What is green investing — and how can it help make the world a better place (while making investors money)? Here’s what investors need to know.
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A joint credit card account is a way for you and a spouse, partner, family member, or trusted friend to co-own a line of credit. A joint credit card is in both of your names, meaning both parties are equally responsible for the debt that the card accrues.
Joint credit cards can make sharing finances with a domestic partner easier, but if you’re not on the same page about using the card and paying off debt, it could mean trouble for your credit score and your relationship. Here, learn the full story on joint credit cards and their pros and cons.
A joint credit card allows two people to fully share in the responsibility of spending with a credit card and paying it off. Each cardholder receives a physical card to use, and each also has full access to credit card statements and payments.
Otherwise, a joint credit card operates just like a traditional credit card — with a credit limit and interest rate on borrowed funds. If you carry over a balance month to month, that balance will accrue interest, and both joint account owners are equally on the hook for paying it back, even if one person is doing most of the spending.
Because a joint credit card is in both owners’ names, it impacts both users’ credit scores. Making regular monthly payments in full and maintaining a low credit utilization could build both cardholders’ scores. On the other hand, late payments and accumulated debt might bring credit scores down.
Recommended: When Are Credit Card Payments Due?
Joint credit card accounts are just one type of shared credit card. Before deciding to apply for a joint credit card, consider whether adding someone as an authorized user on a credit card might be a better option for your situation.
Instead of applying for a credit card with a co-owner, you can make someone an authorized user on an existing credit card. Unlike with a joint account credit card, only one person serves as the cardholder and bears the full responsibility of the card.
The authorized user, on the other hand, can get their own physical card and use it as they see fit. However, the authorized user cannot make larger changes to the card, like requesting an increase in credit limit.
Some, though not all, credit card issuers report authorized users’ activity to the three major credit bureaus. Assuming the main cardholder uses the card responsibly (meaning they make on-time payments and keep credit utilization low), this can reflect well on the authorized user and potentially improve their credit score.
Adding an authorized user can be a good solution for spouses or domestic partners with shared expenses. If one partner has a strong credit score but the other is struggling, the struggling partner might benefit from becoming an authorized user on the other’s card. Additionally, parents who want their children to learn about using a credit card or find comfort knowing their teenage kids have a spending option in emergencies might also benefit from a card with an authorized user.
A caveat: If the main credit cardholder mismanages their credit card and the card issuer reports authorized users to the credit bureaus, this could potentially lower the authorized user’s score rather than helping to build it.
As previously mentioned, joint cardholders share equal responsibility for how the card is used and paid off. Just as there are pros and cons of joint bank accounts, this arrangement can have benefits and drawbacks. A joint credit card enables spouses and domestic partners to approach their finances on equal footing, but a poorly managed card can have major negative impacts on the other.
Sharing a joint credit card requires implicit trust between the co-owners. Partners who disagree about managing finances might not find a joint credit card a good option.
Here’s a closer look at the differences between authorized users and joint accounts.
Joint cardholders share the same level of privileges on a credit card. Authorized users, however, cannot increase the credit limit or add additional authorized users. On top of that, primary cardholders can sometimes impose spending limits on authorized users.
Two co-owners share a joint credit card account. With an authorized credit card, there is a single primary cardholder and one or more authorized users. The max number of permissible authorized users varies by card issuer. Some may let you add up to five.
Both co-owners share equal responsibility for a joint credit card account. Authorized users are not responsible for payments, but how the credit card is managed can impact the authorized user’s credit score.
Both joint credit cards and cards with authorized users can impact credit scores of everyone attached to the card. Authorized users just have less control over how the card is managed, so they must put their faith in the hands of the primary cardholder.
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What are the benefits of a joint credit card? Here are some potential perks of this setup:
• Equal control: Spouses and domestic partners who want equal control of their finances can benefit from a joint credit card, which affords them equal access to spending, statements, and payments.
• Convenience of one shared card: If you share finances with a partner, having one credit card with one payment date might be easier than juggling multiple cards and due dates.
• Potential to boost credit score or get a better rate: If one co-owner lacks a credit history or has a lower credit score, being a co-owner on a well-managed joint credit card could build their score. The person with the lower score might even qualify for a card with a better rate by applying with a joint cardholder.
There are some drawbacks to joint credit cards, however:
• Shared repercussions for mismanagement: If one co-owner maxes out the card or misses a payment they said they would make, both cardholders share the burden, which can include late fees, a credit score impact, or growing interest. And if your partner decides not to do anything about the growing credit card debt, you could be on your own in paying off their shopping spree.
