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Though the terms may be used interchangeably, there are major differences: With a credit card, you can either pay your full monthly bill or a portion of it. With a charge card, no matter how much you owe, you’re expected to pay the monthly bill in full.

That’s not the only thing that sets these cards apart. The two also vary in their accessibility, flexibility, spending limits, and costs. If you’re wondering if a charge card vs. a credit card is a better fit for you, read on to understand their key differences, which can help you decide.

How Charge Cards Work

In some ways, a charge card is much like a regular credit card. When you use it to make a purchase, you’re borrowing money from the card issuer. And when you pay your bill, you’re paying the card issuer back.

But there are several things about the way charge cards work that make them very different from traditional credit cards. And because of the way they work, there are benefits and risks of charge cards to consider.

As mentioned above, a charge card holder’s obligation to pay the bill in full each month is probably the most important distinction. Because you don’t have the option of carrying forward a balance, you won’t pay any interest. But if you don’t pay the balance in full by the due date, you could be subject to a late fee and restrictions on your future card use.

Another thing that makes a charge card unique is that there’s no pre-set credit limit. This offers charge card holders some added flexibility, but it doesn’t mean you can go out and spend as much as you want any time you want — even if you’ve stayed current with your charge card payments.

A transaction still may be declined if it exceeds the amount the card issuer determines you can manage based on your spending habits, account history, credit record, and other financial factors. To avoid any confusion, card holders can contact their charge card issuer before making a major purchase to ask if the amount will be approved.

Recommended: When Are Credit Card Payments Due

How Credit Cards Work

Because they’re more common, you may be more familiar with how credit cards work than you are with charge cards. With a traditional credit card, card holders are given a preset credit limit that’s based on their income, debt-to-income ratio, credit history, and other factors.

Once your account application is approved and you receive a card with a unique credit card number, you can use your card as much or as little as you like — as long as you stay within that limit.

Each month when you receive your billing statement, you can decide if you want to repay the full amount you owe or make a partial payment, but you must make at least the minimum payment that’s due. And if you carry forward a balance, you can be charged interest on that amount. (Similar to your spending limit, interest rates are typically based on a cardholder’s creditworthiness.)

A credit card is classified as “revolving credit” because there’s no set date for when all the money you’ve borrowed must be repaid. As long as you make at least your minimum payments on time and stay within your credit limit, the account remains open, and you can use the available credit over and over again.

Differences Between a Charge Card and Credit Card

Here’s a side-by-side look at some key differences between charge cards and credit cards:

Charge Card vs. Credit Card
Charge Cards	Credit Cards
Full payment required every billing cycle	Can carry a balance, but must make minimum monthly payment
Can be difficult to find and qualify for	Many options available, even for those with not-so-great credit
Accepted by most U.S. vendors (but less so overseas)	Widely accepted in the U.S. and worldwide
No interest charged, but can expect a high annual fee	May avoid annual fee, but interest accrues on unpaid balance
Known for prestigious rewards programs	Many cards offer rewards, often without an annual fee
No hard spending limit	Hard pre-set spending limit

Payment Obligations

With a charge card, you’re required to pay what you owe in full when you receive your monthly billing statement. With a credit card, on the other hand, you can make a full or partial payment, but you’re only required to make a minimum monthly payment.

Even if you’re waiting for a refund that hasn’t yet shown up as a credit on your statement, you’ll be expected to pay the full amount of your charge card bill. With a credit card refund, you’ll just have to make sure you pay at least the minimum amount on your current bill.

Availability

If you’re looking for a new card, you’ll find there are far more credit cards available than true charge cards these days. Even American Express, the only major card issuer that still offers charge cards, has gone with a more hybrid approach.

American Express still offers cards that don’t have a preset spending limit. But those cards now come with a feature that — for a fixed fee — allows a card holder to split up eligible large purchases into monthly installments.

There also are some fuel cards, typically geared toward businesses, that are true charge cards.

Credit cards also are generally easier to qualify for than the charge cards that are available. Even if you have a poor or limited credit history, you may be able to find a secured or unsecured credit card that suits your needs.

Acceptance

Whether you shop local most of the time or hope to use your card as you travel the world, you may want to look at the acceptance rates of charge cards vs. credit cards.

