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The average square footage of a house in the United States is 2,430 square feet, according to the National Association of Home Builders. That figure varies significantly from state to state, however, with averages ranging from 1,164 square feet all the way up to 2,800 square feet.

Average home sizes tend to be larger in areas where prices are lower and smaller in more expensive locales, though other factors also come into play. Understanding the average square footage of houses in your area can help you set realistic expectations for your house hunt and determine how much house you can afford.

Home Square Footage Trends in the U.S.

The size of homes in the U.S. has grown significantly over the past several decades. In 1949, the average square footage of a house for one family was 909 square feet. By 2021, it had almost tripled to 2,480 square feet, according to American Home Shield’s American Home Size Index.

One of the reasons behind expanding home sizes was American migration to the suburbs following World War II. During these years, new highways were built, demand for housing grew, and homeownership rose. People moved into bigger houses with more land outside the densely packed cities.

Overcrowding decreased at the same time. In 1950, 15.7% of U.S. homes were considered overcrowded. By 2000, the proportion had dropped to 5.7%. Today, older homes tend to have smaller floor plans, while more recent constructions are more spacious.

That said, home sizes have decreased slightly in the past few years due to rising interest rates and home prices. Home size was larger during the pandemic when interest rates reached historic lows and homebuyers were often looking for a house that could be home, workplace, and school all at once. Home sizes trended downward in 2022 and 2023 as housing became less affordable. (Learn more about how to save money for a house.)

Still, the mean square footage for new single-family homes was 2,430 square feet in the third quarter of 2023, a huge increase from the 909-square foot average of 1949.

States With the Largest Average Homes

The state with the largest homes on average is Utah, with an average home size of 2,800 square feet. Following Utah are other states in the Mountain West, including Colorado, Idaho, and Wyoming. This chart shows the 10 states with the largest average home sizes in the U.S., along with their median price per square foot.

States With the Most Expensive Cost per Square Foot

In states with a high cost per square foot, homes tend to be smaller on average. The smallest homes are in Hawaii, where the median price per square foot is nearly $744. New York has the next-smallest real estate, with a median price per square foot of more than $421. (New York City, however, has a median price of $1,519.57 per square foot.)

That said, home prices and size don’t always have an inverse relationship. California has some of the most expensive real estate in the country, but its home sizes average 1,860 square feet. Along with cost per square foot, some other factors that influence average home size include income levels and age of the homes.

This chart shows states with the highest median price per square foot, along with their average house sizes. If you’re looking to buy in a less pricey locale, consult a list of the best affordable places to live in the U.S.

Recommended: 12 Tips for First-Time Homebuyers

What to Consider When Buying a Larger Home

Buying a larger home might be appealing if you have a growing family and want space to spread out, but it could have downsides. These are some of the factors to consider before splurging on extra space:

More expensive maintenance costs

Not only may a larger home have a higher initial price tag, but it could also cost you more in maintenance costs. Home repair projects can easily cost thousands of dollars apiece, and prices only go up when you have more house to maintain. Before opting for a big home, consider what shape it’s in and any potential renovation costs. You could also do some research on the cost of services in your area to estimate future expenses.

More time to clean and organize

Larger homes take longer to clean and organize than smaller ones. You’ll have to purchase more furniture and spend more time on general upkeep. If you hire cleaners for your house, the cost of each visit will be higher if you have additional rooms that need cleaning.

Located farther from city center

Homes in and around a city are often smaller, while houses with more square feet and land are typically located outside of the urban center. This may not be ideal if you prefer to live near restaurants, theaters, and other urban activities. It could also be a downside if you work in the city and would have a longer and more expensive daily commute.

A bigger carbon footprint

A larger home will require more heat in the winter and air conditioning in the summer. Not only will your energy bills cost more, but your bigger house will use more resources and have a greater impact on the planet. Some newer constructions may offset this footprint with energy efficient features.

Recommended: Tips to Qualify for a Mortgage

How Much Square Footage Can You Afford?

Before starting the house hunt and the quest for a mortgage loan, it’s worth considering how much square footage you can afford. Even if you get preapproved for a mortgage of a certain amount, you might prefer a smaller loan with lower monthly costs to avoid over-burdening your budget. Many first-time homebuyers opt for a smaller starter home before eventually upsizing. One way to figure out how much house you can afford is with the 28/36 rule.

The 28/36 Rule

The 28/36 rule is a guideline that can help you estimate what price house you can afford. This rule suggests spending no more than 28% of your gross monthly income on housing costs and no more than 36% on all your debt combined, such as housing costs, car payments, and student loans.

Let’s say, for example, that your monthly gross income is $6,000. Using this guideline, you’d want to keep housing costs at $1,680 per month or lower. If you have other debts, you wouldn’t want to spend more than $2,160 on those debts and housing costs combined.

Key Reasons to Purchase a Smaller Home

Purchasing a smaller home can have several benefits, including:

•   Smaller mortgage: A smaller home may have a lower cost, so you might be able to put down a lower down payment and take out a smaller mortgage.

