Credit Archives | Page 25 of 89

Aug

2024

Instant-Use Credit Cards, Explained

After you’re approved for a new credit card, you usually have to wait for it to arrive in the mail before you can start using it. But with an instant-use credit card, as the name implies, you can start shopping immediately.

While not all credit card issuers offer this feature, some issuers share account information with cardholders as soon as they’re approved. Getting a credit card you can use instantly can come in handy if you’re eager to start racking up rewards or spending to secure a sign-up bonus.

What Is an Instant-Use Credit Card?

Instant-use is a feature that some credit cards offer, allowing account holders to use the credit card before they receive a physical card. This is a perk given how long it takes to get a credit card otherwise — usually, cardholders can expect to wait between seven and 10 business days for their card to arrive in the mail.

Each credit card issuer can have unique policies and requirements about using an instant-access credit card. For example, you may not have access to your full credit limit until your physical credit card arrives.

How Instant-Use Credit Cards Work

There are a few different ways that credit cards offering instant use may work. After applying and being approved, you may receive a credit card account number before you get the actual card, which allows you to use the account online. Or, the credit card issuer may provide a temporary instant credit card number or barcode that you can use to make purchases before the official card and number arrives. Note that this differs from virtual credit cards, where the credit card numbers you receive are always temporary and disposable.

In other cases, it’s possible to add the instant-use credit card you’re approved for to a digital wallet, such as PayPal, Google Pay, or Apple Pay. You could then use the card as you’d use other cards in your digital wallet.

Benefits of Instant-Use Credit Cards

The exact benefits of an instant-use credit card depend upon the specific policies of the issuer. Besides providing access to the credit card account more quickly, these cards can offer the following perks.

Faster Rewards Accrual

A key benefit of instant-use credit cards is how quickly you can use them. If a credit card for immediate use features a rewards program, you could start accrue these rewards more quickly, thanks to prompt access to your credit card account. Similarly, if your card offers a lucrative sign-up bonus, you can start spending to earn it that much sooner.

Discounts

Many brands offer discounts to those who get their instant-use credit card. For instance, some retailers may provide a 25% discount on the first purchase you make with the instant-use card. You could use that discount strategically on the largest purchase you’d planned to make in order to maximize this benefit.

Financing Offers

An instant credit card number may offer special financing offers, such as a promotional rate of 0% annual percentage rate (APR) for a designated amount of time. Taking advantage of such an offer can save you a significant amount of money if you pay off your full balance before the promotion ends. Otherwise, the regular interest rate will kick in.

Recommended: How to Avoid Interest on a Credit Card

Drawbacks of Instant-Use Credit Cards

When choosing a credit card, it can understandably seem tempting to get a credit card you can use today. Watch out, though, for the following drawbacks of instant-use credit cards.

Limited Availability

There aren’t that many instant-use credit cards available to choose from. Only a select number of issuers offer them, with some only offering instant access on certain cards. Further, even if you do apply for one of the instant-use credit cards offered, there’s the chance you won’t get immediate access if the issuer encounters any challenges confirming your information.

Initial Usage Restrictions

With some instant-use credit cards, you don’t get immediate access to your full credit limit until you activate your physical card. Instead, when you receive your instant credit card number, you’ll only be able to use a limited portion of your approved credit limit. Especially if you were planning to make a large purchase immediately, this could cap your spending power.

Recommended: What is the Average Credit Card Limit

Potential for Overspending

This can be a downside of any credit card. But with a credit card for immediate use, it can be tempting to run up the balance as soon as you have the account number in hand.

Tips for Getting an Instant-Use Credit Card

If you’re hoping to secure a credit card you can use immediately, here are some tips to keep in mind throughout the process.

Check Your Credit Score Before Applying

Before you move forward with applying — and incurring a dip in your credit score due to a hard inquiry — take a look at your credit score. See if it falls within an issuer’s credit card requirements. If it doesn’t, you might be better off applying for another card you’re more likely to get approved for. Or, you could take steps to improve your credit score before you submit an application, assuming you have the time to do so.

Don’t Skip Researching

If you’re in a rush to find a credit card for immediate use, you might feel tempted to jump on the first instant-use credit card you spot. But don’t let a sense of urgency cause you to skip out on doing due diligence. It’s still important to take the time to compare your options, and to review a credit card’s terms and conditions before you’d move forward with applying.

Remember to Read the Fine Print

When you’re in a rush to get a credit card you can use today, it can seem harmless enough to skip over reading the fine print. However, especially in the case of instant-use credit cards, this can contain some important information when it comes to understanding how credit cards work.

For instance, there may be restrictions on usage of your instant credit card number, such as limited access to your credit limit. If you’d planned to make a massive purchase immediately, you’ll want to know that sooner rather than later.

