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You may be able to finance student loans without a cosigner as long as you meet specific lender requirements. Refinancing is when a private lender like a bank, credit union, or online lender pays off some or all of your existing student loans and replaces them with a new loan.

A cosigner is an individual with good credit who agrees to repay the loan if you, the primary borrower, cannot. A cosigner may give a student without a strong credit history a better chance of being approved for refinancing and also help them secure a better interest rate on the loan. However, it is possible to refinance loans with no cosigner if you meet certain conditions.

Read on for more information about student loan refinancing without a cosigner and what it involves.

Understanding Student Loan Refinancing

With student loan refinancing, a private lender pays off your existing student loans, whether they are private student loans, federal student loans, or a mixture of both. The lender then issues you a new loan with a new interest rate and loan terms.

Ideally, refinancing student loans allows you to get a lower interest rate or more favorable loan terms. The loan interest rate, which is a percentage of your principal amount borrowed, is the amount you pay to your lender in exchange for borrowing money. A lower interest rate can help you save money on your monthly student loan payments.

When you refinance, you may be able to change the repayment terms of the loan. For instance, if you need more time to repay the loan and smaller monthly payments, you may be able to get a longer loan term. However, this means that you will likely pay more in interest overall since you are extending the life of the loan. Alternatively, if you are refinancing student loans to save money, you might be able to get a shorter loan term so that you can repay the loan faster, helping you save on interest payments.

Refinancing can also help you manage your student loan payments by streamlining the process. Instead of having to keep track of multiple loans with different due dates and balances, with refinancing you have just one loan to repay.

You can refinance both federal and private student loans, but be aware that refinancing federal student loans means that you’ll lose access to federal benefits such as federal loan forgiveness and income-driven repayment plans. Clearly, it’s important to consider when to refinance student loans for the best possible outcome.

Recommended: Guide to Student Loan Refinancing

Refinancing Student Loans Without a Cosigner

Refinancing student loans without a cosigner means you’ll have full control over your loan and the responsibility of repaying it will be all yours. No one else will be financially liable for it.

However, to qualify for student loan refinancing on your own you will need to meet specific requirements. These eligibility requirements include:

Qualifying With Your Own Credit

To get approved for student loan refinancing, you typically need a good credit score and a solid credit history. FICO®, the credit scoring model, considers a good credit score to be between 670 to 739. Different lenders have different credit score requirements — some have a minimum credit score that’s slightly lower than 670 — but a higher score is usually better not only for approval but also to get the best rates and terms.

If your credit score needs some work, there are ways to build your credit over time. First, make all your payments in full and on time. Payments account for 35% of your FICO score, so this is critical. In addition, keep your credit utilization — the amount of debt you owe vs. the available credit you have — as low as you can. This can help show that you’re not overspending. And have a balanced mix of credit, such as credit cards and loans, to demonstrate that you can successfully deal with different types of debt.

In addition to your credit score, lenders will also check your credit history — meaning the age of your credit accounts. Having some older active credit accounts shows that you have a track record of borrowing money and repaying it.

Debt-to-Income Ratio

The lender will also look at your debt-to-income (DTI) ratio. This is a percentage that indicates how much of your money goes toward your monthly debts versus how much money you have coming into your household each month.

You can calculate your DTI by adding up your monthly debts and dividing that figure by your gross monthly income (your income before taxes). Multiply the resulting number by 100 to get a percentage, and that’s your DTI. The lower your DTI is, the less risk you are to lenders because it indicates that you have enough money to pay your debts, including the new loan.

If your DTI is high, above 50%, say, work on paying down the debt you owe before you apply for student loan refinancing. You can also work to boost your income by applying for a promotion or taking on a side hustle.

Employment Status

Generally, lenders look for borrowers who are currently employed and have a steady income, or, in some cases, those who have an offer of employment to start within the next 90 days, in order to approve them for student loan refinance. Check with your lender to learn their specific employment and income criteria.

Recommended: Student Loan Refinancing Calculator

Alternatives to Refinancing

If you can’t qualify for student loan refinancing without a cosigner, there are some other options to explore to help manage your student loan payments.

Income-driven Repayment Plans

With an income-driven repayment (IDR) plan, your monthly student loan payments are based on your income and family size. Your monthly payments are typically a percentage of your discretionary income, which usually means you’ll have lower payments. At the end of the repayment period, which is 20 or 25 years, depending on the IDR plan, your remaining loan balance is forgiven.