•   More affordable bills: With less square footage, you’ll have lower monthly bills when it comes to electricity, heating, and cooling. Plus, you won’t have to pay as much in property taxes.

•   Easier and cheaper maintenance: Smaller homes can be easier to clean and maintain, and you won’t have to spend as much on furniture and decorations.

•   Extra room in your budget for other goals: If you’re saving money on housing, you’ll have more money for other things, such as home renovation projects, travel, investing for the future, and dining out.

The Takeaway

The average home square footage in the U.S. is more than 2,000 square feet, but sizes have slightly decreased recently with rising costs and interest rates. Home sizes also vary greatly by state, with the average square footage in some states more than double that in others.

Before splurging on a big house, consider your budget carefully. Use the 28/36 rule to estimate how much house you can afford, and take your other financial goals into account when considering how much you want to spend on housing each month. With careful planning, you can find a house size that meets your needs without overstretching your budget.

FAQ

Are basements included in home square foot calculations?

Basements may or may not be included in home square foot calculations, depending on the state where you live and condition of the basement. If the basement is included, it generally must meet certain criteria for living space, such as having an entrance and exit point that leads outside the home.

How much square footage does a family of four need?

While everyone’s needs are different, one guideline for determining the ideal square footage for one’s family size is 600 to 700 square feet per person. For a family of four, that would be a home with 2,400 to 2,800 square feet.

Is the average house size in the U.S. increasing or decreasing?

The average house size in the U.S. increased significantly over the past 75 years from 909 square feet in 1949 to 2,430 square feet in 2023. However, the past couple of years have seen a slight decrease in house sizes due largely to rising interest rates and worsening affordability.

Photo credit: iStock/years

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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOHL-Q324-006

Many homebuyers finance their home purchase with a mortgage that’s paid back over a specific term, often 15 or 30 years. Borrowers may seek to pay off the loan ahead of schedule, a process known as mortgage curtailment, with the goal of saving on interest and getting out of debt.

Before you start making extra payments on your home loan, let’s take a closer look at curtailment mortgage meaning, its potential benefits, and factors to consider.

How Mortgage Curtailment Works

At a high level, curtailment in mortgage involves additional payments on the mortgage principal to reduce the length of the home loan and pay off a mortgage early. Monthly mortgage payments have four components: principal, interest, taxes, and insurance.

When you make your first mortgage payment, and for the initial portion of your loan, a greater share of the payment goes toward interest. As the principal balance gets paid off, less interest accrues and a greater share of the payment goes toward the principal. Mortgage curtailment speeds up this process by applying extra funds to the principal on top of the monthly payment. This is why it’s sometimes called “mortgage principal curtailment.”

The decision to curtail a mortgage is usually up to the borrower. Occasionally, mortgage principal curtailment can occur to refund overpayment of fees or during a cash-out refinance to bring the loan into compliance.

Recommended: The Mortgage Loan Process Explained in 9 Steps

Differences Between Curtailment and Prepayment

If you’re thinking about mortgage curtailment, you may also run across the term “prepayment,” a general term for making early payments on a loan. A mortgage prepayment could be a curtailment (in which you pay off some of the principal — but not all that you owe — early). Or it could be a complete prepayment of the loan, in which you pay off the entire amount of principal owed. So in short, curtailment is a form of prepayment and the terms are often used synonymously.

Benefits of Mortgage Curtailment

Paying off a home loan early with mortgage curtailment has its advantages. Notably, borrowers can potentially save thousands of dollars on interest by whittling away at the principal early.

Taking out a 15-, 30-, or even 40-year mortgage can be daunting. But chipping away at the principal with extra payments can shave years off the loan term. Besides offering peace of mind, getting out of mortgage debt frees up cash for other financial goals.

Putting more money toward the mortgage principal also builds home equity faster than making only your monthly payments. Greater home equity can increase net worth and boost the return on investment should you decide to sell your home. Additionally, homeowners can leverage their home equity for a variety of loans, whether for repairs and renovations or to purchase a new property before selling their home.

Calculating Mortgage Curtailment Savings

To understand how curtailment helps save money, let’s crunch the numbers with a principal curtailment mortgage example. Suppose a borrower has a $350,000 home loan with a 30-year term and 5.00% interest rate. If the homeowner made regular monthly payments, this would amount to $313,339 in interest over the life of the loan.

In this scenario, tacking on an extra $100 to the $1,804 monthly payment and applying that toward the principal would save $40,614 in interest and reduce the loan term by almost four years. Meanwhile, contributing an additional $400 to the principal each month would translate to $114,759 less in interest payments and paying off the mortgage in under 21 years.

Using a mortgage calculator can help estimate your monthly payment and how much interest you’d pay without mortgage curtailment.

Factors to Consider Before Curtailing

While curtailment can help save on interest and shorten the loan term, it’s important to take your personal financial situation into account. Any high-interest debt, such as credit cards, would be worth addressing first before allocating funds toward extra payments on a mortgage principal. It’s also good practice to have some cash reserves set aside for an emergency fund prior to curtailing a mortgage.

Here are some other factors to consider in the decision-making process.

