than a person with a higher salary and proportionately more debt.
Another crucial factor when it comes to determining your credit limit is your credit history and score.
When credit card issuers take a look at your credit file and see that you've consistently made on-time payments for many years, it is an indication to them of financial stability. The better your credit profile is, the less risky you appear as a borrower.
If your credit report has seen better days, credit card companies are going to see you as a riskier applicant. Delinquencies, bankruptcies, or applying to a number of cards at once can all be red flags to credit card issuers.
Credit card companies will also take a look at your credit limits and payment history, specifically for other credit card accounts you have. If you are frequently maxing out your cards, this will be taken into account when determining if you are approved and what credit limit you are offered.
Having more than one card with the same credit card company can also impact the limit extended to you. This is because financial institutions will want to limit their exposure to risk in the event that you aren't able to pay them back.
While your credit score is a factor and can make a difference in the credit limit you're offered, it's only one part of the equation. In general, the higher your credit score, the higher limit you could potentially be offered.
The credit limit you are offered isn't just determined by your own financial situation and credit history. It also has to do with the policies, practices, and financial state of the credit card company itself.
Credit card issuers are in the business of making money, after all, and they will adjust the way they determine credit limits and how much they are willing to extend to consumers based on a wide variety of factors. Economic conditions like a recession, for example, can mean they are much more cautious about extending lines of credit even to the most creditworthy borrowers.
Every credit card company is going to have its own criteria and formula for calculating credit limits. For this reason, you can't ever precisely predict what credit limit you will be extended. This is the case even if you have accurate numbers regarding your income, debt, credit score, and so on.
If you are 21 years old or older, you can include any income on your credit card application that you have "reasonable expectation to access." The standards are different for consumers that are younger than 21.
For those 21 and up, income on an application can include the following:
For those that are younger than 21, the Consumer Financial Protection Bureau has set different standards. Individuals between the age of 18 and 20 are required to either be able to make minimum payments independently or have a co-signer over the age of 21.
Usually, the income 18-20-year-olds can report includes:
Considering that more than three-quarters of adult American consumers have at least one credit card, you might be wondering if credit card issuers are really pouring over each application and calculating a credit limit for each individual.
Plus, when you see how quickly your credit limit is determined after applying online, it seems clear that this is not typically the case.
There are three general ways that credit limits are calculated.
These are:
Let's explore what each of these means to help you get a sense of how credit limits are determined.
In this method, a credit card issuer will look at your credit score to determine your credit limit.
By using your credit score, they are able to incorporate the factors that go into calculating one's credit score, including:
Along with your credit score, they will most likely look at your household income, monthly expenses, and employment.
Usually, a specific credit card offer will have a set credit limit range. People who have higher credit scores will then be extended the higher extent of the limit, while people with lower scores will be extended the lower extent of the credit limit.
In some cases, particular credit cards come with predetermined limits.
For instance, if you apply for a start credit card you might receive a $500 limit. This might simply be the credit limit that is extended for this particular card rather than a number that was calculated based on your credit score, income, and other factors. Essentially, if you qualify for the card you will receive the same credit limit as everyone else.
On the other hand, a certain premium credit card might offer all new account holders a credit limit of $5,000. If you have what it takes to be approved, you receive the standard credit limit rather than being placed on the higher or lower end of a credit limit range.
Some credit card issuers will actually create a custom credit limit for each applicant. This is a way that credit card companies can reduce their risk while extending credit to consumers.
There are a number of different ways that issuers might determine credit limits in a custom manner. Some, for example, might use a grid system that compares a number of different financial health scores, such as your credit score and bankruptcy score.
There are two different ways that you can increase your credit limit. They are:
A credit card company might offer you additional credit if you have shown, over time, that your financial behaviors and habits are responsible.
If you want to be more proactive and request a credit limit increase from your card issuer, you can improve your chances through the following steps:
Before I sign off, let's look at some of the most common related questions about credit card limits and applications.
There are a lot of different factors that influence your credit limit.
These include:
Credit card companies each have their own systems for determining how likely it is a borrower will pay back what they owe and how much they can afford to pay back on a monthly basis.
According to Experian*, these are the average credit limits in the US based on age:
Older cardholders are more likely to have an established credit history along with a higher income, which means they have a higher average credit limit.
*Source: Experian data from Q2 2019
When you apply for a new credit card and are approved, the issuer will usually clearly communicate the credit line available to you.
However, there are some cards that come with a No Preset Spending Limit (NPSL). While this can make it sound like you basically have unlimited access to cash, this isn't the case.
Almost all credit cards have a preset spending limit. American Express is currently the only major credit card issuer that offers cards with no preset spending limit.
Instead, an NPSL card has fluctuating credit limits from month to month. Both your own spending and payment habits, as well as the overall economic landscape, will influence the limit you are offered on any given month.
One important factor in your credit score is your credit utilization ratio. This is the relationship between how much credit is extended to you and how much credit you are currently using.
A lower credit utilization ratio is always better. Experts frequently suggest keeping your credit utilization ratio below 30%.
If your credit limit goes up, this will reduce your credit utilization ratio, assuming that your spending habits don't change. If your credit limit goes down and your spending habits stay constant, it will increase your credit utilization ratio. The former scenario can raise your credit score, while the latter can drop your credit score.
Your credit limit matters for two primary reasons:
In regards to the first point, having a good credit score is important because it can impact a whole slew of other aspects of your life.
These include your ability to:
As we mentioned earlier, it is possible though quite uncommon, for a credit card company to verify the income you listed on your application. For this reason, you might be wondering whether you can fudge the numbers a bit to receive a higher credit limit.
While this might be a tempting idea, the truth is there are potentially severe consequences for lying on a credit card application. You are technically committing fraud if you knowingly report inaccurate data on a credit card application. The penalty for this type of action can be as severe as decades in prison and/or seven figures' worth of fines.
Even if you feel like the chance of getting caught exaggerating your income on a credit card application is low, it's worth understanding just how extreme the potential penalties are.
In 2012, a man was convicted of bank loan application fraud in Rochester, New York. He reported his income to the IRS as a bit over $12k a year, while he applied for several lines of credit stating his income as $90k-122k. After being extended lines of credit based on the income he reported, he ended up leaving balances on the accounts and filing for bankruptcy.
As you can see, the potential consequences of lying on your credit card application are likely not worth the risk.
There are other legitimate ways to increase your credit limit, including:
Having a salary of $30,000 is only one of the factors that credit card companies will take into account when determining your credit limit. Most will also look at things like your debt-to-income ratio, employment status, and credit score. However, your income is one of the major factors because it is one piece of the puzzle used to determine how much money you can be expected to pay back each month.
The credit system can seem quite complicated at first. Learning about credit cards, credit utilization ratios, debt-to-income ratios, credit scores, and credit limits can feel like trying to pick up a new language.
Though it might not be anyone's idea of a good time, understanding credit is one of the keys to financial health. Borrowing money responsibly can allow you to finance purchases that you otherwise couldn't make with cash. It can also help you build your credit history in a way that can benefit you down the road.
Are you working to gain a deeper understanding of credit and personal finance? If so, make sure you check out our Credit Building Tips blog for more articles and guides!
When you use a debit card at a retail location, they'll often ask you if you want cash back. Can you get cash back with a credit card at a grocery store like you can with a debit card?
At the same time, the term "cash back" also refers to another type of financial transaction-- receiving cash rewards for purchases made using a credit card. Can you receive cash back rewards when you shop at grocery stores?
Here are the short answers: you can't get cash back from a grocery store the same way you can with a debit card. However, you can take out a cash advance at an ATM or financial institution. On the other hand, some credit cards will give you cash back rewards for grocery store purchases-- it depends on the issuer, the card, and the agreement.Now let's dive in and explore everything you need to know about cash back credit cards, getting cash back at a grocery store, and cash advances.
Before we look into whether you can get cash back with a credit card at a grocery store, we need to split some hairs about what one could mean when they use the term "cash back."
Getting cash back can mean:
Making this distinction is important in order to answer the question at hand adequately. Let's take a closer look at the difference between "cash back" and a "cash advance" before answering the following questions:
Worried you're going to overdraw your bank account? Check out our recent posts about the best banks without overdraft fees and whether overdrawing your account will impact your credit.
Another term we'll want to enter into the discussion is "cash advance."
When you take out a cash advance, you are able to use your credit card to get cash at an ATM or a bank. However, rather than withdrawing the funds from an account that holds your own money (like when you use a debit card at an ATM,) you are, instead, taking out a short-term cash loan.
