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The credit limit on a credit card is the maximum amount you can spend before needing to repay it. A high credit card spending limit can provide spending power to people who can pay off their debt on time and not incur too much in the way of interest charges and fees. However, for people who use a high credit card spending limit as permission to overspend, there can be problems.

You can request a credit limit increase, but credit card issuers sometimes automatically increase the credit limit of those who have shown they can manage credit well. But is a higher spending limit a good thing? It may not be for everyone’s financial situation. Here’s how to know if your credit card spending limit is too high.

How Does My Credit Card Spending Limit Work?

Credit cards are a form of revolving debt, which means that there is an upper spending limit. However, the credit can be repaid and used again. It revolves between being available to use, being unavailable because it’s being used, and being available to use again after it’s been repaid.

A credit card issuer typically bases the credit limit on factors such as the applicant’s credit score, income, credit history, and debt-to-income ratio. However, every credit card company differs in which factors it considers and how much emphasis it places on each component.

There may be multiple types of credit limits on the same credit card, e.g., a daily spending limit or cash advance limit.

How much is typical? The current credit card limit for the average American is almost $30,000. However, it’s worth noting, it doesn’t mean you should spend the full amount of your limit.

In fact, you may want to spend no more than 30% of your limit to maintain your financial wellness and to help build your credit score. In fact, many financial experts suggest a credit utilization of 10%. That would mean that if, say, your credit limit was $30,000, you would only carry a balance of $3,000.

Why Your Credit Card Issuer Increased Your Spending Limit

Your spending limit isn’t set in stone, though. Even if you haven’t specifically requested a credit limit increase, your credit card issuer may automatically increase the credit limit on your card.

There are various reasons this might happen.

•   Your credit has improved, resulting in a higher credit score.

•   Your income has increased.

•   The credit card issuer wants to retain you as a customer by offering a higher credit limit.

By increasing your credit card spending limit, the credit card issuer may have hopes that you’ll carry a balance on your card.

One stream of revenue for them is interest charges and fees. If you carry a balance, rather than paying your balance in full each month, you’ll be charged interest on the outstanding amount. And if you fail to make at least the minimum payment due or pay the bill late, you’ll likely be charged a late fee.

Both interest charges and fees are then added to the balance due on the next statement, and themselves incur interest. Essentially, you’ll be paying interest on interest.

Pros of a High Credit Card Spending Limit

For some people, due to their financial needs or goals, there may be practical reasons for having a high credit card spending limit.

•   It can be helpful in an emergency situation. Even if you’ve accumulated an emergency fund or rainy day fund, there might be instances when you need more than that. For instance, if your refrigerator suddenly stops working, you’ll probably want to replace it sooner rather than later. Large appliances can cost several thousand dollars to purchase and have installed.

•   Having a high credit limit while using a small percentage of it can lower your credit utilization rate. Your credit utilization rate is the relationship between your spending limit and your balance at any given time. If your limit is $10,000, and your balance is $1,500, your credit utilization is 15%. Generally, the lower your credit utilization rate, the better (below 30% or closer to 10% is best).

•   If you have a rewards credit card, having a higher spending limit on it could mean reaping greater rewards, whether that’s cash back, miles, or another type of reward. Being financially able to pay the account balance in full each month is key to making the most of this strategy.

Cons of a High Credit Card Spending Limit

As attractive as the benefits might sound, there can be drawbacks to having a high credit card spending limit.

•   You might be tempted to spend because you can, even if you can’t pay your credit card balance in full at the end of the billing period. This will result in purchase interest charges being added to the unpaid balance, and interest will accrue on this new, larger balance. It can become a debt cycle for some people.

•   Having a high credit limit and using a large percentage of it can increase your credit utilization rate. This rate is one of the most important factors in the calculation of your credit score — it accounts for 30% of your FICO® Score, and is considered “extremely influential” to your VantageScore®. It’s generally recommended to keep your credit utilization rate to 30% or less, as mentioned above.

•   Requesting an increase in your credit card spending limit could cause your credit score to decrease slightly. The credit card issuer might do a hard credit inquiry into your credit report, which can mean a ding of several points (say, between five and 10) to your credit score, depending on your overall credit. It’s usually a temporary drop, but if you’re planning to apply for a loan or other type of credit, it could make a difference in the interest rate you’re offered.