Loan Forgiveness Programs

You might qualify for student loan forgiveness through a state-specific or federal program. For instance, borrowers with federal student loans who work in public service may be eligible for the Public Service Loan Forgiveness (PSLF) program. If you work for a qualifying employer such as a not-for-profit organization or the government, PSLF may forgive the remaining balance on your eligible Direct loans after 120 qualifying payments are made under an IDR plan or the standard 10 year repayment plan. There is also a federal Teacher Loan Forgiveness program for student loan borrowers who teach in low-income schools or educational service agencies.

Be sure to check with your state to find out what loan forgiveness programs may be available. Some state programs even offer forgiveness to private student loan holders.

Federal Student Loan Consolidation

A federal Direct Consolidation loan allows you to combine all your federal loans into one new loan, which can lower your monthly payments by lengthening your loan term. The interest rate on the loan will be a weighted average of the combined interest rates of all of your consolidated loans. Consolidation can simplify and streamline your loan payments, and your loans remain federal loans with access to federal benefits and protections. However, a longer loan term means you’ll pay more in interest over the life of the loan.

How SoFi Can Help You Refinance

If you opt to refinance your student loans, you may want to consider refinancing your loans with SoFi. You’ll get competitive fixed or variable interest rates on refinanced student loans, no fees, flexible repayment options, and member benefits such as financial advice.

You can refinance online with SoFi and the process is quick and easy. You can view your rate in just two minutes, and it won’t affect your credit score. Then, you can choose a term and payment that makes sense for you. Just remember that refinancing federal student loans makes them ineligible for federal benefits such as income-driven repayment plans.

FAQS

Can I refinance my student loan without my cosigner?

If you can qualify for refinancing on your own, you typically won’t need to include the cosigner on the new loan which will have new loan terms. By qualifying on your own, you are essentially demonstrating to the lender that you have what it takes to make your loan payments. To qualify for refinancing without a cosigner, you’ll generally need a strong credit score and solid credit history, a low debt-to-income ratio, and a stable income

Is there any way to get a student loan without a cosigner?

Your ability to get a student loan without a cosigner depends on the type of loan it is and your financial situation. Most federal student loans, including Direct Subsidized and Unsubsidized loans, don’t require you to have good credit or to prove you have income, so you won’t need a cosigner for those loans. However, if you’re taking out a Direct PLUS loan and you have adverse credit, such as a recent loan default, you will likely need a cosigner for the loan.

If you’re interested in private student loans, private lenders generally have strict qualification requirements regarding your credit score and income. As a student without much of a credit history or a steady income, you may need a cosigner to qualify for a private student loan.

How easy is it to refinance student loans?

Refinancing student loans is quite easy today because in most cases you can do virtually all of it online. Here’s how: Research different lenders that offer refinancing and compare their loan terms and interest rates. Get a rate estimate from a few lenders to see what rate you may be eligible for (this process involves a soft credit check that does not affect your credit score), and then choose the lender that makes the most sense for you. You can typically complete the entire loan application online (just be aware that you will need to supply documentation to prove your financial situation).

Photo credit: iStock/paulaphoto

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.

SOSLR-Q424-005

Student loan interest rates are rising. In July 2024, interest rates rose to their highest level in 16 years. Rates for undergraduate loans have increased almost 19% over last year and 44% over the past five years. Some loan rates for graduate students have never been as high as they are now.

Why are student loan interest rates so high? Some of it comes down to perception: Interest rates are up after a decade of historical lows. But other factors also come into play.

Read on to learn how student loan interest rates are set, why interest rates are going up, and the different options available for managing high-interest student loans.

Understanding Student Loans

There are two main types of student loans — federal and private student loans. Federal loans are offered by the Department of Education (DOE) and they include Direct Subsized and Unsubsidized student loans for undergraduate students, and Direct Unsubsidized loans and Direct PLUS loans for graduate or professional students.

•   Direct Subsidized loans are for undergraduates who have financial need. You fill out the Free Application for Student Aid (FAFSA), and your school determines how much you can borrow. The interest on the loan is paid by the DOE while you’re in school and for a six-month grace period after graduation.

•   Direct Unsubsidized loans are available for undergrads and graduate students. A borrower does not have to prove financial need for these loans. Again, your school determines the amount you can borrow. However, unlike Direct Subsidized loans, the interest on Direct Unsubsidized loans begins to accrue as soon as the loan is disbursed.

•   Direct PLUS loans are for eligible parents (typically called a parent PLUS loan) and grad students. To be approved for one of these loans, a borrower must undergo a credit check and cannot have an adverse credit history. Interest accrues on Direct PLUS loans while the student is in school.