Many credit cards offer this feature, though typically at a higher-than-usual interest rate. When you take out a cash advance, you are essentially buying cash with your line of credit rather than specific services or goods.
If you need to get cash from your credit card, it is possible. However, it's crucial to understand that it isn't the same thing as taking out money from an ATM with your debit card or getting cash back at a grocery store.
A cash advance can be convenient if you only have your card with you but you want to purchase something from a cash-only vendor. However, it's important to recognize that you'll pay fees and interest on this short-term loan-- there usually isn't the same grace period with cash advances as there are with purchases.
Sometimes, your credit card issuer will have you set up a PIN when you initiate your account. If this is the case, you can typically get a cash advance simply by using an ATM and entering this PIN code.
If you don't have a PIN, you can usually bring your credit card to a bank that is connected to your card's payment network to take out a cash advance. In order to complete the transaction, you'll need to show your ID.
Though getting a cash advance can be convenient or even a lifesaver when you're in a pinch, it's important to realize that they come at a cost.
There are several expenses typically associated with a cash advance from a credit card:
Getting a cash advance from your credit card is definitely not the cheapest way to access cash. You, therefore, really only want to use this as an emergency measure rather than your standard method of getting some cash.
When you go to a grocery store or other retail location, you are often able to get cash back when you make a purchase. However, this is only usually the case if you're using a debit card.
When you're using a debit card to make purchases, you are paying with your own money that comes straight from your bank account. On the other hand, when you use a credit card, you are borrowing money from a line of credit that you are obligated to repay.
This is the key reason why you can get cash back from a grocery store with a debit card and not a credit card. In order to get cash back with a debit card from a merchant, they simply have to overcharge your card and then give you the difference in cash.
The other type of financial transaction that "cashback" refers to is the credit card reward that gives consumers a small percentage of the amount of money they've spent on purchases back to the customer.
This is simply one of the styles of credit card rewards programs out there. Other rewards programs give cardholders points or miles that can be used to buy various goods or services. Cash-back, on the other hand, lets the cardholder receive actual cash instead.
There are a number of ways that cash-back rewards can be delivered to customers, including:
Pretty much every card issuer offers cards with cash-back benefits.
So, can you get cash back with a credit card at a grocery store?
The answer is: yes and no.
Are you working to improve your knowledge about credit cards and credit scores? Check out our guides to dealing with a 100 point credit score drop, how opening a new card impacts your credit, and hacks you can use to boost your credit.
If you have a card that says it offers cash back for groceries, you might be wondering whether you can receive the reward for all purchases at a grocery store or just for food-related items.
You'll want to look at the fine print of your credit card rewards agreement to learn which grocery stores will qualify you for cashback. For example, many issuers won't offer the grocery store cashback rate for purchases made at big box stores, wholesale clubs, convenience stores, supercenters, and discount stores.
For example, let's say your card offers 2% cash back on groceries and 1% cash back on all of the other purchases you make. How do you know when you're receiving the 2% cashback versus the 1%?
In order to gain a greater understanding of what types of purchases you'll earn cashback for, you'll want to understand the concept of merchant category codes. These are four-digit numbers that credit card issuers use to categorize different businesses.
To determine whether purchases from a certain grocery store qualify for cash back, you can look at your credit card statement. Though it might not necessarily list the merchant code, it will typically offer a "merchant description" that lists the category of the merchant.
Every credit card issuer is going to have its own system and structure for cashback rewards programs. For example, some of them will offer percentages of purchases back to the customer based on the category. In contrast, others might offer a flat cash-back rate for purchases regardless of category.
Beyond that, other cards will give consumers the ability to choose which categories receive the highest percentage back or will rotate which categories receive the biggest percentage back.
Using a flat-rate cash-back credit card can be nice because you don't ever have to think about whether your purchases are earning cash back. No matter where you're shopping, a flat percentage amount will be applied to your purchases.
Some popular cards that offer flat rate cash back include:
- Wells Fargo Active Cash Card
- Capital One Quick Silver Cash Rewards Credit Card
- Fidelity Rewards Visa Signature Card
- Bank of America Unlimited Cash Rewards Credit Card
- American Express Cash Magnet Card
- PayPal Cashback Mastercard
Usually, these types of cards won't have rates any higher than 2%. This means that you can earn $20 every time you spend $1,000 dollars, no matter which merchant categories the purchases fall into.
Other cards will give consumers a higher cash back percentage for specific kinds of purchases. You'll usually hear these cards referred to as "bonus category cash back cards."
Some popular cards that offer bonus category cash back include:
- Citi Prestige (Feature categories: restaurants and air travel)
- Chase Sapphire Reserve (Feature categories: dining, air travel, hotels and car rentals, general travel)
- American Express Gold Card (Feature categories: U.S. supermarkets and restaurants)
- Citi Premier (Feature categories: supermarkets, hotels, gas stations)
- The Platinum Card from Americacn Express (Feature categories: flights booked with Amex travel or directly with airlines, prepiad hotels booked with Amex Travel)
A card like this might offer 2% or 3% cash back in certain categories, such as groceries, gas, or travel. For the rest of the purchase categories, they'll offer a smaller percentage of cashback, usually around 1%.
You can usually find higher cash back percentages through rotating cards than you can with flat rate cards. For example, certain types of purchases could earn you as much as 5% cashback.
However, truly benefiting from this type of card is more complex and requires some input on your end.
Some examples of popular rotating category cash back rewards cards include:
- Chase Freedom Flex
- Discover It Cash Back
- Chase Ultimate Rewards
Usually, you will have to activate the rotating bonus category before you are able to reap the rewards. The highest-earning categories will rotate quarterly.
Taking out a credit card cash advance can be tempting, particularly when you're in a pinch. Before you take out one of these short-term loans from your credit card issuer, though, you'll want to consider the pros and cons.
There are a few positive things about cash advances to mention before diving into the downsides:
Are you trying to find the right credit card for your needs? Take a look at some of our recent posts about the easiest Amex card to get, guaranteed approval credit cards, and department store cards for bad credit.
Now that we've considered why taking out a cash advance might be attractive from time to time let's take a closer look at why this really isn't something you want to do with any regularity.
Here are some reasons you might want to find an alternative way to access cash:
Finally, you'll also want to consider these factors when deciding whether a cash advance is the right choice:
Finally, let's take a look at some of the arguments for and against cash-back credit cards.
On the plus side, these cards:
On the other hand, there are some potential downsides you'll want to consider:
It's common for people to think of debit cards and credit cards as somewhat interchangeable, but the truth is they are very different ways of accessing cash. When you use a debit card, you are withdrawing money directly from your own account. When you use a credit card, you are borrowing money against a line of credit that's extended to you.
This difference is why you can't get cash back at a grocery store counter using a credit card, but you can with a debit card. If you want to take out cash from a credit card, you'll need to get a cash advance. These are easy to get if your issuer offers the service, but it is usually a very expensive way to borrow money.
On the other hand, you can earn cash-back rewards at grocery stores using some cash-back credit cards. While there is such a thing as a cash-back rewards debit card, these are not the standard by any means.
The more you know about your credit cards and how they work, the more able you are to take control of your credit and financial life. Taking the time to learn about things like cash back and cash advances can help you make smart financial decisions that pay dividends down the road.
Are you on a journey to improve your credit? If so, you're in the right place! Make sure to check out our Credit Building Tips blog for more articles and guides about achieving financial health.
If you open up your credit card statement and see a transaction you don't recognize, it's easy to start panicking. "Someone used my credit card online," you think to yourself. "What should I do?"
Among the mix of emotions and racing thoughts, it might occur to you that there's the potential to track down the fraudster and turn them over to the authorities.
In general, you can't track someone that used your credit card online. However, your financial institution and law enforcement agencies do have tactics they can use to try and locate credit card thieves.Unfortunately, the reality is that credit card fraudsters are rarely caught. The good news, though, is that your liability is limited by federal law if you report the unauthorized transaction in a timely manner.
When you first realize that someone used your credit card online, it's natural to want to find out who they are and where they are.
The reality is, though, that there really isn't any way you can track someone who uses your card online. These types of transactions are known as remote or card-not-present (CNP) fraud. This means that the card wasn't physically present during the purchase since the fraudster used your card online rather than in a physical location. There likely aren't any witnesses or security camera footage that catch the thief in the act.
Financial institutions have a process they go through when investigating credit card fraud.
They might take some of the following steps during the investigation:
Even though there really isn't any way you can track the credit card fraudster on your own, it can be useful to understand the steps that authorities might take.
