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Biotech investing can be an exciting world or established players and many startups. Here’s a look at what you need to know before investing.

The average salary in the U.S. is $66,622, according to the latest data from the Social Security Administration. How your salary compares will depend on your industry and skilI set, as you’d expect. What you might not realize is that your salary is also greatly influenced by where you live, since salaries go hand in hand with the cost of living.

Here’s a closer look at the average salary in the U.S. and how income varies from state to state.

What Is the Average US Salary (2025)

The national average salary is $63,795. That is the sum of all incomes divided by the number of workers. Where someone lives, their industry, education level, and current demand for that job all contribute to how much a worker earns per year.


💡 Quick Tip: Online tools make tracking your spending a breeze: You can easily set up budgets, then get instant updates on your progress, spot upcoming bills, analyze your spending habits, and more.

Average Salary vs Median Salary: What’s the Difference?

The Bureau of Labor Statistics (BLS) provides data on median pay. As of Q4 2024, the median weekly earnings of full-time workers was $1,192, or $61,984 per year. The median is the midpoint in the data set, with 50% of incomes falling above that figure, and 50% below.

Why are the average and median income figures different? With averages, unusually high or low numbers can skew the results. For instance, multi-millionaires or billionaires might drive the average higher than what the typical worker actually makes. The median is less affected by outliers.

US Average and Median Salary by State in 2025

The following chart shows both the average and median income (in single income households) in each state, according to data from Forbes and the U.S. Census Bureau.

Recommended: Salary to Hourly Calculator

Why Do States Have Different Average Salaries?

The chart shows that the average salary in some states is quite different from the average salary nationwide. That’s partly because the cost of living, which affects how much a company pays its employees, varies significantly by state.

Also, inflation impacts states to varying degrees.

In addition, industries with a concentrated presence in certain states — such as banking or automobile manufacturing — can affect the overall quality of job opportunities in that area.

Which Regions Pay the Most?

Salaries tend to be higher in some areas of the country. Cities on the West Coast and in the Northeast have some of the highest average salaries:

•   Massachusetts

•   New York

•   Washington

•   California

•   New Jersey

•   Connecticut

•   Maryland

Remember, while these states have higher incomes, they may also have a much higher cost of living and higher housing prices.

Recommended: 25 Highest-Paying Jobs in the US

Which Regions Pay the Least?

The South is home to states that tend to pay the least:

•   South Carolina

•   Kentucky

•   Louisiana

•   Alabama

•   Arkansas

•   West Virginia

•   Mississippi

To determine what your personal cost of living is, try tracking your expenses with a free budget app for a few months.

Recommended: Biweekly Money-Saving Challenge

Should You Move to Make More Money?

It’s important to remember that just because a state has a higher average salary, that doesn’t mean it’s more profitable for workers to live there. Higher salaries tend to correlate with a higher cost of living.

Before making a major move, first try living below your means. One reason that people who make more money still have trouble paying their bills is the phenomenon of lifestyle creep. This is when your so-called needs expand to consume your current salary.

One of the most effective ways to counteract lifestyle creep is to downsize your home. Reducing your housing expenses to less than 30% of your gross income can help you pay down debt, increase savings, and become more conscious of how lifestyle choices affect spending.


💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

The Takeaway

The average annual average salary in the U.S. is $66,622. The median annual salary, which is often less skewed by outlying numbers, is $61,984. It’s worth noting that average and median salaries vary quite a bit by state. States in the Northeast and on the West Coast tend to pay higher salaries, while those in the South often pay less. What’s stopping people from moving to a higher paying state? Often, it’s housing prices, which rise along with the cost of living in “richer” states.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

How much do the top 10% of Americans make per year?

The top 10% of Americans earn $167,639 per year. Some top earners live in higher cost of living areas, so it can be more revealing to see how much the top 10% earn in your state.

What percentage of Americans make over $75K?