Here’s a look at how the interest rates on these federal loans have increased over the last four years:

There are several different repayment plans for federal student loans, including the standard 10-year plan; graduated repayment in which your monthly payments gradually increase over 10 years; extended payment, which gives you up to 25 years to repay your loans; and income-driven repayment plans that base your monthly payments on your income and family size. Federal loans come with benefits such as federal loan forgiveness.

Private student loans are issued by private lenders, such as banks, credit unions, and online lenders. Their interest rates and loan terms differ from lender to lender. The interest rates on private student loans may be fixed or variable, and the rate you get depends on your credit history. You can use student loan refinancing later on for potentially better interest rates and terms on your private loans, if you’re eligible. (Federal loans can be refinanced as well, but they then become private loans and lose the federal benefits mentioned above.)

By using our student loan refinance calculator, you can check the interest rate and repayment terms you could qualify for — and find out if refinancing makes sense for your situation.

Factors Contributing to High Interest Rates

Congress sets federal student loan interest rates, while private loan rates depend on the credit rating of the borrower (or their student loan cosigner, if they have one). But that’s not the whole story.

The federal government adjusts federal student loan rates every year based on 10-year Treasury notes, plus a fixed increase. Rates are also capped, so they can’t rise above a certain limit. Here are the formulas:

•   Direct Unsubsidized Loans for Undergraduates: 10-year Treasury + 2.05%, capped at 8.25%

•   Direct Unsubsidized Loans for Graduates: 10-year Treasury + 3.60%, capped at 9.50%

•   PLUS Loans to Graduate Students and Parents: 10-year Treasury + 4.60% Capped 10.50%

The rates for Treasury notes are set based partly on global market conditions and the state of the economy. When market conditions are in flux, the rates for Treasury notes tend to rise.

Federal student loan interest rates are fixed over the life of the loan. That means, if you get a federal student loan for your freshman year, the rate it was issued with won’t change despite Congress setting a new rate every year. If you need to take out another federal student loan for your sophomore year, however, you’ll then get the new rate, not the previous one.

Private student loan rates vary by lender and fluctuate with market trends. A borrower’s credit history also determines the rate they get for a private student loan.

Another factor is that student loans are unsecured. Unsecured loans are not tied to an asset that can serve as collateral. Secured loans, by comparison, are backed by something of value, such as a car or house, which can be seized if you default. But lenders can’t seize a degree. So student loan interest rates may be higher than secured loan rates because the lender’s risk is higher.

Comparison of Federal and Private Student Loan Interest Rates

Why are student loan interest rates so high? As noted above, private student loan rates will fluctuate with market trends and from lender to lender. They also depend on a borrower’s credit score. As of November 2024, some private student loan rates start at about 4% and go up to around 17%.

Private student loan rates for 10-year loans may be higher than the federal interest rate when you are comparing rates concurrently on offer. The rates may be lower for a loan that has a shorter term length than the standard 10 years of federal loans.

What’s more, private student loan rates and student loan refinance rates that are currently on offer can very well be lower than the federal interest rate you received at the time of getting your loan. And you can shop around with private lenders for the best interest rates.

Recommended: Student Loan Refinancing Guide

Pros and Cons of Federal and Private Student Loans

Both federal and private student loans have advantages and drawbacks.

Pros of federal student loans include:

•   Interest rates for federal loans are fixed over the life of the loan

•   The rates for federal loans may be lower than the rates you might get for private student loans

•   Depending on the type of federal loan you have, the government may pay your interest while you are in school and during the six-month grace period after graduation

•   Federal loans have federal programs and protections such as income-driven repayment plans and federal deferment options

Cons of federal student loans include:

•   You can’t shop around for interest rates

•   If you take out a new loan in subsequent years, you may get a higher rate than you got with your initial loans

•   Borrowing limits may be lower compared to private student loans

Pros of private student loans include:

•   You can shop around with different private lenders for lower rates

•   Borrowers (or cosigners) with very good or excellent credit can get lower interest rates

•   May offer higher borrowing limits than federal loans, spending on what a borrower is eligible for

Cons of private student loans include:

•   Borrowers with poor credit will get higher interest rates or may not be able to qualify for a loan

•   If the loan has a variable interest rate, it may rise over time

•   Private loan student holders don’t have access to the same programs and protections that federal student loan borrowers do

•   Deferment and forbearance options (if any) depend on the lender

Interest Rates for Graduate and Professional Degrees

For graduate students and those pursuing advanced professional degrees, interest rates on federal Direct PLUS loans and Direct Unsubsidized Loans for graduate and professional students are substantially higher than the interest rate for Direct Subsidized and Unsubsidized loans for undergrads.

