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Unsecured credit cards, which don’t require a form of collateral to use them, tend to be the most popular kind of credit card. In addition to helping you build credit, these cards often come with perks and benefits, like cash back rewards or free travel insurance.

To decide if an unsecured credit card is right for your financial situation, read on. You’ll learn what an unsecured credit card is, how it works, and the pros and cons of using one.

What Is an Unsecured Credit Card?

When you think of what a credit card is, you’re most likely thinking of an unsecured credit card. An unsecured credit card is a line of credit that gives cardholders the ability to use credit at their whim. In other words, as a cardholder, you can use your credit up to its limit and pay it off continuously, with no end date. Unsecured credit cards get their name since they don’t require a deposit or collateral, unlike secured credit cards.

Depending on the credit card you qualify for, you might be able to receive some additional benefits and perks with an unsecured credit card like cash back rewards.

How Does an Unsecured Credit Card Work?

You’ll receive a credit limit when you open an unsecured credit card. Your credit limit is the maximum credit you can use on this account. You must pay at least the credit card minimum payment each billing cycle if you’ve used the card. Here are some points to know:

•  Your monthly payment will vary depending on how much credit you used during that billing cycle (in fact, some months, you may even have a negative balance on your credit card).

•  If you miss a monthly payment, you’ll likely have to pay a penalty or fee for the infraction.

•  If you make only the minimum monthly payment, your remaining balance (plus accrued interest based on the APR on a credit card) will carry over until the next month.

So, to avoid penalties, fees, and accrued interest, it’s best to pay your balance in full every month.

But, if this isn’t feasible with your budget, aim to pay more than the minimum every month so you can quickly chip away at your total outstanding balance. Just be sure to keep in mind how credit cards work when deciding how much to pay in a given month.

Pros and Cons of Unsecured Credit Cards

Some of the benefits and drawbacks of unsecured credit cards may be obvious. But, to help you determine the risks and rewards of using this type of credit card, here are some pros and cons to get familiar with.

Pros

Upsides of unsecured credit cards include:

•   Higher credit limits: Applicants usually must have a competitive credit score to qualify for an unsecured credit card. For this reason, credit card companies may apply a higher credit card limit since you’ve proved your creditworthiness.

Also, having a higher credit limit can impact your credit utilization ratio, the amount of credit you use compared to the amount of credit you have available. Your credit utilization ratio is used to assess your credit score, and a higher ratio may negatively impact your score. With a higher amount of credit available, it’s easier to maintain a lower ratio.

•   Potential to earn rewards: Many unsecured credit cards offer incentives like cash back or airline miles to encourage cardholders to use their credit. They may also offer additional benefits, such as complimentary airport lounge access or hotel credits. So, when comparing your unsecured credit card options, be sure to look at all perks and rewards that may be offered.

•   Frequently reports credit history to credit bureaus. Since card issuers take on more risk by lending credit to cardholders, they usually report your credit activity to the credit bureaus on a monthly basis.

Your credit usage is another factor used to determine your credit score, so these regular reports can help you assess how well you’re managing your credit. If you’re managing it well, these frequent reports can help your score.

•   An abundance of options: Unsecured credit cards are the most popular type of credit card. Therefore, there’s a vast array of credit card options at your disposal. Because there are so many options, you’ll likely be able to find one suitable to fit your needs.

Cons

While there are many advantages of using an unsecured card, some may come with some downsides, including:

•   Varying approval requirements: Every credit card company usually has different credit card approval requirements, and you’ll generally need a higher score to qualify for an unsecured versus a secured credit card.

For example, some secured credit card requirements are a credit score of at least 580; others may require a score of at least 680. Researching requirements beforehand can help you identify the best cards available that you can qualify for with your credit score.

•   Extra fees: Some unsecured cards may come with extra fees, such as convenience fees, cash advance fees, or foreign transaction fees. Keep in mind that not all cards charge these fees, though, so it’s worth it to compare your options based on your needs. For example, if you travel abroad often, you may want to choose a card that doesn’t have foreign transaction fees.

Unsecured vs Secured Credit Cards: What Are the Differences?

The most significant difference between unsecured versus secured credit cards is that secured cards require a deposit while unsecured cards don’t. Your deposit on a secured credit card usually dictates your credit limit. Depending on the credit card company and your credit score, your deposit may vary between $200 and $3,000, which is far lower than the average credit card limit.

Requiring a security deposit eliminates some of the creditors’ risks; thus, it can be easier to qualify for a secured credit card than an unsecured credit card. Keep in mind, no matter what type of card you have, you’ll find the most favorable terms if you have good credit, such as a good APR for a credit card. Also, you may have to forgo any rewards while you build your credit with a secured card, as they don’t often offer them.