Only 12.1% of Americans make in the $75,000 to $99,999 range. An additional 17% make between $100,000 and $149,000, and 15.7% earn in the $50,000 to $74,999 range.

Which U.S. state has the highest salary?

Massachusetts is the state with the highest annual income of $76,600. This salary is significantly more than the national average salary of $63,795.

About the author

Jacqueline DeMarco

Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.


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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If you travel, you may wonder in which circumstances tips are customary and when they aren’t needed. As you plan a trip, you are likely sticking to a budget and don’t want to overlook this area. But money isn’t the only consideration. You also likely want to do the right thing: In some countries, tipping is a must. In others, it’s optional, and in a few, it’s considered downright rude. Learn the ropes here.

Who Should You Tip While on Vacation?

As you travel, there are many people you could tip: the ones who help you into the airport, out of the airport, into your hotel, out again, into a taxi…the list goes on and on. Most people want to be polite and tip appropriately but don’t want to burn through more money than they have to.

To help you manage this aspect of travel, here are some of the people you probably do want to tip, plus some insight into how much to tip.

Luggage attendants can help get your luggage from the curb at the airport to the check-in counter. You can definitely manage the process on your own, but if you’re wrangling young kids, traveling with pets, or simply packed extra-jumbo bags so you’d have loads of outfits to choose among, it’s nice to get help.

Traditionally, it’s polite to tip $2 for your first bag and $1 for any additional luggage. If your bags are legitimately humongous, consider tipping the full $2 for each one. This expense can’t go on your airline credit card or any other kind of plastic, so be sure to keep cash on you.

Note: Airline employees stationed outside the airport may not be able to accept tips, so be prepared for your bills to be rebuffed if one of these workers assists you.

Car valets park and return your car directly from the curb of hotels and restaurants. It’s a major convenience and generally deserves a monetary thank-you. How much to tip? In the $2 to $5 range when your car is returned to you. Tipping when your wheels are first whisked away is generous, though not necessary.

Housekeepers should be tipped each day during your stay, whether you splurged on luxe accommodations or figured out how to save on hotels and booked a rock-bottom rate. Housekeepers freshen your room, replace those damp towels, and otherwise make it a pleasure to return after a long day of visiting museums, lolling on the beach, or whatever else you’ve been up to.

The best method is to leave the cash in a marked envelope (some hotels provide them for just this purpose) or folded in some hotel stationery that is clearly marked “For Housekeeping.” Best practice suggests $1 to $5 each day of your stay.

Room service is a luxurious treat during vacation. Some hotels automatically include a gratuity on your bill. If you don’t see it on your receipt, however, the answer to the “to tip or not to tip” quandary is that it’s likely a good idea to add 15% to 20%, just as you would in a restaurant.

Drivers help in a few different travel scenarios. If you’re taking a taxi or rideshare, consider tipping either a few dollars for short rides and 10% to 20% for long rides. Add an extra tip if the driver helps with your luggage. It’s also customary to tip shuttle drivers, typically from $1 to $2 per person in your party.

Tour guides share their expertise and passion with you, as they lead you around the best snorkeling spots in Tulum or show you the hidden treasures of Paris. Their services can be a memorable highlight of your summer travel plans, so it’s nice to tip them, especially when you have a great experience. An easy rule of thumb is to tip 10% to 20% of the tour’s cost for your group or $5 to $10 per person.

Recommended: Breaking Down the Different Types of Credit Cards

Why Tipping Is Important

Tipping is by no means a requirement, but in many economies throughout the world (including the U.S.), it’s a way to help workers make ends meet. Many service industry employees are not guaranteed minimum wage.

In fact, in most states in America, there is a much lower minimum wage for tipped employees; hourly rates can dip below $3. While economic policies are a larger discussion, the fact of low wages can help put things in perspective and show the very real value of rewarding workers for a job done well.