For the 2024-2025 school year, the interest rates are:

Direct PLUS loan: 9.08%
Direct Unsubsidized loans for graduate and professional students: 8.08%
Direct Subsidized and Unsubsidized loans for undergraduate students: 6.53%

The higher rates on loans for graduate and professional students add significantly to the cost of borrowing. Not only that, the interest on these loans begins accruing immediately and while the borrower is in school, which also adds to the overall amount they’ll need to repay.

It’s worth noting that loans for graduate students have much higher borrowing limits than federal loans for undergrads. Graduate students can usually borrow up to $20,500 each year, with a lifetime cap of $138,500. Undergrad borrowers can typically borrow $5,500 for the first year, $6,500 for the second year, and $7,500 for the next two years, up to a total of $31,000.

Credit Score Impact on Private Student Loan Interest Rates

Private lenders will look at your creditworthiness when determining your interest rate. This involves considering such factors as:

•   Credit score: Lenders have different requirements when it comes to credit scores for private student loans, but many look for a score of at least 650. As a student, you may not have that high a score, and in that case, you may need a cosigner on the loan in order to be approved.

•   Credit history: When entering college, most students have little to no credit history. That means the lender could be unsure of their ability to repay the loan since students don’t typically have a history of paying any loans. This can lead to a higher interest rate.

•   Your cosigner’s finances: Since many private student loan applicants are relatively new to debt and have no credit history, they might be required to provide a cosigner, as previously mentioned. A cosigner shares the burden of debt with you, meaning they’re also on the hook to pay it back if you can’t. A cosigner with a strong credit history can potentially help secure a lower interest rate on private student loans.

To help build your credit as a student, having student loans can help. Managing your student loans responsibly is a good way to help establish credit.

In addition, you might consider getting a credit card with a lower line of credit and use it to cover a few small expenses such as groceries and transportation. Be sure to pay your bill on time each month and in full if you can. Strategies like these can help you build credit over time.

Strategies to Pay Off Student Loans Faster

Whether you’re still in school or you’ve just graduated, you have options that may save you money. But it’s important to be proactive. Here are some potential actions you could take:

If You’re Still in College or Grad School

Borrowers with Direct Unsubsidized loans are responsible for the interest that accrues while they’re in school and immediately after. They don’t have to make payments while enrolled, but not making payments means that, in certain situations, interest may “capitalize” — that is, it will be added to the principal. In other words, a borrower would be paying interest on the interest.

To save yourself money on interest, consider making interest-only payments during school until your full repayment period begins after graduation. It will take a small bite out of your budget now, but it can save you money in the long run.

If you have Direct Subsidized loans, no interest will accrue until your grace period ends.

If You Graduated

Borrowers are automatically placed on the standard repayment plan, unless they select another option. The standard repayment plan spreads repayment over 10 years. Other options, such as the extended plan, extend the repayment term, which can make payments more manageable in the present, but that means you may pay more in interest over the life of the loan.

With an income-driven repayment (IDR) plan, your monthly student loan payments are based on your income and family size. Your monthly payments are typically a percentage of your discretionary income, which usually means you’ll have lower payments. At the end of the repayment period, which is 20 or 25 years, depending on the IDR plan, your remaining loan balance is forgiven.

Federal Student Loan Forgiveness

You could also explore student loan forgiveness through a state or federal program. Borrowers with federal student loans who work in public service may be eligible for the Public Service Loan Forgiveness (PSLF) program. If you work for a qualifying employer such as a not-for-profit organization or the government, PSLF may forgive the remaining balance on your eligible Direct loans after 120 qualifying payments are made under an IDR plan or the standard 10 year repayment plan.

In addition, check with your state to find out what loan forgiveness programs they may offer.

Refinancing Student Loans

Refinancing is one way to deal with high-interest student loan debt if you don’t qualify for federal protections. You can potentially lower your interest rate or your monthly payments.

If you’re considering refinancing to save money, you could be a strong candidate if you’ve strengthened your credit since you first took out your loans. Unlike when you were first headed to college, you may now have a credit history for lenders to take into account. If you’ve never missed a payment and have continually built your credit, you might qualify for a lower interest rate.

Having a stable income can also help. Being able to show a consistent salary to a private lender may help make you a less risky investment, which in turn could also help you secure a more competitive interest rate.

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.

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.

