The prime interest rate is the interest rate that banks charge their best customers. It’s the lowest rate offered to individuals and corporations that are considered low risk by banks — those with good credit history who aren’t likely to miss payments or default on their loan.
But when you run into the term “prime interest rate” in your daily life (maybe you’re taking out a personal loan or applying for a mortgage), it’s pretty common to feel a little confused, unless you majored in economics in college.
To get a better handle on this financial term and know how it relates to your money, read on. You’ll learn how this interest rate is set, a bit about its history, and how it can impact you.
How Is the Prime Interest Rate Set?
You’ve just learned that the prime interest rate is the rate that banks charge their best customers. Take a closer look at how the prime interest rate is set, as well as how this figure fits into the larger financial landscape.
Individual banks determine their prime interest rate. While the Federal Reserve has no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate.
The federal funds rate is the rate that banks charge each other on an overnight basis and is established by the Federal Open Market Committee.
Why do banks lend each other money? They do so in order to meet the reserve requirement, which is also set by the Federal Reserve.
This is the minimum amount of cash a bank must have in their vault or at the closest Federal Reserve bank. If one bank has excess cash, the bank has a financial incentive to lend that excess cash to a bank that has less than its federally mandated amount. The reserve requirement acts as a lending limit for banks and also ensures that they have enough cash on-hand for the start of business each day.
How Does the Prime Rate Compare
Generally, the prime rate is about three percent higher than the federal funds rate. That means that when the Fed raises interest rates, the prime rate typically goes up as well.
Because the prime interest rate is typically aligned with the federal funds rate, it’s highly susceptible to change. How often could the prime rate change? It can shift quite a bit. Take, for instance, the fact that the prime rate was 3.25% on March 16, 2020. From that date to July 2023, it rose 11 times to 8.50%.
💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.
Why Is the Prime Interest Rate Important?
The prime interest rate impacts all kinds of loans, including interest rates for mortgages, credit cards, auto loans, and personal loans. Typically, banks and lenders will use the prime interest rate as a benchmark for setting interest rates for their customers. Consider some of the ways this can impact personal finance and the economy:
• Changes in the federal funds rate and prime interest rate can impact variable rate credit cards, adjustable-rate mortgages, home equity lines of credit (HELOC), and more. The interest rates on variable loans are based on these market interest rates and therefore change over time. In fact, variable interest rates, including those on credit cards, are often expressed as the prime rate plus a certain percentage.
Unlike fixed-rate loans, monthly payments on any variable loan could change considerably from month-to-month. This is why fixed-rate loans can be a more desirable alternative than variable loans for some borrowers.
• Though rates are largely influenced by the Federal Reserve, borrowers have little control or way of predicting the rates from year to year. Even when the Federal Reserve predicts growth, interest rates can rise due to a variety of factors, causing your monthly bill to rise with it.
• Beyond individual borrowers, the prime interest rate also influences the financial market as a whole. A low prime rate makes it easier and less expensive to borrow loans which increases liquidity in the market.
• Historically, when the prime rate is low, the economy grows. That’s why, if there’s a recession, rates may go down, with the goal of getting consumers and businesses to borrow again and stimulate the economy.
When the prime rate is high, economic growth slows down. For instance, recently interest rates were raised, which can nudge consumers to think twice about spending. This can lower demand and help bring down inflation’s impact.
• The prime rate isn’t the only benchmark that banks use to inform interest rates. Banks also often use the London Interbank Offer Rate (LIBOR). The LIBOR is the rate that banks charge each other for short-term loans. The federal funds rate, prime interest rate, and LIBOR rates generally fluctuate together. When the three rates are out of sync, this can be an indicator of an issue with the financial markets.
An increase in the prime rate and federal funds rate can be an indicator that changes are ahead for consumers. Variable rates may be on the rise, too, so think carefully about how that might impact your finances.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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 .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
Both personal loans and credit cards provide access to extra funds and can be used to consolidate debt. However, these two lending products work in very different ways.