For this reason, when budgeting for an upcoming trip, it’s wise to think about your plans, estimate a tip budget, and include that as part of where you keep your travel fund. It’s one of those incidentals that can add up and throw your financial planning out of whack if not accounted for.

Also, since tips are often given in cash rather than plastic (sorry, you can’t reap those credit card rewards this way), you may want to plan ahead to get some foreign currency for this purpose.

Recommended: How Families Can Afford to Travel

Tipping Guidelines by Destination

You likely do a good amount of research before traveling, scoping out cool hotels, amazing restaurants, and an affordable car rental. So why not, before your next trip, familiarize yourself with tipping customs in different parts of the world? It’ll help you prepare for the costs coming your way and make you feel more comfortable and in control while traveling. Here’s some useful intel:

US

Across the U.S., it’s customary to tip up to 20% for restaurant servers, bartenders, and drivers. In some cities, like New York, the answer to “How much to tip?” is nudging up to 22% or even 25%.

Europe

If you’re planning an epic family reunion trip to France, Spain, Italy, or other European countries, service tips may already be included in your restaurant bill in Europe. Look on the menu; it will probably say so. If it’s not, a maximum 10% tip is recommended. When it comes to your hotel stay, you might tip one euro per bag if a staffer helps you, and leave one euro per day for housekeeping.

Mexico and the Caribbean

Whether you’re heading to Cancun, Mexico City, or the Bahamas, be prepared to tip. Restaurant gratuities usually average between 10% and 20% in Mexico and the Caribbean.

If you’re staying at a resort, remember to keep cash on hand for bellhops, housekeeping, and other employees. Typically, a dollar or two per day/interaction is appropriate.

Central and South America

Heading to Argentina, Bolivia, Colombia, or beyond? Here’s the scoop: The standard tip rate for Latin America is 10% to 15% in restaurants. Some countries (like Brazil) may include the gratuity in your bill, so look carefully at the check before paying for your feijoada. Not sure? There’s no harm asking your server; you’re likely not the first person to do so.

When it comes to hotel staff and drivers, you’ll need a dollar or two (or the equivalent), so it’s wise to have some cash stashed in advance. Also know that tour guides depend on tips, so $10 to $20 of the price is appreciated.

Recommended: Where to Find Book Now, Pay Later Travel

Places You Probably Don’t Have to Tip

Here’s a travel budget bonus: There are a number of countries you might visit that do not have a tipping custom. In fact, it may even be considered rude or insulting to leave a tip. So before you add a tip when paying with your travel credit card or plunking down cash, double-check local etiquette. Here, some pointers:

Australia

Tipping is not vital when Down Under. Compared to the U.S. and many other countries, Australia has a high minimum wage. That’s one of the reasons why tipping in the service industry is seen as optional.

China

If you are going to be exploring China, know that tipping is actually taboo there. And in some places like airports, it’s illegal because it can be seen as a bribe. Stay polite and safe by skipping the tip.

Japan

Heading to Tokyo, Kyoto, or other locations in Japan? Heads up: Tipping is not customary in Japan and is actually considered rude. Although it may feel odd, when wondering whether to tip or not to tip, just don’t do it. Save your money for more shopping or sushi. The one exception may be if you’ve hired a private guide or translator. In that situation, a small amount of cash, presented discretely, can be appropriate.

Scandinavia

Iceland and Scandinavia typically don’t expect you to tip. You might round up a restaurant tab if there isn’t already a service charge added, but these aren’t countries where a 20% gratuity is routine. Taxi drivers don’t expect tips either.

The Takeaway

Preparing for a trip often involves budgeting, and a key way to wind up on or under your budget is to anticipate what costs are coming your way. Tips are one of those incidentals it’s easy to forget about and can throw your financial planning for a loop. By understanding local tipping customs, you can have a smooth, on-budget trip wherever you may go. What’s more, you’ll know exactly what to expect so you can travel with confidence. You can know how much cash to have on hand or when to add a tip to a restaurant credit card bill

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

Are tourists always expected to leave a tip?

