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Credit card debt is a national issue in the United States. In fact, according to the Federal Reserve Bank Of New York, Americans’ total credit card balance was $986 billion in the first quarter of 2023 — $145 billion higher than it was in the first quarter of 2022.

If you’re one of the many people struggling with credit card debt, you know that getting out from under it isn’t easy. The good news, however, is that you do have options. What follows are some smart, simple credit card debt elimination plans that can help you make a dent in your debt — without giving up everything in your life that brings you joy.

How Do You Determine Debt Level?

First things first: In order to pay off debt, it can be helpful to know actual numbers. One way to help get concrete numbers is to gather monthly credit card statements and start to add up total debts. While sitting down and adding up those numbers might seem scary, getting all the information can be a great first step to tackling credit card debt once and for all.

When adding up the amount of debt owed, it might also be helpful to take interest into account — thanks to high interest rates, some debts may actually now be higher than the initial amount owed, even after making payments. A credit card interest calculator can help determine the cost of debt once interest is factored in.

Accounting for Living Expenses

We all know that credit card payments aren’t the only expense in life, which means part of tackling credit card debt may require assessing the other expenses life brings.

To understand exactly where your money is going each month, you may want to take stock of your current income and expenses. This simply involves going through your last three or so months of bank and credit card statements, adding up what is coming in each month on average (income) as well as what is going out each month on average.

You may also want to break down your spending into categories, then divide those categories into two buckets — essential expenses and nonessential expenses. To free up funds for debt repayment, you may need to cut back on some nonessential spending, such as dining out, streaming services, and clothing.

Recommended: Budgeting for Basic Living Expenses

Creating a Budget

After taking stock of financials like your monthly expenses, hunkering down and making a budget is the next logical step. Making a budget doesn’t have to be highly restrictive or complicated. The idea behind budgeting is simply that, rather than spend money willy nilly as expenses come up, you make sure your spending actually lines up with your priorities.

There are many different types of budgets but one simple approach you might consider is the 50-30-20 rule, which recommends putting 50% of your money toward needs (including minimum debt payments), 30% toward wants, and 20% toward savings and paying more than the minimum on debt payments.

Establishing a Plan To Tackle Debt

Once you have an idea of how much you can spend beyond the minimum on credit card repayment, you’ll want to come up with a strategy to pay off your debt. There is no one-size-fits-all plan for credit card debt elimination, so it is important to consider what type of payoff plan will work best for your specific circumstances.

One popular debt elimination plan is called the snowball method. It’s called this because much like building a snowball, you start with your smallest debt, and then roll on to the next highest debt, and so on.

So for example, if a borrower has three separate credit cards with balances of $1,000, $5,000, and $10,000, the snowball method would call for paying off the card with the $1,000 balance first by putting extra money towards that debt while paying on only the minimum balance on the cards with $5,000 and $10,000 balances.

Once the $1,000 debt is paid off, the borrower would then use the newly freed up money from the $1,000 debt payment to start making higher payments on the $5,000 debt and so on. This method is popular because paying off a small debt can help you gather momentum to keep paying off larger debts.

Another popular pay-off plan is the avalanche method. This involves paying off the balance of the credit card with the higher interest rate first. In this scenario, a borrower who has three separate credit cards with interest rates of 17%, 20%, and 22% would focus on paying down the credit card with the 22% interest rate first.

Why focus on the credit card with the highest interest rate? Cards with higher interest rates generally cost you the most over time. Thus, paying off the card with the highest interest rate first could help you save money instead of allowing it to accrue more interest while you pay off other credit cards.

Considering Consolidation

If the snowball or avalanche method doesn’t seem right for you, you may want to consider credit card consolidation. Consolidating your credit card debt involves either transferring your debt to a new credit card with, ideally, a lower interest rate, or taking out a personal loan, ideally with a lower interest rate, to pay off existing credit card debt.

Why replace one type of debt with another type of debt? Some borrowers may qualify for a lower interest rate on a personal loan than the rate they are paying on their credit card debt, which can help you save money. Consolidation also simplifies the debt repayment process. Instead of paying multiple credit card bills each month, you only have to make one payment — on the personal loan.

A personal loan also typically comes with a fixed interest rate and established repayment term. This means that the interest rate agreed to at the start of the loan stays the same throughout the length of the loan.