If you fall behind on your payments, your creditor could cancel your card and send your remaining outstanding balance to a third-party collector with either an unsecured or a secured credit card. However, if you have a secured credit card and your payment is past due, your creditor may keep your security deposit to pay off some of the remaining balance.

Beyond these few items, there is no other real difference between the inner workings of a secured credit card and an unsecured credit card.

•  Each card allows you to make purchases at locations that accept credit card payments.

•  During the billing cycle, you must make at least a credit card minimum payment.

•  Otherwise, you may have to pay fees or penalties with your secured or unsecured credit card.

Who Should Consider an Unsecured Credit Card?

Since there are plenty of unsecured credit card options available, they can suit the needs of many different types of consumers. If you’re in the market for a new credit card, here’s how to decide if an unsecured card is right for you.

The Budgeter

If you’re big on budgeting, you can use an unsecured credit card as a tool to help you as you make a budget and stick to it. Many credit issuers offer online statements or apps that can make it easy to track all of your spending right on your phone.

But, if you’re going to use your credit card for all of your spending, make sure to keep the interest in mind. While unsecured credit cards can help you budget, they can also hinder you if you get into the habit of overspending.

The Frequent Flyer

Do you love spending your time on the move? Many unsecured credit cards provide travel rewards that help you earn free travel experiences. For example, some cards can come with reward points or miles that you can use toward booking airfare or accommodations.

You may also receive additional perks like annual hotel credits, access to airport lounges, or discounts on flights when using miles.

The Business Owner

Unsecured credit cards are also useful for business owners. Business owners can capitalize on the perks of unsecured credit cards like rewards, sign-up bonuses, and other benefits. Also, an unsecured card can provide short-term funding for business growth. Plus, it can help businesses build credit for future financing endeavors.

Of course, benefits and terms will vary depending on the type of card you choose.

Typical Requirements to Apply for an Unsecured Credit Card

When you apply for an unsecured credit card, you must meet certain criteria to qualify. Some common requirements when applying for a credit card include:

•   Be at least 21 years of age. While this is generally the age required to get a credit card, if you’re over 18 and can prove you have an income, you may qualify.

•   Provide proof of income to demonstrate you can make the minimum payments.

•   Be a U.S. citizen or have the authority to work in the U.S.

•   Have an acceptable credit score range per the lender’s requirements.

•   Provide personal information such as your name, age, address, Social Security number, and more.

Keep in mind that all credit issuers have different criteria for approval. Some credit issuers may give you the option to pre-qualify. This way, you can see if you may qualify without submitting a hard inquiry on your credit, which can impact your credit score.

The Takeaway

Unsecured credit cards can come with many perks, such as earning cash back rewards and helping you build credit. But, before you apply for just any old card, make sure to compare your options, keeping the average credit card interest rate in mind, and understand the criteria for approval. Identifying an unsecured credit card that’s suitable for your needs might take a little time, but it’s worth it.

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

Is it good to have an unsecured credit card?

If you can handle an unsecured credit card responsibly, it can help you build credit. Also, it can be a good way to receive additional benefits, such as cash back or other rewards, for completing your daily transactions.

What credit score do I need for an unsecured credit card?

Typically, if you have a credit score of 579 or less, credit issuers may be reluctant to approve your application. To qualify for the most competitive rates and offers, you typically want to have a credit score of 670 or higher.

How long before I can get an unsecured credit card?

If you’re working on building credit and don’t qualify for an unsecured credit card, you may have to start with a secured card. But, the amount of time you must use your secured credit card before you graduate to an unsecured time can vary from a few months to several years. Ultimately, it will depend on factors like your current credit score and the criteria of the unsecured credit card you’re applying for.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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If you need to send money with a credit card, there are several ways you can complete the transaction, including taking a cash advance, using a peer-to-peer (P2P) app, or using a money transfer service. While it’s convenient to send money by credit card, it may be costly and it could impact your credit.

Before you transfer money, here’s a rundown on how to send money with a credit card and what you need to know about doing so.

Transferring Money From a Credit Card to a Bank Account or Debit Card

You usually have three methods to choose from in order to send money by credit card. Here’s a breakdown of how each one works.

1. Cash Advance

The first way you can send money using a credit card is through a cash advance, which is one of the ways credit cards work. Essentially, a cash advance is like a personal loan that you can use to pay bills or make purchases.

Since you’re borrowing money from your creditor, the cash advance will begin accruing interest immediately. Also, you must pay a fee. Therefore, it’s best to be timely when repaying the loan amount.