It depends on where you’re staying. Countries in North and South America, Europe, and Africa typically have tipping customs, particularly at restaurants and resorts. But Asian and Pacific countries like Australia, Japan, and China often do not incorporate tipping into their cultures — and it can even seem impolite.

Who are you supposed to tip at the airport?

In many countries (with China being an exception), it’s polite to tip a baggage handler who carries your luggage to the check-in counter. Some, however, may be unable to accept tips, depending on their employer’s policies.

How much do you tip internationally?

How much to tip internationally varies tremendously. Research each country individually to understand tipping customs. While it’s traditional in many foreign countries, it’s also rude (and sometimes illegal) to tip in others.

Photo credit: iStock/DragonImages

**Terms, and conditions apply: This SoFi member benefit is provided by Expedia, not by SoFi or its affiliates. SoFi may be compensated by the benefit provider. Offers are subject to change and may have restrictions, please review the benefit provider's terms: Travel Services Terms & Conditions.
The SoFi Travel Portal is operated by Expedia. To learn more about Expedia, click https://www.expediagroup.com/home/default.aspx.

When you use your SoFi Credit Card to make a purchase on the SoFi Travel Portal, you will earn a number of SoFi Member Rewards points equal to 3% of the total amount you spend on the SoFi Travel Portal. Members can save up to 10% or more on eligible bookings.

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Many people struggle to keep up with the demands and expenses of daily life, which can create stress and anxiety. That’s why some choose a minimalist lifestyle: Fewer possessions make for easier management. Minimalists strive to eliminate anything in their life that does not serve their purpose. This leads to more physical, emotional, and financial space.

If the concept of minimalism appeals to you, read on to better understand what a minimalist lifestyle is, its benefits, and how to start on the path to a simpler, more manageable, and possibly more affordable lifestyle.

What Is a Minimalist Lifestyle?

Minimalist living is uncluttered by superfluous items like luxury cars, excessive clothing, and purely decorative furnishings. There can be many reasons someone chooses a minimalist lifestyle; they might want to simplify their life to reduce stress, improve their health, or reduce harm to the environment. They may also want to cut back on expenses and improve their budgeting and finances.

Recommended: Free Credit Score Monitoring

Surprising Benefits of a Minimalist Lifestyle

When you have less stuff, it follows that you have less to worry about. A minimalist lifestyle allows you to carry less literal and metaphorical baggage around.

Another benefit is that minimalists buy fewer things, which can allow you to save money. From a holistic perspective, minimalism reduces consumerism, and that can benefit the planet.

How to Live a Minimalist Lifestyle

Living a minimalist lifestyle can seem daunting for some, requiring a mindset shift. Here’s a window into a more minimalist mindset and lifestyle to give you a taste of what it involves. And don’t forget as you read that there are benefits to living below your means.

Invest in Experiences

Rather than collecting things and possessions, a minimalist lifestyle emphasizes experiences. Minimalists spend, just in a more deliberate way. For example, minimalists may spend on vacations and concerts rather than on cars and jewelry.

Audit Your Life

Auditing your life involves deciding what is most important and eliminating anything superfluous. Deciding what is most important can be difficult, but some questions to ask yourself are: How am I doing mentally and physically? What’s important to me now that perhaps wasn’t before? The answer to these and similar questions can help you pinpoint your core values and priorities.

A free budget app can help you audit your spending and evaluate how much of it is really necessary.

Eliminate Needless Expenses

A meaningless expense to one person may be valuable to another. That’s why conducting a life audit is important to help you decide which expenses are not serving your purpose. For example, a person might discover that buying gas is often unnecessary if they can manage without a car most of the time. Or that mid-price brands and gently used items can be just as nice as luxury goods.