A credit card credit is a type of revolving credit. You have access to a line of credit and your balance fluctuates with your spending. A personal loan, by contrast, provides a lump sum of money you pay back in regular installments over time. Generally, personal loans work better for large purchases, while credit cards are better for day-to-day spending, especially if you are able to pay off the balance in full each month.
Here’s a closer look at how credit cards and personal loans compare, their advantages and disadvantages, and when to choose one over the other.
Personal Loans, Defined
Personal loans are loans available through banks, credit unions, and online lenders that can be used for virtually any purpose. Some of the most common uses include debt consolidation, home improvements, and large purchases.
Lenders generally offer loans from $1,000 to $50,000, with repayment terms of two to seven years. You receive the loan proceeds in one lump sum and then repay the loan, plus interest, in regular monthly payments over the loan’s term.
Personal loans are typically unsecured, meaning you don’t have to provide collateral (an asset of value) to guarantee the loan. Instead, lenders look at factors like credit score, debt-to-income ratio, and cash flow when assessing a borrower’s application.
Unsecured personal loans typically come with fixed interest rates, which means your payments will be the same over the life of the loan. Some lenders offer variable rate personal loans, which means the rate, and your payments, can fluctuate depending on market conditions.
Personal loans generally work best when they are used to reach a specific, longer term financial goal. For example, you might use a personal loan to finance a home improvement project that increases the value of your home. Or, you might consider a debt consolidation loan to help you pay down high-interest credit card debt at a lower interest rate.
Key Differences: Credit Card vs Personal Loan
Both credit cards and personal loans offer a borrower access to funds that they promise to pay back later, and are both typically unsecured. However, there are some key differences that may have major financial ramifications for borrowers down the line.
Unlike a personal loan, a credit card is a form of revolving debt. Instead of getting a lump sum of money that you pay back over time, you get access to a credit line that you tap as needed. You can borrow what you need (up to your credit limit), and only pay interest on what you actually borrow.
Interest rates for personal loans are typically fixed for the life of the loan, whereas credit cards generally have variable interest rates. Credit cards also generally charge higher interest rates than personal loans, making it an expensive form of debt. However, you won’t owe any interest if you pay the balance in full each month.
Credit cards are also unique in that they can offer rewards and, in some cases, may come with a 0% introductory offer on purchases and/or balance transfers (though there is often a fee for a balance transfer).
Line of Credit vs Loan
A line of credit, such as a personal line of credit or home equity line of credit (HELOC), is a type of revolving credit. Similar to a credit card, you can draw from a line of credit and repay the funds during what’s referred to as the draw period. When the draw period ends, you’re no longer allowed to make withdrawals and would need to reapply to keep the line of credit open.
Loans, such as personal loans and home equity loans, have what’s called a non-revolving credit limit. This means the borrower has access to the funds only once, and then they make principal and interest payments until the debt is paid off.
Consolidating Debt? Personal Loan vs Credit Card
Using a new loan or credit credit card to pay off existing debt is known as debt consolidation, and it can potentially save you money in interest.
Two popular ways to consolidate debt are taking out an unsecured personal loan (often referred to as a debt or credit card consolidation loan) or opening a 0% interest balance transfer credit card. These two approaches have some similarities as well as key differences that can impact your financial wellness over time.
Using a Credit Card to Consolidate Debt
Credit card refinancing generally works by opening a new credit card with a high enough limit to cover whatever balance you already have. Some credit cards offer a 0% interest rate on a temporary, promotional basis — sometimes for 18 months or longer.
If you are able to transfer your credit card balance to a 0% balance transfer card and pay it off before the promotional period ends, it can be a great opportunity to save money on interest. However, if you don’t pay off the balance in that time frame, you’ll be charged the card’s regular interest rate, which could be as high (or possibly higher) than what you were paying before.
Another potential hitch is that credit cards with promotional 0% rate typically charge balance transfer fees, which can range from 3% to 5% of the amount being transferred. Before pulling the trigger on a transfer, consider whether the amount you’ll save on interest will be enough to make up for any transfer fee.
Using a Personal Loan to Consolidate Debt
Debt consolidation is a common reason why people take out personal loans. Credit card consolidation loans offer a fixed interest rate and provide a lump sum of money, which you would use to pay off your existing debt.