Of course, you will want to contact your bank or credit card issuer right away when you realize someone used your credit card online. They will cancel the card so no one can make any more unauthorized charges and send you a new card with a new number.
If large amounts of money are involved in the fraud, the procedure will be slightly different. Bank investigators or law enforcement will take on the case if it surpasses a certain limit.
Here are the ways that the authorities can track card-not-present fraud:
Depending on the size and scope of the fraudulent activity, your credit card company might assign a team of investigators to the case.
They will begin by looking at the IP address and the transaction timestamp. This is the first step because they need to verify whether you are correct in your claim that fraud has occurred. The credit card issuer needs to rule out the possibility of friendly fraud or unintentional fraud.
Some examples of these phenomena include:
If it becomes clear that fraud has, indeed, occurred, investigators will start to dig deeper. They'll look into the IP address to try to find out where the fraudster is. If it's found that the customer orders services or goods in a different state or country than the IP address, geolocation data can be used to try and figure out exactly where they are.
Financial institutions like banks and credit card companies are able to extract geolocation data using specific software. This helps them gain information about the internet service provider (ISP), time zone, and location of the person who used your card without authorization.
Credit card information thieves will often take a number of steps to cover their tracks. This means that efforts to find out more about the individual's physical location might help locate the fraudsters.
Investigators will try to look for additional information if their other efforts at location tracking aren't successful.
For instance, they might find that the fraudster appears to have used your card online several different times. This can offer the opportunity to spot buying patterns that can be used by criminal profilers to try and identify them.
They also might do the following:
Though all of this might sound pretty promising, the truth is that credit card fraudsters are very rarely caught.
It's pretty disappointing to realize that credit card fraud investigations rarely result in finding the fraudster. Not only does it seem deeply unjust that they get away with using your card scot-free, but you're also likely worried that you're on the hook for the cost of what they bought.
On the one hand, the liability of credit card fraud victims is generally limited under federal law to $50. Credit cardholders, in most cases, are protected in the following ways according to the Fair Credit Billing Act:
Beyond that, many credit card issuers offer zero-liability credit card protection. This means that charges that are reported by consumers or that are detected by credit card companies as fraudulent will be removed from their accounts. When they are removed, this means that the cardholder isn't liable for the charges.
Even though you can technically be liable for $50, most card issuers won't make you cover that cost if you report it in a timely manner.
Debit cards and credit cards work in different ways. With credit cards, you're extended a line of credit by the credit card issuer, and you have to repay what you use. Debit cards are directly linked to a bank account, and when you use the card the money is withdrawn from your account.
This means that the same protections you will enjoy using a credit card aren't the same as those you'll receive using a debit card.
If someone steals your debit card information and makes a purchase online, you might be liable for some of the cost. According to the Electronic Fund Transfer Act (EFTA), how quickly you report the theft will inform your user liability:
Luckily, there are a number of steps you can take to keep yourself safe from credit card fraud both online and in-person.
E-commerce has completely changed what it means to be a consumer in recent years. You can easily compare prices, don't have to fight for parking spots, and don't even have to change out of your pajamas to buy pretty much anything you could need from the comfort of your home.
At the same time, though, it's important to recognize that there are risks associated with shopping online. One vital thing to always remember is that entering personal or financial information into an unsecured or inauthentic website can leave you vulnerable to credit card fraud.
For this reason, it's essential that you always check to make sure a website is secure and authentic before you go through the steps of making a purchase. Here are two things to look for when verifying the security of a website:
Of course, on top of making sure the site is secure, you want to make sure it's legitimate. Site security doesn't do you any good if the owners of the site have set it up for fraudulent purchases. Do your due diligence before buying anything online-- research the company, look at reviews, and generally stay on your toes.
Public Wi-Fi allows us to stay connected while we're on the go. However, it's easy to assume that everything we do online is private, no matter what network we're connected to. The truth is people have their information compromised while using public Wi-Fi more often than you might think.
According to a study conducted by Forbes Advisor, 40% of participants had their information compromised while they were connected to public Wi-Fi networks. Interestingly, the two places where people were most likely to have their information compromised were using public Wi-Fi networks at airports and restaurants.
If you're out at the coffee shop and you remember that you want to transfer money between bank accounts, it's likely best to wait until you get home and can connect to a secure network. The same goes for using public Wi-Fi at the airport and finding something you want to purchase online-- bookmark it for later, and purchase it when you know your connection is secure.
Phishing scams have been getting more and more sophisticated as the years have gone on. Phishers can contact you through email, text, phone, or snail mail. Though they approach from a number of different angles, the goal is always the same: to get you to give them your financial information.
Phishing scams come in all shapes in sizes. The goal is always the same, though: to get you to hand over your personal and financial information.
It's important to recognize that phishing scams are no longer as easy to recognize as they used to be. For example, you might receive an email that even has your bank's logo asking you to send information. A financial institution, however, will never request that you send sensitive information in that manner.
Look for typos or anything else that seems a little off when you are concerned a communication is actually a phishing scam. If the message appears to be from your financial institution, call them to verify that it is real. Don't use the phone number in the email, though-- use the number on the back of your card or on their secure, official website.
There are a number of credit cards that advertise that they provide $0 liability on unauthorized charges. Some examples include:
Having one of these cards can give you a little extra peace of mind. As long as you catch fraud early and report it right away, you shouldn't get stuck footing the bill for fraudulent charges.
Another way that scammers will steal credit card information is through devices known as "skimmers."
Credit card skimmers are devices that thieves will attach to unattended payment terminals, such as gas pumps or ATMs.
Though EMV chips help to protect you from card skimmers, it's still a good idea to be attentive when you're using an unattended payment terminal. If you notice anything that seems out of the ordinary about the card slot or indicates tampering of any kind, don't use it, and let an employee know what you saw.
Make a habit of reviewing your credit card and bank statements.
Skim them periodically to make sure that you recognize all of the transactions. You can even download the official app from the financial institution or card issuer to set up notifications to help keep you up to date.
Keeping an eye on your credit reports is also an important step for avoiding credit card fraud and, at worst, catching it early.
You'll want to look for anything that seems suspicious, particularly new accounts that aren't recognizable to you.
Are online credit monitoring services safe? Check out our recent posts about Credit Karma and Rocket Money.
Shredding any documents you no longer want that contain financial information, such as credit card statements and credit card offers, can help protect your information.
It might seem unlikely that someone will dig through your trash to steal your credit card info, but the truth is it's not as uncommon as you might think.
Though this tip won't necessarily prevent fraud, it can be a useful tactic to reduce the impact of credit card fraud.
Using this method, pick one card that takes care of all of your autopay accounts. Then, you can use a different card for everyday purchases.
When you do this, it means that your autopay credit card is going to be much less likely to be compromised. After all, it's not being used at gas station pumps, cafes, retail locations, and so on.
What this can do is both help you track unusual spending and protects your autopay accounts from incurring late fees. Beyond that, it saves you the hassle of having to switch all of your autopay accounts if fraud does occur.
Ever wondered what would happen if you simply stopped paying off your credit card? Take a look at my recent post about the consequences of not paying your credit card bill.
It's a good idea to monitor your accounts manually. However, you can also sign up for transaction alerts, where you get a notification when transactions are made on your card.
For example, you could set up an alert when any of the following occurs:
Another tactic you can use to prevent credit card theft is to use smartphone-based payment services when you're out and about making purchases.
Make sure all of the apps on your computer and phone are kept up-to-date to ensure the latest security features are protecting you. The same goes for anti-virus software on your computer-- don't keep ignoring that reminder that it's time for an update.
Make sure your online passwords are unique and include random combinations of letters, special characters, and numbers.
If possible, make sure that each of your accounts has a different password.
Though letting someone borrow your card can seem like a nice gesture, don't do it.
If you need to lend someone a small amount of money to make a purchase, give them cash instead. Once your credit card is out of your hands, you have no way of knowing who is getting their hands on your information.
Paying over the phone isn't the most common occurrence, but it's important to take extra precautions when doing so. For example, you might give your credit card info when paying a bill from a small business owner or ordering takeout over the phone.
It's actually a bit riskier to pay over the phone than it is to shop online or in person. In order to protect yourself when giving your payment information over the phone, use these best practices:
It might be disappointing to learn that you can't really track down someone that used your credit card online. At the same time, it's good to know that there are tactics financial institutions and law enforcement agencies can use to try and figure out who stole your information.