SOSLR-Q424-001

Debt is a slippery slope. You can be doing just fine when an unexpected bill starts a slide. Maybe you use a credit card or three to keep up for a while. But one setback — like major car repairs — throws you off balance again, and eventually debt begins to swallow you up.

But there’s good news. First, you’re not alone. Second, millions of people like you have dug themselves out of debt using the Debt Avalanche Method. This debt reduction strategy focuses your efforts on the debts with the highest interest rates. Keep reading to learn the advantages and disadvantages of this strategy, as well as some proven alternatives for paying off debt.

Understanding the Debt Avalanche Method

The Avalanche Method is all about the interest rate. Essentially, you’ll make the minimum payments toward all of your debts but put anything extra you can (bonuses, tax refunds, that $20 your grandma stuck in your pocket) toward paying off the high-interest debt at the top of the list. When it’s paid off, move on to the debt with the second-highest interest rate and so on.

Fans of the Debt Avalanche Method laud its efficiency. The most expensive debt is ditched first, which can be a big money saver. And the amount of time it takes to get out of debt overall is cut too, because less interest accumulates every month.

Debt Avalanche Method vs. Other Payoff Strategies

The Avalanche is for rational thinkers. But when it comes to money — and life in general — humans tend to follow their gut. That’s why some people prefer the Avalanche’s more emotionally available cousin, the Snowball Method.

With the Snowball Method, the steps are much the same, but you start your list with the smallest balance and work your way toward the largest, disregarding the interest rate. The idea is that those first targets can be knocked down quickly, creating a sense of accomplishment that helps keep you on task until it becomes a habit.

There are pros and cons to each method. If you use the Avalanche, it may take longer to move from one debt to the next. Also, this method assumes paying off debt as quickly as possible is always the right thing to do. But there are other factors to consider, like your credit score. That said, if you have a larger balance with higher interest rates, you could save money over time.

If you plan to pay off debt with the Snowball Method, you’re more likely to experience quick wins, which could help you stay motivated. But you probably won’t save as much on overall interest as you would with the Avalanche.

If you have multiple high-interest balances, you may want to consider a debt consolidation loan. These personal loans roll several debts into a single loan, which ideally has a lower interest rate. This approach can be a smart move if you’re able to stay on top of monthly payments and have a strong credit score.

Implementing the Debt Avalanche Method

Interested in trying the Debt Avalanche Method? It helps to get your finances organized first.

First, make a budget. Find ways to trim the fat from anything you can — dinners out, streaming services — so you’ll have more cash to pay toward that smothering debt. If you need help, here’s a guide to the 70-20-10 rule of budgeting.

Then make a list of all your debts. Start with the loan or credit card that has the highest interest rate, and work your way down to the one with the lowest interest rate. Continue to make the minimum payments on all your debts, but put anything you can (bonuses, tax refunds, that $20 your grandma stuck in your pocket) toward paying off the high-interest debt at the top of the list.

When the first debt on your list is paid off, cross it off and move to the next debt on your list. Roll whatever payment you were making on the first debt into the second debt, adding it on to the minimum payment. When that debt is paid off, do the same with the third on the list. As you continue paying off outstanding debt, you should have more and more money to put toward the next target balance. Keep going until you’ve plowed through each debt on your list and can declare yourself debt-free.

Depending on how much you owe, it could take some time before you’re able to move from one debt to another. Adopting sound financial habits, like tracking spending and using a budget app, can help you stick to your payoff plan.

Is the Debt Avalanche Method Right for You?

Using the Avalanche Method to pay off debt isn’t necessarily a good fit for everyone. The method is great for disciplined, analytical thinkers who get excited by the knowledge that they’re playing the long game. To make this approach a success, it helps to be the type of person who is self-disciplined, self-motivated, self-aware, and capable of celebrating self-made milestones.

Alternative debt payoff strategies, like the Snowball Method or a personal loan, may make more sense for your lifestyle, financial situation, and personal preferences.

Here are some questions to ask yourself as you weigh your options:

•   What are my short- and long-term financial goals?

•   Do I have high-interest debt?

•   Do I need a series of quick wins to stay motivated?

Maximize the Benefits of the Debt Avalanche Method

Before you begin tackling debt with the Avalanche Method, consider some strategies to get the maximum benefits:

•  Accelerate debt repayment. Paying off your balance doesn’t just relieve stress — it can also save on interest. Kick in more than the minimum payment each month. And if your lender and budget allow, make extra payments.