Tips for Using an Instant-Use Credit Card

If you get approved for a credit card for immediate use, it’s likely you’ll want to start using it as soon as possible. Here are some important tips to keep in mind as you start spending.

Know Your Options for Access

Issuers will provide approved applicants with usage instructions for their instant-access credit cards. The issuer may give you a credit card number that you can then use to make purchases online or using your mobile wallet. If the credit card is attached to a retailer, they may set it up so you can use their app right away with the credit card number they provide.

Don’t Forget to Active Your Physical Card When It Arrives

Even if you’re already off to the races when it comes to spending with your new credit card, don’t neglect your physical card when it does arrive in the mail. Unless you have your card in your digital wallet, an instant-use credit card number limits you to online or over-the-phone purchases. Plus, some issues only offer partial access to your credit limit until your physical card is activated.

Remember That Basic Credit Card Rules Still Apply

Same-day credit cards come with the same set of credit card rules as any other card. Before you get carried away with making purchases, make sure you’re not spending more than you can afford to pay off. You’ll also want to set up a reminder — or even better, auto-pay — to ensure you make timely payments on your new credit card.

Recommended: When Are Credit Card Payments Due?

What to Do If Your Card Doesn’t Offer Instant Access

If you thought you’d applied for an instant-access credit card only to discover it actually isn’t a credit card you can use instantly, you do have options.

• For one, you can call your credit card issuer and request rush delivery. Though this likely won’t be as speedy as instant access, it can expedite the mailing process. Just keep in mind that you may owe a fee to cover the cost of faster shipping.

• You might also explore a personal loan. Many online lenders offer same-day funding, and the interest rates for personal loans tend to be lower than those of credit cards. Just keep in mind that applying for multiple loans in a short amount of time can affect your credit score. That’s because each application results in a hard inquiry, which will temporarily lower your score.

• Lastly, this could be a good time to dip into your emergency fund — especially if you really need fast access to cash. If you do, just make sure to replenish your savings so you’re covered the next time an unexpected expense comes up.

The Takeaway

Applying for instant-use credit cards can come with benefits, including immediate buying power. There are some downsides to consider, though, before making the right credit card choice for your unique needs. For one, you’ll have a more limited selection of cards to choose from, as not all credit card issuers offer instant-use credit cards.

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

FAQ

Can you use a credit card the same day you get it?

With instant-use credit cards, you can use the card upon approval, which could happen almost instantly. For credit cards that don’t offer instant use, you can typically use the card as soon it arrives in the mail.

How long does it take for a credit card to arrive in the mail?

There are two factors that can impact how long it takes for a credit card to arrive. The first is how long approval takes, which can happen nearly instantly or take up to a week or so. You’ll then have to wait on mailing time, which can take anywhere from five business days up to two calendar weeks.

Can I use my credit card before it arrives?

There are credit cards that you can use instantly, although not all credit cards offer this capability. Some cards require you to wait for the physical card to arrive before you use it. If you have an instant-use credit card, you’ll receive instructions from the issuer on how to start using the account right away.

Photo credit: iStock/Cunaplus_M.Faba

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Aug

2024

What to Do When a Family Member Uses Your Credit Card Unauthorized

By Dan Miller | Credit, credit card, Family Finances | Comments Off

Dealing with unauthorized credit card charges by family members or friends can get complicated. Your credit card issuer may want you to file a police report and even take legal action against the person who made the charges. You’ll have to decide whether it’s worth potentially damaging your relationship with your family member or friend.

One of the main advantages of using a credit card for purchases is that, in most cases, you’re not liable for fraudulent charges. If your card is lost or stolen, usually all it takes is a quick chat with your credit card issuer to resolve the issue. While this likely means you won’t be liable for a relative’s charges made without permission, read on to learn more about managing this scenario.

Authorized vs Unauthorized Credit Card Charges

While you are legally responsible for paying back any authorized credit card charges, in most cases, you will not need to cover any unauthorized credit card charges.

Most credit cards come with a 0% liability guarantee, meaning that you’re not liable for any unauthorized or fraudulent charges that were made with your credit card or account information. This can help protect you against credit card scams and other fraudulent activity, as well as charges made to your card without your permission.

Legal Protection Against Unauthorized Use of Credit Cards

There are two main federal laws that help to protect you against unauthorized use of your credit card or account information:

• Fair Credit Billing Act (FCBA): This law limits your liability for unauthorized credit card charges to $50, though many card issuers lower your liability to $0 for all unauthorized charges.

• Electronic Fund Transfer Act (EFTA): Sometimes referred to as Reg E, this law limits liability for ATM transactions or debit card charges, among other types of transactions, if it’s reported within 60 days.