And unlike the revolving debt of credit cards, personal loans are known as installment loans because you pay them back in equal installments over a predetermined loan term. This means that you won’t accrue interest for an indeterminate time, as is possible with a credit card.

The Takeaway

Having a credit card elimination plan in place is key to getting rid of high-interest debt. To get started, you’ll want to assess where you currently stand, find ways to free up funds to put towards debt repayment, and choose a debt payoff method, such as the avalanche or snowball approach.

Another option is to get a debt consolidation loan. This can help simplify repayment and also help you save money on interest. If you’re curious about your options, SoFi could help. With a lower fixed interest rate on loan amounts from $5K to $100K, a SoFi debt consolidation loan could substantially lower how much you pay each month. Checking your rate won’t affect your credit score, and it takes just one minute.

See if a personal loan from SoFi is right for you.

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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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Typically, it does not cost the borrower money to refinance student loans. Most lenders do not charge origination fees or application fees. However, you can end up paying fees if you don’t make your payments on time.

In the right circumstances, refinancing your student loans can help you save both time and money as you work to pay down your student debt, without costing you any money to do so.

Student Loan Refinancing Recap

Student loan refinancing is the process of paying off one or more existing student loans with one new one through a private lender. You can typically refinance both federal and private student loans, and depending on the terms of your current loans and your creditworthiness, you may be able to get a lower interest rate or lower monthly payment.

This process is different from federal student loan consolidation, which involves combining several eligible federal loans into one new loan with a federal loan servicer. While that process can simplify your repayment plan and help you maintain federal loan protections, it typically doesn’t help you save money.

Every situation is different, but with the right refinance loan, you could save hundreds or even thousands of dollars as you pay down your student debt.

That said, there are both benefits and drawbacks to consider before you pull the trigger.

Pros of Student Loan Refinancing

Can Save You Money

If you qualify for a lower interest rate than what you’re currently paying, refinancing your student loans could save you money on interest over the life of the loan. Keep in mind that this includes keeping the loan term the same. If you extend your loan term, you could end up paying more in interest, even with a lower rate.

If you don’t qualify for a lower rate on your own, you may be able to add a cosigner with solid creditworthiness to help improve your chances.

Can Give You More Flexibility

Student loan refinance lenders typically offer a range of repayment terms, allowing you to shorten or lengthen the amount of time you have to pay off your debt.

Simplifies Your Repayment Plan

If you have multiple student loans across more than one servicer or lender, refinancing them all into one new loan can make repayment a little easier.

Cons of Student Loan Refinancing

You’ll Lose Federal Benefits and Protections

If you have federal student loans, refinancing with a private lender will cause you to lose certain benefits and protections, such as access to income-driven repayment plans, federal loan forgiveness programs, and more.

It May Not Save You Money

If your current interest rates are already low, it may be tough to qualify for something even lower. Also, applying for a longer repayment period than what you already have could end up costing you more in interest over the life of the loan.

You May Get Less Help When You’re Struggling

Federal student loans allow you to apply for student loan deferment or forbearance if you’re struggling to make your payments. When you refinance with a private lender, you may not get these same benefits.

Deferment and forbearance options can vary by private lenders. With SoFi, for instance, you may qualify for a deferment if you return to graduate school on a half-time or full-time basis, undergo disability rehabilitation, or serve on active duty in the military.

How Much Does It Cost to Refinance Student Loans?

Refinancing student loans with a private lender typically does not come with any costs to the borrower. Most companies do not charge any fees associated with student loan refinancing. If you are being charged fees (see below), you may want to look elsewhere for your refinance.

Common Fees When Refinancing Your Student Loans

If a lender does charge fees for refinancing, these are some you may run into:

•   Application fee: This fee covers the cost of processing the application and is typically due when you submit your application.

•   Origination fee: Some lenders charge this fee to help cover the costs of processing your loan and disbursing the funds.

•   Late payment fee: Many lenders charge this fee if you miss a payment. Depending on the lender, you may get a grace period between your due date and when the fee is assessed.

•   Returned payment fee: If you try to make a payment but don’t have enough money in your checking account to cover it and no overdraft protection, some lenders may charge you a fee for the failed transaction.

In most cases, you won’t have to pay anything up front to refinance your student loans. With SoFi, there are no application fees, no origination fees, no late fees, and no prepayment penalties.