•  Build an emergency fund. While whittling down debt is the priority, it’s also a good idea to sock away money into an emergency fund. Determine a target amount — a good rule of thumb is to have enough to cover three to six months of expenses. Then open a high-yield savings account and add to it regularly.

•  Seek the help of a professional. Looking for personalized guidance? Consider meeting with a financial advisor, who can examine your current finances, discuss your financial goals, and help you create a plan to achieve them.

The Takeaway

Using the Debt Avalanche Method is a great way to pay off debt for disciplined, logical personalities who want to maximize their savings on interest. The Avalanche works by paying down the highest-interest debt first, regardless of balance, while making minimum payments only on other debts. It’s not for everyone, though, especially if your highest-interest debt is also your biggest balance.

If quick wins help you stay motivated, consider paying off debt with the Snowball Method. Instead of focusing on interest rate, borrowers prioritize the lowest balance first. A debt consolidation loan is another potential avenue to explore, as you can roll multiple high-interest debts into a single loan with (hopefully) a better interest rate.

The key to any debt payoff strategy is to know yourself and choose the method that best fits your preferences and financial goals.

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.

FAQ

How long does it take to pay off debt using the Avalanche Method?

While the Avalanche Method tends to whittle down debt faster than making minimum payments each month, the time it takes for you to pay off your balance will depend on the amount you owe, your interest rate, and how much extra you’re able to pay each month.

Can the Debt Avalanche Method be used for all types of debt?

The Avalanche isn’t suited for every type of debt. Consider using it to pay off credit cards, personal loans, student loans, and car loans. Don’t include your mortgage, as financial experts consider this “good” debt. One day, you may decide to put extra money toward paying down your mortgage principal, but for now, focus on your other debts.

What should I do if I have multiple debts with
similar interest rates?

When faced with paying down multiple debts with similar interest rates, the Snowball Method may be your best approach. It involves paying off your lowest balance first, while making minimum payments on your other debts. If the interest rates are high, you may want to explore a debt consolidation loan. That’s where you take out one loan or line of credit (ideally with a lower interest rate) and use it to pay off other debts.

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.

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.

SOPL-Q424-059

Imagine you have four credit cards, each with a $5,000 limit, for a total of $20,000. You have a balance of $2,000 on Credit Card A from vacation travel, $1,000 on Credit Card B from buying new car tires, $2,000 on Credit Card C from last holiday season, and $1,000 on Credit Card D from regular monthly bills. Altogether, you owe $6,000. If we calculate that as a percentage, we have your credit card utilization rate: 30%.

In this guide, we’ll focus on credit utilization, determine how much of your credit you should use, and show how credit card utilization affects your credit score and overall financial standing.

What Is a Credit Utilization Ratio?

Your credit utilization ratio is a fancy way of referring to how much of your credit you’re using. Lenders and credit reporting agencies use it as an indicator of how well someone is managing their finances.

A low credit utilization ratio says you live within your means, use credit cards responsibly, and therefore probably manage the rest of your finances well. A high credit utilization hints that your expenses are outpacing your income, a sign that you’re misusing credit cards, and possibly mismanaging the rest of your finances.

The reality of the situation may be different. Perhaps you have temporary cash flow problems due to a job loss. Or you happen to have a pileup of pricey expenses within a short time, such as medical bills, car repairs, and a destination wedding. It happens. That’s why credit utilization is just one factor that goes into calculating your credit score.

Recommended: Types of Personal Loans

How Do You Calculate Your Credit Card Utilization Rate?

In the example above, we saw that if you have $20,000 of credit available to you, and you owe $6,000, your credit utilization rate is 30%. How did we get there? To find out your credit card utilization rate, simply divide your total credit card balances by your total credit line, like this:

Total Balance / Total Credit Line = Utilization Rate

With the numbers from our example, it looks like this:

6,000 / 20,000 = .3 or 30%

Simple, right? You’ve got this.

What Counts as “Good” Credit Card Utilization?

As it turns out, just because you’ve been approved for a $10,000 credit card doesn’t mean it makes financial sense to charge $10,000 worth of rosé and seltzer — even if you know you can pay it off over a couple of months. In fact, you might be shocked to learn how little of your available credit you’re supposed to use.

The general rule is that you should not exceed a 30% credit card utilization rate. That means that in our example, you would not want to use more than $6,000 of your available $20,000 credit. Even though 30% might seem like a small percentage, keeping below that threshold can ensure that your credit score isn’t being dinged for over-utilization.

How Can You Lower Your Credit Card Utilization Ratio?

You can lower your credit utilization ratio by paying down your credit card balances. Ideally, you should pay off your credit card balances in full every billing cycle to avoid paying interest. When that’s not possible, pay off as much of the bill as you can.