Though you might desire that the fraudster receives criminal punishment for their crimes, it's best not to hold your breath. On the bright side, your liability will be limited. That is, so long as it's clear that the charges really were fraudulent and you reported them in a timely manner.
Taking the time to learn more about topics like credit card fraud and identity theft can help you protect yourself from becoming a victim. As you increase your knowledge about credit and personal finance, you'll find that you are better able to keep your private and financial information safe from bad actors.
Are you on a journey to improve your credit and increase your financial literacy? If so, make sure to check out our Credit Building Tips blog!
Did you notice the term 'counter credit' on your bank statement, and it has you concerned?
After all, the presence of the word 'credit' might make you worry that a credit account has been opened in your name.
No need to panic-- counter credit is just a term that means that you deposited money into your bank account by handing it to a bank teller. When you go to a physical bank branch and deposit money in person, it often shows up as a 'counter credit' on your bank statement.In this article, let's take a closer look at what you should know about counter credit, the pros and cons of physically depositing money, and much more.
If the term 'counter credit' shows up on your bank statement, you might be wondering what the heck it means.
'Counter credit' simply means that you made a deposit into your bank account with a bank teller in person. Essentially, rather than depositing money using your phone or with an ATM, you actually walked into a bank and handed your deposit to a person.
When you deposit funds at your bank or financial institution over the counter, they will update your account in order to reflect the funds you deposited. It's known as a counter credit because the newly updated account balance was manually adjusted by the bank teller at the counter.
If you see a counter credit on your bank statement, you will probably see the following information:
There are a few other terms that could be used to describe counter credit that might show up on your bank statement, including:
It's very easy to use counter credit. Pretty much every physical bank and financial institution will have a table with deposit slips and pens that you can use right when you walk in.
The steps you'll need to follow are:
Once the teller has the money and the deposit slip, they can credit the money to your account. They'll also give you a receipt.
You'll usually see this type of transaction show up on your bank statement as a counter credit.
Are you working to improve your financial literacy? Make sure to check out our guides to credit report tradelines, what opening a new credit card means for your credit score,
There are a number of reasons why a person might want to deposit money over the counter rather than using an ATM or mobile app.
Some of the benefits of this method include:
On the other hand, there are certainly reasons someone might choose one of the other deposit methods over counter credit.
Some of the drawbacks include:
It might sound kind of old-fashioned to actually physically go to a bank and deposit money. After all, there are other ways to deposit money, such as mobile apps and ATMs.
That being said, there are plenty of good reasons that a person might want to deposit their money over the counter rather than in an ATM or on a mobile app.
For example, people that have hearing or visual impairments can have a hard time using these other deposit methods. Beyond that, there are some individuals that prefer to hand their money over to an actual person rather than inserting it into an ATM or uploading a check to their phone.
For some people, it's more comfortable and familiar to deposit money in person. After all, you have to remember that envelope-free ATMs didn't become widespread until the late 1990s and early 2000s. Banking mobile apps that you could use to deposit funds weren't common for another decade at least.
Learning the ropes of responsible credit card usage? Take a look at my recent articles about how much credit you should use and why you shouldn't borrow up to your credit limit.
A counter credit is essentially a type of deposit.
Whenever you add money to your bank account, whether you do so by going to a bank, making a direct deposit, making an ATM deposit, or using a mobile banking app, you're making a deposit. Counter credit, on the other hand, only refers to when you add money to your account by handing it in person to a bank teller at a physical branch.
Before I sign off, let's take a look at some commonly asked questions about counter credit and bank deposits.
In many cases, the cash you deposit at the counter with a teller will appear in your bank account right away.
This makes counter deposits an appealing option when you need to put funds in your account immediately. For example, you might know that you're going to be making a purchase with your debit card that would overdraw your account if you didn't deposit more funds.
Are overdraft fees the bane of your existence? Check out our list of the best banks without overdraft fees. You can also learn about how overdrafts might impact your financial future in our post about whether bank overdrafts could impact your credit score.
You might find that your financial institution only offers some methods of making deposits. However, in general, there are a number of different ways that you can deposit or move money into your account.
If you have cash to deposit, you typically have the following options to choose from:
Curious to know if you'd be better off using credit rather than cash to make purchases? Check out my recent post about the benefits and drawbacks of using credit instead of cash.
If you're depositing a check, most banks will offer some combination of the following options:
Finally, there are a few other ways to deposit money into an account. These methods apply to moving money that is already in a bank account.
Is it time for you to clean up your credit file? Take a look at our guides to removing derogatory marks, removing charge offs, and removing collections from your credit report.
When you have cash that you need to put in your bank account, you obviously can't make use of the convenience of a mobile app. On the other hand, the idea of going into a bank branch to physically deposit the money might sound inconvenient and annoying.
You can often deposit cash into ATMs if they are owned by or affiliated with your bank. Not all ATMs are designed to take cash deposits and some banks will set limits regarding how much money you can deposit at an ATM.
Luckily, you might be able to deposit your cash into an ATM. It's worth noting that not all ATMs are set up to accept cash deposits. Beyond that, you usually need to find an ATM that's owned by your bank or operates in partnership with your bank.
There can sometimes be limits on the amount of money you can deposit into an ATM. For larger sums, it's likely a good idea to go into a bank branch and make a counter-deposit. If you're not sure, you can check with your bank about their deposit limit.
In many cases, you can deposit cash into another person's bank account. If you want to deposit actual cash bills, you can do so by going to the financial institution where the individual has an account. You will need to give the teller the following information:
Some banks won't allow you to deposit money into someone else's account, though. Others will have some restrictions on how and when you can do add money to another person's account. As an example, Wells Fargo states that non-account owners can't deposit cash into consumer accounts according to their deposit account agreement.
There are a few other ways you can transfer money into other people's accounts, including:
There are a number of popular online-only banks these days, including:
As you might imagine, banking with a financial institution that doesn't have physical branches can be a problem when you want to deposit cash.
Though it can take several steps, there are a few ways you might be able to add actual cash to your online-only bank account.
Counter credit is a term that refers to a deposit that was made at a physical bank branch by handing the money and a deposit slip to a teller. When you deposit money in this way, it will often show up on your bank account as a 'counter credit.'
There are a number of benefits to depositing money this way, including instant access to the funds. On the other hand, with many other convenient ways to deposit money these days, many people take advantage of mobile app banking, ATM deposits, and other available methods.
Taking a close look at your bank statements and credit card statements is an excellent personal finance habit. By keeping an eye on these statements, you don't just get a clearer sense of your income and expenses, but it also lets you catch signs of identity theft or credit card fraud early on.
Are you eager to learn more about how you can improve your financial health? If so, make sure to check out our Credit Building Tips blog.
There are many reasons someone might stop paying their credit card bill, including a sudden loss of income, a financial emergency, unexpected expenses, poor money management, or even simple forgetfulness and disorganization.
Failing to make at least your minimum monthly credit card payment on time can have some serious financial ramifications, though.
If you stop paying your credit card bill, you'll probably get hit with late fees, higher interest rates, a lower credit score, and marks on your credit report. There are several stages of credit card delinquency, and the longer you leave a debt unpaid, the worse the consequences get. Creditors can charge off your account, send your debt to collections, and even sue you if you don't pay your debt.Whether you're worried you're going to miss a payment soon or you already have some late payments on your credit report, understanding what happens when you stop making credit card payments is essential to your financial health.
If you stop paying your credit card bill, the clock will start ticking on your account. The first missed payment date is known as the date of the first delinquency.
A number of negative consequences can, and likely will, result if you simply stop making payments toward your credit card debt. In this article, we'll take a close look at what each of these ramifications can mean. In short, though, you can expect the following to occur:
In general, credit card payments are considered late when 30 days have passed from the due date. According to Equifax, one of the three major credit reporting agencies, a late payment usually won't appear on your credit report until the payment is 30 days past due.
Even though a missed payment might not be reported to the credit bureaus right away, that doesn't mean there aren't meaningful consequences immediately.
In many cases, you'll be charged a late fee if you do not pay at least your minimum balance by the due date.
The longer a debt goes unpaid, the more severe the consequences. Let's look at the stages of credit card delinquency to help you understand the general timeline.
If thirty days pass and you still haven't made your credit card payment, there's a chance you'll experience the following:
There are a number of different factors that impact how much one late payment will affect your credit score. For example, the newer the derogatory mark is, the more it will hurt your score.
You can experience a drop in your credit score by as much as 50 or 100 points for one single 30-day late payment on your credit report.