As you’re shopping around, make sure you read the fine print to understand the cost of refinancing student loans with that particular lender.

Reducing the Cost of Refinancing Student Loans

Because many student loan refinance lenders don’t charge upfront fees, shopping around with those costs in mind can help you improve your chances of finding a low- or no-costs lender.

Keep in mind, though, that some lenders may charge what are called “hidden fees.”

Instead of showing up in marketing material, these fees are often buried deep in the terms and conditions of the loan and can be tough to find if you’re not looking for them.

Taking the time to thoroughly read the terms and conditions before refinancing could help you avoid unexpected fees down the line.

If you get approved for the new loan, you might consider setting up automatic payments to help avoid missing a payment and getting charged a late fee. Some lenders, including SoFi, offer an interest rate discount to qualified borrowers using autopay.

Then, you might make it a goal to always have a buffer in your checking account or overdraft protection to ensure a payment doesn’t get returned.

Considering SoFi to Avoid Upfront and Hidden Costs

If you’re considering refinancing your student loans, shopping around can take time. When refinancing with SoFi, you don’t have to worry about paying upfront costs or hidden fees.

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.

FAQ

Does it cost money to refinance loans?

No, it does not cost money to refinance student loans. Most student loan refinance lenders do not charge fees associated with refinancing — including application fees and origination fees. If you are being charged a fee to refinance, that could be a red flag and you may want to look elsewhere.

What is a finance charge on a student loan refinance?

On a student loan refinance, a finance charge is what you pay the lender beyond the principal balance. This would include interest and any fees associated with the loan.

How much does it cost to consolidate student loans?

If you want to consolidate your federal student loans, there is no application fee associated with a Direct Consolidation Loan. It does not cost the borrower anything to consolidate federal loans.

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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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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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Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

If repayment of your student loans has started or interest is accruing, it might be high time to school yourself on managing your school debt. Refinancing is one option.

Sure, it’s not the most fun way to occupy a weekend, but taking a close look at your student loans and understanding the ways to repay them may save you money and angst.

When Might It Be a Good Idea to Refinance Student Loans?

There are many reasons it may be a good idea to refinance your student loans, including lowering your interest rate, lowering your payment, and combining multiple loans into one. You can refinance both federal and private student loans, but refinancing federal loans with a private lender will forfeit your eligibility for federal benefits and protections.

When It Would Save You Money

The main goal of refinancing with a private lender is to lower the interest rate on your student loans — federal and/or private — with one new loan with a new rate that pays off the existing loans.

When rates are low, refinancing student loans could make a lot of sense. How much could you save? This student loan refinancing calculator can be enlightening.

Refinancing could be a great choice for working graduates who have higher-interest Direct Unsubsidized Loans, graduate PLUS loans, and/or private loans.

Or, perhaps you need to lower your monthly payment to help save money right now. One way to do this is to refinance your student loans with a longer loan term. This will reduce your payment, but you may end up paying more in interest over the life of the loan due to the extended term. You could also lower your payment by qualifying for a lower interest rate, if you can, and keeping the term the same.

You Qualify for Refinancing

Your eligibility to refinance student loans depends on your financial history, employment, and monthly income vs. expenses. If you’ve spent time building your credit and have a stable job, you could qualify for the best student loan refinancing rates.

You can also consider applying for a student loan refinance with a cosigner. If your cosigner has a stronger credit profile than you or better debt-to-income ratio, you may be able to land a better rate on your refinance.

You can usually refinance student loans right after graduating, and as often as you want after that. Most lenders charge no fees to refinance.

You Want to Remove a Cosigner

Some lenders allow a cosigner to be released from any repayment obligation when student loans are refinanced.

Principal borrowers applying for cosigner release typically have to demonstrate that they are able to handle the loan on their own by meeting certain minimum requirements.

You Want to Switch to Fixed Interest

If you have student loans with variable rates, you may want to consider refinancing to lock in a fixed rate before rates rise.

Then again, if you’re willing to take on a risk to potentially save on interest — and will be able to pay off your student loans quickly — you might consider switching from a fixed rate to a variable rate. A variable-rate loan typically starts with a rate that’s 1-2% lower than a comparable fixed-rate loan.

But what if variable rates rise? Variable rates often will still save you money over the long term.