Depending on your credit card issuer, you may have several options for taking a cash advance, including:

•   Visiting an ATM

•   Requesting a convenience check

•   Going to a bank branch in person

•   Getting a cash advance from a loan agency (though you’ll need a credit card PIN for the agency to distribute the funds, which is different from the CVV number on a credit card)

If you’re requesting a cash advance from your local bank, they may allow you to visit a bank branch and deposit the funds directly into your bank account. A convenience check works similarly to a traditional check, except the funds come from the line of credit on your credit card instead of directly from your bank account. You can then deposit the money into your bank account or use it to pay for another expense.

2. Peer-to-Peer Applications

Another option is to download a P2P app like Venmo, Cash App, or PayPal. Then, you can link your account to your credit card and send money to another receiver.

It’s important to note that all P2P apps have different requirements for sending funds, and they can charge a fee to do so. For example, if you choose to use the Cash App to send money with a credit card, you’ll pay a 3% fee.

3. Money Transfer Services

Lastly, you could use a money transfer service to send money by credit card. For example, Western Union allows customers to pay for a money transfer using a credit card. You can do so via the app, in person, or online. But, like the other solutions for transferring money with a credit card, a money transfer service may charge a fee.

You may also be able to transfer funds from your credit card to your bank account through your bank.

Banks vs Money Transfer Providers for Credit Card Payments

Here’s a difference to consider if you are deciding between how a bank vs. money transfer service may look at credit card payments.

•   Usually, if you decide to transfer money using your bank, your creditor will categorize the transfer as a cash advance. Your creditor will charge a fee, and if you’re sending the money internationally, you also may have to pay a foreign transaction fee. A cash advance interest rate — which is usually higher than the average credit card interest rate for purchases — will also apply.

You can request that the cash advance get directly deposited into your bank account, or you can take the cash advance from an ATM or request a convenience check. Once you receive the funds or the check, you can deposit the money into your bank account.

•   On the other hand, when you use a money transfer service, you will link a credit card to your account. This gives you the ability to send money, often within minutes. However, depending on the company, you may have to pay a fee for the transaction. Creditors generally treat this transaction just like any other purchase transaction, meaning the purchase APR on a credit card will apply.

Things to Consider When Transferring Money From a Credit Card

Although using credit cards to send money is a convenient solution, it’s not always advisable. When you have the choice, using cash or your savings is a better option since you can avoid paying high fees or going into debt that might not be easy to shake (here’s what happens to credit card debt when you die, for instance).

But, if you find yourself in a bind and have limited options, you may need to send money with a credit card. Before you do so, however, here are a few considerations to keep in mind.

Credit

When you take a cash advance from your credit card, it can negatively impact your credit. Credit bureaus use your credit utilization ratio to determine your credit score, which is the amount of credit you’re using versus the amount of credit you have available. Ideally, you want your credit utilization ratio to fall under 30%, ideally closer to 10%.

If you take a cash advance, there’s a chance it will spike your credit utilization ratio and ding your credit. For example, let’s say your credit limit is $5,000, and you take a $3,000 cash advance. This would make your credit utilization ratio 60% — double the recommended benchmark. Keeping your credit limit above this threshold for too long can affect your credit score.

Likewise, not handling your credit card usage responsibility can harm your credit. So, even when using a P2P app to send money, it’s important to make on-time credit card payments (ideally of more than the credit card minimum payment) to avoid late fees or potential damage to your credit score.

Fees

Most options for using a credit card to transfer money will involve your paying transfer fee. This may be a fixed amount or a percentage of the cash advance.

While you can compare options to identify the cheapest solution, it’s best to find a solution that doesn’t charge any fees. This way, you don’t have to worry about losing money on the extra fees you must pay.

Interest

In addition to fees, you must pay interest on all of your credit card purchases — including money transfers — if you don’t (or can’t) pay off your balance in full each billing cycle given what a credit card is and how it works.

And, if you take a cash advance, your interest rate is usually higher on those transactions. Further, interest on cash advances starts accruing immediately. (You may have noticed these points when applying for a credit card and reviewing the disclosures.)

So, even if it is an emergency, you must consider the interest you’ll pay if you choose to send money with a credit card.

Pros and Cons of Sending Money With a Credit Card

Understanding the advantages and disadvantages of sending money with a credit card will help you make a more informed decision. Like with most financial decisions, there are pros and cons to using a credit card to send funds.

Pros

•   Rewards. You could earn credit card rewards if you have a card that offers cashback, miles, or bonus points when you spend money. Purchases may include a money transfer if you decide to use a money transfer service.

•   Convenience. Using a money transfer service can help you transfer funds from your credit card to another party within minutes. So, if you need money fast, this could be a good solution.

•   Security. Using a credit card is often more secure than using a debit card. Credit cards typically have stronger fraud protection and other security features to keep your money and identity safe, especially when sending money abroad. For instance, if you believe a charge is fraudulent, you can request a credit card chargeback.