What Happens if You Go Over Your Spending Limit

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) put consumer protections against unfair credit card practices into place. One of the stipulations in this Act is that credit card issuers cannot charge an over-the-limit fee unless the card holder opts into an agreement for charges above the credit limit to be paid.

If you choose not to opt in to this agreement, any charges you try to make that exceed your credit card spending limit will be denied.

If you do opt in, the excess charges will be paid, but the credit card issuer may charge a fee for covering the overage amount. Generally, the first-time fee can be up to $25. If you exceed your spending limit a second time within six months, you could be charged up to $35. The fee can’t be larger than the amount you went over your credit limit by, though. So, if you charge a purchase that’s $100, but you only have $90 of available credit, the over-limit fee would be $10.

Before you opt in to an agreement like this, the credit card issuer must tell you what potential fees there might be. They must also provide you with confirmation that you opted in.

If you opted in to an over-the-limit agreement, but no longer want it, you can opt out at any time by contacting your credit card issuer’s customer service department.

Recommended: Maxed-Out Credit Card: Consequences and Steps to Bounce Back

Taking Control of Credit Card Debt

A higher spending limit can be a good thing if it’s used responsibly. Looking for a credit card that has more favorable rewards or offers perks that your current credit cards don’t have could be a good option for managing your debt.

If you’re struggling with credit card debt and a higher credit card spending limit is not an option for your financial situation or comfort level, another possible option could be to consolidate high-interest credit card debt with a personal loan.

With a credit card consolidation loan, all your balances are merged into one new loan with just one monthly payment and one interest rate instead of several. This new interest rate could end up being lower than the rates on your current individual credit cards, which could lower your monthly debt payment.

Also, a personal loan is installment debt, which means there will be a payment end date. Credit cards are revolving debt with no firm end date.

The Takeaway

A higher credit card spending limit may or may not be a positive thing, depending on your financial situation. You may have requested a credit limit increase or your credit card issuer may have automatically increased your spending limit because of factors such as an improved credit score or increased income, among others. But if the amount of credit you’ve been approved for results in poor financial decision making or increased debt, your credit card spending limit may be too high.

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

What’s the average credit card limit?

Currently, the average credit card limit is close to $30,000.

Can a spending limit be too high?

Depending on your financial situation, a spending limit could be too high. If that high limit encourages you to overspend and carry a high level of debt at a high interest rate, it could be problematic.

Is it bad to use 50% of your credit limit?

Financial experts recommend that you use no more than 30% of your credit limit, preferably close to 10%. Going higher than that can negatively impact your credit score and your financial health.

Photo credit: iStock/mixetto

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.

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.

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When you’re applying for a home loan, your mortgage lender is going to be interested (understandably) in your ability to repay the likely six-figure sum you are borrowing. And that means providing proof of both your income and your existing assets — which may mean sharing some bank statements with the lender.

The number of bank statements you’ll need to provide depends on the lender you choose as well as the type of loan you’re applying for. You typically won’t have to submit more than two months’ worth of statements. In some cases, however, you may need to provide six to 12 months’ worth of bank statements. To know for sure how many bank statements you need to submit, the best move is to talk to your loan officer.

How to Get Bank Statements

Once you know how many bank statements you need based on your lender’s mortgage requirements, the next question is: how and where do you get them? These days, bank statements can usually be downloaded from your bank’s online portal (you’ll probably be able to access your entire bank statement history). If you have trouble finding the documents, you can contact your bank’s customer service team.

It’s not unusual to wonder how long to keep bank statements and other financial documents, and banks are accustomed to receiving requests for old statements.

Why Are Bank Statements Needed for Mortgage Applications?

Bank statements are used by mortgage lenders in order to ensure you have the money it will take to fund the upfront costs of the loan, as well as to confirm that you have regular income. However, lenders may also use other documents to confirm these eligibility requirements, such as tax returns or W-2s. It can be a hassle to pull together all the paperwork for your mortgage application, but documentation is an important part of the lender’s defense against mortgage fraud.

What Underwriters Look for in Bank Statements

Mortgage underwriters may also be looking at your bank statements to ensure the funds you’re using for your down payment or closing costs are “seasoned money.” That is to say, the money has been in your possession for 60 days or more. This is because some lenders have restrictions against gift funds or family loans being used to pay upfront loan costs, such as the down payment on a home.

What Are Bank Statement Loans?