Your card may not do you much good if you can’t use it where you like. American Express says its cards can now be accepted by 99% of the vendors in the U.S. that accept credit cards. If you aren’t sure your favorite local boutique or grocer will accept a particular card, you may want to ask or look for the card’s network logo in the store window.

If you plan to use your card overseas, you may want to check ahead on the acceptance rate in that country and also find out if you’ll have to pay a foreign transaction fee. Charge cards tend to have a lower rate of acceptance overseas.

Costs

If you’re trying to decide between a charge card vs. a credit card, how much a credit card costs compared to a charge card — both in interest charges and fees — could be an important consideration.

Interest

You can find a full explanation of how your card issuer calculates interest in your card’s terms and conditions. But as noted above, if you carry forward a balance on your credit card, you can expect to pay interest on the outstanding amount.

According to the Federal Reserve, the average credit card’s annual percentage rate (APR) is currently around 22.8%. Your rate may be higher or lower, depending on your creditworthiness.

You may not have just one interest rate associated with your account either. Your account may have a different APR for purchases, for example, than for credit card cash advances or balance transfers. Or you might have a lower, introductory APR for the first few months after you get a new card. If, over time, you miss payments or make late payments, the card issuer also could decide to raise your APR.

Because you don’t carry a balance with a charge card, you don’t pay interest. But if you pay off your credit card balance by the due date every month, you also won’t have to worry about accruing interest on a credit card account.

Annual Fees

You won’t pay interest with a charge card, but you may end up paying a significant annual fee just to own the card. (The annual membership fee for an American Express Platinum Card, for example, is currently $695.)

Some credit cards also charge annual fees, but you can find many that don’t.

Rewards and Perks

You may decide it’s worth paying a higher annual fee to enjoy the extra benefits some charge cards offer. American Express, for example, has a reputation for offering its card holders prestigious perks, including travel and retail purchase protections, early access to tickets for concerts and other entertainment events, and special offers from partner merchants.

However, plenty of credit cards also come with special benefits, such as cash back rewards, travel rewards, retail discounts, and more. And many of those card issuers don’t charge an annual fee.

Both charge card and credit card issuers also occasionally offer generous welcome or sign-up bonuses to new card holders, so that might be another benefit worth looking at when you’re searching for a new card.

Before you sign up for any card to get the perks it offers, though, it can be a good idea to step back and assess whether it’s worth paying a higher annual fee (or accruing interest on a balance you can’t pay off) to reap those rewards.

Spending Limit

With a credit card vs. a charge card, you’ll know exactly how much you can spend, because your credit card will come with a pre-set limit. You can go online or use an app to check your credit card account at any time to see how much available credit you have.

Charge cards don’t have hard spending limits. But that doesn’t necessarily mean you can use your card to buy a car or take a trip around the world. Your card issuer may decline a charge if you’re spending more than it thinks you can afford.

How Card Choice Can Impact Your Credit Score

When it comes to what a charge vs. credit card can do for (or to) your credit score, there are few things you should know.

Inquiries

Whether you’re applying for a charge card or credit card, you can expect the card company to run a hard inquiry on your credit. This could temporarily lower your credit score, but usually only by about five points.

Payments

Whether you use a charge card or a credit card, paying your monthly bill on time is critical to building and maintaining a good credit record.

Payment history makes up 35% of your FICO® credit score, so consistency is key. If your payment is 30 days or more past due and your card issuer reports it to the credit bureaus, that negative news could remain on your credit report for up to seven years. And it could come back to haunt you when you try to borrow money to buy a car or house.

Utilization

Credit utilization (the percentage of your available credit that you’re currently using) makes up 30% of your FICO score, so it’s important to keep your credit card balances well under the assigned limit.

To maintain or positively impact your credit score, the general rule is that you should try not to exceed a 30% credit card utilization rate. If you’re using up a big chunk of the pre-set limit on your credit card, it could have a negative effect on your score.

Because charge cards don’t have a pre-set credit limit, it can be difficult to determine if a card holder is at risk of overspending — so neither FICO or VantageScore include charge card information when calculating a person’s utilization rate.

This can have both pros and cons for charge card holders. The advantage, of course, is that you don’t have to worry about negative consequences for your credit score if you spend a lot in one month using your charge card. On the flip side, though, if you have a large amount of available credit that you aren’t using, it won’t do anything to help your score.