Prepayment Penalties

Paying off a mortgage early can come with a cost — literally. Depending on the mortgage agreement, borrowers may be on the hook for covering a prepayment penalty, a fee imposed by the lender to offset the loss in interest income the lender will experience if a borrower prepays.

Different types of mortgages have varying terms and requirements. Reach out to your lender or check the fine print to see if prepayment penalties apply.

Opportunity Costs

Putting more money toward the mortgage principal is one way to increase wealth and get out of debt. But it’s worth considering the opportunity cost of mortgage curtailment versus using funds for other financial goals, such as retirement savings.

The money used for curtailment mortgage could potentially get a higher return on investment if invested in stocks, a Roth 401(k), or other retirement fund. When comparing how much interest you might save through mortgage curtailment vs. estimated earnings from investments, it’s important to factor in how much you expect the property to increase in value, as you will be building equity, not just saving on interest charges.

Tax Implications

Homeowners who itemize deductions on their tax returns can claim what they paid in mortgage interest, capped at a maximum of $750,000 in debt. The mortgage interest deduction also extends to home equity loans or lines of credit if the money borrowed is used for home improvements.

If total write-offs don’t exceed the standard deduction amount ($14,600 for single or married filing separately and $29,200 for married filing jointly), then an itemized deduction may not be worth it.

Strategies for Mortgage Curtailment

Borrowers have options for their mortgage curtailment strategy. Partial curtailment involves making additional payments (which might be monthly, or another frequency) on the loan principal. Borrowers still make regular monthly payments until the loan is paid off, but with each added payment, the mortgage amortization is updated to reflect the reduced principal balance. This approach offers flexibility for homeowners to adjust their extra payments based on their financial situation.

Alternatively, borrowers can pursue total curtailment to pay off the entire outstanding mortgage principal in one lump sum. Depending on how much you owe, this could require significant savings, or a windfall from, say, an inheritance.

Alternatives to Mortgage Curtailment

There are other ways to save on a mortgage that are worth looking into as you consider whether curtailment is right for you.

To take advantage of lower interest rates, homeowners can consider a home loan refinance. When doing so, choosing a mortgage term that’s shorter can save on interest payments over the life of the loan.

Borrowers who put less than 20% down on a house are required to pay private mortgage insurance (PMI) until they reach 20% equity. Making additional payments can put borrowers on a path to hitting 20% and getting out of PMI early, at which point they can decide if mortgage curtailment is a worthwhile long-term strategy.

Recommended: How to Get a Home Loan

The Takeaway

Mortgage curtailment involves making extra payments to reduce the principal on a home mortgage loan. Mortgage curtailment can reduce the total interest paid on a home loan as well as the loan term. It’s important to evaluate how curtailment impacts other financial goals, such as building up an emergency fund and saving for retirement, before making an extra payment on your home loan.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

What is the difference between mortgage curtailment and prepayment?

People often use the terms interchangeably, but curtailment curtails (shortens) the loan term and the amount of interest you’ll pay. Prepayment might mean making extra payments via curtailment or it could mean paying off the entire loan early.

How much can I save by curtailing my mortgage?

Total savings depends on the loan amount, repayment term, and the timing and amount of additional payments. For example, paying $100 extra each month on a 30-year, $350,000 loan with a 5.00% interest rate would save more than $40,000 in interest payments.

Will curtailing my mortgage affect my credit score?

Making additional payments each month will not affect your credit score. But paying off a mortgage in full reduces your length of credit history which could impact your credit score, although the interest savings might well be worth it.

Photo credit: iStock/kate_sept2004

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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOHL-Q324-010

Defensive driving courses aren’t just for motorists hoping to shave points off their driving record. For some people — especially teens and seniors — taking a defensive driving class can earn them discounts on their car insurance premiums.

But what is defensive driving? In this guide, we’ll look at what these courses have to offer, who might benefit from them, and what kind of insurance discounts may be available to course participants.

What Is a Defensive Driving Course?

It isn’t the same thing as driver’s ed. In defensive driving, drivers learn strategies specifically designed to keep them safer on the road.

Experienced drivers can think of it as a refresher course or a tune-up of the skills they already have. They may even learn that some traffic laws are different from when they first got their license. New drivers, meanwhile, can pick up strategies that reinforce and improve on what they recently learned, with a focus on staying alert to potential hazards.

Drivers often take a defensive driving course (sometimes referred to as “traffic school”) to remove violation points from their driving record and keep their insurance costs from going up. Other drivers may be able to use a defensive driving course to lower their car insurance costs.

These days, anything that offsets high gas prices and car maintenance costs is welcome.

Recommended: How to Get Car Insurance

Who Is Eligible for a Defensive Driver Training Discount?

Eligibility requirements for a defensive driver training discount vary from one insurance company to the next, and from state to state. Insurers may limit discounts to older drivers (starting at age 50 or 55), but some make discounts available to drivers younger than 25.

Many people sit down for a personal insurance planning session once a year. That’s a great time to ask your insurance agent if there’s a defensive driver discount you might qualify for. Or check the list of available discounts on your insurer’s website.