Another factor that can influence the effect a missed payment has on your score has to do with your credit rating before the mark shows up. In general, the higher your score is, to begin with, the more of a drop you'll see when the late payment appears on your credit report.
If another thirty days pass and your credit card payment is now sixty days late, you'll experience even greater financial consequences.
Typically, you will:
Depending on the card agreement you signed when you opened the credit card account, the penalty interest rate might be triggered at this time if it didn't go into effect after 30 days.
Federal law doesn't put any limits on the rates that credit card issuers charge their customers. That being said, there can be ceilings set at the state level.
The 90-day mark is an important milestone in the credit card delinquency timeline.
At this point, the following might occur:
Your credit score has likely already been damaged by the 30- and 60-day late payment marks. However, your score will probably take another big hit, both because of the 90-day late payment and, potentially, a new collections account on your credit report.
According to one financial wellness expert, a 90-day late payment can drop a credit score by as much as 180 points.
The consequences will continue to get harsher once you've missed at least four consecutive payments.
Here are some of the effects you might experience include:
If your payment is missed for this long, the credit card issuer will most likely turn your debt over to a debt collector if they haven't already. This is known as a charge-off.
A charge off means that the creditor has written off your account as a loss. It will also result in your account being closed to future charges. This debt is not forgiven and you are still obligated to pay it off.
Each issuer has its own rules for when they charge off an account. For some, it might be a year or longer, while others might charge off an account in six months or fewer.
If your account is charged off, it will appear as a derogatory mark on your credit report. Marks like charge-offs will stay on your report for up to seven years.
If your debt goes unpaid for more than 180 days, your account will probably be closed if that hasn't already occurred.
Credit card companies continue to report missed payments to credit bureaus until the debt gets turned over to a debt collector, which will likely occur at this point if it hasn't yet.
Now that we have a sense of the delinquency timeline let's take a closer look at what each of these consequences means.
Late payment fees can start showing up right away when you miss a credit card payment.
How much you will owe will depend on your current balance as well as the particular card. There are federal limits on these fees, though, thanks to the Credit CARD Act of 2019.
Under federal law, there is a maximum amount that credit card issuers can charge in the form of late fees. For a first late payment, companies can charge no more than $29. For subsequent missed payments, the cap is $40.
It's important to note that just one late payment can also terminate a promotional 0% APR interest rate. This means that you will be charged interest on the balance of your card going forward, regardless of when the promotion was supposed to end. The interest rate will also apply to the fees you accrue.
When you've missed payments on your card debt, you'll probably be contacted by the creditor.
If enough time passes, the account can be sold or sent to collections. At that point, you'll start receiving communications from the debt collector.
Once your card payment is late by thirty days, the credit card company will most likely report it to one or more of the credit bureaus.
It's important to understand that your payment history is the factor that carries the most weight for your credit score. Your overall credit profile will impact the precise number of points that you'll lose.
In general, a new late payment will reduce your credit score by more points if you have good to excellent credit. If you have poor credit, your credit score probably won't drop by as many points.
Until you bring your account current, the credit card company can continue to report your account as late to the credit bureaus. This means that your credit report will include notes stating that your payment was at least 30, 60, 90, 120, 150, or 180 days late.
Though missed payments are most impactful to your score when they are new, they can stay on your credit report for up to seven years. During this entire period, they can continue to have an effect on your credit scores.
Depending on your card issuer and the terms of your card agreement, a penalty APR can kick in after the payment has been late by a certain number of days.
If you have a promotional 0% APR card, you can lose the promotional interest rate after just one missed payment.
For many companies, a higher penalty APR will be applied once you're sixty days behind. This higher interest rate will be applied to both the existing balance on your account as well as any future transactions you make.
Don't worry-- you might be able to get your lower interest rate back in the future if you've been hit with a penalty APR. Usually, you'll need to make six consecutive on-time payments of at least the minimum payment due. At that point, you might be able to bring your interest rate back down to the level it was before the missed payments.
Depending on the creditor, when your debt is sent to collections can vary. However, the card issuer is likely to assume that you're not planning on making a payment around the 180-day mark. At this point, they'll charge off your account.
Charging off a debt is an accounting procedure used by credit card companies. This allows them to deduct the amount of the unpaid bill from its earnings. However, your debt is not forgiven, and you are still obligated to pay it.
When they charge off your account, creditors might sell or send the account to a debt collector. The collections agency will then attempt to collect the money that you owe.
You will usually see charge-offs and collections accounts on your credit reports. These are derogatory marks that can cause further damage to your credit. They will fall off your credit report in seven years.
At the point when an account is sent to a collector, the account has likely accrued additional interest charges and late fees that have increased the balance far above the initial amount you owed.
When your account is closed due to a series of missed payments, the negative marks that have stacked up on your credit report will remain there for seven years. The clock starts running from the date of first delinquency, which is the date that the first payment was missed.
Once a debt has been sent to collections, you'll start receiving communications from the debt collector.
Debt collectors are notorious for their persistence. They have even developed a reputation for being rude, obnoxious, and even fear-inducing. Getting calls and letters from collections agencies can be stressful, but it's important to know what your rights are.
There are a number of laws that have been put in place to limit annoying and even abusive behaviors by debt collectors. These laws include:
It's possible that either the credit card issuer or collections agency could take legal action against you in order to collect the debt you owe.
If they win, they might be able to force payment in a number of ways, including:
It's important not to ignore a lawsuit filed against you. If you don't respond, they could win in a default judgment. Depending on the state, it's possible that a creditor could win a default judgment even if the statute of limitations has already passed.
Depending on how many months you let go by without paying your bill, your credit report can really start to stack up derogatory marks. This can damage your reputation as a borrower and a consumer in ways that can have a very real impact on your life.
For example, failing to make credit card payments can make it hard to:
Beyond that, having bad credit can strain your personal relationships. Money problems on their own can lead to anxiety, stress, and conflict with the ones you love. Having bad credit can create a lot of tension when your credit file makes it difficult to buy a house, rent an apartment, get a job, or take out a loan.
If you are pretty sure you're not going to be able to make an upcoming credit card payment, don't panic. The first thing you'll want to do is contact your credit card company.
This might seem counterintuitive, but the truth is that card issuers want to collect the money they're owed. They might be willing to set up a more affordable minimum monthly payment for you, particularly if you're able to explain that you're experiencing a hardship that impacts your ability to pay.
Here are some other steps you can take if you anticipate you might struggle to pay your credit card bill:
If you've already missed a payment and it's just a few days past due, bring the account current if you're able to.
A missed payment that hasn't yet reached the 30 day mark might not ever show up on your credit report. For that reason, it's a good idea to pay your bill immediately before that first negative mark shows up. Remember, derogatory marks can stay on your report for seven years.
This way, you can contact the credit card company and ask them if they would be willing to refund the interest and fees charged on the late payment. They might not agree to this, and they aren't obligated to. However, credit card companies might be willing to get rid of these fees if you've otherwise had a good track record with them as a borrower.
In the future, setting up automatic payments can help ensure that you don't miss your credit card payments. There are few things more frustrating than having the money in your account to pay a bill only to accrue late fees and interest because you forget to pay it on time.
If you're behind on your credit card payments and feeling overwhelmed, here are some of the things you can do:
Bankruptcy will wipe out your debt, but you should only go this route if there is no other viable solution. It's also important to understand that certain types of debt can't be discharged through bankruptcy, including child support, alimony, certain unpaid taxes, and, in most cases, student loan debt.
When you're worried you won't be able to make a credit card payment, it's understandable to feel overwhelmed. If you've already missed some payments, you might be tempted to ignore the issue altogether.
The truth is, though, the last thing you want to do when you miss a credit card payment is to avoid the situation.
Missing credit card payments can:
Staying on top of your credit can help you achieve a state of financial health. It opens up new opportunities for you and makes it much easier to get a mortgage, take out a car loan, be approved on an apartment application, and more.
You're in the right place if you're on a journey to improve your credit. Make sure you check out our Credit Building Tips blog for more valuable resources to help you along the way.
Whenever you're considering giving a company access to your personal information, it's essential to do some research first. Considering that Credit Karma is one of the most prominent credit monitoring services available, it's perfectly reasonable to wonder, "Is Credit Karma safe?"
Used by somewhere around 130 million users and nearly half of American millennials, Credit Karma is a well-known and well-regarded service. As one of the most prominent credit monitoring services, you certainly don't have to question whether this is a "legit" company.