Recommended: What is a Charge Card?

Tips for Handling Accidental Possession of Credit Cards

One of the best things you can do to help avoid unauthorized use of your credit card by a third party is to keep it in your possession. Make sure you know where your credit cards are at all times, especially if you have teens or other adults living in your home.

It’s also a great idea to regularly monitor your bank accounts and credit card accounts. That way, you can spot any unauthorized charges quickly.

Tips for Handling Unauthorized Credit Card Charges

If unauthorized charges were made to your credit card, here are some tips for how to handle the situation.

Contact Your Credit Card Issuer

The first thing you’ll want to do if you spot an unauthorized credit card charge on your account is to contact your credit card issuer. You can do this by calling the number printed on the back of your credit card or contacting your issuer through your online account.

Request a Refund

As the refund process may vary slightly by issuer, the customer service representative you talk with can help you figure out how to request one. A refund is also sometimes referred to as a credit card chargeback. In many cases, the bank will provisionally credit your account within 24-48 hours while they investigate the fraudulent charges.

File a Police Report

In some cases, your bank or credit card company may request you to fill out a police report. In other cases, the card issuer may file a police report themselves. This can make the situation complicated if it’s a friend or family member who made the unauthorized charges.

Disputing Credit Card Charges

Disputing credit card charges is another term for reporting unauthorized or fraudulent activity on your account. When you dispute a credit card charge, you’re letting the card issuer know that you believe you should not be responsible for paying that particular charge. It’s important to dispute any fraudulent charges as soon as possible.

Reporting Unauthorized Credit Card Use

It’s good financial practice to regularly review your bank and credit card accounts for a number of reasons. One reason is to report any unauthorized credit card use as soon as you see it. The best way of handling fraudulent charges is to report them immediately and then let your bank or credit card company investigate them.

Recommended: How to Avoid Interest On a Credit Card

Tips for Avoiding Credit Card Fraud and Unauthorized Use

There are two things that you’ll want to do to avoid unauthorized use on your credit card:

• First, make sure that you keep track of your cards and don’t leave them where someone else might use them.

• Second, regularly monitor your bank and credit card accounts. That way, you can report any unauthorized use to avoid being liable for any credit card purchase interest charges that may accrue otherwise.

The Takeaway

Federal law limits consumer’s liability for fraudulent or unauthorized charges, and most credit cards have a $0 fraud liability policy. So if you do have any unauthorized or fraudulent charges, make sure to report them to your credit card issuer right away.

Where this situation can get complicated is if it’s a friend or family member who made the unauthorized charge. In the case of unauthorized use of a credit card by a family member or friend, you’ll need to decide whether to try and get the money back directly from that individual or report the charge to your card issuer, which may mean filing a police report.

FAQ

Who is liable for unauthorized credit card charges?

Federal law limits a consumer’s liability for unauthorized credit card charges and credit card fees stemming from unauthorized use. If you see a charge on your credit card account that you don’t recognize, make sure to report it to your card issuer as soon as possible.

How do credit cards investigate unauthorized charges?

Credit card companies have a variety of different ways that they investigate unauthorized charges. They may contact the merchant, review video from the purchase, or check online activity. In some cases, they may work with local law enforcement and/or pursue criminal charges.

Should you report a family member for unauthorized credit card use?

Whether or not you report a family member for unauthorized credit card use depends on the situation. Keep in mind that reporting a family member for unauthorized credit card use may lead to the card issuer pressing charges against them for fraud. So, depending on your relationship, you may not want to report your family member to the card issuer and instead try to get the money back directly from them.

Photo credit: iStock/Erdark

Aug

2024

Instant Approval Credit Cards: How They Work

By Dan Miller | Credit, credit card | Comments Off

Typically, when you apply for a credit card, you may be instantly denied, or you may receive a notice that the card issuer needs more time to evaluate your application. Another possibility is that you’re instantly approved for the credit card; there are cards that guarantee a decision in just minutes.

When you receive an instant approval for a credit card, you can rest easy knowing that you’ll get the credit card and any applicable welcome bonus. In some cases, credit card issuers will allow you to have instant access to your credit card number. That can be useful if you want to make an immediate and time-sensitive purchase.

What Is an Instant Approval Credit Card?

An instant approval credit card is a credit card that guarantees a decision about your application within a matter of minutes. Once you submit your application, the credit card issuer will instantly let you know if you’ve been approved or denied for the card.

Not all credit card issuers do instant approvals, and it’s possible to not receive an instant approval even if you have excellent credit and income. For some issuers and certain credit cards, when you’re instantly approved, you also receive your credit card number and everything else you need to make a purchase with the card right away.