If you have solid credit, a personal loan for debt consolidation may come with a lower annual percentage rate (APR) than what you have on your current credit cards. For example, the average personal loan interest rate is 11.31% percent, while the average credit card interest rate is now 24.37%. That difference should allow you to pay the balance down faster and pay less interest in total.
Rolling multiple debts into one loan can also simplify your finances. Instead of keeping track of several payment due dates and minimum amounts due, you end up with one loan and one payment each month. This can make it less likely that you’ll miss a payment and have to pay a late fee or penalty.
Both 0% balance transfer cards and debt consolidation loans have benefits and drawbacks, though credit cards can be riskier than personal loans over the long term — even when they have a 0% promotional interest rate.
Is a Credit Card Ever a Good Option?
Credit cards can work well for smaller, day-to-day expenses that you can pay off, ideally, in full when you get your bill. Credit card companies only charge you interest if you carry a balance from month to month. Thus, if you pay your balance in full each month, you’re essentially getting an interest-free, short-term loan. If you have a rewards credit card, you can also rack up cash back or rewards points at the same time, for a win-win.
If you can qualify for a 0% balance transfer card, credit cards can also be a good way to consolidate high interest credit card debt, provided you don’t have to pay a high balance transfer fee and you can pay the card off before the higher interest rate kicks in.
With credit cards, however, discipline is key. It’s all too easy to charge more than you can pay off. If you do, credit cards can be an expensive way to borrow money. Generally, any rewards you can earn won’t make up for the interest you’ll owe. If all you pay is the minimum balance each month, you could be paying off that same balance for years — and that’s assuming you don’t put any more charges on the card.
When is a Personal Loan a Good Option?
Personal loans can be a good option for covering a large, one-off expense, such as a car repair, home improvement project, large purchase, or wedding. They can also be useful for consolidating high-interest debt into a single loan with a lower interest rate.
Personal loans usually offer a lower interest rate than credit cards. In addition, they offer steady, predictable payments until you pay the debt off. This predictability makes it easier to budget for your payments. Plus, you know exactly when you’ll be out of debt.
Because personal loans are usually not secured by collateral, however, the lender is taking a greater risk and will most likely charge a higher interest rate compared to a secured loan. Just how high your rate will be can depend on a number of factors, including your credit score and debt-to-income ratio.
The Takeaway
When comparing personal loans vs. credit cards, keep in mind that personal loans usually have lower interest rates (unless you have poor credit) than credit cards, making it a better choice if you need a few years to pay off the debt. Credit cards, on the other hand, can be a better option for day-to-day purchases that you can pay off relatively quickly.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Most Americans swipe and tap their way through the day, using credit cards for a variety of purchases. Plastic is quick and convenient, and it can help a person make purchases they otherwise wouldn’t be able to afford in a single transaction.
But with credit cards come high interest rates…and fees. Often, many different kinds of fees are levied on a single transaction.These charges may be part of the reason why there’s so much credit card debt right now. The average American carries an approximate credit card balance of $7,951.
If you’re trying to control your costs, read on to learn more about these fees, plus smart tips on how to dodge them. It can be a good path to taking control of your credit and your cash.
Breaking Down the 6 Main Credit Card Fees
The best way to sidestep credit card fees is to know what they are. Sounds obvious, but it can be your primary defense in the battle against fees. Here’s a summary of some of the most common credit card fees and advice on how to avoid them.
1. Annual Fees
An annual fee is the yearly price you pay to use a credit card. Not all credit cards have annual fees, but many reward-heavy and premium cards do. It’s not inherently bad to pay an annual fee on a credit card, but it does require busting out a calculator and doing some math. To justify paying an annual credit card fee, you should earn enough in rewards to cover the fee and then some.
How to avoid this fee: Lots of cards have no annual fee or will waive an annual fee in the first year. When choosing a credit card, you’ll want to do some comparison shopping and annual fees should be something you pay close attention to. Ultimately, if you’re going to pay a fee for using a rewards card, you should make sure you’ll be cashing in on rewards you’ll actually use.
💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.
2. Late Payment Fees
Late payment fees are pretty self-explanatory. Basically, some banks will ding you if you miss a payment. Currently, late payment fees can run up to $41, but there’s a movement afoot to cap these. The Consumer Financial Protection Bureau, for instance, has proposed a limit of $8. But for the time being, these fees are still quite steep.
How to avoid this fee: Consider automating your finances. Specifically, you could set up an automatic payment for at least the minimum monthly payment. That way, you are in a good position to avoid late fees.
If you do miss a payment, call your credit card company and ask them to waive the fee. (If you’re a first-time offender, they might be amenable to it.)
3. Cash Advance Fees
When you use a credit card to withdraw cash from a bank or ATM, you will almost always be charged a cash advance fee. Credit card cash advance fees generally cost 5% of the amount you withdraw or $10, whichever is higher. Also be aware the interest rate on a cash advance is likely to be higher than on “normal” credit card purchases, and interest accrues immediately.
How to avoid this fee: Don’t use your credit card like a debit card. If you’re going to take out cash, it should be with a debit card. If you do have to take out a cash advance on your credit card, try to pay it back as soon as possible. And to avoid needing to take out a cash advance in the future, establish a cash emergency fund that’s easily accessible.
When you transfer a credit card balance to a new card with a lower interest rate (often 0% interest for a promotional period of, say, 18 months), the new credit card issuer may charge you a fee. The fee is usually 3% to 5% of the balance being transferred. Balance transfer cards usually offer 0% interest rates to new customers who want to transfer their credit card debt — so charging a fee allows them to make some money on the initial transaction.
How to avoid this fee: If a balance transfer card would stress you out with its tight timeline before its interest rates change, you could instead consider taking out a personal loan to pay off your credit card debt. A personal loan will usually charge a lower interest rate than your credit card, but it can allow you to pay off your debt on a timeline that’s right for you.
💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why credit card consolidation loans are so popular.
5. Foreign Transaction Fees
If you use a credit card while traveling outside of the country, you may be charged a foreign transaction fee of around 1% to 3%. Once very common, these fees are declining in popularity thanks to the rise of cards with no foreign transaction fees.
Also know that banks may charge currency conversion fees in addition to foreign transaction fees.
How to avoid this fee: Choose a card that doesn’t charge foreign transaction fees. There are lots of options out there, it’s just a matter of shopping around. Airline cards often don’t have foreign transaction fees, but plenty of other cards have dropped these fees as well.
Interest is how credit card issuers stay in business, to a large extent. They are extending you credit to make a purchase, and interest is what you pay for that privilege. Credit card issuers assess interest on any balance that remains on your card after the due date. You will also see this interest rate called the purchase APR.
How to avoid this fee: Pay off your credit card balance in full each month. If you’re unable to do that, pay as much as you can — every dollar counts.
Credit cards can be a convenient way to purchase, and most Americans use them. However, these cards can also charge fees that can add to any debt you carry. It’s worthwhile to acquaint yourself with these fees and work to avoid them so your balance doesn’t grow.
If you’re currently chipping away at a balance, you may want to consider taking out a personal loan to pay off your credit card. This can lower your rate of interest and make your debt less of a burden.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
Credit card debt is usually high-interest debt, meaning what you owe can snowball. You might charge some holiday gifts, then need new brakes, and then a friend asks if you can join on a low-cost getaway to Mexico. Next thing you know, you have a sizable balance due. And chipping away with minimum payments isn’t paying it down too well.
So how do you know if your credit card debt is actually too much? Take a closer look at the factors here, plus tips for what to do when your credit card debt veers into “too high” territory.
Managing Monthly Credit Card Payments
Many people believe that as long as they can afford the monthly payments, their level of credit card debt is fine. But faithfully making the minimum monthly payment on your credit card might not be a good indicator of whether you have too much credit card debt.
Generally speaking, it can be helpful to pay off your entire balance each month, but that is not a realistic option for many — and it can be easy to just pay the minimum amount required. This can be problematic: Thanks to compound interest, paying only the minimum amount can actually cause your debt to grow.