Credit Karma states that it goes above and beyond, essentially, to protect your personal information and privacy. At the same time, you're always running a risk when you hand over your information online.So, just how safe is Credit Karma? Let's take a look at what you should know.
When you google "Is Credit Karma Safe?" the top results will likely assure you that Credit Karma is a safe and secure credit monitoring service.
The truth is, though, you are always taking risks when you enter personal and sensitive information online. There are major benefits to using credit monitoring services, and Credit Karma is one of the most prominent free services out there. This means that each individual has to weigh out the pros and cons of using a service like this before moving forward.
The shortest answer is: yes. Credit Karma is a safe service and a legitimate company. They have fairly impressive security practices and promise to go the "extra mile" to keep your data safe. First, let's look at their security features, but be sure to stick around for some of the caveats that you'll want to know about.
Some of the security features they utilize include:
They also use a program where they pay people to go through their site to look for vulnerabilities. This is known as a bug bounty program. Other big tech companies, like Google and Apple, have been using this type of program for years.
Though Credit Karma claims to go above and beyond when it comes to protecting personal and financial information, and it certainly appears that they do from their list of security practices, it's important to recognize that there's no such thing as being 100% safe when entering your personal information online.
A cautionary tale to this effect can be found in Credit Karma's own history.
In 2019, a number of Credit Karma users claimed that they were being shown the account information of other people when they logged in. This includes information about credit card accounts and current balances for complete strangers.
According to a Credit Karma spokesperson, this occurred as a result of a "technical malfunction," and there was "no evidence of a data breach." They didn't comment on how many customers were impacted or how long the issue went on.
Though this isn't technically a security breach, you also probably want to know about the action the FTC took against Credit Karma at the end of 2022.
According to the FTC, they took this action against Credit Karma for:
"...deploying dark patterns to misrepresent that consumers were “pre-approved” for credit card offers. The FTC alleges that the company used claims that consumers were “pre-approved” and had “90% odds” to entice them to apply for offers that, in many instances, they ultimately did not qualify for. The agency’s order requires the company to pay $3 million that will be sent to consumers who wasted time applying for these credit cards and to stop making these types of deceptive claims."
The complaint went on to say that Credit Karma harmed consumers in two ways:
At the end of the day, only you can decide whether or not you want to use an online credit monitoring service like Credit Karma. Though there does appear to have been a malfunction in 2019 that exposed the personal information of users to other users as well as some sketchy practices with the pre-approved offers, most experts state that Credit Karma is safe to use.
There are always risks when you enter your personal information online. Credit Karma is used by somewhere around 130 million members in the U.S., Canada, and the U.K. Almost half of all American millennials use the service.
You can rest assured that Credit Karma is just about as "legit" as credit monitoring services get, as it's one of the most well-known services, along with Experian, CreditWise, Equifax, TransUnion, Credit Sesame, and IdentityForce.
Yes, in order for Credit Karma to link to your credit profiles, they'll need to collect certain information.
Credit Karma will ask you for your personal information, including your:
They use this information in order to match your identity with your credit files. Credit Karma gives you access to your Equifax and TransUnion profiles.
In some circumstances, Credit Karma might need your full Social Security number in order to locate your particular credit files.
Though you might only have to hand over a few key pieces of information about yourself in order for Credit Karma to link you to your credit profile, people who are particularly concerned with privacy and security might be interested in taking a look at the Global Privacy Statement provided by Credit Karma's owner, Intuit.
In this lengthy document, you'll find that a lot more information about you might be collected than you originally thought. Since the document doesn't make a clear distinction between Credit Karma and other Intuit brands, it's difficult to know precisely which information is applicable to the credit monitoring service.
For what it's worth, Intuit also owns the following popular brands:
Credit Karma states the following when it comes to selling or sharing your personal information:
"We do not sell your personal information to or share it with unaffiliated third parties for their own advertising or marketing purposes."
You can take a closer look at Intuit's Privacy Policy to learn more about how data is collected and used.
One question that might be on your mind is how Credit Karma is able to be a profitable business if it offers its services for free.
After all, Credit Karma doesn't just offer credit scores to consumers but also useful tools that help them improve their credit profiles and ratings.
Using Credit Karma, individuals can access their information as often as they desire, completely for free. As a point of contrast, you can only receive your complete credit information from the three major credit bureaus for free once a year.
According to Investopedia, Credit Karma makes money by charging a fee every time a user ends up buying one of the services or products it recommends. Essentially, they advertise financial products to you based on your personal information and then receive a commission if you end up following through.
Before I sign off, let's take a closer look at some frequently asked questions about this popular credit monitoring service.
Credit Karma isn't a credit reporting bureau that collects information from creditors. Instead, it's a fintech company that uses your TransUnion and Equifax credit reports to offer scores and credit profiles.
When you see your credit score on Credit Karma, you're viewing VantageScores that are calculated using information from your Equifax and TransUnion reports. This means that you won't see your FICO score or information from your Experian report.
The short story is this: your Credit Karma score should be accurate-- the scores and reports you see "come directly from TransUnion and Equifax," according to Credit Karma. At the same time, it might be different from the score you receive from Experian or another credit monitoring service.
Though we often think of our credit score as a single, three-digit number, most of us have more than one credit score. This is because credit scores can be calculated using different models and using different information sourced from different credit reports.
Credit Karma uses Equifax and TransUnion to provide you with your credit scores and reports. This means that you get to see your information from two out of the three major credit bureaus.
Your credit file or score from the third credit reporting agency, Experian, won't show up on your Credit Karma profile.
Credit Karma uses the VantageScore 3.0 model. It calculates two scores for you, one using your Equifax credit report and one using your TransUnion credit report.
VantageScore was designed and created by all three credit reporting agencies in a collaborative effort. It is one of the two most widely-used credit scoring models, along with FICO.
Which credit scoring model and credit bureau a lender will use when making a lending decision is going to depend on a variety of different factors. FICO is the more popular of the two. Straight from the horse's mouth, FICO claims that 90% of top lenders use FICO when making lending decisions.
According to Credit Karma, your TransUnion credit score can be updated as often as every day. For your Equifax score, though, you shouldn't expect it to be refreshed more than once a week.
As of March 1, 2023, a limited number of members were receiving daily updates to their Equifax scores. Your updated score, if you're due for one, will refresh automatically when you sign into your account.
You can look at each individual score on your profile to learn when your score was last updated.
If you're careful to keep your credit in good shape, you likely know that hard inquiries can temporarily lower your credit score. Beyond that, too many hard inquiries in a short period of time can raise some red flags for lenders.
For this reason, you might be concerned that Credit Karma is going to impact your credit score. After all, if you're checking it every day or every week, couldn't that ding your score?
The good news is that using Credit Karma doesn't hurt your credit score. The reason for this is that using the service is considered a self-initiated inquiry. This means that it's just a soft inquiry, which won't harm your score and won't be viewable by anyone other than you on your credit reports.
Credit Karma won't directly or automatically help you improve your credit. That being said, this service (as well as other credit monitoring services) can be a useful tool for monitoring and managing your credit.
In addition to offering you free access to your credit scores and reports from TransUnion and Equifax, Credit Karma also provides features and resources that can help you gain a greater understanding of your financial situation. In this way, it can help you improve your credit by giving you the information you need to make informed decisions.
Some of the ways that Credit Karma can help you boost your credit include:
Credit Karma also offers personalized recommendations for credit cards and loans. This is also how they make their money as a company-- by taking a kickback when you purchase a service or product they advertised to you.
There's no shortage of credit monitoring services out there. Some of them are free, some of them cost money, and many of them offer some free services in addition to additional paid membership plans.
Here are some popular alternatives to check out:
Credit Karma is one of the most well-known credit monitoring services. Since it offers countless resources and tools for free, it's no wonder millions of people use it. They offer lots of safety features to help keep your private info secure.
At the same time, there's always a risk you run when entering your personal information online. For this reason, it's a good idea to learn as much as you can about the privacy policy and security features of any online financial site.
Whether you choose to use Credit Karma or another monitoring service, keeping track of your credit is a great financial health habit.
Ready to start improving your credit? Make sure you check out our Credit Building Tips blog!
When you receive a new credit card, you'll also learn how much money the issuer is going to allow you use. This is known as your credit limit. However, borrowing up to your credit limit generally isn't advised.
Why is this the case? Shouldn't it be fine to use your full credit limit?
When you borrow the full amount of your credit limit or more, it's known as maxing out your credit card. This isn't a good idea for a number of reasons, including the fact that it can negatively impact your credit score, increase your debt load, reduce your financial flexibility, and more.Financial experts typically advise that you use no more than 30% of the credit extended to you. This can help you be a more attractive borrower to lenders, ensure that you have access to funds in the case of an emergency, and help you keep your debt load low.