How Instant Approval Credit Cards Work

When you apply for a new credit card, the card issuer will typically conduct a hard pull of your credit report and review your credit history, income, and other financial information. They will use this information to decide whether or not to approve you for a card.

If they have enough information on your credit report to approve you automatically, you may be instantly approved. In other cases, a credit analyst may need to review your application before making a decision. This will impact how long it takes to get a credit card.

Instant Approval vs Prequalified Offers

Many credit card issuers also allow you to prequalify for a credit card. When a lender prequalifies you for a credit card, they usually take your basic information and do a soft pull on your credit report, as opposed to the hard inquiry done for formal approval of your application. This soft pull allows them to see a limited amount of information about you, which may be enough for them to prequalify you.

Being prequalified does not mean that you’ll necessarily be approved when you fill out the complete application. In contrast, when you receive an instant approval, that means that you’ve actually been approved for the card.

Recommended: What is the Average Credit Card Limit

Pros and Cons of Instant Approval Credit Cards

Fast credit cards approval has some obvious upsides, but there are also some possible downsides to take into consideration as well:

Pros	Cons
You know right away when you are approved	You may not be instantly approved, even with good credit and income
You may be able to access your card information instantly	Instant access to your credit card number may tempt you to spend more

When to Consider an Instant Approval Credit Card

The only time it may be worth it to go out of your way to go for an instant approval card is if you have a large purchase that you need to make within the next day or two. In that case, being able to secure a big signup bonus on a new card or get a card with an introductory 0% APR offer may be worthwhile, given how credit cards work.

When possible, however, it’s better to manage your credit cards and credit card applications so that you don’t have to depend on instant credit card approval.

When to Skip an Instant Approval Credit Card

In most non-emergency cases, it doesn’t make sense to go out of your way to find an instant approval credit card. Instead, review the different credit cards that are out there and find the best card for you — regardless of whether you might be instantly approved.

Choosing a credit card that’s right for you might earn you hundreds of dollars or more in rewards. In the end, it may be worth more than getting the card information a few days earlier.

Choosing an Instant Approval Credit Card

It’s not always possible to determine whether any particular card will give you instant approval. Some card issuers (including American Express) publicly state that they offer instant credit card numbers to eligible cardholders.

That being said, receiving instant approval (and an instant credit card number) is contingent on the information on your credit report and the credit card requirements of the card issuer itself. In other words, instant credit card approval and use is not something that can be guaranteed.

Increasing Your Chances of Approval

While there isn’t always a guarantee of getting instant credit card approval, there are a few things you can do to help increase your chances of getting approved immediately.

Provide Information About Your Income

Most credit card applications ask about your total household income. Providing accurate income information can help the credit card issuer understand your financial situation and possibly approve you instantly.

Remember, one of the key credit card rules is that you should be truthful. If an issuer finds out that you were dishonest on your application, they may close your account.

Recommended: How to Avoid Interest On a Credit Card

Check Your Credit Reports

Another great idea if you’re hoping to secure instant approval on a credit card is to check your credit report. Keep your eye out for any incorrect or inconsistent information. If there’s incorrect negative information on your credit report, it may prevent you from being instantly approved for a credit card.

In general, it’s a wise financial move to regularly review the information on your credit report at least on a yearly basis.

Apply for the Right Instant Approval Credit Card

You’ll also want to be realistic about your approval odds for the credit card you’re looking at. If your credit isn’t that great, you might not want to try applying for an instant approval credit card that requires excellent credit (meaning a score of 800+). It’s more important to try to apply for a card that you’re likely to get approved for than one that might offer instant approval.

Alternatives to Instant Approval Credit Cards

One alternative to an instant approval credit card is to just apply for the best credit card for you, regardless of whether you might be instantly approved. You might also look at virtual credit cards, where you can get a temporary, randomly generated credit card number that’s linked back to your actual credit card account.

If you are in need of fast funding, there are other options to explore there, too. Some online lenders offer funding the same day you apply and get approved for a personal loan. You might also consider tapping into your emergency fund, which you then can replenish once you’ve addressed your need for fast cash.

The Takeaway

When you apply for a credit card, it’s possible the credit card issuer may instantly approve you. In other cases, they may need more time to decide whether or not to approve your application. If you are instantly approved, you may also be able to have immediate access to your card number and other credit card details. Instant approval credit cards with instant use can be useful if you have an immediate need to make a large purchase and want to do it on a new credit card.

FAQ

What credit score do I need for an instant approval credit card?

There isn’t a single credit score you’ll need to be approved for an instant approval credit card. Instead, each credit card has its own criteria for approval. When choosing a credit card, it’s important to select a credit card that matches your credit profile. If you have fair or worse credit, you shouldn’t apply for a credit card that requires excellent credit — you’ll likely be denied.