• Difficulty of removing someone: Removing someone from a joint credit card can be challenging. Your only option for getting out of a bad situation might be paying off and closing the card.
• Possibility of damage to the relationship: If you and a partner do not share the same financial philosophy, entangling your debts might do more harm than good. Couples who already fight about making financial decisions may find that sharing a joint credit card is detrimental to their relationship.
Does a joint account sound right for your situation? Here’s how to apply for a joint credit card:
1. Find a credit card issuer with a joint credit card option: Not every credit card issuer offers joint cards. Understand that your options will be more limited than if you applied for a credit card by yourself. Just as you would if you were choosing a joint bank account, take the time to compare a few options and find a joint credit card you’re both happy with.
2. Understand the qualification requirements: Read the fine print to make sure you and your co-owner can qualify. It’s not just your own credit score and credit history you have to consider; credit card issuers will be reviewing both applicants to determine if you can get a joint credit card.
3. Fill out the application: Have all of the necessary information for both applicants handy. It’s a good idea to apply together at a computer, if possible.
4. Set the ground rules: Make sure both of you are on the same page about how you will use the card and who is responsible for making on-time payments. If you’re not sure where to start, check out these basic credit card rules, which can promote healthy card usage.
Joint credit cards give both co-owners equal responsibility for credit card usage and payments. Using a joint credit card can be a good way to combine finances and help boost a partner’s credit score. However, applicants might benefit from going the authorized user route instead. Understanding the risks of both options is important before completing a joint credit card application or making someone an authorized user on an existing card.
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.
Joint credit cards affect both users’ credit scores equally. A well-managed card that is paid off in full each month might build both users’ scores. On the other hand, regularly late payments and a high credit utilization could bring both scores down.
Not every credit card issuer offers joint account credit cards. However, most allow you to add authorized users to existing credit cards. Contact your credit card issuer to learn more.
Requirements for getting a joint credit card account will vary by credit card issuer. Credit card companies typically consider factors like age, credit score, and income to determine whether you can get a joint credit card.
Photo credit: iStock/gorodenkoff
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 .
SOCC-Q224-1909300-V1
A statute of limitations is a state law that limits the period during which a creditor or debt collector can bring action in court to enforce a contract, such as a loan agreement or note. This means a creditor may not be allowed to sue a borrower in court to force them to pay a debt after the period has expired.
However, the statute of limitations on debt isn’t a wait-it-out solution that simply erases debt once it’s been owed for a few years. There may still be consequences to failing to pay back debts once the statute of limitations for debts has expired — and statutes of limitations don’t apply to some debts, including federal student loans. Here’s what you should know about statutes of limitations on debt.
Essentially, a statute of limitations on debt puts a time restriction on how long a creditor or debt collector is able to sue a borrower in state court to enforce the loan agreement and force them to repay the outstanding debts. In practice, this means that if a borrower chooses not to pay a debt, after the statute of limitation runs out, the creditor or debt collector doesn’t have a legal remedy to force them to pay.
To be clear, just because the statute of limitations has expired, it doesn’t mean that the borrower no longer owes the money, even though it does mean that the lender may not be able to take them to court for non-payment. The borrower will continue to owe the money borrowed, and their non-payment could be reported to the credit bureaus, which would then remain on the report for as long as allowed under the applicable credit reporting time limit. (For further evidence of how long debt can stick around, you might consider what happens to credit card debt when you die.)
Statutes of limitations don’t apply to all debts. They don’t, for example, apply to federal student loans. Federal student loans that are in default may be collected through wage or tax refund garnishment without a court order.
The length of the statute of limitations is determined by state law. State statutes of limitations on debt typically vary from three years to more than 10 years, depending on the type of debt and when the contract was entered into.
Figuring out exactly which state’s laws your debt falls under isn’t always as simple as you might imagine. The applicable statute of limitations may be determined by the state you live in, the state you lived in when you first took on the debt, or even the state where the lender or debt collector is located. The lender may even have included a clause in the contract you signed mandating that the debt is governed by a specific state’s laws.
One commonality in every state’s statutes of limitations on debt is that the “clock” does not start ticking until the borrower’s last activity on the relevant account. Say, for example, that you made a payment on a credit card two years ago and then entered into a payment plan with the debt collector last year but never made any subsequent payments. In that case, the statute of limitations clock would start on the date that you entered into the payment plan.