An insurer may want you to take a particular driving course that it has pre-approved. If you’re looking for a discount, be sure you’re familiar with all the requirements before signing up for a class. As anyone familiar with how car insurance works can tell you, it pays to read the fine print.

Recommended: Auto Insurance Terms, Explained

Defensive Driving Insurance Discount Exclusions

Don’t count on getting a discount if you’re taking a court-ordered defensive driving course or hope to have points removed from your driving record. Taking a defensive driving class can help keep your premiums from increasing (and/or lower your fine) if you got a ticket, but you probably won’t see an additional reduction.

Your age can also exclude you from receiving a discount. Some states require insurers to offer discounts to older drivers who take a course. But if it isn’t state-mandated, a company may not offer this discount to any of its customers, regardless of age or driving experience.

How Much Can You Save with a Defensive Driving Insurance Discount?

Defensive driving discounts can vary depending on the state you’re in and the insurance company you choose. But generally, if an insurer offers a discount, it’s between 5% and 20%, and typically lasts three to five years.

How Can You Renew a Defensive Driving Insurance Discount?

Be sure to find out how long your discount will stay in effect and mark that anniversary on your calendar. You’ll have to take another defensive driving course before that time is up, or you may lose your discount and your premiums could increase.

What Happens in a Defensive Driver Training Class?

Defensive driving is generally defined as using skills that can help minimize risk and avert car accidents. The focus in a defensive driving course is your safety — and that of your passengers and the people (and critters) on the roads you travel.

State course requirements vary, but you can expect the class to last about six to 10 hours and cover topics like speeding, common distractions, anger management, reaction times, driving under the influence, crash prevention, passing and parking techniques, and your state’s traffic laws.

And yes, there will be a test. It might be a comprehensive final exam or quizzes on each separate unit, but you’ll have to pass to complete the course.

Online vs In-person Driver Training Classes

Defensive driver courses are available in-person or online, so you can choose the style that suits you best. Some states and insurance companies require you to take a specific pre-approved class to get a discount (or have points removed), so if that’s your goal, make sure you’re meeting those requirements.

Beyond that, it’s really a matter of preference. There are pros and cons to both types of classes. Taking an online course offers convenience and flexibility: You can take the class whenever it works for your schedule. And an online course may be less expensive. But with an in-person class you may be able to engage with the instructor and your classmates in a way that makes the information more meaningful — and memorable.

Recommended: How Much Does Insurance Go Up After an Accident?

Why Take a Defensive Driving Course?

There are a few good reasons why someone might take a defensive driving course:

•   Earn an insurance discount. Even with just a 10% discount every month for three years, the savings can be significant.

•   Improve driving skills. If you’re a newbie behind the wheel, you may learn some techniques and behaviors that can help keep you safe. And if you’ve been driving for decades, you might be surprised at what you’ve forgotten — or never learned.

•   Shave points from your record. Taking a class may reduce the cost of a traffic ticket or remove points from your record. And that can keep your insurance premiums from increasing. (Each insurance company has its own method for deciding how your driving record affects your rate.)

•   Because you have to. If you’re convicted of a DUI or another serious offense, your course may be court-ordered.

Car Insurance Companies That Offer Defensive Driving Discounts

Many traditional and online insurance companies offer defensive driving discounts, but the eligibility requirements and discount amount vary by state. Here’s a look at what some insurers offer:

States that Offer Defensive Driving Discounts

Some states encourage or mandate insurance discounts for motorists who take a defensive driving course. Here’s a sampling of what’s available across the country:

California

Older drivers can qualify for reduced insurance premiums after successfully completing an approved course. California law allows insurers to determine the reduction amount. Customers with a poor driving record can be refused the discount.

Delaware

Drivers who complete a Delaware DMV-approved course are eligible to receive an insurance discount of up to 10% for three years. If they take a refresher course within 180 days of the end of that period, they may be eligible to receive a discount of up to 15% for the next three years.

Florida

Florida drivers 55 and older can qualify for a discount of up to 10% a year for three years. The state’s mandated discount applies to all insurance companies; contact your insurance agent for your discount amount and eligibility requirements.

New Jersey

New Jersey drivers who complete a defensive driving course approved by the New Jersey Motor Vehicle Commission can receive a discount that applies for up to three years. The discount does not apply to the state’s Driver Improvement Plan (DIP) or Probationary Driver Program (PDP) course.

New York

The state of New York has a mandatory three-year, 10% insurance discount for motorists who complete a defensive driving course.

Texas

Texas does not require insurers to provide a defensive driving course discount, but many insurers in the state do offer them for motorists who take a state-approved class.

Virginia

Insurance providers in Virginia must offer a discounted rate to drivers who are 55 and older who complete an approved driving course.

The Takeaway

Defensive driving courses can be a (relatively) painless way to get a discount on your auto insurance premiums of between 5% and 20%. And it could make you a better, safer driver. But before you sign up for a class, make sure it’s approved by the state and/or your insurer. Most insurance companies offer several different types of discounts to customers, so if you’re looking to lower your premiums, shop around and compare auto insurance quotes.