Bank statement loans are mortgages that use bank statements specifically, rather than tax returns, to qualify applicants for a mortgage loan. If you’re applying for a bank statement mortgage, you will likely need to submit substantially more of those statements — sometimes as much as two years’ worth.

Bank statement loans can make getting a mortgage possible for self-employed borrowers or others whose paperwork might not match the traditional required documentation. However, they can be harder to find, and may come with more stringent credit requirements and higher minimum down payments.

What Other Documents Are Needed for a Mortgage Application?

Of course, the best way to know exactly what documentation is required for your mortgage application is to ask your lender. However, documents that are often required for a mortgage application include the following:

•   W-2 forms

•   Pay stubs

•   Tax returns

•   Bank statements

•   Alimony or child support documentation

•   Retirement and investment account statements

•   Gift letter, if you’re using gift funds

•   Identification documentation

Depending on your specific circumstances, you may also need to provide proof of rental payments, a divorce decree, any bankruptcy or foreclosure records, or other specific documents. Again, your lender will have the full details.

The Takeaway

Depending on the type of loan you’re applying for, you may need to submit only a couple months’ worth of bank statements — or up to two years of banking history. Fortunately, bank statements are easy to generate in most banks’ online management portals, so all you’ll have to do is download and submit them.

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

Does FHA require 2 months of bank statements?

Lenders offering Federal Housing Administration (FHA) loans have their own specific requirements as far as how many months of bank statements you’ll need to provide. Some lenders offer FHA loans with just two months’ worth of statements, but you may be asked to submit more if the lender has specific requirements or some other part of your application creates the need (such as a lower credit score, for example).

How many months of bank statements do you need to refinance your mortgage?

Refinancing your mortgage is, in many ways, basically just like getting a mortgage in the first place — which means that you’ll again likely be asked to submit two months’ worth of bank statements. However, as always, specific lenders have different requirements, and if you have a nontraditional application, you may be asked to submit more.

What is a 12-month bank statement mortgage?

Also known as a bank statement loan, these mortgages use bank statements as the primary qualifying factor to approve you for a home loan (as opposed to other traditional documentation like W-2s or tax returns). For these loans, you may need to provide 12 or even 24 months’ worth of bank statements, since they’ll be such an important source of information for the lender.

Photo credit: iStock/brizmaker

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 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.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
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.

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When deciding on a student loan repayment schedule, the option with the lowest possible monthly payment is not always best.

That’s because of amortization, the process of paying back a loan on a fixed payment schedule over a period of time. A repayment option with the lowest monthly payment typically means the loan is stretched out over a longer time frame. This results in the borrower paying more in interest than they would have with a shorter loan term and a higher monthly payment.

Read on to learn more about an amortized student loan, how it affects your monthly payments, and ways to potentially lower the amount you pay in interest on your student loans.

Exploring Amortization

Amortization is common with installment loans, which have regular monthly payments. Are student loans amortized? Yes, because they are installment loans.

With an amortized student loan, a borrower pays both the principal balance and interest each month. This is called a student loan amortization schedule. The schedule begins with the full balance owed, and the payments are then calculated by the lender over the life of the loan to cover the principal and interest.

At the beginning of an amortization schedule, payments typically cover more interest than principal. As time goes on, a bigger amount goes toward the principal.

To help determine amortization on your student loans, it’s important to first calculate the cost of the loan. You’ll need to know these three variables:

1.    The loan principal

2.    The interest rate and annual percentage rate (APR)

3.    The duration, or term, of the loan (usually given in months or years)

Using this information, it is possible to determine both the monthly payment on the loan and the total interest paid on the loan. A student loan interest calculator can help you figure this out.

The next step is to determine how much of each monthly payment is going toward both interest and principal. That’s when the loan’s amortization schedule comes into play.

💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Student Loan Amortization Examples

To understand how student loan amortization works, let’s say a borrower takes out a $30,000 student loan at 7% interest rate amortized over a 10-year repayment period.

The borrower’s monthly payment is approximately $348. Each year, the borrower will pay about $4,180 total on their loan. While these monthly and yearly amounts will remain the same, the proportions allocated to the principal and interest will change.

The chart below shows you what a student loan amortization schedule might look like for a $30,000 loan at 7% interest over 10 years. The chart illustrates the principal and interest amounts monthly for the first year and the last year of the loan, and annually for the years in between.