What is the difference between instant approval and instant use of credit cards?

When you apply for a credit card, you may be instantly approved if the card issuer has enough information to make an automatic decision. If you’re instantly approved, some issuers allow you to have instant access to your credit card number and account. That immediate access is what’s known as instant use.

Does an instant approval credit card guarantee you’ll be approved?

There’s no guarantee you’ll get approved when you apply for a credit card, and the same goes for instant approval credit cards. Whether you’re approved will depend on your financial specifics and the credit card’s requirements. Even if you’re prequalified or preapproved, that does not guarantee that you’ll be approved when you go through the formal application process.

What if my application for an instant approval credit card gets declined?

If your instant approval credit card application is denied, you may still eventually be approved for the card. It may just mean that the issuer needs additional information or more time to determine if they can extend credit to you. If you receive a firm denial, then it’s time to move on and find a credit card which will approve you.

Photo credit: iStock/PeopleImages

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Aug

2024

What Is Credit Card Arbitrage and Is It Worth It?

By Kim Franke-Folstad | Credit, credit card, Growing Wealth | Comments Off

Credit card arbitrage is a strategy in which you borrow money with a 0% or low-interest credit card and then put that money into an investment that earns a higher rate of return. It can sound like a way to make easy money, but it does carry some risks. And it isn’t necessarily a good fit for average investors.

If you’ve heard of credit card arbitrage and wondered if it’s something you should try, read on for a rundown of the risks and rewards.

What Is Credit Card Arbitrage?

With credit card arbitrage, or balance transfer arbitrage, you sign up for a credit card with a low or 0% annual percentage rate (APR). Then, you use that credit card account to put money into an investment that will earn more than the interest rate you’re paying on the credit card balance you’re carrying.

You follow one of the basic credit card rules of making at least the minimum credit card payment on time each month. When the card’s introductory rate expires, you take the money you need out of the investment, pay off the remaining balance on the card, and keep the difference as your profit.

Credit Card Arbitrage Strategies

What you decide to invest in using a credit card may depend on a few different factors. This includes how much you can borrow, the length of your introductory rate (which is often between 12 and 21 months), and your tolerance for risk.

Some possible investments for your credit card arbitrage strategy include a high-yield savings account, a certificate of deposit, and short-term bond ETFs.

High-Yield Savings Account

A high-yield savings account may be a good option for risk-averse investors attempting credit card arbitrage. You can’t lose the money because it’s protected at banks by the Federal Deposit Insurance Corporation (FDIC) and at credit unions by the National Credit Union Administration (NCUA). However, you may have to keep a minimum balance to avoid a monthly service fee.

An alternative to attempting credit arbitrage using a high-yield savings account might be to save using an online-only financial institution. Online banks tend to offer more competitive rates than brick-and-mortar banks.

Certificate of Deposit

Another investment with limited risk is a short-term (six months to a year) or no-penalty certificate of deposit, or CD. A CD may offer a higher interest rate than a savings account, and it also will be insured by the FDIC.

The benefit of a no-penalty CD over a short-term CD is that if you find a higher return elsewhere, you can withdraw your money and move it without paying a fee. Otherwise, you’ll face an early withdrawal penalty if you try to take your money out of a CD before the term is over.

Recommended: How to Avoid Interest on a Credit Card

Short-Term Bond ETFs

A bond exchange-traded fund (ETF) that holds short-term bonds may be another low-risk option to consider. Bond ETFs are traded on the stock market, so they’re more liquid than other types of bonds and bond funds. And funds that have a shorter term are less exposed to changing interest rates.

Still, if you’re unfamiliar with bond ETFs, you may want to take some time to research the pros and cons of this investment — including the risk and potential for loss and how to reduce trading costs.

Pros and Cons of Credit Card Arbitrage

As mentioned, there are definite downsides to credit card arbitrage. However, there’s the potential for gains, too. Here’s a quick rundown of the pros and cons of credit arbitrage:

Pros	Cons
May be an easy way to make money if you can find the right investment	Difficult to find a safe investment that makes the strategy worth the effort and risk
A low-interest card with cash-back rewards or points could add to the strategy’s benefits	Consequences for late payment could eat into expected profit
Making timely payments could help build your credit score	Taking out a card and using up your available credit could negatively affect your credit score

The upside to using credit card arbitrage is the potential to make some extra money with very little effort. If you’ve worked hard to earn and maintain a credit score that qualifies you for a credit card with a 0% or low-interest rate, you can use that card to fund an investment and, if all goes well, quickly pocket a profit.

If you choose a credit card that offers credit card rewards, such as cash back or points, that could be an added benefit. Further, by always making at least the minimum payments on the credit card and repaying the balance on time, you might help build your credit score. (Although if you qualify for a low-interest card, you probably already have good credit.)