When you’re ready to shop for auto insurance, SoFi can help. Our online auto insurance comparison tool lets you see quotes from a network of top insurance providers within minutes, saving you time and hassle.

FAQ

Is an advanced driving course worth it?

Defensive driving courses typically cost $25-$100. If you can get an insurance discount for taking a class, you might be able to make that back in savings in less than a year. And many defensive driving course discounts are good for two or three years after taking a class. Another plus: You’ll likely come away with some improved driving skills.

Does a defensive driving course lower insurance in California?

Yes, older drivers in California can qualify for reduced insurance premiums after successfully completing a state-approved defensive driving course.

How hard is the advanced driving test?

If you pay attention in class, your defensive driving exam (or unit quizzes) shouldn’t be too difficult. But if you’re concerned, there are practice tests available online that can give you an idea of what a test might look like.

Photo credit: iStock/ljubaphoto

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

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

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

SOPRO-Q324-004

Despite the saying, “cash is king,” there are pros and cons to using cash over credit cards in everyday transactions. Likewise, credit cards have their own share of advantages and disadvantages when it comes to making purchases.

Here’s what you need to consider when choosing cash vs. credit cards, and when you might opt for using one method of payment over the other.

Defining Cash and Credit Cards

Cash is the legal tender — whether coins, paper bills, or other notes — that you can exchange for goods and services. According to Merriam-Webster dictionary, cash is considered “ready money.” Translation: You actually own the value of the cash and can use it immediately during a transaction.

Credit cards, on the other hand, can also be used to purchase goods and services. However, you’re borrowing the funds from a third party (i.e. a bank) to make your purchase today with the promise that you’ll pay the credit card balance back later.

When to Consider Using Cash

Deciding whether to use cash vs. credit depends on your purchasing situation and preferences. Situations when paying with cash is preferred might include:

•  Buying goods or services from merchants who only accept cash

•  When your credit or income doesn’t qualify for a credit card

•  Limiting your spending to a specific amount

•  Keeping your personal information private during a transaction

•  Avoiding credit card-related fees

•  Avoiding credit card debt

You can also use cash to grow your money through an interest-bearing deposit account, instead of spending it. If you’d like to build your savings fund, you can only do so using cash.

Recommended: How to Avoid Interest on a Credit Card

Benefits of Using Cash

Here are some benefits of using a credit card:

•  Since cash represents the monetary value you actually have, it makes budgeting simple. If you have $100 in cash to spend for the weekend, for instance, you’re focused on making careful decisions about how you spend that finite cash amount. After you’ve depleted your cash, you can’t make additional purchases until you have more cash.

•  Cash provides some convenience despite its additional physical bulkiness in your wallet. 

•  For merchants, the benefit of cash vs. credit cards is that they save money on credit card processing fees. To avoid this, some merchants only accept cash payments, while others offer a small discount as an incentive for customers to pay using cash.

•  Cash can also be used widely by any consumer, regardless of their credit score. This makes cash a more accessible payment method for everyday purchases. 

•  Cash also doesn’t contain any of your personal data, so if a private purchase is important to you, cash is beneficial.

Recommended: When Are Credit Card Payments Due?

Drawbacks of Using Cash

Here, some downsides of using cash:

•  The biggest drawback to using cash vs. credit, however, is that it caps your buying power to only the amount of cash you have. Although this can be a benefit, as mentioned above, when you’re on a budget, it can restrict your ability to make larger purchases today.

For example, if your car unexpectedly needs a repair that costs $800 but you only have $500 in cash to pay upfront, you’ll have to make a tough decision. You might be forced to shop around for a cheaper car repair shop, spend time negotiating a lower price with the current mechanic, or possibly wait to complete the repair until you have the additional funds necessary. All of this can cost you extra time and can possibly impact your earnings if you rely on your car to drive to work.

•  Physical cash is harder to trace between transactions. Your personal information isn’t tied to cash bills in your pocket. This means that if you lose it or it gets stolen and it’s used by someone else, it’s harder to get back.

When You Might Consider Using a Credit Card

There are many use cases for credit cards, if you qualify for one. Some situations when a credit card might make sense include:

•  Making a larger purchase now and paying it off later

•  Breaking down a large purchase into smaller installment payments

•  Earning points, miles, or cash back on purchases using a rewards credit card

•  Unlocking additional purchase protections

•  Building your credit profile

Recommended: What Is a Credit Card Advance?

Benefits of Using a Credit Card

Using a credit card as a payment method for daily transactions offers various benefits when managed responsibly. 

•  If you don’t have enough cash for a purchase, a credit card lets you buy it now and pay it back the following month.

•  You can also choose to take out a credit card cash advance (though typically at a higher APR,or annual percentage rate, than your standard purchase APR), or even send money with a credit card.

•  With a credit card, you get to choose how you’ll repay your purchases, whether in full when your billing statement is due, or incrementally over multiple months. The caveat is that letting a balance roll over to the next month incurs interest charges.

•  Since all credit card activity is reported to the credit bureaus, on-time payments and other factors can be favorable to building your credit history and credit score. A high credit score can help you qualify for competitive interest rates and terms on other consumer credit products, like other credit cards and loans.