For example, let’s say you have $5,000 worth of debt with a 20% interest rate and are paying off $100 a month. At that rate, it would take you 109 months (9-plus years) to pay off the original $5,000 and would cost you an extra $5,840 in interest alone. And, yes, as you may have noticed, the interest amounts to more than the principal in this scenario.
Curious how your credit card payments stack up? Use a credit card interest calculator to see exactly how much you can expect to pay in interest. That can help you see how the numbers stack up and then get a better handle of how your debt could grow in the future.
💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.
Credit Card Utilization
One helpful way to determine if you’re being smart with your credit cards is to look at your rate of credit card utilization. Credit card utilization is the amount of debt you have compared to the total amount of credit that is available to you.
It can come as a shock to people that using their full line of credit can negatively impact their credit score, but in general, it is commonly recommended to use only 30% of the credit available. Credit reporting agencies use your credit card utilization percentage as an important part of determining your credit score.
What does that look like in practice? If you have a credit card with a $10,000 limit, and you spend $1,000 on a new couch, $900 on new brakes, and $500 on a plane ticket, you’re using $2,400 — or 24% of your available credit. That’s relatively close to that 30% threshold, so you’ll want to consider treading carefully.
If, on the other hand, you made the exact same purchases but you only have access to a $5,000 line of credit, you would be using 48% of your available credit. A credit card utilization rate of 48% has the potential to negatively impact your credit score.
If you’re concerned about your credit score, you may want to keep your credit card usage to below 30% of the total credit line available to you.
Debt-to-Income Ratio
Another important consideration when looking at your credit card debt is your debt-to-income ratio. Your debt-to-income ratio is essentially a measure of how much of your pretax income goes to paying monthly debt, like car payments, student loans, and credit cards.
If your debt-to-income ratio is very high, meaning that a large portion of your monthly income goes to paying off debt, some lenders might be reluctant to lend to you.
This means that you could be charged a higher interest rate on new loans or a mortgage because the lender is worried that you won’t be able to make your monthly payments — if you’re able to get a loan at all.
In general, industry professionals suggest that a debt-to-income ratio at or below 36% is considered good, but of course, that will vary by your specific circumstances.
If your debt-to-income ratio is higher than you hope, that may be one sign that you’re carrying too much credit card debt.
If you’re worried about the amount of debt you’re carrying on your credit card, there are several ways to take control.
• First, consider making more than the minimum payment. Many people simply stick with minimum payments because they think that is what they should pay. But increasing your monthly payment could help you pay down credit card debt faster.
• If you’re worried about your credit card utilization rate (and are not carrying a credit card debt balance), you may simply be due for an increase in your line of credit. For example, if you’re still using the same credit card with a $5,000 limit that you got right after college, but now you have a better job and more monthly expenses, you might want to ask your lender for an increase in your credit line in order to improve your credit card utilization rate.
Your debt-to-income ratio can also be helped by either increasing your income or decreasing your debt.
• Since one of the downsides of credit cards is their notoriously high interest rates, you might consider using a personal loan to pay off your credit cards and save you some money on your monthly payments.
• The benefit of paying off your credit cards with a personal loan is that you may be able to trade a high interest rate for a lower interest rate and secure a more favorable repayment plan. A personal loan allows you to make a static payment every month for a set amount of time instead of paying the minimum amount due on your credit card, which can make you feel like you’ll never get out from under credit card debt.
Bear in mind that once you’ve paid off your credit card balances, it’s important to keep them low. Running those balances back up has the potential of making your credit profile less attractive to lenders due to the increased total debt.
And in the future, keep an eye on your credit limit when you’re making big purchases — it can pay off in the long run.
How much credit card debt is too much will depend upon your specific financial situation. Such factors as your debt-to-income ratio and your credit utilization can help determine if your credit card balances are getting too high.
If you have incurred a considerable amount of high-interest debt, you might consider ways to pay that off, including getting a personal loan at a lower interest rate.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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 .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
It’s hard to believe that Americans ever got by without plastic, but the credit card is less than 75 years old. There’s a good chance your grandparents could tell you about life in the days of nothing but cash or checks.