Amortization schedule for $30,000 student loan with 7% interest over 10 years

Using this estimated example, during the first year, the borrower’s monthly payments would be about half interest and half principal. With each passing month and year of paying down debt, more of each payment is allocated to the principal. By the final year, the borrower pays only $154 to interest and $4,026 to principal.

To see how a longer loan term can affect amortization, here is a student loan amortization schedule with a longer timeline of 20 years. It’s important to note that a 20-year payback period isn’t standard for federal student loans — this example is to illustrate the impact of time on amortization calculations.

Amortization schedule for the first year and last year of payment on a student loan of $60,000 with 7% interest over 20 years:

In this example, each monthly payment for the 20-year duration is $465. In January 2024, the first month of the first year of the loan, $350 is paid towards interest, and $115 is paid towards the principal. That’s less than 25% of the total payment, compared to 50% in the previous example.

In the last year of the loan, only $206 total goes towards interest versus $4,155 in the first year.

If you’re interested in expediting your loan payoff, you may want to explore different loan lengths to see how much you could save on interest if you shorten the term.

Alternative Repayment Plans and Amortization

In addition to the standard 10-year federal student loan repayment plan, there are some alternate repayment plans such as income-driven repayment (IDR) plans. There are four types of IDR plans:

•   SAVE (Saving on a Valuable Education) plan

•   PAYE (Pay as You Earn) plan

•   Income-Based Repayment (IBR) plan

•   Income-Contingent Repayment (ICR) plan

Each of these plans uses your income and family size to determine what your payments are.

Depending on an individual’s discretionary income and family size, the monthly payments with IDR plans are generally lower than with the standard, 10-year repayment plan because repayment is stretched out over 20 or 25 years. At the end of that time, any remaining balance you owe is typically forgiven.

While IDR may be a good option if you’re having trouble affording your monthly payments, it’s important to understand that not only will you likely pay more in total interest over the course of the loan because the term is longer, but it is also possible that your payments will dip into what is called negative amortization.

Negative amortization on a student loan is when your monthly payment is so low that it doesn’t even cover the interest for that month. When this happens, it can cause the loan balance to increase.

This is not ideal, of course, but utilizing an income-driven repayment plan is a far better option than missing payments or defaulting on a federal student loan. Using an income-driven repayment plan is also necessary if the borrower plans on utilizing the Public Service Loan Forgiveness (PSLF) program.

💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

Managing Student Loan Amortization

To avoid the full impact of an amortized student loan there are several steps you could take to potentially help lower your interest payments.

Pay back your student loans faster than the stated term.

You can do this by paying more than you owe each month, or by making additional payments on your student loan, if you can afford to. Paying off the loan in advance may help you to pay less interest over the life of the loan.

If you opt to pay more than your minimum payments or make additional payments on your loans, it’s a good idea to let your lender know that the additional amount or payment should be applied to the principal of the loan, not the interest. That way, the extra amounts can help lower the principal amount you’re paying interest on.

Explore debt reduction methods.

For borrowers with multiple federal or private student loans who want to expedite their debt repayment, it can sometimes be hard to know where to start.

If your primary goal is to reduce the overall amount of interest you owe, you might want to consider the debt avalanche method of debt repayment. Using this technique, you choose the student loan debt with the highest interest rate and work on tackling it first. You would do this while making the minimum payment on all other loans or sources of debt. After the loan with the highest interest rate is paid off, focus on the loan with the next highest interest rate, and so on.

Refinancing student loans.

When you refinance a student loan, you’re essentially paying off your old loan or loans with a new loan from a private lender. Ideally, with refinancing, you would get a lower interest rate if your credit score and income qualify.

You might also be able to shorten the repayment term to pay off the loan faster, or lengthen the term to lower your monthly payments. Just remember, you may pay more interest over the life of the loan with a longer loan term.

When considering whether to refinance, borrowers should think carefully about the benefits their federal student loans have, such as income-driven repayment and the Public Service Loan Forgiveness option. When you refinance federal loans with a private lender, you lose access to these federal programs.

Weigh all your options to help determine what course of action makes the most sense for you.

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.

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.

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 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.

Both Buy Now, Pay Later (BNPL) and credit cards are ways to spread out the payment for a purchase over time, but they have a few key differences. Buy Now, Pay Later plans typically have a specific number of payments that are determined upfront. You’ll often pay a portion at the time of purchase, and then make regular payments over time, often with zero interest.