Cons

•   High interest rates and fees. If you choose the credit card cash advance route, you must pay the cash advance fee and cash advance interest rate. Even if you use a money transfer service, you’ll usually pay a fee.

•   Not accepted everywhere. Some companies may not accept a credit card as a form of payment for a money transfer.

•   Potential impact to your credit. If you’re unable to pay off the cash advance or your credit card balance, it could impact your credit score. This can make it harder to get approved for a loan or a mortgage in the future.

Alternatives to Using Credit Cards for Sending Money

Again, if you send money with a credit card, you’ll have to pay fees and interest. With this in mind, there are other alternative solutions that can help you save money. Some other options you may consider include:

•   Low-interest personal loan. If you have a good credit score, you could qualify for a competitive interest rate, potentially one that’s lower than your credit interest rate. Also, personal loan approval can happen quickly, so you may not have to wait too long for the money to come through.

•   Credit card with 0% introductory offer. Some credit cards offer promotional periods where the APR is 0%. Some may simply offer a good APR on a credit card that’s lower than the standard APR. This means you could make purchases and not have to pay interest. However, you’ll still have to pay the transfer or cash advance fee if you go this route, and that introductory period will end at some point.

•   Home equity line of credit. A home equity line of credit (HELOC) lets you access the equity you have in your home. You may have a lower interest rate compared to unsecured lines of credit, and your lender may even waive the closing cost for the line of credit. Keep in mind that this loan is secured by your home though, so if you fail to repay it, your home may be on the line. An unsecured credit card, meanwhile, doesn’t require any collateral.

The Takeaway

It is possible to send money via a credit card in certain situations. However, this can involve significant fees. It may be wise to consider your options before sending money with a credit card. Doing so can help ensure you use your credit card wisely.

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 transfer money with a credit card?

Yes, you can transfer money using a credit card via a cash advance, P2P app, or a money transfer service. But, many of these options come with extra fees, so before you choose one, make sure you understand the costs involved.

Is it secure to use a credit card to transfer money?

Yes, usually credit cards provide fraud protection and additional security features to protect your money. This can make them more secure to use than debit cards, for instance.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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

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An overdraft line of credit is a pre-approved loan attached to your checking account. If you don’t have enough money in your account to cover a transaction (such as a debit card transaction or automatic bill payment), the line of credit kicks in and covers the overdraft. This prevents denied and failed transactions, overdraft fees, non-sufficient fund fees, and potentially other fees and headaches. However, these credit lines come with costs of their own. Are they worth it? Here are key things to know about overdraft protection lines of credit.

What Is an Overdraft Line of Credit?

An overdraft line of credit is a feature offered by banks and credit unions that links your checking account to an established line of credit. If you sign up for this type of overdraft protection, you can borrow against that line of credit to cover shortfalls when (or if) you overdraw your checking account.

For example, let’s say your checking account is low on cash due to some unexpected expenses, then an automated payment goes through or a check you wrote a while ago (and forgot about) gets cashed. With an overdraft line of credit, the bank or credit union will cover that overage by drawing from your credit line. The payments will go through and you won’t get hit with a non-sufficient funds (NSF) or bounced check fee.

However, there are still costs involved. Credit unions and banks that offer an overdraft line of credit will typically charge a transfer fee each time you draw from the credit line. On top of that, you’ll pay interest on the borrowed balance until you pay it off.

How Overdraft Lines of Credit Work

Typically, if your checking account doesn’t have enough money to cover a debit card purchase, check, or online bill payment, the bank will either cover the pending transaction and charge you overdraft fee, or they will reject the transaction and charge you a fee for insufficient funds (you may also get hit with a fee from the party that was expecting payment).

If you have a checking account with an overdraft line of credit, on the other hand, any overdraft is automatically withdrawn from your line of credit and deposited into your account. You will typically be charged a small fee for each overdraft that is covered. You’ll also pay interest on the money you borrow from your credit line.

An overdraft protection line of credit has a preset amount it can cover on your behalf, which can range from $500 to $7500 or more. As with other lines of credit, you only pay a transfer fee or interest if you actually borrow money from the credit line.

Banks and credit unions often have requirements for customers to qualify for an overdraft line of credit, such as maintaining a specific account balance for a certain period of time, depositing money regularly into the account, having a positive credit history, and having minimal overdrafts in your recent banking history.

What Happens if You Use Your Overdraft Line of Credit?

If you use your overdraft line of credit, the bank or credit union will typically charge a transfer fee and interest on the balance provided for your purchase. For example, say you spend $100 at the grocery store using your debit card but only have $60 in your account. The transaction will go through and your overdraft line of protection kicks in, putting $40 in your account.

You’ll pay a small fee for the cash transfer (usually around $12) and the $40 balance will start accruing interest until it’s paid back in full. You’ll need to repay the amount you borrowed according to the terms set by your bank. Typically, you need to make monthly payments, either manually or by having them automatically deducted from your checking account.