You Are Willing to Give Up Federal Benefits

If you have federal student loans, refinancing them into a private student loan will eliminate the ability to participate in income-driven repayment plans, Public Service Loan Forgiveness, and federal deferment and forbearance.

If you are using these benefits or plan to, it’s not recommended to refinance your student loans. Instead, you could consider a federal student loan consolidation. This combines multiple loans into one, with the interest rate being the weighted average of the loans you are consolidating rounded up to the nearest one-eighth of a percent.

Want to see if refinancing could be right for you? We’ve created a quick quiz that might help.

IMPORTANT: The projections or other information generated by this quiz regarding the likelihood of various outcomes are hypothetical in nature, do not reflect actual results, and are not guarantees of offers.

The Takeaway

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.

FAQ

When is it a good time to refinance student loans?

You can refinance your student loans at any time, but a good time to refinance is if you’re looking for a lower interest rate or lower monthly payment, and you’re not using or planning on using federal benefits. To qualify for the best rates, you’ll need a solid credit profile and a stable income. You can also consider refinancing your student loans with a cosigner.

Can refinancing student loans reduce the cost of your total debt?

Yes, refinancing your student loans can reduce the amount of interest you pay over the life of the loan. You can do this by lowering your interest rate (and keeping your loan term the same) and/or shortening your loan term.

What credit score do you need to refinance student loans?

The minimum credit score needed to refinance student loans varies from lender to lender, but FICO states that a “good” credit score is 670 or higher. To get the best student loan refinance rates, you’ll want to have a good credit score and low debt-to-income ratio. If you don’t meet those requirements, you may want to consider refinancing with a cosigner.

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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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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.

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A “secured” credit card is one that requires a security deposit — typically several hundred dollars — that is used as collateral in case the cardholder fails to make payments. If you have a brief credit history or dinged credit, a secured credit card can be a good tool for building credit.

Why care about your credit health? Because creditworthiness can come into play when applying for loans, jobs, apartments, and other situations that require a credit check. If you can’t get a regular “unsecured” credit card, a secured credit card may be a good option.

What Is a Secured Credit Card?

A secured credit card is a credit card that requires a refundable security deposit, which counts as collateral until the account is closed.

The security deposit decreases the risk for the credit card issuer, and allows people with damaged or limited credit to build a history of on-time payments. If your credit score is 600 or so (fair), you may be able to get a decent secured credit card.

Most secured cards require a minimum deposit of $200 or $300, and that amount is usually equal to your credit limit. If your deposit is on the low end, you’ll want to be careful how you use the card. Credit scoring models typically penalize utilization over 30%, so if your credit limit is $300, you may want to keep your balance under $90. A higher deposit will provide breathing room. A deposit of, say, $1,000 boosts the 30% threshold to $300.

Finally, a heads-up if your credit is bad: Unsecured cards targeting people with bad credit are notorious for high fees and confusing terms. And issuers of these cards usually don’t have good cards to upgrade to.

How Does a Secured Credit Card Work?

Here’s how a secured credit card works: You put down your security deposit, and then you get the same amount to spend as a line of credit.

If you want to increase your limit, you’ll have to contribute more to your security deposit. Secured credit card issuers don’t want to be left in the dust if you decide not to pay — or cannot pay — your balance. If that were to happen, they would just take your security deposit.

This type of card may be suitable for people who’ve gone through bankruptcy or are just starting out and have a limited credit history. Typically, a secured card is a better option than a high-interest unsecured credit card that’s targeted to people with a low credit score. That’s because a high-interest card, while enticing, can take years to pay off and end up damaging your financial reputation even further. A secured credit card poses a much lower risk.

A secured credit card looks the same as a regular credit card on a credit report — so users don’t have to worry about other lenders seeing that they have this type of card. And as long as the balance is paid in full and on time every month, your credit score should start to mend.

After using the card responsibly for a certain amount of time, a secured-card holder may be able to get an unsecured card. Your secured-card company can switch a card to unsecured as well, allowing access to a higher line of credit without a deposit.

Pros and Cons of a Secured Credit Card

Like most things in life, there are positives and negatives to this kind of card.

Pros

•   Rebuild credit. Secured cards allow you to rebuild your credit history if you have limited or damaged credit. You do that by making on-time payments every month — at least the minimum payment, but preferably the full amount to avoid interest charges.