Set Limits and Delegate

A minimalist lifestyle is easier to control. Setting limits and delegating is one way to live a minimalist lifestyle because you have less to manage. For example, you might use an accountant to do your taxes, or hire someone to manage your website. You might have fewer screens or electronics or downsize to a smaller home.

Recommended: Does Net Worth Include Home Equity?

Honor Your Priorities

The goal of auditing your life is to establish priorities to eliminate what doesn’t align with them. Part of the journey to minimalism is learning to appreciate what you have and not constantly desire new things. Perhaps you and your partner decide to live on a single income while one of you cares for the family. You may also earn less and have to economize.

Minimalist Lifestyle Tips

How do you implement a minimalist lifestyle? Because the changes can be profound, try making small changes at first as you gradually adjust to a new mindset.

Recommended: What Is the 50-30-20 Budget?

1. Declutter Your Environment and Your Mind

A great place to start is to declutter your environment. Start with your home, your workspace, your car. Get rid of things you haven’t used in a while or that you are just hanging onto in case you need them. As the space around you becomes less messy, you might find your thinking becomes more clear. You can also make some money by selling your unwanted stuff or donate items.

2. Be a Purposeful Not Prolific Consumer

Minimalists still make purchases, but the emphasis is on quality rather than quantity. An example is choosing to use one credit card that serves many purposes rather than five because each one comes with different rewards. Yes, you may benefit from free miles and cash back, but you will also have to buy more to earn those points and rewards, which is consumerism, the antithesis of financial minimalism.

3. Digitize Movies and Books

Most of us have bookcases full of books that sit and gather dust. It’s fine to keep some treasured items and classic novels, but you can also download e-books or visit your local library. Declutter your home of old DVDs, CDs, and books you don’t need.

4. Recycle and Reuse

Reusing shopping bags, refilling a water bottle instead of buying bottled water, or taking your own cup to Starbucks are ways to cut back on trash and single-use products. You’ll save money and help the environment.

5. Get Organized

As you declutter, you’ll find ways to be more organized. Find a space for things you want to keep, and use storage bins and organizers. When everything has a place, you’ll waste less time trying to locate things, and you’ll be more motivated to put things back when you’ve used them.

Recommended: The 52 Week Savings Challenge

The Takeaway

A minimalist lifestyle is appealing, considering how busy and cluttered daily life can be. You don’t have to embrace full-on minimalism immediately but can take small steps, such as establishing goals and priorities, decluttering your environment, and organizing. You can also reduce your expenses and financial obligations this way. As you progress, you may find that your mind clears, your life slows down, and you are able to budget more appropriately too.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

SoFi helps you stay on top of your finances.

FAQ

How do you live a minimalist lifestyle?

Living a minimalist lifestyle requires prioritizing and eliminating things that do not align with your values. The process of elimination will be different for everyone, but it does not have to be quick or painful. Just removing one thing or downloading a budgeting and money tracking app can help you achieve a simple minimalist lifestyle.

What is an example of a minimalist?

An example of a minimalist is someone who lives with very little furniture, or none at all, or someone who moves to a smaller home. A less extreme version of a minimalist might be someone who simplifies things by clearing items from countertops, buys few clothes, or chooses a vegan diet.

What is the 90 rule for minimalism?

The hardest part of achieving a simpler minimalist lifestyle is decluttering. How do you decide what to get rid of? The 90 rule can help. Choose a possession, and ask yourself if you’ve used that item in the past 90 days. If not, then it’s a candidate for elimination from your life because it is not currently serving a useful purpose.

Photo credit: iStock/Pramote Naksomrit

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.


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.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

SORL-Q125-008

A credit card is a small, rectangular piece of plastic or metal that lets you make purchases. Whether you’re buying lunch or a new piece of furniture, a credit card enables you to borrow funds from a credit issuer to pay the merchant. Then, every month, you’ll receive a statement in the mail with your balance, which you’ll want to pay off every billing cycle. Otherwise, you’ll owe interest on the remaining amount.