•  Credit cards also offer benefits and rewards that cash doesn’t provide. Rewards credit cards let you earn points or miles that you can then redeem for travel, cash back, gift cards, merchandise, special experiences, and more.

Different credit cards can also offer benefits like travel cancellation protection, warranty insurance, and more. For example, some cards feature purchase protection, which replaces an item that was lost, stolen, or damaged if it was purchased using the card.

•  Using a credit card limits your liability when unauthorized or fraudulent purchases or activity occurs on your account. Depending on when you report the unusual activity, you might only be liable for up to $50 of those charges. Some credit cards even have zero-liability policies.

Recommended: What Is a Charge Card?

Drawbacks of Using a Credit Card

Here are some downsides to using a credit card:

•  Interest charges, expressed as an APR, are one of the biggest disadvantages to using credit vs. cash. With how credit card payments work, unless you make full, on-time credit card payments each month, interest charges will likely apply to balances that roll over from one month to the next.

If you roll over a balance, you’ll not only pay more money toward your purchases, but your outstanding debt can snowball quickly. This can prove financially damaging to your everyday finances and to your credit if you fall behind on payments while amassing growing debt.

•  Certain credit cards also incur annual fees for the privilege of using them. This is money that you’ll pay out-of-pocket upfront. You can also incur other fees, such as foreign transaction fees, late payment fees, balance transfer fees, and more.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

Is Using a Debit Card the Same Thing as Using Cash?

Using a debit card is similar to using cash. In fact, one of the biggest differences between a credit card and debit card is that debit cards draw funds from the cash that you already have in your personal checking or savings account. Still, a debit card provides the convenience of swiping or tapping a card on a payment processing machine, like a credit card, to process a digital transaction between your bank and the merchant’s bank.

However, debit cards carry many of the same disadvantages as cash. For one, a debit card limits your purchasing power to the amount that’s in your checking or savings account. Additionally, debit cards don’t offer the same level of protection against unauthorized or fraudulent activity as credit cards do.

Recommended: What Is the Average Credit Card Limit?

Understanding Your Spending Habits Is Key to Picking Which to Use

Taking stock of your buying habits can help you decide whether cash vs. credit is a better option for you. When considering these two payment options, think about the following:

•  How much do you spend each month?

•  How much discretionary income do you have?

•  Where do you typically make purchases — online or in a brick-and-mortar store?

•  Do you tend to overspend or stay within a budget that you can afford?

•  If you’re thinking about a credit card, what’s your goal?

By answering these questions, you will likely be able to tell which payment method will be more convenient for you. For instance, if you’re trying to curb your spending, then cash might be the better bet, given how credit cards work. On the other hand, if you’re primarily an online shopper or you’re trying to build your credit history, a credit card could be worth exploring.

The Takeaway

Cash can help you contain your spending to the money you actually own. This can potentially limit the amount of debt you’d take on through credit. It can also offer convenience when it comes to shopping through cash-only merchants. The caveat is the risk you’re taking on if the cash is lost or stolen since it can be difficult to get back.

Credit cards can offer greater protection against unauthorized activity, and they can enhance your spending power. However, access to borrowed funds could get you deeper into debt if you’re unable to repay your balance on time each month. With responsible borrowing habits, however, credit cards can be a handy way to make purchases and may offer rewards, like cash back.

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

Which is better when traveling, cash or credit?

When traveling, credit cards are typically a safer option to carry than cash. It can be difficult and near impossible to trace and verify whether lost or stolen cash belongs to you. If a credit card is lost or stolen, the card issuer can freeze new transactions on the account, and your maximum liability for fraudulent charges can be $50 or nothing at all.

Are credit cards safer than cash?

Yes, credit cards can be safer than cash. Credit cards typically reduce your liability in the event of unauthorized or fraudulent activity.

What is the difference between cash and credit cards?

Cash is a physical currency and liquid asset that provides you with purchasing power. When you use cash toward a purchase, you don’t owe that amount to another entity. Conversely, a credit card is a physical tool that lets you increase your purchasing power using borrowed money. You’ll need to repay purchases made to your credit card, possibly plus interest charges.

Cash or credit, which is more convenient?

Whether cash or credit is more convenient is subjective. For example, while many merchants accept credit cards, some only accept cash payments. However, as more businesses accept digital payments and transition to cashless transactions, a credit card might be more convenient.

Photo credit: iStock/Ridofranz

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

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

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

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Even if you’ve never been a victim of credit card fraud yourself, you probably know someone who has — and you may have wondered how credit card frauds are caught. Credit card companies and merchants frequently update the security measures they use to prevent credit card fraud, and their investigators will check into issues as they occur. Law enforcement also may get involved, depending on the type of fraud and the amount.

That being said, it’s still important for you to protect yourself against credit card fraud. Read on to learn about the different types of credit card fraud you might encounter, what to do if you suspect your account has been compromised, and steps to take to safeguard your account going forward.

What Is Credit Card Fraud?