In contrast, when you pay with a credit card, you may not have to make any payment immediately. Instead, the credit card company will send you a monthly statement. You’ll likely need to make at least a minimum payment and will owe interest on any remaining balance. As long as you continue to make at least the minimum payments, there’s no limit to how long you can take to repay your purchase.

Read on for more on the differences between Buy Now, Pay Later vs. credit cards.

What Is BNPL (Buy Now, Pay Later)? And How It Works

BNPL (Buy Now, Pay Later) is a type of installment loan that allows customers to purchase something (either online or in-store) and pay for it over time. In recent years, there’s been a big jump in the growth of Buy Now, Pay Later programs.

Several retailers and even some credit card companies offer Buy Now, Pay Later. The details of these programs vary depending on the merchant, but there are some similarities. With a BNPL plan, generally you make an initial deposit of around 25% at the time of purchase. Then, you’ll make a series of installment payments until your balance is paid off, similarly to how you would with layaway.

Recommended: When Are Credit Card Payments Due

Pros and Cons of Buy Now, Pay Later

Next, consider the pros and cons of Buy Now, Pay Later:

What Is a Credit Card? And How It Works

A credit card is a type of revolving credit that allows you to make charges against your line of credit.

When you apply for a credit card, the issuer will do a hard pull on your credit. If approved, you’ll be given a specific credit limit that is the maximum amount you can borrow.

As you borrow against that limit when using a credit card, your available credit is reduced. Similarly, it’s replenished when you make payments.

Each month, you’ll get a statement listing all of the charges you made that month, plus any outstanding balance. If you pay off the balance in full, you won’t be charged any interest due to how credit cards work. However, if you pay less than the full amount, you’ll owe interest on any remaining balance.

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

Pros and Cons of Credit Cards

Credit cards can serve as a useful financial tool when you use them responsibly and adhere to credit card rules. However, they also have the potential to cause harm. Here are some pros and cons of using credit cards:

Difference Between Buy Now, Pay Later and Credit Cards

While Buy Now, Pay Later plans and credit cards have some similarities, they have a few key differences. Here’s a look at BNPL vs. credit card distinctions:

What Is a Buy Now, Pay Later Credit Card?

Traditionally many Buy Now, Pay Later plans were offered by companies that were not traditional credit card companies. However, several issuers are now starting to offer credit cards with Buy Now, Pay Later features available.

With these Buy Now, Pay Later credit cards, you can combine some of the benefits of both options. You can use your credit card like you normally would (including earning rewards) and then identify larger purchases that you’d like to pay for over time with the Buy Now, Pay later card feature.

Among the companies offering such products are American Express, Chase, and Citi.

Choosing a Buy Now, Pay Later Credit Card

Credit card issuers that offer Buy Now, Pay Later credit cards each run their programs slightly differently. You’ll want to look at the terms and conditions of each credit card you’re considering to see which works best for you. If the Buy Now, Pay Later options are similar, you can compare the credit cards themselves to find the best option.

Benefits of Buy Now, Pay Later Credit Cards

These are some of the upsides of BNPL credit cards to consider:

•   Earn credit card rewards on your purchases.

•   You can finance the purchase for a variable length of time.

•   Responsible and on-time payments can help your credit score.

Risks of Buy Now, Pay Later Credit Cards

That being said, there are potential downsides to know about too, including:

•   Buy Now, Pay Later cards may encourage you to spend more than you have.

•   Unlike traditional Buy Now, Pay Later plans without credit or debit cards, you may be charged a fee to pay for your purchase over time.

•   There is likely a minimum purchase amount you must meet to be able to use the BNPL feature of your credit card.

Recommended: How to Avoid Interest On a Credit Card

The Takeaway

Buy Now Pay Later and credit cards are two ways to pay for your purchases over time. With BNPL, you’ll usually pay an initial deposit at the time of purchase, and then you’ll make several fixed payments over the course of a few months. With credit cards, you have a set credit limit; each month, you’ll get a statement with your total monthly charges and any outstanding balance. If you don’t pay your statement balance in full, you’ll owe interest on any unpaid amount. Each option has its pros and cons. Another possibility is to get a Buy Now, Pay Later credit card, which combines features from both types of plan.