While the concept sounds simple, it’s easy to rack up debt if you’re not careful. With that in mind, here’s credit cards explained in-depth.

Credit Card Meaning

Banks and other financial institutions issue credit cards to consumers to extend revolving lines of credit. A revolving line of credit means the cardholder can borrow money up to their credit limit and then repay it on a continuing basis.

With other lines of credit, like a personal loan, you take out a lump sum amount and agree to repay it within a specific timeframe. During this timeframe, you make fixed installment payments. On the other hand, with a credit card, you can repeatedly borrow against the limit, which gives you more flexibility to use the card as needed.

When you receive your credit card, you’ll note several different numbers on it. There’s the credit card account number, alongside your name and the credit card issuer’s logo. Also on a credit card are the credit card expiration date, which marks when the card is valid through, and the CVV number on a credit card, which offers an extra layer of security in purchases made online or over the phone.

Recommended: What Is a Credit Card CVV Number?

How Does a Credit Card Work?

While there are different types of credit cards, this is the basic way they work. Once you have a new credit card in hand, you can use it to make purchases at places that accept credit card payments. Then, every month, you’ll receive a statement either electronically or in the mail, depending on your preference. The statement will include all purchases, your outstanding balance, and the minimum monthly payment due.

You’re required to make at least the minimum payment on your account to keep it open and in good standing. However, you also can opt to pay your entire balance in full or decide on another amount (as long as it meets the minimum payment requirement). If you were to pay an amount that exceeds your total balance, then you’d end up with a negative balance on your credit card.

If you aren’t able to make the minimum credit card payment, the outstanding balance will roll over to the next month and begin accruing interest and fees — which can significantly add up over time. Therefore, it’s best to get in the habit of paying off your credit card every month to avoid paying an extremely high amount of interest. But, if your finances don’t allow you to pay the entire balance, you could make smaller payments throughout the month to minimize the amount of accumulating interest.

To ensure you make your monthly payments, you can usually set up autopay for the minimum payment. This way, you won’t miss a payment and get charged a late fee. Unfortunately, late payments also can end up on your credit report, which can negatively affect your credit score.

How Does Credit Card Interest Work?

Every credit card comes with an annual percentage rate (APR), which represents the annualized cost of borrowing including interest and fees and marks an important part of how credit cards work. In general, credit cards are considered to have high interest rates vs. some other forms of credit, such as personal loans.

Some credit cards have more than one APR, such as a balance transfer APR, an introductory APR, or a cash advance APR. While introductory APRs are usually lower than the standard rate but only last for a promotional period, cash advance APRs are typically higher than the standard purchase APR.

You will pay interest based on the APR on a credit card if you have an outstanding balance that carries over from one month to the next. Credit issuers use your average daily balance, interest rate, and the number of days in the billing cycle to calculate the interest amount.

Usually, credit issuers offer a grace period where interest will not accrue. This period is typically between the statement date and due date, commonly 21 days.

Credit vs. Debit Cards

They may look alike, but there are notable and important differences between credit cards and debit cards. For starters, you’re not borrowing funds with a debit card. Instead, you’re drawing on funds in the bank account attached to the debit card. As such, you can’t incur interest charges, nor can you rack up debt. However, you can’t use a debit card to help establish your credit.

In general, debit cards offer less robust consumer protections against financial fraud and theft than credit cards do. They also don’t typically offer rewards or other benefits that credit cards can have.

6 Common Types of Credit Cards

Now that you understand how credit cards work, here are some available credit card options.

1. Reward Cards

You can earn cash back, points, or miles when you spend money using a rewards credit card. Some credit cards may also offer a sign-up bonus. For example, a credit card could offer 100,000 points when you spend $4,000 or more within the first three months of enrolling.

You can usually find a card offering rewards that coincides with your spending habits. For example, if you love shopping at a particular store, retail-branded cards have lucrative benefits for frequent shoppers.Some programs, like SoFi Plus, provide exclusive benefits that go beyond standard rewards, offering additional perks for members who qualify.