Choosing Between Credit Cards and Charge Cards

Deciding whether to apply for a credit card vs. a charge card may come down to evaluating the benefits you’re hoping to get from the card and assessing your own spending behavior. Here are some questions you might want to ask:

•   Does the card offer unique, valuable perks you think you’ll use?

•   If there’s a high annual fee for the card, does it fit your budget and are the card’s perks worth the cost?

•   Do you have enough money, discipline, and organization to ensure your bill is paid in full every month? Or could there be times when you’ll want to make a partial or minimum payment and carry forward a balance?

•   Is your credit score good or excellent? If not, you may have more options and a better chance of qualifying if you apply for a credit card instead of a charge card.

•   If you think you’ll pay off your card’s balance every month, would a credit card still be a better fit because of the rewards, low or no fees, and wider acceptance from vendors?

Also keep in mind that you don’t necessarily have to choose. In fact, you could benefit from owning both a charge card and a credit card. You may find there are reasons to have both types of cards in your wallet.

Recommended: Charge Cards Advantages and Disadvantages

The Takeaway

The terms charge card and credit card are often used interchangeably, but they are not the same thing. A charge card must be paid off every month, so there’s no interest to worry about — but there may be a high annual fee to pay. A credit card allows the user to make a minimum monthly payment and carry forward a balance, but the interest on that balance can add up quickly.

Each individual user must decide which is the better fit for their needs. And a card’s benefits vs. its costs may be a deciding factor.

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 a credit card easier to get than a charge card?

Because these days there are more companies issuing credit cards, it may be easier to find one that suits your needs and has qualifications you can meet — even if you have a poor or limited credit history. There are very few charge cards available anymore.

Does a charge card build credit better than a credit card?

Both a credit card and a charge card can help or hurt your credit score, depending on how you use it.

When do credit cards charge interest?

Most credit cards come with a grace period, which means the credit card issuer won’t charge you interest on purchases if you pay your entire balance by the due date each month. If you fail to pay the entire amount on your statement balance, however, or if you make your payment after the due date, interest charges will likely appear on your next monthly statement.

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Photo credit: iStock/9dreamstudio

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 .

SOCC-Q224-1883221-V1

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An income of around $260,000 a year could allow you to afford a $900,000 mortgage, assuming you don’t have other significant debt, such as student loans. But a variety of factors determine how much house you can afford, including how much you have saved for a down payment and your credit history, to name two. The income needed for a $900K mortgage also comes down to the loan term, and interest rate.

Here’s a closer look at the variables that impact how much house you can afford.

Income Needed for a $900,000 Mortgage

How much income is needed for a $900K mortgage loan? Though mortgages don’t carry specific income requirements, you’ll need to show that you can afford closing costs (typically 2% to 6% of the home sale price), and the down payment.

Of course lenders also look at your income to assess if you can afford monthly mortgage payments over the life of the loan. Crunching the numbers with a home affordability calculator shows that the income needed for a home valued at $1,000,000 with a down payment of $100,000 is about $260,000. Note that multiple forms of income, such as dividends from investments, can count toward your gross income.

In many parts of the United States, a mortgage exceeding $766,550 is considered a jumbo loan. These larger mortgages typically have stricter lender requirements because they are nonconforming loans, meaning they’re not guaranteed by the government in the event of default.

So if you’re in the market for a $900,000 jumbo loan, you may need to put at least 10% down. Let’s suppose you qualify for a 30-year fixed rate mortgage with a 7% interest rate. Using a mortgage calculator, the monthly payment comes out to about $6,000 if you put 10%, or $100,000, toward a down payment on a property that costs $1,000,000.

Following the 28/36 rule, your home payments should be at or below 28% of your income. Total debt payments, including your mortgage payment, shouldn’t exceed 36% of your income. Using the example above, you’d need to earn $21,666 a month ($260,000 a year) to afford a $6,000 mortgage while still following the 28% guideline.

What Is a Good Debt-to-Income Ratio?

Your debt-to-income (DTI) ratio is calculated by dividing all your fixed monthly debts — like student loans or auto loans — by your gross monthly income. For a jumbo loan, a strong DTI ratio is essential to qualifying. Having a DTI ratio of 43% or less is recommended, though lenders may want to see a ratio as low as 36%.