Keep in mind that once you use an overdraft line of credit, it can have an impact on your credit, since it qualifies as a loan. Paying off the balance in a timely fashion can have a positive impact on your credit, while carrying a high balance and/or making late payments can have a negative impact on your credit.

Recommended: Can You Overdraft a Credit Card?

Pros and Cons of Overdraft Lines of Credit

An overdraft line of credit can save you in a pinch but can also cause unwanted financial consequences. Here are some benefits and potential pitfalls to consider.

Pros of Overdraft Lines of Credit

•   Provides a safety net. Overdraft credit lines (which often come with high limits) can help you afford necessary expenses and handle emergencies without taking out a loan.

•   Transactions won’t fail. With an overdraft line of credit, debit card purchases, online bill payments, and checks will go through successfully, even if you don’t have the funds in your account to cover them.

•   May be cheaper than other options. The transfer fee plus the interest charges can end up costing less than overdraft fees and the penalties for returned payments and checks.

•   Can help you build credit. Drawing from your credit line and then paying off your balance responsibly can have a positive impact on your credit.

Cons of Overdraft Lines of Credit

•   Not everyone qualifies. Approval for the line of credit may involve passing lender requirements, such as keeping a certain average account balance, signing up for direct deposit, and having a strong credit history.

•   Fees can add up. Typically, you incur a transfer fee for every advance. Some lenders also charge annual fees and account fees for overdraft lines of credit.

•   Interest rates tend to be high. Overdraft lines of credit tend to have high interest rates because there’s no collateral from the borrower, which increases risk to the lender.

•   Could negatively impact your credit. If you carry a high balance and/or don’t make your payments on time, an overdraft credit line could have a negative impact on your credit.

Alternatives to Overdraft Lines of Credit

While overdraft lines of credit offer convenience and might help you save money, other options might be more beneficial depending on your situation. Here’s a breakdown of the alternatives to overdraft lines of credit.

Effective Account Management

Effectively managing your checking account and finances can help you avoid overdrafts altogether. This entails regularly monitoring your account balance, signing up for “low balance” alerts, and always keeping a cushion of cash in your checking account.

Link Another Account to Your Checking Account

Linking your checking account to another financial account, such as a savings account, can provide a safety net in case of insufficient funds. If a transaction will overdraft your checking account, funds will automatically transfer from the linked account to cover the shortfall.

This option avoids overdraft fees and ensures that your transactions are not declined due to insufficient funds. However, you may pay a transfer fee when the protection is triggered, and you’ll need sufficient funds in your linked deposit account to cover the overdrawn amount to use this service.

Opt Out of Overdraft Coverage

If all of your bank’s overdraft protection options involve costs, you might consider going without overdraft coverage. If you go this route, your bank will decline any transactions that would bring your account into the negative. This could put you in a difficult situation if you can’t make a needed purchase, but you’ll avoid overdraft fees and/or running up interest.

Consider Switching Banks

You may be able to find a bank with generous overdraft protections for checking accounts. For example, some banks offer grace periods after overdrafts, such as one business day to cover the overage without incurring any penalties. In addition, many financial institutions have reduced or eliminated their overdraft fees.

Recommended: Switching Bank Accounts When in Overdraft

The Takeaway

Overdraft lines of credit give bank and credit union customers immediate access to funds to cover transactions and avoid costly overdraft and non-sufficient fund fees.

While they can cover emergency expenses and prevent transactions from failing when your account balance is low, high interest rates and credit implications can lead to other challenges. Alternatives to using an overdraft line of credit include: effective account management, linking accounts, and/or finding a bank with favorable overdraft policies.

FAQ

Does tapping into your overdraft line of credit affect your credit score?

Tapping into your overdraft line of credit means taking on debt, which can impact your credit. If you consistently make timely payments and manage that debt responsibly, it can have a positive impact on your credit history. Conversely, if you fail to repay the borrowed amount on time, it could lead to negative marks on your credit report.

How does an overdraft protection line of credit work?

An overdraft line of credit is a safety net for checking accounts, providing funds to cover transactions that exceed available balances. When faced with insufficient funds, the bank or credit union extends a predetermined line of credit, allowing the transaction to proceed without incurring overdraft fees. The customer then repays the borrowed amount, along with any applicable fees and interest.

Can you overdraw your credit limit?

No, you cannot overdraw beyond the credit limit set for your overdraft line of credit. Your bank establishes a maximum limit based on your creditworthiness and financial history. If a transaction exceeds this limit, it will typically be declined, and you may still face fees for insufficient funds. It’s important to be aware of your credit limit and monitor your account to avoid transactions that might exceed it.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

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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.