•   Lower credit line. A lower limit means you’re less likely to go over it and risk running a high balance. This is helpful for people who are still learning how to use credit responsibly.

•   Card benefits. Secured cards may offer basic benefits like fraud protection and cash back, just like you get with an unsecured card.

•   Potential to upgrade. Some secured cards allow the holder to switch to a regular unsecured card after a period of responsible use.

Cons

•  Security deposit. All secured cards by definition require the holder to provide the issuer with a cash deposit. That deposit is refunded once you switch to an unsecured card.

•  Fewer rewards. Secured cards don’t offer all the bells and whistles that an unsecured card can. For instance, you may not earn travel points, receive any discounts on goods and services, or get access to airport lounges.

•  Interest rate. As noted above, secured cards often carry higher interest rates than regular credit cards. (Of course, the interest rate won’t matter if you’re paying your bill in full each month.)

•  Requires a hard inquiry. The issuer will need to run a hard inquiry or pull on your credit report. This usually translates to a slight drop in your credit score.

Applying for a Secured Credit Card

The application process for a secured card should be relatively quick and simple, provided you prepare what you need ahead of time.

1.   Shop Around. Secured credit cards are not all the same. Look for a card with no annual fee (they’re nonrefundable) and a minimum deposit amount that meets your needs. Some cards even offer limited rewards, like cash back. Finally, make sure your payment history will be reported to the three main credit bureaus — that is how you’ll rebuild your credit.

2.   Check your credit score. It’s smart to go into the application process knowing exactly what your credit score is. There are several ways to find it without having to pay a fee. The credit bureau Experian provides consumers with their FICO Score at no charge. Your bank may also provide your credit score online for free.

3.   Collect your information and paperwork. Application requirements vary depending on the card issuer. To make sure you have all the documentation you need, gather the following:

  – Proof of identity, such as a driver’s license, passport, or other photo ID.

  – Proof of address, like a recent utility bill.

  – Bank account info. If you have a checkbook, your bank info and account number appear on your checks.

  – Citizenship or residency info.

  – Recent pay stub, W2 form, tax return, or other proof of employment and income.

  – Social Security number. You don’t have to bring your card; just make sure you know your number.

4.   Complete the application. You can do this in person if your credit card issuer has a branch near you. You may also do it over the phone with a customer service rep — just be aware you’ll need a way to provide your documentation, either in person or via upload. The easiest method is online, as long as you have access to a computer or smartphone that allows you to upload documents or images.

5.   Provide a deposit. This is usually done via online transfer from your checking or savings account.

Tips for Bettering Your Chances at Approval

If you’re nervous about getting approved, taking these extra steps can help you maximize your odds.

1.   Review your credit report. Request free reports from the three major credit agencies at AnnualCreditReport.com, and review them carefully. If you find any errors — from outdated information to unfamiliar accounts — file a dispute to have the data corrected or removed.

2.   Pay your bills on time. Many people hit a financial rough patch at some point. The important thing is to show a recent history of on-time payments. If you can point to a year’s worth of good habits, credit card issuers will be more likely to consider you worth the risk.

3.   Maintain a steady job. Even if you don’t have a high income, job security reassures credit card companies that you have the cash flow you need to pay your bills. Your employer may be able to give you a reference letter stating how long you’ve worked for the company and your track record of reliability and good work.

4.   Become an authorized user. Got a family member or close friend with great credit? Ask them if they’ll add you as an “authorized user” on their credit card. Over time, their good habits will rub off on your credit history. And that may give you the boost you need to get approved for your own card.

Using a Secured Credit Card

Major credit card companies such as MasterCard, Visa, and Discover offer secured credit cards. This means you can use your card anywhere these brands are accepted.

Some secured credit cards offer benefits like cash back and free access to your credit score.

Many major credit cards also provide liability protection, so you won’t be responsible for fraudulent charges on your account. You may have to pay fees, such as a monthly maintenance fee, annual fee, balance inquiry fee, or an activation fee.

Though you may be able to get a secured credit card with a lower interest rate than an unsecured credit card, the average rate for secured cards is still higher, at 22.48%, than the average regular credit card interest rate of 20.09%.