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

FAQ

Is Buy Now, Pay Later better than a credit card?

Buy Now, Pay Later and credit cards can both be the right answer depending on your specific situation, so it’s hard to say that one is better than the other for every scenario. Buy Now, Pay Later can be a good option if you want to finance a purchase over a fixed period of time with low interest and fees.

Will BNPL affect my credit score?

Generally speaking, BNPL plans do not impact your credit score as long as you make your payments on time. However, if you do not fulfill your BNPL contract, your outstanding debt may be reported to the credit bureaus, which could have a negative impact on your credit score.

Will BNPL replace the use of credit cards?

While BNPL and credit cards are both financial instruments that allow you to pay for purchases over time, they have some important differences. Since they have different pros and cons, it is unlikely that one will completely replace the other. Instead, it is more likely that both will continue to be used in different situations.

Photo credit: iStock/RgStudio

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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Some credit cards offer a promotional interest rate, as low as 0% APR, for purchases and/or balance transfers. Often, these promotional interest rates are offered for a limited period of time when you apply for a new card, though some issuers offer promotional rates for existing cardholders as well.

If you have a large purchase coming up, or an existing credit card balance that you want to transfer over, these cards can save you a significant amount of interest. You’ll just want to make sure to pay off the full balance by the end of the promotional period, as your interest rate will likely jump significantly when your promotional APR expires.

What Are Credit Card Promotional Interest Rates?

A credit card promotional interest rate is an interest rate that is offered for a limited amount of time, as a promotion. During the promotional period, you’ll be charged a lower interest rate than your typical interest rate.

It’s common for credit cards to offer these introductory promotional interest rates for new members when you open a credit card account. However, it’s also possible for issuers to offer promotional interest rates to existing cardholders.

Recommended: How to Avoid Interest On a Credit Card

How Credit Card Promotional Interest Rates Work

One common scenario for how credit card promotional interest rates work is that an issuer might offer a 0% promotional interest rate on purchases and/or balance transfers for a certain period of time. When you’re using a credit card during the promotional interest period, you won’t pay any interest.

It’s important to note that there are two major types of promotional interest rates, and they vary slightly. With a 0% interest promotion, you won’t pay any interest during the promotional period. If there’s any balance remaining at the end of the promotional period, you’ll begin paying interest at that time. With a deferred interest promotional rate, on the other hand, you’ll pay interest on any outstanding balance back to the date of the initial purchase.

Benefits of Credit Card Promotional Rates

As you may have guessed, there are certainly upsides to taking advantage of credit card promotional interest rates. Here’s a look at the major benefits.

Low Interest Rate During the Promotional Period

One benefit of credit card promotional interest rates is the ability to take advantage of a low or even 0% interest rate during the promotional period. Having access to these promotional rates can give you added flexibility as you plan your financial future.

Ability to Make Balance Transfers

One possibility to maximize a credit card promotional rate is if you have existing consumer debt like a credit card balance. By using a balance transfer promotional interest rate, you can transfer your existing balance and save on interest. This can help lower the amount of time it takes to pay off your debt.

Can Pay For a Large Purchase Over Time

If your credit card has a 0% promotional interest rate on purchases, you can take advantage of that to pay for a large purchase over time. That way, you can spread out the cost of a large purchase over several months rather than needing to pay it off within one billing period.

Just make sure to pay your purchase off completely before the end of the promotional period to avoid paying any interest.

Drawbacks of Credit Card Promotional Rates

There are downsides to these offers to consider as well. Specifically, here are the drawbacks of credit card promotional interest rates.

Deferred Interest

You need to be careful if your credit card promotional rate is a deferred interest rate, rather than a 0% interest rate. Because of how credit cards work with a deferred interest rate promotion, you’ll pay interest on any outstanding balance at the end of the promotional period — back to the date of the initial purchase. This amount will get added to your existing balance, driving it higher.

Penalty Interest Rates

You still have to make the minimum monthly payment on your credit card during the promotional period. If you don’t make your regularly scheduled payment, the issuer may cancel your promotional interest rate. They may even impose an additional credit card penalty interest rate that’s higher than the standard interest rate on your card.

May Encourage Poor Spending Habits

Establishing good saving habits and living within your means is an important financial concept to live by. While it may not always be possible, it’s generally considered a good idea to save up your money before making a purchase. While a 0% interest promotional rate means you won’t pay any interest, it can contribute to a mindset of buying things you don’t truly need.