In this example, simply entering into a payment plan counts as “activity” on the account. This can make it confusing to determine if the statute of limitations has expired on your old debts, especially if you haven’t made a payment in a long time.
It may be possible to find out what the statute of limitations is by contacting the lender or debt collector and asking for verification of the debt. Remember that agreeing to make a payment, entering a payment plan, or otherwise taking any action on the account — including simply acknowledging the debt — may restart the statute of limitations.
After the statute of limitations on the debt has expired, the debt is considered time-barred.
As mentioned, the length of the statute of limitations on debt can vary depending on the type of debt it is. To know which timeline applies, it helps to understand the different types of debt.
A written contract is an agreement that is signed in writing by both you and the creditor. This contract must include the terms of the loan, such as how much the loan is for and how much monthly payments are.
An oral contract is bound by verbal agreement — there is no written contract involved. In other words, you said you would pay back the money, but did not sign any paperwork.
Promissory notes are written agreements in which you agree to pay back the amount of money by a certain date, in agreed upon installments and at a set interest rate. Examples of promissory notes are student loan agreements and mortgages.
Open-ended accounts include credit cards and lines of credit. With an open-ended account, you can repeatedly borrow funds up to the agreed upon credit limit. Upon repayment, you can then borrow money again.
Each state has its own statute of limitations on debt collection. Here’s a breakdown of the varying timelines by state:
| State | Written Contract | Oral Contract | Promissory Note | Open-Ended Account |
|---|---|---|---|---|
| Alabama | 6 | 6 | 6 | 3 |
| Alaska | 3 | 3 | 3 | 3 |
| Arizona | 6 | 3 | 6 | 3 |
| Arkansas | 5 | 3 | 5 | 5 |
| California | 4 | 2 | 4 | 4 |
| Colorado | 3 | 3 | 3 | 3 |
| Connecticut | 6 | 3 | 6 | 3 |
| Delaware | 3 | 3 | 3 | 3 |
| District of Columbia | 3 | 3 | 3 | 3 |
| Florida | 5 | 5 | 4 | 4 |
| Georgia | 6 | 4 | 4 | 4 |
| Hawaii | 6 | 6 | 6 | 6 |
| Idaho | 5 | 4 | 5 | 4 |
| Illinois | 10 | 5 | 10 | 5 |
| Indiana | 6 | 6 | 6 | 6 |
| Iowa | 10 | 5 | 10 | 5 |
| Kansas | 5 | 3 | 6 | 3 |
| Kentucky | 15 | 5 | 10 | 5 |
| Louisiana | 10 | 10 | 10 | 3 |
| Maine | 6 | 6 | 6 | 6 |
| Maryland | 3 | 3 | 6 | 3 |
| Massachusetts | 6 | 6 | 6 | 6 |
| Michigan | 6 | 6 | 6 | 6 |
| Minnesota | 6 | 6 | 6 | 6 |
| Mississippi | 3 | 3 | 3 | 3 |
| Missouri | 10 | 6 | 10 | 5 |
| Montana | 8 | 5 | 5 | 5 |
| Nebraska | 5 | 4 | 5 | 4 |
| Nevada | 6 | 4 | 3 | 4 |
| New Hampshire | 3 | 3 | 6 | 3 |
| New Jersey | 6 | 6 | 6 | 6 |
| New Mexico | 6 | 4 | 6 | 4 |
| New York | 6 | 6 | 6 | 6 |
| North Carolina | 3 | 3 | 3 | 3 |
| North Dakota | 6 | 6 | 6 | 6 |
| Ohio | 8 | 6 | 6 | 6 |
| Oklahoma | 5 | 3 | 5 | 3 |
| Oregon | 6 | 6 | 6 | 6 |
| Pennsylvania | 4 | 4 | 4 | 4 |
| Rhode Island | 10 | 10 | 10 | 10 |
| South Carolina | 3 | 3 | 3 | 3 |
| South Dakota | 6 | 6 | 6 | 6 |
| Tennessee | 6 | 6 | 6 | 6 |
| Texas | 4 | 4 | 4 | 4 |
| Utah | 6 | 4 | 4 | 4 |
| Vermont | 6 | 6 | 14 | 3 |
| Virginia | 5 | 3 | 6 | 3 |
| Washington | 6 | 3 | 6 | 6 |
| West Virginia | 10 | 5 | 6 | 5 |
| Wisconsin | 6 | 6 | 10 | 6 |
| Wyoming | 10 | 8 | 10 | 6 |
Statutes of limitations on certain old debts may prevent creditors or debt collectors from suing you to recover what you owe. However, it’s important to realize that debt statutes of limitations don’t protect you from creditors or debt collectors continuing to attempt to collect payments on the time-barred debt, such as in the case of credit card default. Remember, you still owe that money, whether or not the debt is time-barred. The statute of limitations merely prevents a lender or debt collector from pursuing legal action against you indefinitely.