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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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Paying down your credit card debt is a huge win for your finances, but you might see your credit score go down even after you lower your balance. While this can be confusing, the drop is often due to other factors, like the types of credit you have and the length of your credit history.

Read on to learn why your credit score may have dropped after paying off debt and how you can boost it.

Why Your Credit Score May Drop When a Credit Card Balance Decreased

While you might expect your credit score to go up after paying off debt, there are a few reasons why it could dip instead. 

Worst case scenario: If someone uses your personal information to open a new credit account, or makes charges on your cards without your approval, your credit score may take a hit. The longer the fraud goes unnoticed, the harder it becomes to fix the issue.

More likely, closing your account after paying off a credit card balance can affect your credit score. This changes the overall picture of your credit usage and history, which might cause a small, temporary drop.

Remember that credit scores can fluctuate for many reasons, and a drop isn’t always a bad sign. You can keep track of your score with credit score monitoring.

Credit Score Factors

Let’s dive deeper into the factors that can affect your credit score. We’re focusing on the FICO credit scoring model, which most lenders use to make their decisions.

Payment History

A history of on-time payments has the biggest impact on your credit score, making up 35% of it. If you’ve recently missed a payment or two, your credit score might be negatively affected. On the flip side, staying on top of due dates, whether with a money tracker app or a calendar, can help you keep your credit score healthy.

Credit Utilization

Paying off your credit card balance and then closing the account could cause your credit score to drop. That’s because it increases the percentage of credit you’re using compared to the total amount available — also known as credit utilization. Lenders typically want you to have a credit utilization ratio under 30%. If yours is higher than that, rest assured there are ways to lower your credit card utilization.

Length of Your Credit History

Length of credit history refers to the average amount of time your credit accounts have been open. In general, the longer your credit history, the better your credit score may be. Closing a credit card account, especially one you’ve had for a long time, can bring that average down, and you may see a drop in your credit score as a result. So think carefully before you decide to close an account.

Credit Mix

Paying off certain types of debt might also lower your credit score because it reduces the variety of your credit types. Lenders like to see that you can responsibly handle different kinds of debt, such as installment loans and mortgages. When you pay off a car loan or other type of debt, it can decrease the diversity of your credit mix, which could lead to a drop in your credit score.

If you paid off both your credit card debt and a loan simultaneously, this might explain the drop in your score. Also, if you closed the credit card account after repayment, your credit mix may be impacted.

New Credit Card Applications

When you apply for a new line of credit, like an auto loan or credit card, the issuer usually performs a hard inquiry on your credit report, which can temporarily lower your score. Lenders check your credit to see if you’re a responsible borrower. Even requesting a credit line increase on an existing card can trigger a hard inquiry.

A soft inquiry is different. It just means you or another company looked at your report, but it doesn’t impact your score. If you’ve recently applied for credit, that hard inquiry could be the reason for the dip. It can be helpful to learn more about soft credit inquiries vs. hard credit inquiries.

Recommended: 10 Strategies for Building Credit Over Time

How to Pay Off Debt and Help Your Credit Score

To pay off debt and help your credit score, here are a few steps to follow:

•   Create a budget. By tracking your income and expenses, you can understand where your money is going. This will help you find ways to save money and put more toward paying off debt. A spending app can help automate budgeting.

•   Prioritize debts. Depending on your situation, you may want to focus on paying off high-interest debts first, such as credit cards, while making minimum payments on lower-interest debts. Doing so could help you save money on interest in the long run.

•   Make regular payments. Consistently pay at least the minimum amount due on all your debts. Whenever possible, pay more than the minimum, which can help reduce your debt faster.

•   Consider debt consolidation. If you have multiple high-interest debts, you may want to consider consolidating them into a single loan with a lower interest rate. This can simplify your debt management efforts and potentially reduce overall interest costs.

•   Use credit responsibly. Aim to keep your credit utilization ratio below 30% by not maxing out your credit cards.

How Do I Keep My Credit Score From Dropping?

It can take a while to build up your credit, so you’ll want to take steps to protect it. Here are some tips to help you keep your credit score from dropping after you pay off debt:

•   Pay your bills on time. Sending bill payments on time is important because it’s such a big part of your credit score. If you need a hand, set up autopayments to make sure your lender or creditor gets your payment on or before the due date.

•   Think twice before closing an account. After you pay off a credit card, try not to close it unless you really have to. If you’re worried about spending, you can cut up the card. Keeping older accounts open helps maintain the length of your credit history, which is good for your score.

•   Avoid new credit applications. Every time you apply for new credit, it can result in a hard inquiry on your report, which might temporarily lower your score.Try to avoid opening new lines of credit unless you really need to.

•   Check your credit report. Regularly check your credit report for any errors or signs of fraud. (There are ways to check your credit score without paying.) If you spot something unusual, be sure to dispute any inaccuracies right away.