When you borrow the full amount of your available credit (or even exceed it,) it's known as "maxing out" your credit card.
When you max out your credit card, it means that you won't be able to make any further purchases with the card because you don't have any more available credit. That is unless you make some payments to reduce the account balance.
There are several reasons that you don't want to max out your cards (aka borrow up to your credit limit,) including the fact that it can:
Let's take a closer look at each of these to help you understand the consequences of borrowing up to your credit limit.
When you have a credit card, your credit limit is the amount of revolving credit you have access to at any given time. As you make purchases, your available credit will go down to ensure that you don't spend more than your credit limit.
The ratio displaying the relationship between your card balance and your credit limit is known as your credit utilization ratio. This is one of the significant factors that is taken into account when calculating your credit score.
Your credit utilization ratio is one of the major factors that impacts your credit score. The higher your balances are in relation to your credit limit, the higher your credit utilization ratio will be.
For example, if you have a $10,000 credit limit and a $2,000 balance, it means that your credit utilization ratio for that card is 20%. However, if you have an 8,000 balance on the same card, your credit utilization ratio is 80%.
When you spend up to your credit limit, it means that you're increasing your total debt burden. Depending on your financial situation, the card limit, and many other factors, this might not necessarily be a problem for you.
Carrying debt long-term can have a lot of negative effects on a person-- both financially and personally.
Here are some of the long-term consequences of carrying debt over an extended period of time:
If you're planning on applying for a mortgage anytime soon, it's a good idea to keep your credit utilization ratio low. The same is true for any other type of loan or line of credit.
On top of raising your credit utilization ratio, maxing out your cards can give you a less favorable debt-to-income ratio. When lenders are deciding whether or not to extend a loan to you, they want to know that there is a high likelihood that you will pay back what you owe on schedule.
Beyond that, if borrowing up to your credit limit leaves you with dings in your credit score and marks on your credit report due to missed payments, this is going to have a negative impact on your approval chances.
Credit cards often have high-interest rates. The average credit card rate as of July 2023 is 20.09% for existing accounts and 22.39% for new offers. Since 2010, the average interest rate for new offers has gone up by almost two percent.
The interest rate attached to your account will depend on a number of factors. The better your credit score was when you applied for the card, the lower the interest rate you can usually achieve.
Credit cards have higher interest rates than other forms of debt for a number of reasons, including the fact that this type of debt is unsecured (aka not backed up by collateral in the same way a home loan or auto loan is.)
If you max out your credit card, you're reducing your ability to cover unexpected expenses. For example, if you have a surprise medical emergency, car repair, or high utility bill, you won't have available credit waiting to help you take cover of the bill.
It's good to have some wiggle room when it comes to your finances. You never know when you'll need to replace your washing machine or have to get an electrical repair done, for instance.
Keeping your balance low can help you have peace of mind, too, as you know that you will be able to pay for unexpected costs if they crop up.
If you borrow up to your credit limit and aren't able to keep up with the payments, you could face additional fees and penalties.
If you can't afford to pay your bills and miss payments, this can lead to late fees, high penalty APRs, and potentially even having your account sent to collections if you don't pay up.
The general rule of thumb is that you want to keep your credit utilization ratio under 30%.
Keeping your credit utilization low is recommended for a number of reasons, including:
You might assume that paying off your balance in full every month should mean that how much you spend should have no impact on your credit score.
For this reason, it's important to really minimize credit card usage when you're planning on applying for a mortgage or otherwise trying to borrow money. Similarly, be careful not to rack up too high of a balance if your credit report will be pulled for an apartment application, job application, or for any other reason.
Sometimes, a credit card issuer will allow you to actually spend more than your credit limit. In some cases, you will specifically need to opt in for this feature. Other times they might give you a little wiggle room.
In some instances, going over your limit can mean that you face a penalty interest rate and an additional fee. Whether or not this is true in your situation has to do with the fine print of your card agreement.
You'll probably also see your credit score drop if you go over the limit, and this is reported to the credit reporting agencies. It's generally considered negative to exceed your credit limit, regardless of the specific amount or percentage that you went over the line.
Before I sign off, let's take a look at some commonly asked questions about credit limits and credit card usage best practices.
There are a number of advantages to having a higher credit limit. For example, it can:
On the other hand, having a high credit limit isn't always all sunshine and roses. There are some potential downsides, some of which can be catastrophic.
Having a higher credit limit can:
If you're thinking about applying for a new credit card or requesting a credit increase, it's important to think carefully about your income and expenses. You never want to borrow more than you can afford to pay back in a reasonable amount of time.
Whether or not you should request a credit limit increase will depend on a bunch of personal factors.
The best time to ask for an increase is when:
A credit card issuer doesn't have to increase your credit limit. They might also only grant you an increase that is a percentage of what you requested.
Are you requesting a credit limit increase because you're already deep in debt? If so, you'll want to slow down and decide if this will really help you solve your problem. If your debt is the result of a spending problem or poor money management, you could just end up finding yourself with a higher debt load in a short amount of time.
Requesting a lower credit limit usually isn't a good idea when it comes to your credit.
This is because it will likely increase your credit utilization ratio. For example, if you have a $5,000 balance on a $15,000 limit card, your credit utilization ratio is 30%. However, if the balance is lowered to $10,000, this means that your credit utilization is 50%.
That being said, keeping your credit score perfect isn't always the most important thing. Maybe you already have a mortgage and a car loan, and you're not planning on borrowing money anytime soon. If you're not worried about having a pristine credit score but more interested in reducing your access to available funds, you certainly could request a lower credit limit.
Some of the reasons you might choose to request a lower limit include:
You'll want to think about the pros and cons of requesting a reduction in your credit limit before making the call. Depending on whether you need your credit score to be in great shape in the near future, it may or may not be a good idea for you.
Credit cards can be a high-risk, high-reward type of thing. When used correctly, they can help you build a healthy credit profile. Used irresponsibly, though, they can send you into spiraling debt.
Here are a few things to keep in mind when you're learning the best ways to use credit cards:
It's best not to borrow up to your credit limit. When you max out your card, it can mean you're:
It can be tempting to spend the money extended to you. The truth is, though, the last thing you want is to enter a cycle of unmanageable debt.
On top of that, it's important to recognize that a high balance can still impact your score even if you pay your balance in full every month. This is because it can be hard to know precisely when the credit card company will report to the credit bureaus.
Are you working to learn more about responsible credit use and improving your credit? If so, you're definitely in the right place! Here at Credit Building Tips, it's our mission to help people improve their financial literacy and gain access to more financial opportunities.
Looking for more resources? Make sure to check out our Credit Building Tips blog!
In 2022, 77% of American adults had at least one credit card, with the average number of cards per consumer coming in at 3.84. In the last three months of that same year, Americans collectively carried $986 billion in credit card balances. Considering the stress and strain of having credit card debt, you might wonder, "why do people use credit to pay for things instead of simply using cash?"
The truth is, there’s a long list of reasons why people choose to use credit cards for all kinds of purchases.
In some cases, an individual might choose to use credit cards for reasons that aren’t indicative of a debt problem, such as the additional security, convenience, and access to rewards and perks. Other people, though, might use credit because they have entered an unmanageable debt cycle.Let's take a close look at why credit cards can be beneficial to your financial health. At the same time, we’ll examine the risks that they can pose when consumers aren’t careful to use them responsibly.
There are some pretty compelling reasons to use credit instead of cash, at least in some situations. Here are some of the most common justifications for making purchases using credit cards rather than cash, debit cards, or checks.
The most common form of identity theft is credit card fraud. While this might sound like a reason not to use a credit card, the truth is that the major credit card networks offer strong protection against fraud.
Credit cards, in general, offer better fraud protection than debit cards. This means that you'll be less likely to be responsible for transactions made by fraudsters with a credit card than a debit card. In terms of cash, cash that's stolen from you is, most likely, lost and gone forever.
Sometimes it makes sense to make big purchases with a credit card. This can be particularly useful if the card you’re using has a low interest rate or an introductory 0% interest rate.
Beyond that, though, credit cards can help protect major purchases. The reason for this is that many issuers will offer extended warranties and purchase protection.
When you use cash, of course, there’s no additional purchase protection or warranty beyond what is offered by the manufacturer or retailer. For this reason, it can make sense to put certain purchases on a card to help provide further protection.