Credit card fraud is the unauthorized use of a person’s credit card information to purchase goods and services or get cash from an account. According to data the Federal Trade Commission (FTC) has collected over the past four years, credit card fraud is the most reported form of identity theft.

Luckily, federal law can limit your responsibility if you move quickly to report a lost or stolen card or dispute unauthorized charges. Still, it can be a real hassle to clear up the mess and keep inaccurate information caused by identity theft off your credit reports.

Recommended: Tips for Using a Credit Card Responsibly

What Types of Credit Card Fraud Are There?

You can become a victim of credit card fraud whether someone physically takes your card, virtually hacks into your account, or uses your information to create a new account. Here’s how fraudsters can obtain and use your account information through various credit card scams.

Card-Present Fraud

Card-present fraud is when a person uses a physical card to make an unauthorized purchase. EMV chips, PINs, and other security measures have made “card-present” fraud less of a factor than it used to be. But there are still some criminals who are willing to risk using a lost, stolen, or counterfeit card to make an in-person purchase — and they’ll likely move quickly to do so.

Even if you think you’ve simply misplaced a card, you may want to use your card’s “on/off” feature, if there’s one available, to temporarily suspend the card until you can locate it or report that it’s missing.

Card-Not-Present Fraud

Even if your cards are safely tucked away in your wallet, you may find unauthorized charges on your statement. These days, it’s far more common for a thief to work behind the scenes to get your account information and use it to commit fraud online or over the phone.

Card Skimming

You’ve probably seen warnings in the news about thieves placing skimming devices on gas pumps, but credit card skimmers can be used to steal information just about anywhere there’s a card-reading device. This can include on ATMs and at stores and restaurants.

When you swipe a card, the skimmer reads the magnetic strip and stores the credit card number, expiration date, and cardholder’s name. There are also devices (cameras or false keypads) that can record a PIN number.

The captured information can then be used to make fraudulent charges online or over the phone. The hacker could also sell the collected data or use it to create counterfeit cards.

Recommended: What Is a Charge Card?

False Application Fraud

If identity thieves can get access to your personal information (through a data breach or some other method), they might be able to use it to apply for a new credit card, loan, or line of credit in your name. Or, they might blend information from several victims to create a false identity.

“Card Never Arrived” Fraud

This type of fraud can happen when someone intercepts a new or replacement card before you receive it in the mail. If a new card doesn’t come when you think it should have arrived, you may want to check with your credit card issuer to make sure it hasn’t been taken.

Phishing

Sometimes identity thieves will try to get the personal information they need using a phishing email, text, or phone call that appears like it’s from a bank or some other familiar contact or business. The message might ask you to click on a link or go to a website where you’ll be asked for your password, the CVV number on your credit card, or other details that may be used to access your accounts.

Hacking

Your personal details also could be at risk if your bank, credit card company, or some other business that stores your info is involved in a data breach. If this were to happen, a hacker could get hold of your credit card information.

Account Takeover

Once a person’s identifying information is stolen (through a data breach, phishing, or another method), a thief may contact credit card companies directly. They could impersonate the cardholder and change their PINs and passwords to take over the account.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

How Are Credit Card Frauds Typically Caught?

Early detection is critical when it comes to catching credit card fraud and minimizing the damage thieves can do. Unfortunately, unless you notice your card is lost or stolen, or you see unusual activity on your account statement, you and your credit card company might not know someone is making unauthorized charges for days or even weeks.

How Often Do Credit Card Frauds Get Caught?

It’s difficult to say how often credit card frauds get caught. A savvy clerk might notice someone using a stolen credit card and call it in to the police. Or an investigator might be able to trace a criminal who uses a stolen credit card number online. But unless you know the person involved in committing the fraud, you may not find out if there’s actually been an arrest.

The good news for credit card fraud victims is that if you quickly report the fraudulent use of your account, you won’t be held responsible for the charges. The Fair Credit Billing Act protects credit card users from being held liable for more than $50 in the event of fraud. Even better, major card networks have their own “zero liability” policies to ensure you won’t pay for unauthorized charges made with your credit card or account information.

Recommended: Complete Guide to How Credit Cards Work

How Do Credit Card Companies Investigate Fraud?

The best way to start an investigation into fraudulent transactions on your credit card is to notify the credit card issuer, either by phone or online chat. The card issuer will likely deactivate your card and send you a replacement. It also may refund your money at this point, or it may want to wait until the case is investigated.

The issuer then has 30 days to respond to your report and begin its investigation. The investigation can take up to 90 days to be completed.

As for how credit card companies investigate fraud, the issuer’s internal investigation team will begin by gathering evidence about any disputed transactions. It may check for things like transaction timestamps, the IP address of the person who made the disputed purchase, and the purchaser’s geographic location. If the crime appears to be part of a larger pattern or organization, the card issuer might alert the FBI or other law enforcement officials.

You may be able to help the investigation if you also report the crime to local law enforcement — especially if you believe the theft was committed by someone you know, or by someone local who stole personal information from your computer or mailbox. The FTC’s identity theft website can take you through the steps of filing an identity theft report.

What Should You Do If You Suspect Credit Card Fraud?