It’s smart to do some online comparison shopping of different credit cards to see which one has the most appealing terms. However, it’s best not to apply for too many; one hard inquiry can cause a credit score to drop 5 to 10 points. If you apply for more than one or two cards, that could have a negative effect on your credit score.

When you start using your card, paying it on time is going to impact your credit score rating. If you may not remember to pay it each month, you could set up automatic payments to ensure your bills are up to date. You can also check your credit score every month to make sure it’s trending upward.

Building Credit with a Secured Credit Card

Secured cards are a great way to build credit if you have a low credit score or a limited credit history. How they do that is not so different from how a regular credit card works.

First, you need to pay your bills on time, each and every month. Missing one payment will undo all your good work up to this point. If you don’t trust yourself to remember every single time, there’s a simple solution. Set up automated payments through your bank so that your card is paid on the same day each month. You can choose to pay the minimum, a set amount over the minimum (say, $100), or the whole balance. Hot tip: Paying off the balance each month will save you money on interest.

Second, avoid running up a high balance. In this case, a high balance just means an amount approaching your credit limit (the same amount as your security deposit). Try to keep your credit utilization — the percentage of credit that you actually use — below 30%. If your credit limit is $500, the most you should charge per month is $150 (this assumes you have no other debt). As you rack up a history of on-time payments, you can request a higher limit, though that will require a higher deposit.

Denial of a Secured Credit Card

Even though getting a secured credit card with limited or damaged credit history is possible, an applicant may still be denied. Anyone who is denied a card should receive a letter from the credit card issuer explaining why. Perhaps they didn’t fill out the application properly and all they need to do is fix it, or their credit score wasn’t high enough.

If the reason has to do with the applicant’s credit report, they can get free access to their report through AnnualCreditReport.com and see their entire credit history. For example, the credit report may reveal that the credit utilization ratio, or the amount of debt compared with the amount of credit a person has, is too high. An applicant could start paying down debt more aggressively in order to bring down the credit utilization ratio and have a better chance of being approved for a secured credit card.

Another factor that may cause a denial is if an applicant doesn’t make enough income or can’t prove income. The credit score just may be too low as well.

The Takeaway

A “secured” credit card is one that requires a security deposit that is used as collateral in case the cardholder fails to make payments. Secured cards have more relaxed application requirements than unsecured cards, making them popular with people who have limited or damaged credit histories. Some secured cards offer the same conveniences as regular credit cards — from cash back to rental car coverage — without the risk of running up a huge bill. Most secured cards report to the major credit bureaus, allowing holders to build up a positive credit history over time.

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

FAQ

Do secured credit cards build credit?

Many secured credit cards can help you build credit. Before you apply, check that the card issuer reports to the three main credit bureaus. Then, make sure you make on-time payments each and every month.

How does a secured credit card differ from an unsecured credit card?

A secured credit card requires a cash deposit that is equal to your credit limit. This serves as collateral in case you are unable to pay your bill. The deposit is refunded if you close the card or switch to a regular unsecured card. Secured cards typically have low credit limits, higher interest rates, and few perks or rewards.

How do I close a secured credit card?

To close your card, call the number on the back or log in into your account online. Or you may choose to cut up the card without officially closing it, so that your credit history doesn’t take a hit.

How can I change a secured credit card to an unsecured card?

If you have a record of on-time payments with your secured card issuer, ask them if they offer an unsecured upgrade. Some card issuers want to see a year or so of good credit habits before switching you to an unsecured card.

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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 .

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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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Dealing with debt can be overwhelming and stressful. If you find yourself struggling to pay off multiple debts, the snowball method can provide a practical and effective strategy to regain control of your financial situation. This method, popularized by personal finance expert Dave Ramsey, focuses on paying off debts in a specific order to build momentum and motivation.

Read on to learn how the snowball debt payoff method works, including its benefits, plus alternative payoff strategies you may want to consider.

Building the Snowball

With the snowball method you list your debts from smallest to largest based on balance and regardless of interest rates. The goal is to pay off the smallest debt first while making minimum payments on other debts. Once the smallest debt is paid off, you roll the amount you were paying towards it into the next smallest debt, creating a “snowball effect” as you tackle larger debts.

Getting rid of the smallest debt first can give you a psychological boost. If, by contrast, you were to try to pay down the largest debt first, it might feel like throwing a pebble into an ocean, and you might simply give up before you got very far.