It’s possible to use a credit card to pay for things you don’t have the money for right now while still avoiding paying interest, even without promotional 0% APR cards. The reason for this is that there is a grace period, which is the period of time between when you made the purchase and the due date of the bill.
If you pay off your card in full by your due date every month, you can avoid interest charges entirely. This means that, depending on when during your billing cycle you make a purchase, you can defer your payment for up to 30 days without racking up any interest.
Even if you have the money in your bank account to pay for the purchase you’re making, some people might use credit cards instead of cash in part because of the concept of the time value of money (TVM).
This notion assumes that having a dollar right now is more valuable than having a dollar down the road because of factors like interest rates and inflation. While deferring payments by only thirty days might not sound like that much, it can free up your cash for other purchases and investments in the present.
One of the primary reasons that people will use credit in order to pay for things rather than cash is that it’s often more convenient.
If you only use cash, it means that you have to carry enough with you at all times to make sure you can purchase what you need. When you have a credit card, you know that you’ll never be caught without spending power so long as there’s available credit on your account.
Another reason someone might use credit to pay for things instead of cash is that the card can give them access to more money than they actually have at the moment. This isn’t necessarily always a bad thing– for example, you might choose to purchase a dishwasher for your home using a low-interest rate or 0% APR card with a plan to pay it off over the course of the next few months. If you have a clear, attainable, realistic strategy for paying off your credit card balance, it isn’t the end of the world to use credit cards to purchase items you don’t have the cash for.
For example, the average American has more than $22,000 available to them across all of their credit cards. If you have a $20k credit limit and you start using your card without giving any thought to paying it off, you’re going to find yourself in a rough spot if you’re not pulling in a pretty healthy monthly income.
Another common reason that some individuals prefer using credit cards rather than cash is for safety reasons. For example, if they were robbed or lost their wallet, there’s a high likelihood they’ll never recover the cash they had on hand.
Some people also reasonably feel vulnerable when their wallet is brimming with cash. Credit cards, on the other hand, are small and discrete.
If they lose track of their credit card, though, they won’t be (in most cases) responsible for purchases made by unauthorized parties. Having someone make fraudulent transactions using your account can definitely be a big headache and take some time to clean up, but you typically won’t be liable for the payments made on your account fraudulently.
Let’s face it– it’s pretty hard to keep tabs on your budget. Living in the modern world means making lots of little (and not so little) purchases every month, and keeping track of all of your spending can feel like having a second job.
When you use a credit card rather than cash, though, you have a record of all of the purchases that you’ve made with that account. You can usually see your transactions nearly instantaneously, and many credit card issuers will even categorize your purchases based on the type of company.
Many of the biggest credit card companies will also let you create reports that break down where your money has been going each month. If you use one of the popular budgeting apps like You Need a Budget or Mint, you can easily import your credit card data into the app to help track your spending.
Some credit cards will run promotional offers where you can make purchases or balance transfers with low or no interest rates for a period of time. When used responsibly, this can be a great way to pay for larger purchases over time without having to pay much in the way of interest, if any.
Though not all credit cards offer rewards programs, many of them do. Depending on how much money you spend on your card, it’s possible to earn hundreds or even thousands of dollars back every year. There are lots of different programs out there geared towards different types of consumers, including:
It’s important to understand, though, that credit card rewards are only really worth it if you aren’t carrying a balance on your account every month. If you’re paying steep interest rates, the benefits of these credit card rewards can easily get overshadowed.
First of all, it’s important to note that you can have good credit without having a credit card. Other tools you can use to establish and maintain a healthy credit score include:
That being said, the single best way to increase your scores is through the responsible use of a credit card. Improving your credit can legitimately change your life, as it can impact your ability to get an apartment, a loan, a line of credit, or even a job.
Remember, it’s important to make sure that you are always paying your bills on time and keeping your balances low when you have a credit card. Otherwise, it can end up doing more harm than good to your credit.
For some types of transactions, using a credit card might not be advantageous.
Whenever you use your credit card, the card issuers charge a merchant fee. The merchant (aka the business you’re making a purchase from) is expected to pay this fee in order to cover the cost of processing the payment.
In some instances, businesses will charge a surcharge to the customer to pass the cost onto the consumer. For example, you’ve probably encountered a gas station or convenience store with a sign on their card reader that said something along the lines of “a 3% surcharge will be added to purchases under $5.”
Businesses will also sometimes charge a convenience fee, which is a fee that is applied when a customer uses a non-customary form of payment. For example, you might be able to pay a bill for no additional fee over the phone, but using an online platform to pay will cost an additional few dollars.
The following expenses often come with a transaction fee if you’re using a credit card:
If you’re planning on applying for a loan or line of credit, you’ll want to be careful racking up too high of a balance on your credit cards.
For example, if you’re trying to buy a house, mortgage underwriters will usually be very wary of changes in your creditworthiness during the time between your initial application and the closing. Your credit score could drop if your credit card utilization goes up, which could impact your ability to qualify for a loan.
One of the dangers of credit cards is that they can potentially give you access to money that you can’t actually afford to pay back.
If you know that you can’t afford a specific purchase, you shouldn’t use a credit card just because you have available credit. Debt can get out of control faster than you might imagine when you don’t have the cash flow to pay your balance every month.
For some large purchases and big bills, there can be room to negotiate and come up with a payment plan or other arrangement.
For example, if you’re facing significant medical bills it could be advantageous for you to set up a payment plan rather than get hit with your card’s interest rate. In some instances, you can even get the balance reduced depending on the circumstances.
Though there are benefits to using credit cards, there are also some serious risks.
If you aren’t careful, using credit cards can lead to unmanageable debt accumulation. There are a number of ways this can happen:
Though carrying cash with you puts you at risk of losing your cash or having it stolen, no thief will be able to steal your identity by getting their hands on your stack of Benjamins.
Using credit cards, however, does carry some risk of identity theft. The information from your credit card online or IRL leaves you vulnerable to identity theft and credit card fraud.
There are usually high-interest rates associated with credit cards. Because it’s an unsecured debt, the rates are a lot higher than when you take out a secured loan like a home loan or an auto loan.
We’ve already mentioned this a few times, but it bears repeating– if you don’t pay off your balance in full every month, the interest can really start to stack up. When you’re only making minimum payments, it can take an outrageous amount of time to pay back what you owe. In the meantime, you’ve handed over a lot more money to the credit card issuer than you originally borrowed.
For example, let’s say that your credit card has a 22% APR and the balance is $4,000. You’re only making minimum payments, which are 2% of the balance ($80). With these numbers, it would take you decades to pay off this $4,000 balance, and you would end up spending potentially as much as $37k in interest.
Some credit cards have annual fees, cash advance fees, and/or balance transfer fees. It’s always important to look at the fine print before taking out a credit card, transferring a balance to a card, or taking out a cash advance.
Using a credit card responsibly is essential to ensure you don’t accumulate debt or harm your credit. Some people struggle to keep credit cards with them, as the immediate access to funds makes them more likely to make impulsive purchases that they wouldn’t otherwise make.
For some people, using actual cash helps them recognize that they’re spending their hard-earned money. When they use credit cards, the sense that the money is going to eventually come out of their pocket is more abstract. If you’re one of these people, minimizing your credit card use might be a good idea.
Though this is somewhat related to impulse purchasing, it’s worth also noting that credit cards can tempt people to rack up a balance they really can’t afford to pay. They might justify it through an unreasonable assumption that they will have access to more money next month, or they might not have a realistic sense of their income and expenses.
Some people might choose to use cash whenever possible due to privacy concerns associated with using credit cards. Some of these concerns include:
Though responsibly using credit cards can help you improve your credit, irresponsible use of credit can wreak havoc on your credit score.
Not only can a lower credit score make it more difficult to borrow money in the future, but the negative marks on your credit file can be red flags to future lenders.
To wrap things up, there are a lot of different reasons why some people might choose to use credit rather than cash to pay for purchases. Some of these reasons are indicative of irresponsible borrowing, for example, being stuck in a debt cycle. On the other hand, there are lots of financially responsible reasons to use credit, including increased safety and security, additional perks and rewards, and the ability to improve one's credit score.
Having a credit card and paying off the balance in full every month can help you create a strong credit profile. On the other hand, racking up credit card debt, missed payments, and collection accounts can destroy your credit.
Whether you’re on a mission to build credit from the ground up or improve your credit after a few bad years, you’re in the right place. Make sure you check out our Credit Building Tips blog for more useful resources to help you in your journey to financial health.