What Determines How Much House You Can Afford?

A variety of factors determine how much house you can afford. So far, we’ve covered income, debt, and debt-to-income ratio. Additionally, your credit score and the amount you have saved for a down payment will impact your homebuying budget if financing a home purchase. If you have less saved for a down payment, you’ll need to demonstrate a strong credit history and that you can manage higher monthly payments.

Location plays a role in home affordability. A $900,000 mortgage goes a long way in the most affordable states. In pricier markets, a $900,000 mortgage can still open the door to homeownership, but with significantly less square footage.

Home affordability also varies between different types of mortgage loans. Certain government-backed loans let buyers put less money down, but this may mean being subject to private mortgage insurance.

Recommended: Cost of Living by State

What Mortgage Lenders Look For

What do you need to qualify for a $900,000 mortgage? Lenders look at a variety of factors when evaluating a borrower and setting the loan terms during the mortgage preapproval process. In terms of income, lenders prefer borrowers who have stable and predictable income. They’ll also consider your credit history, existing debt, down payment amount, and assets.

$900,000 Mortgage Breakdown Examples

A monthly payment on a $900K mortgage can vary widely depending on the type of mortgage and loan terms. Using a mortgage calculator with taxes and insurance included can give you a more exact estimate of your expected mortgage costs.

For example, suppose you secure a 30-year fixed-rate mortgage with a 6% interest rate. With a 10%, or $100,000, down payment, you’d have a total monthly payment (principal, interest, insurance, and taxes) of $6,604.

Increasing the down payment to 20% would cut the monthly payment to $6,000. Whereas a jump in interest to 6.5% would bump up the monthly payment to $6,264.

In the 20% down payment scenario, which has the lowest monthly payment, you’d need to earn $21,666 a month ($260,000 a year) to satisfy the 28/36 rule. Again, this assumes that you don’t have significant other debts to pay each month.

Pros and Cons of a $900,000 Mortgage

Financing a larger home purchase has its advantages and drawbacks. A $900K mortgage can mean more funds for renovations and other financial goals.

On the other hand, a jumbo loan or larger mortgage is usually tougher to qualify for. In the case of a jumbo loan, rates could be higher since this loan type isn’t guaranteed by Fannie Mae or Freddie Mac. And with a larger loan, you’ll see higher monthly payments and closing costs.

How Much Will You Need for a Down Payment?

Borrowers can expect to put 10% – 20% toward a down payment on a $900,000 mortgage. This amounts to $100,000 – $200,000, and doesn’t include closing costs. Certain government-backed loans can allow a smaller down payment, but borrowing $900,000 is only possible in designated high-cost areas.

Can You Buy a $900K Home With No Money Down?

You could buy a $900K home with no money down through a USDA loan or VA loan. However, getting a $900,000 USDA loan is only possible in a small selection of counties. The maximum amount for 2024 is $919,800 in designated high-cost areas.

Similarly, the limit on VA loans is below $900,000 in most U.S. counties. But some high-cost counties have maximum loan amounts of up to $1,149,825.

Can You Buy a $900K Home With a Small Down Payment?

If you don’t qualify for a USDA loan or VA loan, there are other options to consider. An FHA loan is a government-backed loan that only requires a down payment of 3.5% for borrowers with a credit score of 580 or higher. Unless you live in a high-cost area or purchase a multi-unit property, the FHA loan limit is capped below $900,000.

The limit for high-cost areas is $1,089,300 for a single-family home. Homebuyers in Alaska, Hawaii, Guam, and the U.S. Virgin Islands could go up to $1,633,950 with a FHA loan.

With a conventional, fixed-rate loan, certain borrowers can put as little as 3% – 5% down on a home purchase.

Is a $900K Mortgage with No Down Payment a Good Idea?

Buyers who lack savings but have steady income and strong credit might consider a mortgage with no down payment. Putting less down means borrowing more, and in turn, paying more interest over the life of the loan. You’ll also be starting out with zero home equity if you don’t put any money down. When you put less than 20% down, you’re typically also on the hook for paying private mortgage insurance.

Keep in mind that if your credit score and financial situation change after you purchase your home, you can always consider a mortgage refinance to land more favorable mortgage loan terms.

Can’t Afford a $900K Mortgage With No Down Payment?