Today, about 84% of Americans have at least one credit card, which allows them to quickly and conveniently tap or swipe their way towards purchases. Unfortunately, those rectangles of plastic may make spending a little too easy: The average household has almost $8,000 in this kind of debt.
Here, you’ll learn just how the credit card came into being, as well as smart ways to manage your credit card usage more effectively.
The Origins of Credit
Here’s how the story of the first credit card goes: Businessman Frank McNamara was having dinner at a New York City restaurant in 1949 when he realized he forgot his wallet. Rather than dine and dash, he came clean and asked if he could sign for the meal and pay later.
Though some say this legendary dinner never happened, everyone agrees McNamara founded Diners Club, the world’s first multipurpose charge card, in 1950. McNamara sold Diners Club memberships to friends and acquaintances willing to pay $3 for the “sign now, pay later” privilege at participating restaurants and hotels.
Until that point, only individual stores extended credit to customers. If you couldn’t pay for, say, a dress or a new suit at the general store — and the owner knew you were good for the money — you could run up a tab and pay cash later. But the Diners Club card provided the benefit of credit at multiple locations instead of just one establishment.
💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.
Next Came the “Big Four” of Credit Cards
Of course, future entrepreneurs and banks wouldn’t let Diners Club monopolize the charge and credit market for long. Eventually, other cards came on the scene—most notably Visa, Mastercard, American Express, and Discover.
• Visa: In 1958, Bank of America issued the BankAmericard — the first true credit card — to customers in California. While the original Diners Club card required payment in full at the end of each month, BankAmericard users could pay off purchases over time. In 1976, BankAmericard became Visa.
• Mastercard: BankAmericard got a run for its money when a group of banks joined forces in 1966 to create the Interbank Card Association (ICA). In 1969, ICA created Master Charge: The Interbank Card, which became Mastercard in 1979.
• American Express: The American Express Company has been around since 1850, but it didn’t issue its first charge card until 1958. Like Diners Club, the American Express card had to be paid in full each month. That changed in 1987 with the introduction of the Optima card, the first true credit card by American Express. (Fun fact: Elvis Presley was one of the earliest American Express card members.)
• Discover: Discover is the newest major credit card network on the scene. Sears launched the Discover card in 1986, distinguishing it from the pack by charging no annual fees and offering higher credit limits than other cards at the time.
Discover was also the innovator of cash rewards on credit card purchases—back in 1986. At that time, Discover cardholders could earn rewards of up to 1% cash back on all purchases. Incidentally, Discover Financial Services purchased Diners Club International in 2008.
How Credit Cards Have Changed Over Time
A lot has changed since McNamara’s legendary dinner. Take a look at some of the biggest shifts in the credit industry:
The Ubiquity of Credit
In the early decades, credit was curbed by restrictive interstate banking laws. But credit’s big breakthrough came in 1978, when the Supreme Court ruled to allow nationally chartered banks to charge out-of-state customers the interest rate set in the bank’s home state.
Credit expanded as a result, and today, the average American credit card holder has nearly four cards.
The Evolution of Fees
When Diners Club began, it made money by charging stores a 7% fee on all transactions. Today, credit card companies charge interest on debt, too, so they make money when you don’t pay your bill in full. This is what’s typically known as high-interest debt. How high? At the end of 2023, the average credit card interest rate was reported as 24.59%.
Also, Diners Club used to charge nominal membership fees, but by the 1980s, many credit card companies eliminated annual fees to stay competitive.
The Advent of Rewards
The ’80s also brought tangible rewards for using credit cards instead of cash. Discover pioneered cash rewards, allowing cardholders to get a percentage back on purchases charged. And in 1987, Citibank made a deal with American Airlines to give consumers reward points to use for future flights.
Today, consumers continue to use credit card rewards programs to earn cash or points for future purchases, including travel. In fact, more than 87% of credit card users have rewards programs associated with their cards.