Whatever you do, don’t make a habit of paying only the credit card minimum payment suggested on your bill.

When trying to pay down your credit cards, focus on the one with the highest interest rate. That way, you’ll save the most money on interest. Or you can pay off your cards with a personal loan.

In fact, debt consolidation is one of those most common uses for personal loans. A personal loan calculator can show you how much you could save on interest.

Another way to lower your utilization rate is to increase your available credit. Ask your bank to raise your credit card limit. If they agree, your utilization will quickly drop. Also, keep open any cards you don’t use rather than closing the accounts. They’re serving a valuable purpose by contributing to your credit limit, even if you’ve cut up the actual cards.

As you can tell, credit utilization is a nuanced topic. Learn all the ins and outs in our Guide to Lowering Your Credit Card Utilization.

How Does Credit Card Utilization Affect Your Credit Score?

You may be wondering, How much will lowering my credit utilization affect my credit score? Credit card utilization plays a big role in how companies compute your credit score. In fact, about 30% of your credit score is determined by your credit card utilization rate. That means a high credit card utilization rate can adversely affect your credit score. For a deep dive into the topic, check out How Does Credit Utilization Affect Your Credit Score?

How Do You Monitor Your Credit Card Utilization?

Your credit utilization might seem difficult to keep track of. But we live in the 21st century, so it’s actually quite easy to set up account reminders to alert you when you are approaching that 30% credit card utilization mark.

In addition to watching your credit usage, make your best effort to pay your credit card bills on-time each month. Checking your credit score regularly will also help you keep your financial health in check. Although you don’t want to check your score too often, it’s good to keep tabs to make sure the data being reported is accurate.

The Takeaway

Your credit card utilization ratio is the sum of all your credit card balances divided by the sum of your credit limits. Credit reporting agencies recommend keeping your ratio at 30% or below. Higher ratios can hurt your credit, since credit utilization accounts for 30% of your credit score.

To lower your utilization rate, simply pay down your credit card balances. And think twice before closing a credit card you no longer use. You might also consider consolidating your credit card debt with a personal loan.

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 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 .

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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Figuring out how to prepare for a recession — or any crisis — can be difficult. When facing a potential recession, financial decisions take on a new weight. After all, financial policy may change during a recession, which can leave consumers with questions. For example, if the Federal Reserve lowers interest rates, should you borrow money during a recession?

While lower recession interest rates might sound appealing, there are lots of things to consider before borrowing money during a recession.

Understanding Recessions

A recession is a period of time when economic activity significantly declines. In the U.S., the National Bureau of Economic Research defines a recession as more than a few months of significant decline across different sectors of the economy. We see this decline in changes to the gross domestic product, unemployment rates, and incomes.

In essence, a recession is a period of time when spending drops. As a result, businesses ramp down production, lay off staff, and/or close altogether, which in turn causes a continued decrease in spending.

There are many possible causes of the recession. Usually, recessions are caused by a wide variety of factors — including economic, geopolitical, and even psychological — all coinciding to create the conditions for a recession.

For example, a recession could be caused by a major disruption in oil access due to global conflict, or by the bursting of a financial bubble created by artificially depressed interest rates on home loans during a financial boom (as was partially the case with the 2008 financial crisis in the U.S.). A recession also could be caused in part by something like a pandemic, which could create supply chain disruptions, force businesses into failure, and change spending habits.

As for how psychology plays a role in recessions, financial actors might be more likely to invest in a new business or home renovation during boom years when the market seems infallible. But when an economic downturn or recession starts, gloomy economic forecasts could make people more likely to put off big purchases or financial plans out of fear. In aggregate, these psychological decisions may help control the market.

In the case of a recession, for example, many people choosing not to spend out of fear could cause a further contraction of the market, and consequently further a recession.

Financial Policy During a Recession

Economic policy might temporarily change in an effort to keep the market relatively stable amid the destabilization a recession can bring. The Federal Reserve, which controls monetary policy in the U.S., often takes steps to curb unemployment and stabilize prices during a recession.

The Federal Reserve’s first line of defense when it comes to managing a recession is often to lower interest rates. The Fed accomplishes this by lowering the interest rates for banks lending to other banks. That lowered rate then ripples throughout the rest of the financial system, culminating in reduced interest rates for businesses and individuals.

Lowering the interest rate could help to stem a recession by decreasing costs for businesses and allowing consumers to take advantage of low interest rates to buy things using credit. The increase in business and purchasing might in turn help offset a recession.