If you can’t afford the higher monthly payments on a $900K mortgage with no down payment, there are steps you can take to improve your qualifications as a borrower.

Pay Off Debt

Tackling debt can improve your DTI ratio, effectively increasing your homebuying budget. Focusing on recurring debt that you can pay off in full in the near-term, such as credit cards or a personal loan, can deliver more immediate results.

Look into First-Time Homebuyer Programs

Are you a first-time homebuyer? If so, you could be eligible for down payment assistance to make homebuying more affordable. FHA loans allow qualified first time buyers to put just 3.5% down on a home. It’s also possible to finance your closing costs with an FHA loan.

Recommended: Finding Down Payment Assistance Programs

Cultivate Your Credit

Keeping your credit utilization — the percentage of credit you’re using on credit cards and other lines of credit — below 30%, if possible, can reflect well on your credit score. Payment history is also a significant component of your credit score. Ensure you’re making minimum monthly payments on any revolving credit every month.

Start Budgeting

After crunching the numbers on homebuying costs, setting up a budget can help you pay off debt or save up for a down payment. Budgeting is also a useful exercise for understanding how much you can reasonably afford in monthly mortgage payments.

Alternatives to Conventional Mortgage Loans

Homebuyers can consult a home loan help center to learn about other financing ideas, and may want to explore other means for buying a home besides conventional mortgages and government-backed loans.

•   Jumbo loans: Many lenders provide these mortgage loans, which exceed the maximum dollar limits set by the Federal Housing Finance Agency (FHFA).

•   Interest-only mortgages: Here, borrowers make smaller, interest-only monthly payments for a set period before having to cover principal and interest.

•   Balloon mortgage: Borrowers make low monthly payments for a short period of time before the entire loan balance comes due at the end of the term.

Mortgage Tips

A $900,000 mortgage is a big responsibility so before you wade into the mortgage market, make sure you understand some tips to qualify for a mortgage, such as understanding the difference between fixed-rate and adjustable-rate mortgages. Shop around and get prequalified with a number of different lenders to begin to understand what rates you might qualify for. These are just two of the many tips for shopping for mortgage rates.

The Takeaway

The income needed for a $900,000 mortgage depends on your personal finances and the type of home loan. Increasing your down payment, reducing recurring debt, and keeping up good credit habits could up your homebuying budget and help you land a lower interest rate.

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.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What income do you need for a $900,000 mortgage?

To afford a $900,000 mortgage, you’ll need to make $260,000 or more a year. Buyers with more money saved for a down payment could still qualify while earning less.

How much do I need to make for a $800K house?

You need to make at least $200,000 a year to comfortably afford a $800K house, assuming you don’t have significant recurring debt.

Can you buy a house with a $40K salary?

You can afford a house priced around $100,000 – $110,000 on a $40K salary. This assumes you have some money for a down payment and are not carrying significant debt, such as a student loan or auto loan.

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Photo credit: iStock/fizkes

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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.

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.

^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.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
SOHL-Q224-1838480-V1

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Regulation T, or “Reg T” for short, is a Federal Reserve Board regulation governing the extension of credit from brokerage firms to investors (also called margin accounts). In margin trading, Regulation T is used to determine initial margin requirements. An investor who fails to meet the initial margin requirements may be subject to a Reg T call, which is one type of margin call.

Understanding Regulation T and Regulation T calls is important when trading securities on margin.

What Is Regulation T?

Regulation T is issued by the Federal Reserve Board, pursuant to the 1934 Securities Exchange Act. The purpose of Reg T is to regulate how brokerage firms and broker dealers extend credit to investors in margin trading transactions. Specifically, Regulation T governs initial margin requirements, as well as payment rules that apply to certain types of securities transactions.

Margin trading means an investor borrows money from a brokerage to make investments. This allows the investor to potentially increase their investment without putting up any additional money out of pocket. For example, an investor may be able to put up $10,000 to purchase 100 shares of stock and borrow another $10,000 on margin from their brokerage to double their investment to $20,000.

Regulation T is central to understanding the inner workings of margin accounts. When someone is buying on margin, the assets in their brokerage account serve as collateral for a line of credit from the broker.

The borrowed amount is repaid with interest. Interest rates charged on margin accounts vary according to the brokerage and the amount borrowed. Trading on margin offers an opportunity to amplify returns, but poses the risk of steeper losses as well.