Unfortunately, there are also plenty of downsides to credit card arbitrage — starting with finding an investment that works well with the strategy. Though in recent months the Federal Reserve has been bumping up its benchmark interest rate, it may take a while before those increases lead to noticeably higher yields on savings accounts and CDs.

Depending on how much you decide to borrow and how long your introductory period lasts, the small amount you might earn from your investment may not be worth the effort or risk of using your credit card.

And there are risks involved with credit arbitrage. For starters, you can expect to feel some effects if you make a late payment on your card. You might have to pay a late fee or, worse, the credit card company could cancel your promotional interest rate and immediately begin charging a substantially higher interest rate on the account. That could take a significant bite from your profits.

Your credit score also could suffer — even if you make timely payments. Just opening a new line of credit may temporarily lower your score. And if you borrow all or a large portion of your available credit, it could affect your credit card utilization ratio, which also can negatively affect your credit score.

You also can expect your credit score to go down if you do end up making a late payment (or payments). Payment history is the No. 1 factor in determining your FICO Score®.

Considering Credit Card Arbitrage? What to Know

There’s an old saying in investing: Don’t risk more than you can afford to lose. Or, as your mom might put it: Just because you can doesn’t mean you should.

Credit arbitrage may look like an easy and “free” way to make some extra money, but it’s a strategy that’s probably best left to investment professionals. If you do decide to attempt it, here are a few things you can do in advance to protect yourself:

• Have a backup plan. What would happen if you suddenly lost your job or had unexpected expenses from an illness or accident? Unless you have a healthy emergency fund or your investment can be easily liquidated, you could quickly run into financial trouble.

• Make sure you understand the terms of your credit card agreement. How long does the introductory period last? (The longer the better.) What happens if you miss a payment? What’s the rate when the promotional period expires?

• Know yourself. This strategy requires using a credit card responsibly. If you aren’t clear on how credit cards work or think you’ll be tempted to use your card for a spending spree instead of investing, you may want to think twice before moving forward.

• Don’t forget about fees. Run the numbers to be sure your investment will still pay off after you cover fees and other costs.

Recommended: 10 Credit Card Rules You Should Know

Other Ways to Save and Make Money Using Your Credit Card

If the concept of credit card arbitrage is new to you, it may be because there are other popular ways to use a credit card to save and make money. Here are some other options to consider.

Earning Cash Back

With a cash-back rewards card, cardholders can get back a percentage of the money they spent on purchases during a billing cycle. That percentage varies from one card to the next — and there also may be different ways you can receive your cash rewards. You may be able to apply the cash directly to your balance, put it toward gift cards or charitable giving, or have the money deposited directly into your checking account.

Getting cash-back rewards can be an especially effective strategy if you use your card for frequent and/or major purchases and pay down your balance every month.

Earning Rewards Points

Some card issuers offer a rewards program based on credit card points. Cardholders may be able to put their points toward multiple purposes, including travel (flights, hotels, car rentals), statement credits, cash back, and more. The value of points may vary depending on the specific credit card as well as how you opt to redeem earned points.

Investing Your Rewards

You also may be able to invest with credit card rewards. For instance, if you earned cash-back rewards from your credit card spending, you could redeem your rewards as a direct deposit or check. Then, you could use that money to invest with credit card rewards basically — either in a literal investment, such as stocks or index funds, or even in yourself, through additional job training or classes.

Shopping Online to Earn Bonus Rewards

Some credit cards offer bonus rewards for shopping online or through an app. Card issuers may have different rules for their rewards (think goods instead of services or certain brands only,) so it’s a good idea to check out a rewards program’s requirements before signing up.

Using a Balance Transfer Card to Pay Down Debt

Another possibility is to use a no-interest balance transfer credit card to pay down debt. Once you move your balance from a high-interest card to the new card, you’ll have several months to pay down your debt without accruing any additional interest.

Just as with credit card arbitrage, it’s important to be sure you make your monthly payments on time, though, or you could see a big jump in your card’s interest rate. Also keep in mind that a balance transfer fee will apply, so be sure to factor that into the equation.

Using a 0% APR Card

Planning to take a dream trip or make a major purchase? A no-interest credit card could allow you to finance your big spend without accruing interest. You’ll just want to make sure you can pay off the balance within the promotional period, and make your payments on time.

The Takeaway

You may have heard credit card arbitrage, or balance transfer arbitrage, touted as an easy way to make some extra cash. But the process, which involves using a no- or low-interest credit card to finance an investment that earns a higher rate of return, isn’t as simple as it may seem. It can require careful planning, financial savvy, and some research to find the right investment for this strategy. And even if all goes well, the payoff may not be worth the time and effort to use credit cards in this way.