Debt collectors may continue to contact you about your debt. But under the Fair Debt Collection Practices Act, debt collectors cannot sue or threaten to sue you for a time-barred debt. (Note that this act applies only to debt collectors and not to the original lenders.)
Some debt collectors, however, may still try to take you to court on a time-barred debt. If you receive notice of a lawsuit about a debt you believe is time-barred, you may wish to consult an attorney about your legal rights and resolution strategies.
If a debt collector is contacting you to attempt to collect on a debt that you know is time-barred and you don’t intend to pay the debt, you can request that the debt collector stop contacting you.
One option is to write a letter stating that the debt is time-barred and you no longer wish to be contacted about the money owed. If you’re unsure, it may be possible to state that you would like to dispute the debt and want verification that the debt is not time-barred. If the debt is sold to another debt collector, it may be necessary to repeat this process with the new collection agency.
Remember, even though a collector can’t force you to pay the debt once the statute of limitations expires, there may still be consequences for non-payment. For one, your original creditor may continue to contact you through the mail and by phone.
Additionally, most unpaid debts can be listed on your credit report for seven years, which may negatively affect your credit score. That means that failing to pay a debt may impact your ability to buy a car, rent a house, or take out new credit cards, even if that debt is time-barred.
Statutes of limitations don’t apply to federal student loan debt. If you default on your federal student loan, your wages or tax refunds may be garnished.
If you have federal student loan debt, you may consider managing your student loans through consolidating or refinancing. This can help you decrease your loan term or secure a lower interest rate.
Borrowers who hold only federal student loans may be able to consolidate their student loans with the federal government to simplify their payments.
Those with a combination of both private and federal student loans might consider student loan refinancing to get a new interest rate and/or loan term. Depending on an individual’s financial circumstances, refinancing can potentially result in a lower monthly payment (though it may also mean paying more in interest over the life of the loan).
All borrowers with federal loans should keep in mind that refinancing federal loans can mean relinquishing certain benefits, like forbearance and income-based repayment options.
The statute of limitations on credit card debts can generally range anywhere from three years to 10 years, depending on the state. However, the laws in the state in which you live aren’t necessarily what dictates your credit card statute of limitations. Many of the top credit issuers name a specific state whose laws apply in the credit card agreement.
Here’s a look at how long can credit card debt be collected through court proceedings for each state in the U.S.:
|
Statute of Limitations on Credit Card Debt By State |
|
|---|---|
| State | Number of years |
| Alabama | 3 |
| Alaska | 3 |
| Arizona | 6 |
| Arkansas | 5 |
| California | 4 |
| Colorado | 6 |
| Connecticut | 6 |
| Delaware | 3 |
| District of Columbia | 3 |
| Florida | 5 |
| Georgia | 6 |
| Hawaii | 6 |
| Idaho | 5 |
| Illinois | 5 |
| Indiana | 6 |
| Iowa | 5 |
| Kansas | 3 |
| Kentucky | 5 or 15 |
| Louisiana | 3 |
| Maine | 6 |
| Maryland | 3 |
| Massachusetts | 6 |
| Michigan | 6 |
| Minnesota | 6 |
| Mississippi | 3 |
| Missouri | 5 |
| Montana | 8 |
| Nebraska | 4 |
| Nevada | 4 |
| New Hampshire | 6 |
| New Jersey | 6 |
| New Mexico | 4 |
| New York | 6 |
| North Carolina | 3 |
| North Dakota | 6 |
| Ohio | 6 |
| Oklahoma | 5 |
| Oregon | 6 |
| Pennsylvania | 4 |
| Rhode Island | 10 |
| South Carolina | 3 |
| South Dakota | 6 |
| Tennessee | 6 |
| Texas | 4 |
| Utah | 6 |
| Vermont | 6 |
| Virginia | 3 |
| Washington | 6 |
| West Virginia | 10 |
| Wisconsin | 6 |
| Wyoming | 8 |
The statute of limitations on credit card debt doesn’t have an impact on what appears on your credit report. Even if the credit card statute of limitations has passed, your debt can still appear on your credit report, underscoring the importance of using a credit card responsibly.