Keep in mind that you typically have to have a good credit score to qualify for a rewards credit card. But, even if you do qualify, it’s essential to keep your spending habits in check. Reward cards incentivize you to spend money, so you don’t want to end up overspending and getting into a pile of debt you can’t climb out of.

2. Credit Builder Cards

If you have little to no credit or need to build your credit, a credit builder credit card is a viable solution. You’ll likely start with a lower credit card limit and an APR that’s higher than the average credit card interest rate to reduce the credit card issuer’s risk.

Credit builder credit cards usually don’t come with the bells and whistles that rewards cards offer. Instead, the card can help you build your credit. With that said, you’ll want to use your credit card responsibly, making on-time monthly payments and paying off your balance every month. Not doing so could negatively impact your credit history and cost you a lot of money.

3. Balance Transfer Cards

Do you have a high-interest outstanding credit card balance? Using a balance transfer credit card is one solution for helping you tackle your debt. Balance transfer credit cards let you move your current credit card debt to a new account with a lower interest rate. Additionally, transferring your balance can mean you’ll only have to stay on top of one payment a month, rather than multiple.

Having a good credit score can help you qualify for a balance transfer credit card. If you qualify, you could receive a lower ongoing rate or even a 0% introductory rate, which usually will last for six to 18 months. You’ll want to try to pay off your balance within that promotional period, before the higher APR kicks in.

Note that balance credit cards often charge a fee for transferring a balance — usually 3% or so of the amount transferred. So, make sure you factor in the additional fees before you move over your existing balance.

4. Secured Credit Cards

Another option for those with little to no credit or poor credit history is a secured credit card. With a secured credit card, you make a refundable deposit, which protects the card issuer from defaulted payments. If you default, the credit card issuer can use the deposit to recoup the loss.

Your deposit is usually the amount of your credit limit. For example, if you are approved for a $500 limit, you may need to put down $500. Though your deposit will be tied up while the account is open, a secured credit card can allow you to build your credit when used responsibly. Just keep in mind that while secured credit cards are generally easier to qualify for, they also tend to have higher APRs and fees.

If you decide to close a secured credit card account, you can usually get your deposit back. The card issuer may also give you the option to upgrade to an unsecured card if you’ve proven your creditworthiness. In this case, you’d receive a refund as well.

5. Travel Credit Cards

If you’re a frequent flier or visit hotels often, a travel credit card can be a lucrative choice. Many airline and hotel brands have credit cards that let you earn miles, points, or rewards to use toward your travel adventures. Some credit cards may also come with a sign-up bonus or extra perks such as free checked bags, access to VIP airport lounges, and travel insurance.

When selecting a card, you’ll want to find the card that makes sense for the way you travel. That way, you can get the most out of your credit card. Travel credit cards usually require applicants to have good to excellent credit for approval. So, before applying, make sure to check your credit score to see if it’s acceptable.

6. 0% Introductory APR Credit Cards

If you’re getting ready to make a big purchase, a 0% introductory APR credit card might be worth considering. With this type of credit card, the card issuer gives you a 0% introductory rate to make purchases during a specific time frame. This way, you can make the purchase without paying interest on the expensive item(s).

However, you’ll want to make sure you repay the entire amount before the introductory period ends to avoid interest. Before you swipe, make sure you have a plan to pay off the balance within that time frame.

Also note that to qualify for a 0% introductory APR credit card, you usually must have good to excellent credit.

Pros and Cons of Credit Cards

Here’s an overview of the pros and cons of credit cards, which are helpful for anyone just getting familiar with the credit card definition to be aware of:

Pros

Reasons a credit card can be worthwhile include:

•   Convenience. A credit card offers much greater convenience than, say, carrying around a wad of cash. You can easily swipe or tap your card at any merchant that accepts credit card payments, which the vast majority do.