The Federal Reserve also may take other monetary policy actions in an attempt to curb a recession, like quantitative easing. Quantitative easing, also known as QE, is when the Federal Reserve creates new money and then uses that money to purchase assets like government bonds in order to stimulate the economy.

The manufacturing of new money under QE may help to fight deflation because the increase in available money lowers the value of the dollar. Additionally, QE can push interest rates down because federal purchasing of securities lowers the risks to lending institutions. Lower risks can translate to lower rates.

Recommended: Federal Reserve Interest Rates, Explained

Downsides to Borrowing Money During a Recession

How do you prepare for a recession? It might seem smart to borrow during this time, thanks to those sweet recession interest rates. But there are other considerations that are important when deciding whether borrowing during a recession is the right move. Keep in mind the following potential downsides:

•   There’s a heightened risk of borrowing during a recession thanks to other difficult financial conditions. Disruptive financial conditions like furloughs or layoffs could make it more difficult to make monthly payments on loans. After all, regular monthly expenses don’t go away during a recession, so borrowers could be in a tough position if they take on a new loan and then are unable to make payments after losing a job. Missed payments could negatively impact a borrower’s credit score and their ability to borrow in the future.

•   It may be harder to find a bank willing to lend during a recession. Lower interest rates may mean that a bank or lending institution isn’t able to make as much money from loans. This may make lending institutions more hesitant.

•   Lenders could be reluctant to lend to borrowers who may be unable to pay due to changes in the economy. Most forms of borrowing require borrowers to meet certain personal loan requirements in order to take out a loan. If a borrower’s financial situation is more unstable due to a recession, lenders may be less willing to lend.

When to Consider Borrowing During a Recession

Of course, there are still situations where borrowing during a recession might make sense. If you’re hit with unexpected expenses or have the opportunity to buy quality stocks for a lower price, for instance, it could make sense to have extra funds available.

Another scenario where it might be a good idea is if you’re consolidating other debts with a consolidation loan.

If you already have debt, perhaps from credit cards or personal loans, you may be able to consolidate your debt into a new loan with a lower interest rate, thanks to the changes in the Fed’s interest rates. Consolidation is a type of borrowing that doesn’t necessarily increase the total amount of money you owe. Rather, it’s the process by which a borrower takes out a new loan — with hopefully better interest rates and repayment terms — in order to pay off the prior debts.

Why trade out one type of debt for another? Credit cards, for example, often have high interest rates. So if a borrower has multiple credit card debts with high interest rates, they may be able to refinance credit card debt with a consolidation loan with a lower interest rate. Trading in higher interest rates loans for a consolidation loan with potentially better terms could save borrowers money over the life of the loan. It also streamlines bill paying.
When considering consolidation, borrowers may want to focus on consolidating only high-interest loans or comparing the interest rates between their current debts and a potential consolidation loan.

Note that interest rates on consolidation loans can be either fixed or variable. A fixed rate means a borrower may be able to lock in a lower interest rate during a recession. With a variable interest rate, the loan’s interest rate could go up as rates rise following a recession.

Additionally, just like many other types of loans, consolidation loans require that borrowers meet certain requirements. Available interest rates may depend on factors like credit score, income, and creditworthiness.

Recommended: How to Apply for a Personal Loan

The Takeaway

It can be challenging to navigate any economic downturn, and it’s natural to wonder how to prep for a recession. Deciding whether to borrow, including taking out a personal loan, is a decision that depends on your specific circumstances. There are downsides to consider, such as the general economic uncertainty that can increase risk and heightened risk-aversion from lenders. But if you have high-interest debt, or can secure a lower rate by consolidating, then taking out a consolidation loan during a recession could make sense. It’s a good idea to weigh the risks and benefits carefully and seek out professional advice before making a decision.

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.

FAQ

Is it good to have money in the bank during a recession?

The general consensus is that banks are a safe place to keep your cash during a recession. If your account is insured by the Federal Deposit Insurance Corporation (FDIC), then individual deposits up to $250,000 are protected. Banks also protect funds against theft or loss.

Is it better to have cash in a recession?

It’s a good idea to have some of your money in cash during a recession. That’s because if you’re laid off from your job or an emergency arises, it can be helpful to have a cushion of readily accessible money.

Should I withdraw all my money during a recession?

If you’re thinking about how to prepare for the recession, it can be tempting to want to take out all of your money from a bank. But there’s good reason to reconsider. Many banks are FDIC insured, which means deposits up to $250,000 are protected.

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.

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