FAQ

Are there risks involved in credit card arbitrage?

Yes. Even if your investment seems super safe and like it won’t lose money, if you don’t make your monthly payments on time or if you can’t pay off the balance before the promotional period is up, you could find yourself in a financial bind.

Is credit card arbitrage legal?

Yes. But just because you can do it doesn’t mean you should. There are other more proven ways to save and invest using a credit card.

How much can you make with credit card arbitrage?

The amount you can make using credit card arbitrage depends on several factors. This includes how much you choose to borrow and invest, your card’s interest rate, how much your investment pays, the length of your card’s promotional period, and the fees you might incur when investing.

Photo credit: iStock/Prostock-Studio

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

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

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Aug

2024

Does Closing a Credit Card Hurt Your Credit Score?

By Dan Miller | Credit, credit card, Family Finances | Comments Off

Closing a credit card can hurt your credit in some situations. If you already have good to excellent credit, closing one credit card generally won’t have a huge impact on your credit score. However, there are a few scenarios where closing a credit card can hurt your credit score; say, doing so might shorten the length of your credit history or might send your credit utilization rate soaring.

Learn more about the potential consequences of closing a credit card, as well as alternatives to explore to avoid possible impacts to your credit score.

Ways Closing Your Credit Card Can Affect Your Credit Score

If you’re worried about whether it hurts your credit to close a credit card, you should know that there are two main ways that canceling a credit card can indeed affect your credit score.

Through Credit Card Utilization Ratio

The first way that canceling a credit card affects your credit score is by raising your credit card utilization ratio. Your utilization ratio (sometimes called your utilization percentage) is the total amount of available credit that you’re actually using. If you have a credit card with a $10,000 limit and you regularly spend $5,000 on that card each month, you’d have a utilization ratio of 50% ($5,000 divided by $10,000).

Having a low utilization ratio is generally considered a positive factor in determining your credit score. Lenders prefer when you’re not using all of your available credit, since doing so can be an indicator of financial distress. Typically, you should be using no more than 30% of your credit limit across all your lines of credit and ideally no more than 10%.

When you cancel a credit card, you lower the total amount of your available credit line, which will generally raise your credit card utilization ratio.

Example: Say you have two credit cards.

• On credit card A, you have a balance of $5,000 and a credit limit of $10,000.

• On credit card B, you have no balance and a credit limit of $10,000 too.

• So, on these two cards, your combined limit is $20,000. The fact that you have a $5,000 balance means your credit utilization is $5,000 out of $20,000 or 25%.

• If you close credit card B, you now have a balance of $5,000 with a $10,000 limit. Your utilization ratio rises to 50%.

If you close credit card B, your credit utilization could rise and your credit score could be lowered.

Recommended: What Is the Average Credit Card Limit

Impact on the Length of Credit History

Another way that canceling a credit card can affect your credit score is by impacting the average length of your credit history. Your average age of credit accounts is another factor in determining your credit score, with an older average being better. You’ll especially see an impact on your score if you close a card that you’ve had for a very long time — and the impacts of a bad credit score are myriad. Credit can be harder to secure and more expensive.

When Canceling a Credit Card Might Make Sense

There are several scenarios when canceling a credit card might be the right financial move, such as when:

• Your card has a steep annual fee that isn’t worth it. One of the most common reasons for when to cancel your credit card is if you have a card with an annual fee and you’re no longer getting enough in benefits to justify paying that cost. It doesn’t make sense to pay an annual fee of $100 or more a year if you’re not getting much benefit from having the card — and there are plenty of credit cards that come with no annual fee.

• You have multiple credit cards and want to streamline your finances. Another scenario is if you have multiple credit cards and want to simplify your finances. With how credit cards work, missing a payment can have a big negative impact on your credit score. So if you’re in a situation where you have too many credit cards and are having trouble keeping payments straight, it may be a good idea to simplify your life and cancel some of your credit cards.

• You have a high interest rate on a card. Particularly if you need to carry a balance for whatever reason, ditching a card with a high interest rate might be in your best interest. That will save you from paying more than necessary in interest charges.

• You want to replace a basic or secured credit card. Another reason you might consider canceling your card is if you have a very basic starter credit card. Or perhaps you have a secured credit card and want to upgrade to an unsecured card. Especially if you have built your credit score considerably since you opened that card, you could secure better terms and potentially the opportunity to earn rewards as well.

Recommended: When Are Credit Card Payments Due

When It Might Make Sense to Keep the Credit Card Account Open

On the other hand, there can be good reasons to keep your credit card accounts open as well. This includes if:

• Your card doesn’t have an annual fee. If the card has no annual fee, you could always keep the card open and not use it rather than closing the account. When you close an account, the next time the credit bureaus are updating your credit score, your score may decrease. Keeping your credit card open instead could prevent that.