How Long Does It Take for Your Credit Score to Improve After Paying Off Debt?

Lenders usually update account activity with the three major credit bureaus — Experian, Equifax, and TransUnion — at the end of the billing cycle. This means it can take 30 to 45 days for any changes to impact your credit report.

It’s a good idea to check your credit report at least once a year. You can get a free report from AnnualCreditReport.com. Remember that checking your credit report and score won’t hurt your credit score.

Ways to Increase Your Credit Score After Paying Off a Loan

To help give your credit score a boost after paying off debt, stay on top of your other credit accounts by paying bills on time and using credit wisely. For example, if you have a credit card, use it for small purchases like gas or groceries, and pay off the balance each month. It proves to lenders that you can manage credit well.

Also try to keep the amount of credit you’re using low compared to your total credit limit. Remember, creditors usually like to see a ratio below 30%. This means using less than 30% of your available credit. Paying off smaller debts may help improve your overall debt-to-income ratio.

How to Get Credit Score Monitoring

Credit monitoring can help you keep an eye on your accounts and catch issues early. It tracks your accounts and alerts you to any unusual activity so you can address problems right away. 

Many financial companies offer free credit monitoring, so it’s a good idea to contact your bank or credit card to see if you qualify. If you’ve been part of a data breach, you might get credit monitoring for free. Otherwise, you can sign up for it yourself, typically for a monthly fee of $10 to $30. Alternatively, you can take a DIY approach and monitor your credit for free.

Recommended: Why Did My Credit Score Drop After a Dispute?

The Takeaway

After paying off credit card debt, it’s possible to see your credit score dip. While this drop is usually short-lived, it can be due to changes in your credit mix, history length, utilization ratio, or a combination. To boost your score, focus on responsible credit management. Consider strategies like setting up autopay to ensure you make timely payments, and avoid taking on more debt. These habits can help you maintain a strong credit score.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

Why has my credit score gone down when nothing has changed?

Your credit score might change even if everything seems the same. Certain factors like report updates, identity theft, variations in credit usage, and new information from creditors can impact your score. By regularly reviewing your credit report, you can catch and address changes and errors.

Is a decrease in credit balance good?

It’s usually best to pay your credit card bill in full instead of carrying a balance, as carrying a balance doesn’t help your credit score. Aim to keep your balances below 30% of your total credit limit to maintain a healthy credit score.

Why is my credit score going down if I pay everything on time?

Even if you pay everything on time, your credit score might still go down because of things like using more of your available credit or applying for new credit. Closing old accounts or having a short credit history can impact your score, too.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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

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

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.

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It may come as a surprise, but sometimes your credit score drops after you pay off a loan or credit card debt. This happens because paying off debt can impact several factors that make up your credit score. For example, it might change your credit mix, shorten your credit history, or impact your credit utilization ratio.

If you’re wondering why your credit score dropped 40 points after paying off debt, here are some potential reasons to consider. 

Why Would My Credit Score Drop 40 Points After Paying Off Debt?

Paying off your debt is a big win and usually boosts your credit score. But sometimes, you might see a dip. To understand why, it’s important to know how your score is calculated.

Information from the three major credit bureaus — Equifax, TransUnion, and Experian — comes together to create your credit score. The bureaus gather details about your loans, credit cards, and other debts. Your credit score is calculated using a formula that measures how reliable you are at making payments. Lenders use this score to decide if they should give you credit.

Recommended: How Long Does It Take to Build Credit?

Credit Score Factors

Although there are many ways to calculate your creditworthiness, here are some common factors that may affect your credit score after you pay off your debt. 

Payment History

Payment history makes up 35% of your FICO credit score and is the most important factor. So while late or missing credit card payments might not seem significant at the time, they could bring down your overall score. 

If you need help keeping track of bills, consider a tool like a money tracker app. It allows you to spot upcoming bills, create budgets, and monitor your credit score.

Credit Utilization

Your credit card utilization ratio — or the amount of available credit you’re using — makes up 30% of your credit score, so it’s worth monitoring. 

Here’s how it works: If you have $10,000 in available credit and a $5,000 credit card balance, your credit utilization ratio is 50%. Usually, credit bureaus and lenders want to see a utilization ratio under 30%.

When you pay off your debt and close the account, your total available credit decreases and your credit utilization ratio increases. This, in turn, can cause your credit score to dip. 

Length of Your Credit History

Your credit reports show how long your credit accounts have been open. Having a longer credit history can improve your credit score, albeit not to the extent other factors can. (It makes up 15% of your credit score.) On the flip side, if you close an old account, you shorten your credit history — which can potentially lower your score.