Besides reporting credit card fraud as soon as you suspect there’s an issue, there are other steps you can take to further safeguard your finances. This applies whether you notice small unauthorized transactions or charges that go up to your credit limit.

Send a Follow-Up Letter

The FTC recommends following up immediately with a letter to the card issuer that confirms you reported unauthorized activity on your account. You should note the date and time you reported the loss, and include any relevant documents (such as your police report and/or your report to the FTC).

Send the letter to the credit card company’s address for billing inquiries (not the address where you make payments). Consider sending it by certified mail so you have a receipt.

Change Your Passwords

It’s a good idea to change your password occasionally anyway. But if you suspect you’ve been the victim of identity theft, you may want to review all of your accounts and change your passwords and PINs.

Contact the Credit Bureaus

You also should contact the three major credit bureaus to report your problem, and you may want to request a credit freeze, credit lock, and/or fraud alert. What’s the difference?

•   A credit freeze, also known as a security freeze, limits access to your credit report without your permission. This can make it harder for an identity thief to open a new credit account or loan in your name. A credit freeze is free, but you must request a separate freeze from each credit bureau. And when you want to unfreeze your file, you must do that separately as well, usually by using a PIN or password provided by each credit bureau.

•   A credit lock is pretty much the same thing as a credit freeze, but it may be more convenient. Once you set it up, you can lock and unlock your credit reports using an app or secure website. Plus, you don’t have to keep track of a PIN or password to change your status.

•   A fraud alert doesn’t put an all-out block on your credit report the way a freeze or lock can, but it still can be a useful tool. It puts a notice on your credit reports that cautions creditors that you may be a fraud victim. Additionally, it encourages them to take extra steps to verify your identity before opening a new account or changing something on a current account. Fraud alerts are free, and once you place a fraud alert with one of the credit bureaus, it will send a request to the other two bureaus to set up alerts on their reports.

Watch Your Credit Card and Banking Statements

Don’t assume you’re out of the woods because you haven’t seen any unauthorized charges for a while. It may take weeks or even months before charges show up on your accounts if you’re the victim of identity theft. Checking your bank account, credit card, and other statements regularly for unusual charges (and to track your own spending) is a healthy financial habit to develop.

Track Your Credit Reports and Credit Score

It also can be helpful to track your credit reports to make sure the unauthorized charges you reported were blocked or removed, and that nothing new has turned up. Lenders, credit card issuers, and others use these reports to determine your creditworthiness, so you’ll want them to accurately reflect your finances.

You also can check your credit score to be sure it’s where it should be. Consumers can get a free credit report once a year from each of the three credit bureaus, and many financial institutions and credit card companies provide free credit scores to their customers. 

Even if you’re not a victim of identity theft, this can be a good credit card rule to follow.

Protecting Yourself From Credit Card Fraud

Unfortunately, identity theft and fraud can happen to even the most vigilant credit cardholders. To improve your chances of spotting and tracking unusual transactions, you may want to:

•   Set up transaction alerts: If your credit card issuer offers fraud notifications, it could help you react more quickly to unauthorized charges on your account. You may be able to set up alerts for specific transaction types, amounts, or locations. If an alert is triggered, you’ll be notified (usually by text, push notification, or email), so you can let the card issuer know as soon as possible if there’s a problem.

•   Track charges online or with an app: The days of waiting for your monthly credit card statement to arrive in the mail are long gone. You can check your current credit card balance and other details any time you like, by logging into your account regularly (at least once a week) or using a mobile app.

•   Sign up for credit monitoring: A credit monitoring program is another way to find out quickly (generally within 24 hours or less) if there’s been some type of unusual activity on an account. The service can notify you of major changes to your credit report, including large purchases or inquiries from lenders or credit card companies. If you didn’t make any big purchases or apply for a new credit card or loan, you can quickly take steps to inform your card issuer and the credit bureaus.

The Takeaway

Detecting and reporting credit card fraud as soon as possible is critical if you hope to limit the stress and cost of clearing it up. Even though issuers are on top of credit card fraud investigation, it’s also important to take steps to proactively protect your accounts. It’s all part of using a credit card wisely.

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

FAQ

Can you trace credit card fraud?

Yes. If you notice suspicious activity on your credit card account, you can notify your credit card issuer immediately. The card issuer will then take steps to investigate any fraudulent transactions. You also should contact the three major credit card bureaus, and you may want to make a police report.

How long does it take to investigate a credit card fraud?

The card issuer must send a letter confirming it received your fraud report within 30 days. It then has 90 days to complete its investigation.

What evidence can a card issuer use to investigate a credit card fraud?

The card issuer will use any information you provide in the course of its investigation. It also may gather further evidence by talking to the merchant who was involved, looking at transaction timestamps, or checking the IP address of the device used to make an online transaction.

What fraud protection measures do credit card issuers provide?

Credit card issuers have developed several features to stop criminals from committing fraud. Those measures range from chip technology and PIN and password protections, to real-time risk assessments that allow merchants to decide whether to approve or deny a transaction.

Photo credit: iStock/Galetos

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.

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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