A Word about Paying off High-interest Debt First

From a purely financial perspective, it might make more sense to first tackle the debt that comes with the highest interest rate first, since it means paying less interest over the life of the loans (more on this approach below).

However, the snowball method focuses on the psychological aspect of debt repayment. By starting with the smallest debt, you experience quick wins and a sense of accomplishment right away. This early success can then motivate you to continue the debt repayment journey. In addition, paying off smaller debts frees up cash flow, allowing you to put more money towards larger debts later.

Recommended: How to Get Out of $10,000 in Credit Card Debt

Making Minimum Payments Doesn’t Equal Minimum Payoff Time

While you may feel like you’re making progress by paying the minimum balance on your debts, this approach can lead to a prolonged payoff timeline. The snowball method encourages you to pay more than the minimum on your smallest debt, accelerating the repayment process. Over time, as you pay off each debt, the amount you can allocate towards the next debt grows, increasing your progress.

The Snowball Plan, Step By Step

Here’s a step-by-step guide to implementing the snowball method.

1. List all debts from smallest to largest. You want to list them by the total amount owed, not the interest rates. If two debts have similar totals, place the debt with the higher interest rate first.

2. Make minimum payments. Continue making minimum payments on all debts except the smallest one.

3. Attack the smallest debt. Put any extra money you can towards paying off the smallest debt while making minimum payments on others.

4. Roll the snowball. Once the smallest debt is paid off, take the amount you were paying towards it and add it to the minimum payment of the next smallest debt.

5. Repeat and accelerate. Repeat this process, attacking one debt at a time, until all debts are paid off.

A Word About Principal Reduction

It’s a good idea to reach out to your creditors and lenders and find out how they apply extra payments to a debt (they don’t all do it the same way). You’ll want to make sure that any additional payments you make beyond the minimum are applied to the principal balance of the debt. This will help reduce the overall interest you pay and expedite the debt payoff process.

Perks of the Snowball Method

The snowball method offers several advantages:

•   Motivation and momentum The quick wins and sense of progress provide motivation to continue the debt repayment journey.

•   Simplification Focusing on one debt at a time simplifies the process, making it easier to track and manage.

•   Increased cash flow As each debt is paid off, the money previously allocated to it becomes available to put towards the next debt, accelerating the payoff timeline.

Alternatives to the Snowball Method

While the snowball method has proven effective for many, it’s not the only debt repayment strategy available. Here are three alternative methods you may want to consider.

The Avalanche Method

The avalanche method involves making a list of all your debts in order of interest rate. The first debt on your list should be the one with the highest interest rate. You then pay extra on that first debt, while continuing to pay the minimum on all the others. When you fully pay off that first debt, you apply your extra payment to the debt with the next highest interest rate, and so on.

This method can potentially save more on interest payments in the long run. However, it requires discipline and may take longer to see significant progress compared to the snowball method.

The Debt Snowflake Method

The debt snowflake method is a debt repayment method you can use on its own or in conjunction with other approaches (like the snowball or avalanche method). The snowflake approach involves finding extra income through a part-time job or side gig, selling items, and/or cutting expenses and then putting that extra money directly toward debt repayment. While each “snowflake” may not have a significant impact on your debt, they can accumulate over time and help you become free of high-interest debt.

Debt Consolidation

If the snowball, avalanche, or snowflake methods seem overwhelming, you might want to consider combining your debts into one simple monthly payment that doesn’t require any strategizing. Known as debt consolidation, you may be able to do this by taking out a personal loan and using it to pay off your debts. You then only have one balance and one payment and, ideally, a lower interest rate, which can help you save money.

Recommended: How Refinancing Credit Card Debt Works

The Takeaway

The snowball method offers a practical and motivational approach to paying down debt. By starting with small debts and building momentum, you can gain control of your finances and work towards becoming debt-free.

However, it’s important to choose a method that aligns with your financial goals and personal preferences. Whichever method you choose, the key is to take action and commit to a debt repayment strategy that works for you.

If you’re interested in exploring your debt consolidation options, SoFi could help. With a lower fixed interest rate on loan amounts from $5K to $100K, a SoFi personal loan for debt consolidation could substantially lower how much you pay each month. Checking your rate won’t affect your credit score, and it takes just one minute.

See if a debt consolidation loan from SoFi is right for you.

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

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