💡 Quick Tip: When you trade using margin, you’re using leverage — i.e. borrowed funds that increase your purchasing power. Remember that whatever you borrow you must repay, with interest.

How Reg T Works

Regulation T works by establishing certain requirements for trading on margin. Specifically, there are three thresholds investors are required to observe when margin buying, one of which is directly determined by Regulation T.

Here’s a closer look at the various requirements to trade on margin:

•   Minimum margin. Minimum margin represents the amount an investor must deposit with their brokerage before opening a margin account. Under FINRA rules, this amount must be $2,000 or 100% of the purchase price of the margin securities, whichever is less. Keep in mind that this is FINRA’s rule, and that some brokerages may require a higher minimum margin.

•   Initial margin. Initial margin represents the amount an investor is allowed to borrow. Regulation T sets the maximum at 50% of the purchase price of margin securities. Again, though, brokerage firms may require investors to make a larger initial margin deposit.

•   Maintenance margin. Maintenance margin represents the minimum amount of margin equity that must be held in the account at all times. If you don’t know what margin equity is, it’s the value of the securities held in your margin account less the amount you owe to the brokerage firm. FINRA sets the minimum maintenance margin at 25% of the total market value of margin securities though brokerages can establish higher limits.

Regulation T’s main function is to limit the amount of credit a brokerage can extend. It’s also used to regulate prohibited activity in cash accounts, which are separate from margin accounts. For example, an investor cannot use a cash account to buy a stock then sell it before the trade settles under Reg T rules. It may be beneficial to review the basics of leveraged trading to deepen your understanding, too.

Why Regulation T Exists

Margin trading can be risky and Regulation T is intended to limit an investor’s potential for losses. If an investor were able to borrow an unlimited amount of credit from their brokerage account to trade, they could potentially realize much larger losses over time if their investments fail to pay off.

Regulation T also ensures that investors have some skin in the game, so to speak, by requiring them to use some of their own money to invest. This can be seen as an indirect means of risk management, since an investor who’s using at least some of their own money to trade on margin may be more likely to calculate risk/reward potential and avoid reckless decision-making.

Example of Reg T

Regulation T establishes a 50% baseline for the amount an investor is required to deposit with a brokerage before trading on margin. So, for example, say you want to open a margin account. You make the minimum margin deposit of $2,000, as required by FINRA. You want to purchase 100 shares of stock valued at $100 each, which result in a total purchase price of $10,000.

Under Regulation T, the most you’d be able to borrow from your brokerage to complete the trade is $5,000. You’d have to deposit another $5,000 of your own money into your brokerage account to meet the initial margin requirement. Or, if your brokerage sets the bar higher at 60% initial margin, you’d need to put up $6,000 in order to borrow the remaining $4,000.

Why You Might Receive a Regulation T Call

Understanding the initial margin requirements is important for avoiding a Regulation T margin call. In general, a margin call happens when you fail to meet your brokerage’s requirements for trading in a margin account. Reg T calls occur when you fall short of the initial margin requirements. This can happen, for instance, if you’re trading options on margin or if you have an ACH deposit transaction that’s later reversed.

Regulation T margin calls are problematic because you can’t make any additional trades in your account until you deposit money to meet the 50% initial margin requirement. If you don’t have cash on hand to deposit, then the brokerage can sell off securities in your account until the initial margin requirement is met.

Brokerages don’t always have to ask your permission to do this. They may not have to notify you first that they intend to sell your securities either. So that’s why it’s important to fully understand the Reg T requirements to ensure that your account is always in good standing with regard to initial margin limits.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

The Takeaway

Regulation T is used to determine initial margin requirements — i.e. the amount of cash an investor must keep available relative to the amount they’ve borrowed. Margin trading may be profitable for investors, though it’s important to understand the risks involved. Specifically, investors need to know what could trigger a Regulation T margin call, and what that might mean for their portfolios.

An investor who fails to meet the initial margin requirements may be subject to a Reg T call, which is problematic because they are restricted from making additional trades until they deposit the 50% initial margin requirement. If the investor doesn’t have cash on hand to deposit, then the brokerage can sell off securities in the account until the initial margin requirement is met.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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Photo credit: iStock/loveguli

SoFi Invest®

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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