•   Pay over time. Another benefit of a credit card is that it allows you to pay over time for a purchase. Say you’re in an emergency and need to access funds immediately, but know you’ll be good to pay back the amount soon. Or maybe you’re making a big purchase and don’t want to have to shell out for it all at once, instead spreading out payments throughout the month.

•   Build positive credit history. Credit cards give you the means to establish a strong payment history, which can help boost your credit score. When you need to apply for a personal loan or mortgage in the future, a higher credit score can help you qualify for better terms and rates.

•   Track spending. Credit cards are valuable tools for budgeting since many cards let you track your spending on an app or online. Also, some credit cards give you the ability to categorize your expenses to see where your money is going and make adjustments accordingly.

•   Get fraud protection. If your debit card information is stolen, fraudsters can directly access your bank account. But, if you use a credit card, you usually have more fraud protection benefits in places such as purchase protection and identity theft protection. For instance, you can dispute a credit card charge and even receive a credit card chargeback.

•   Earn rewards. Many credit cards offer a reward program like SoFi Plus that gives you points or cash back when spending money. For example, you could earn money for traveling, shopping, or even statement credits.

Cons

Remember, while credit cards are a valuable financial tool, they can also hinder you if not used responsibly. Here are some downsides to keep in mind:

•   Potential to damage credit. Just as you can positively impact your score with a credit card, you can also negatively affect it.

•   Possible to rack up debt. Credit cards can make it easy to rack up a mountain of debt that can continue ballooning, thanks to interest. It’s not easy to get rid of credit card debt either (for instance, here’s what happens to credit card debt when you die).

•   Interest. Credit cards generally have higher APRs compared to other types of debt — usually well into the double digits. It can make purchases much more expensive if you’re paying a hefty amount of interest on top of the actual cost.

•   Fees. Another downside of credit cards is the potential to incur fees. Some are avoidable, like late fees or cash advance fees, while others can be harder to avoid, such as if your credit card of choice charges an annual fee.

How to Apply for a Credit Card

Before you apply for a new credit card, you’ll want to check your credit score. You can pull a free copy of your credit report at AnnualCreditReport.com. Knowing your credit score will help you determine whether you meet the approval requirements for the cards you’re interested in.

Once you decide on some card options, you can usually get prequalified online. If you prequalify for a card, your approval odds could be in your favor (though you’re still not actually approved). Also, when companies process your preapproval, they only complete a soft credit inquiry, which won’t impact your credit like a hard inquiry does. However, when you’re ready to apply, the credit issuer will conduct a hard credit inquiry.

If you’re approved for the card you apply for, you should receive your credit card in the mail within 14 days.

The Takeaway

A credit card, in simplest terms, is a physical card you can use to make purchases and pay bills. A credit card typically comes with a credit limit, and you’ll receive a statement each month that details your purchases, the outstanding balance, and the minimum payment due. You’re required to pay the minimum amount due each month in order to remain in good standing with the credit card issuer and avoid negatively impacting your credit score. Paying off your balance in full each month enables you to avoid interest charges.

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 are the main differences between credit and debit cards?

Debit cards use the money in your checking account to pay for purchases. When you make a purchase using a credit card, on the other hand, you’re using a line of credit to borrow money. Therefore, you usually have to pay interest on your transactions with a credit card if you don’t repay your balance right away.

How do I choose a credit card?

It’s helpful to select a credit card that matches your needs and financial habits. You’ll also want to make sure you meet the card issuer’s approval criteria. For example, if a credit card requires a credit score of 700 and your score is 650, you may have to explore other options or take steps to build your credit before applying.

How long does it take to get a credit card?

Once you submit a credit card application, it may take just minutes before you’re approved. Usually, you’ll receive your credit card within 14 days of approval. You can call the credit issuer and request expedited processing if you need your credit card sooner.

Photo credit: iStock/Nodar Chernishev

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.


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Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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