Credit Mix

The variety of your credit accounts — like personal loans, credit cards, and mortgages — is 10% of your credit score. And managing different kinds of credit can help improve it. Paying off a specific type of credit, such as a car loan or mortgage, can have the opposite effect, as it reduces the diversity of your credit mix. 

New Credit Applications

When you apply for a new line of credit, lenders check your credit report to determine the risk of lending you money. This check, known as a hard inquiry or “hard pull,” can drop your credit score by a few points for a short time, though it stays on your report for two years. 

But keep in mind, when calculating your score, FICO, the scoring model most lenders use, only looks at credit pulls from the past 12 months. And new credit only makes up 10% of your credit score.

Recommended: What Is a FICO Score?

How to Pay Off Debt and Help Your Credit Score

Paying off debt may lead to a temporary dip in your credit score, but its benefits far outweigh any drawbacks. In fact, there are steps you can take build your credit as you whittle down your debt load:

•   Make on-time payments: Always make payments on time, whether it’s your credit card balance or mortgage. Punctual payments positively impact your score the most.

•   Prioritize high-interest debt: Pay off credit cards with the highest interest rates first to reduce debt risk.

•   Pay off cards with a low credit limit: This can help keep your debt-to-credit ratio in check.

•   Keep credit utilization low: Aim to use less than 10% — and no more than 30% — of your available credit.

•   Clear small balances on multiple cards: Having zero balances on more cards is better for your score.

•   Pay off past-due bills: Prioritize the most recent ones. This shows new lenders that you’ve settled your debts.

How Long Does It Take for Your Credit Score to Improve After Paying Off Debt?

Luckily, a drop in your credit score is generally brief. After you pay off your debt, your score should bounce back within a month or two because credit bureaus typically update your credit information every 30 to 45 days.

You can check your credit score without paying. If it doesn’t improve right away, don’t worry. The paid-off debt will stay on your credit report for up to 10 years. If you made payments on time, this positive history can help boost your credit score in the long run. 

Ways to Increase Your Credit Score After Paying Off a Loan

Once your debt is settled, you may want to turn your focus to boosting your credit score. Some steps you may have taken as you paid down the debt will serve you well at this point, such as making on-time payments and keeping credit utilization low. But there are other strategies that can help:

•   Build a long credit history: Keep older accounts open so you can build a long history of responsible credit use. The longer your history of on-time payments, the better your score may be. 

•   Apply for credit sparingly: Only apply for new lines of credit when needed. Too many applications in a short period can negatively impact your score.

•   Review your credit reports: Regularly review your credit reports for any errors or inaccuracies. If you spot anything out of the normal, make sure to dispute any mistakes. This way, you can ensure your score reflects accurate information.

How to Get Credit Score Monitoring

Using a credit monitoring service can help you keep tabs on your credit score. These services notify you when there are changes to your credit reports, which can help you catch any suspicious activity. While comprehensive monitoring services are available, there are ways to monitor it yourself:

•   Ask for a free copy of your credit report: You’re entitled to a free credit report every year from each of the three credit bureaus. Visit AnnualCreditReport.com to get started. 

•   Check for complimentary credit monitoring: Some accounts offer free credit score monitoring. Call your bank or credit card company to see if you qualify.

•   Freeze your credit reports: If you suspect a data breach or theft of your Social Security number, consider freezing your credit report. This restricts access to your credit information, stopping thieves from opening new accounts in your name. Note that freezing or unfreezing your credit is free and doesn’t affect your credit score.

•   Set up fraud alerts: You can place a fraud alert on your credit report if you think you’re a fraud or identity theft victim. Creditors will verify your identity by calling you when a credit application is made. It’s free to request and lasts for one year without affecting your credit score.

The Takeaway

There are many reasons why your credit score dropped 40 points after paying off debt. You may see a temporary dip in your credit score due to changes in your credit mix, history length, and utilization ratio. 

To help boost your score, make on-time payments, use less credit, maintain old accounts, apply for new credit sparingly, and regularly check for errors in your credit reports. These habits can help you maintain a strong credit score. And if you need help managing your finances as you pay off debt, consider enlisting the help of a spending app.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

How long does it take for a credit score to update after paying off debt?

You can expect your credit score to update within a month or two as long as you continue practicing good credit habits like making on-time payments. Credit bureaus usually refresh your information every 30 to 45 days.

Why is my credit score going down even though I pay on time?

Paying on time is just one part of your credit score. Other factors, like how much credit you’re using or the length of your credit history, can also cause your score to drop, even if you don’t miss any payments.

How to increase credit score after paying off debt?

To keep your credit score strong after paying off debt, follow a few key tips. For example, always make your payments on time, avoid using too much of your available credit, and apply for new credit only when you really need it. Also, review your credit score regularly so you can spot discrepancies.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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

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

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.

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