• You don’t have many accounts open. One of the factors that’s used to determine your credit score is your mix of accounts. If you don’t have many accounts open, closing one of your few accounts could ding you in this area, possibly dragging down your credit score. Plus, it could cause your available credit to take a big hit, which would increase your credit utilization.

• Your only reason for canceling is not using your card very often. Given the potential impacts to your credit, if you don’t have much reason to cancel a credit card, you’re likely better off keeping it open due to the importance of good credit. That way, you won’t risk driving up your credit utilization or lowering the average age of your accounts, both of which can cause your score to drop. Plus, there aren’t any penalties for not using a credit card frequently.

Recommended: What Is a Charge Card

Guide to Closing a Credit Card Safely

To close a credit card safely, there are a few things that you’ll want to keep in mind before canceling your card.

Automatic Payments

If you have any automatic payments being charged to the card, you’ll want to contact the vendors and change them to another card if you own multiple credit cards. Once you close your credit card account, if a vendor attempts to charge your account, the charge will likely be denied. This could lead to interruptions in other areas of your life, especially if it’s for something crucial like rent or utilities.

Paying Your Balances in Full

Simply closing your credit card account does not eliminate your responsibility for any charges already on the account. You’re still just as responsible and liable for the total balance on your account, so you should pay off your balance in full. If you don’t pay the full balance when you close the account, your card issuer will still issue you monthly statements, and interest will continue to accrue.

Redeeming Your Rewards

If you have a credit card that allows you to earn cash back, travel, or other rewards, you’ll want to redeem those rewards before you close your account. Once you close your account, you may not be able to access them, and it’s possible that you will lose some of your hard-earned rewards. To avoid that possibility, you should redeem your rewards before canceling your credit card account.

Alternatives to Canceling a Credit Card

If you’re worried about how closing a credit card can hurt your credit, there are alternatives to explore.

Downgrade to a No-Fee Card

If one of the reasons you’re considering canceling your credit card is to avoid paying an annual fee, you may be able to downgrade the card instead. Many credit card issuers offer a variety of different cards, and only some of them come with annual fees. Downgrading to a no-fee card will keep your account open without having to pay the annual fee.

Negotiate With Your Credit Card Company

Another option is to negotiate with your credit card company. Most credit card issuers do not want you to cancel your card, so you may be willing to negotiate for better terms. This might include waiving the annual fee, lowering the interest rate, or getting additional rewards — it never hurts to call your credit card company to ask what they might be willing to do.

Put Your Card Away

If you’re considering canceling your credit card because you’re worried about overspending on the card, you also have the option to just take it out of your wallet. Depending on your situation, simply placing the card in your sock drawer, for instance, might prevent you from overspending without having to actually close the account.

Recommended: How to Avoid Interest on a Credit Card

Check Your Credit Report Before Closing an Account

If you’ve decided to close your credit card account, it can be a wise move to check your credit report both before and after canceling your card. If you’re concerned about how checking your credit score affects your rating, remember that it won’t impact it.

Also keep in mind that you have different credit scores, so take some time to check each one before and after closing your account. That way, you’ll have an accurate idea of how closing your credit card impacted your credit score.

The Takeaway

While closing a credit card likely won’t have a huge impact on your credit score, it can lower it, especially in certain situations. Unless you have a good reason for closing your account, you may want to consider keeping your credit card open. Instead, you could consider downgrading to a no-fee card, negotiating with your credit card company, or just taking your card out of your wallet.

FAQ

Is closing a credit card bad?

Closing a credit card isn’t usually bad, but it may lower your score in some situations. Instead, consider alternatives to closing your credit card like downgrading your card or negotiating with your card issuer.

Is it better to cancel unused credit cards or keep them?

In many scenarios, it’s preferable to just keep your credit card accounts open, even if you don’t regularly use them. This allows your average age of accounts to increase and also lowers your utilization ratio by having access to a higher total of available credit. Both of these factors can help build your credit score.

Does closing a credit card with a zero balance affect your credit score?

If you close a credit card, even if you have a $0 balance, your credit score might drop. This is because closing your card could lower your average age of accounts and/or increase your credit utilization ratio. Instead of canceling your credit card, consider negotiating with your card issuer for a lower interest rate or lower fees.

How much does your credit score drop if you close a credit card?

If you already have good or excellent credit, closing a credit card generally won’t have a huge impact. If you have a low credit score, however,it’s possible that closing a credit card can hurt your score even more. This is especially true if the card you close is one you’ve had for a long time or one with a high credit limit.

Photo credit: iStock/wichayada suwanachun

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

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

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