Recommended: Tips for Using a Credit Card Responsibly

How Long Do Credit Card Promotional Interest Rates Last?

By law, credit card promotional interest rates must last at least six months, but it is common for them to last longer. You may see introductory interest rates lasting 12 to 21 months, or even longer.

Regardless of how long your promotional period lasts, make sure you have a plan to pay your balance off in full by the end of it. Credit card purchase interest charges will kick in once your promotional period is over.

Zero Interest vs Deferred Interest Promotions

Both 0% interest rates and deferred interest rates are different kinds of promotional rates where you don’t pay any interest during the promotional period. However, they come with some key differences:

What to Consider When Getting a Card With a Zero-Interest or Deferred Interest Promotion

One of the top credit card rules is to make sure you pay off your credit card balance in full, each and every month. But if you’re carrying a balance with a promotional credit card rate, you’ll want to make sure you understand if it’s a 0% rate or a deferred interest promotion.

With a 0% promotional rate, you’ll start paying interest on any balance at the end of the promo period. But with a deferred interest promotional rate, you’ll pay interest on any balance, back-dated to the date of the initial purchase.

In either case, the best option is to make sure that you have a plan in place to pay off the balance by the end of the promotional period.

Paying off Balances With Promotional Rates

You’ll want to have a gameplan for how to pay off your balance before the end of the promotional period. That’s because at the end of the promotional period, your credit card interest rate will increase significantly.

If you still are carrying a balance, you will have to start paying interest on the balance. And if you were under a deferred interest promotional rate, that interest will be calculated back from the initial date of purchase.

Watch Out for High Post-Promotional APRs

Using a 0% promotional interest rate can seem like an attractive option, but it can lull you into a false sense of financial security. You should always be aware that the 0% interest rate won’t last forever. Your interest rate will go up at the end of the promotional period, and if you’re still carrying a credit card balance, you’ll start paying interest on the balance.

Exploring Other Credit Card Options

There are some other credit card options besides getting a card with a promotional interest rate. For instance, you might look for a credit card that offers cash back or other credit card rewards with each purchase.

Before focusing on credit card rewards or cash back, however, you’ll want to make sure that you first focus on paying off your balance. Otherwise, the interest that you pay each month will more than offset any rewards you earn.

If you’re carrying a balance, you can also attempt to get a good credit card APR by making on-time payments and asking your issuer to lower your interest rate. By simply securing a good APR, you won’t have to worry about it expiring and then spiking like you would with a promotional APR.

The Takeaway

Some credit cards offer promotional interest rates to new and/or existing cardholders. These promotional interest rates could be a 0% interest rate for a specific period of time, or a lower interest rate to encourage balance transfers.

While taking advantage of promotional interest rates can be a savvy financial move if you have existing consumer debt or need to make a large purchase, you’ll want to make sure you have a plan to pay off your balance in full before the promotional period ends. That way, you avoid having to pay any interest.

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

Will my interest rate spike after a promotional deal ends?

Yes, generally credit card promotional interest rates last only for a specific number of months. The way credit cards work is to charge interest on balances that are not paid off. So, while your credit card may charge 0% or a lower promotional rate for a period of time, the interest rate will rise once the promotional period is over and will apply to any outstanding balance on the card.

How does promo APR work?

Promotional APR offers are generally put forward by credit card companies as a way to entice new applicants. Cards may offer a 0% introductory APR for a certain number of months on purchases and/or balance transfers. Once the promotional period is over, your interest rate will rise to its normal level.

Should you close a credit card with a high interest rate?

Having a credit card with a high interest rate will not negatively impact your credit or your finances if you’re not carrying a balance. So, simply having a high interest rate is not a reason, in and of itself, to close a credit card. But if you have a balance on a credit card with a high interest rate, you might want to consider doing a balance transfer to a card with a promotional 0% interest rate while you work to pay it off.

Is my credit card’s promotional rate too good to be true?

Promotional interest rates are a legitimate marketing strategy used by many credit card companies. While you shouldn’t treat them as a scam, you also need to make sure that you are aware of the terms of the promotional rate and how long the rate is good for. Make a plan to completely pay off your balance by the end of the promotional period before your interest rate increases.

Photo credit: iStock/Jakkapan Sookjaroen

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