How to Control Your Credit
Credit can be convenient and a real asset when you want to buy something you don’t have enough cash to pay for outright. It’s a powerful tool, and one that must be managed wisely. In the summer of 2023, credit card balances in America hit a new milestone, topping a total of $1 trillion. That likely means many people are carrying a significant amount of debt. To avoid having your balances soar too high, consider these ways to take control of your credit.
Build Your Credit History Wisely
It might sound enticing to pay for everything in cash (and thus stay out of debt), but most of us don’t have the cash flow to pay for college, buy a car, and purchase a home outright. Besides, even if you do have the cash to buy everything you need right now, when the day comes to apply for a loan, you’ll need a solid credit history to qualify.
If you’ve never had a single credit card or loan, your credit history is minimal, which means you pose a higher risk to lenders. In that way it pays to borrow, as long as you do so responsibly. That means spending less than you earn and paying your bills on time, every time. Whenever possible, pay off your credit card in full every month.
Consider Prefinancing
Of course, credit cards aren’t the only way to pay for purchases and build a strong debt payment history. Prefinancing (getting access to a sum of money in advance of a purchase), such as taking out a personal loan, is another option. When you apply for a loan, you’re requesting a specific amount of money from a lender and agreeing to repay that loan over a predetermined period of time.
How credit cards work is a different process. When you pay on credit, the credit card network (e.g., Visa) pays the merchant (e.g., Home Depot) for your purchases, and you pay the network back for your purchases each month. If you don’t pay your balance in full, you’ll be charged interest on future payments.
Between the two options, prefinancing may offer the benefit of lower interest rates and shorter loan terms, helping you get out of debt quicker. After all, if you don’t have a system in place to pay off purchases in a reasonable time frame, credit card debt can haunt you for a long time.
Think about it: If you’ve racked up $15,000 in credit card debt at an interest rate of 20%, and make a payment of $300 each month, it will take you 109 months (9+ years) to pay off your debt, including $17,635.48 in interest, by the way. (You can use a credit card interest calculator to see how your own debt stacks up.)
Understand Your Credit Score
Whenever you borrow money via a personal loan or use your credit card, your lenders and creditors send details of those transactions to three major national credit bureaus (Equifax®, Experian®, and TransUnion®). That information is then used to assess your creditworthiness, which is expressed as a three-digit credit score that represents the risk you pose to lenders.
The higher your credit score, the less risky you are in their eyes. FICO® scores are the ones used most often in lending decisions in the United States, with scores typically ranging from 300 (poor) to 850 (exceptional).
Your credit score comprises five categories, and each one has an impact:
• Payment history: Late or missed payments drag down your score.
• Amounts owed: High balances can hurt you; maxing out your credit cards is even more damaging.
• Length of credit history: A long history can increase your score.
• Credit mix in use: A healthy mix of credit cards, student loans, a mortgage loan, etc., can boost your score.
• New credit: Opening several credit accounts in a short period of time can damage your score.
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Build Your Credit Score
If your credit score isn’t where you want it to be, there’s good news: Scores aren’t set in stone. Try these tips to build yours:
Getting out of Credit Card Debt With a Personal Loan
Sometimes the problem is bigger than a low credit score. Unfortunately, some people get so deep into debt that it’s hard to find a way out on their own. One option: A personal loan to pay off credit card debt. This kind of loan usually allows you to consolidate high-interest credit card debt into one lower-interest loan with a fixed monthly payment.
Balance-transfer credit cards are another potential avenue to get out from under debt. Keep in mind, though, that these likely charge balance transfer fees, and your interest rate will be considerable after the promotional period. On the other hand, if you shop around, you may be able to find a personal loan that doesn’t charge origination or other fees.
You might also benefit from free or low-cost financial counseling from a nonprofit organization, such as the National Foundation for Credit Counseling (NFCC).
The Takeaway
Clearly, Americans have become accustomed to and perhaps even reliant on credit cards since they were developed almost 75 years ago. When managed effectively, credit cards are valuable tools to help you pay for the things you need and to sustain the lifestyle you want.
If, however, you feel weighed down by credit card debt, start taking steps to control your credit, rather than letting it control you. Consider your options, such as balance transfer credit cards or using a personal loan, to help you pay off your balance.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.
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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 .