Unpaid debts typically remain on your credit report for seven years, during which time they’ll negatively impact your credit (though its effect can wane over time). So, for instance, if the state laws of Delaware apply to your credit card debt, your statute of limitations would be four years. Your unpaid debt would remain on your credit report for another three years after that period elapsed.
This is why it’s important to consider solutions, such as negotiating credit card debt settlement or credit card debt forgiveness, rather than just waiting for the clock to run out.
To determine if a debt is time-barred — meaning the statute of limitations has passed — the first step is figuring out the last date of activity on the account. This generally means your last payment on the account, though in some cases it can even include a promise to make a payment, such as saying you’d soon work on paying off $10,000 in credit card debt.
You can find out when you made your last payment on the account by pulling your credit report, which you can access at no cost once per year at AnnualCreditReport.com.
Once you have that information in hand, you can take a look at state statutes of limitation laws. Keep in mind that it might not be your state’s laws that apply. If you’re looking for the statute of limitations for credit card debt, for instance, check your credit card’s terms and conditions to see which state’s laws apply.
Figuring out all of the relevant information isn’t always easy. If you’re unsure or have any questions, consider contacting a debt collections lawyer, who should be able to assist with answers to all your credit card debt questions.
Even if you know a debt is time-barred, it’s important to take action if you’re sued over it. You’ll need to verify that the statute of limitations has indeed passed, and you’ll need to come forward with that information. It may be helpful to work with an attorney to help you respond appropriately and avoid any missteps.
If you do end up going to court, it’s critical to show up. The judge will dismiss your case as long as you can prove that the debt is indeed time-barred. However, if you don’t show up, you will lose the case.
If you’re not sure whether a debt you’ve been contacted about is yours, you can ask the debt collector for verification. Request the debt collector’s name, the company’s name, address and phone number, and a professional license number. Also ask that the company mail you a validation notice, which will include the name of the creditor seeking payment and the amount you owe. This notice must be sent within five days of when the debt collector contacted you.
If, upon receiving the validation notice, you do not recognize the debt is yours, you can send the debt collector a letter of dispute. You must do so within 30 days.
Statutes of limitations on debt create limits for how long debt collectors are able to sue borrowers in a court of law. These limits vary by state but are often between three to 10 or more years. Once the statute of limitations on a debt has expired, the debt is considered time-barred. However, any action the borrower takes on the account has the potential to restart the statute of limitations clock.
While borrowing money can leave you in a stressful situation where you’re waiting for the clock to run out, it can also help you build your credit profile and access new financial opportunities.
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.
Yes. The statute of limitations passing simply means that the creditor cannot take legal action to recoup the debt. Your debt will still remain, and it can continue to affect your credit.
Yes, a debt collector can still contact you after the statute of limitations on debt passes as there isn’t a statute of limitations on debt collection. However, you do have the right to request that they stop contacting you. You can make this request by sending a cease communications letter.
Additionally, if you believe the contact is in violation of provisions in the Fair Debt Collection Practices Act — such as if they are harassing or threatening you — then you can file a complaint by contacting your local attorney general’s office, the Federal Trade Commission, or the Consumer Financial Protection Bureau.
The clock starts ticking on the statute of limitations on the last date of activity on the account. This generally means your last payment on the account, but it also could be when you last used the account, entered into a payment agreement, or made a promise to make a payment.
Even if the statute of limitations has already passed, debt will remain on your credit report for seven years. At this point, it should automatically drop off your report. If, for some reason, it does not, then you can dispute the information with the credit bureau.
If you’re unsure of what the statute of limitations on credit card debt is, the first thing to do is to check your credit card agreement. Which state you live in may not have an impact, as many credit card companies dictate in the credit card agreement which state court will preside.
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 article is not intended to be legal advice. Please consult an attorney for 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.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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.
SOCC-Q224-1909476-V1
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Credit card companies make money by extending credit and facilitating transactions. They charge interest and fees for these services.
Using a credit card as a method of payment requires an intricate process happening behind-the-scenes when you buy your morning coffee or make an online purchase in seconds. Read one to learn more about this and how credit card companies make money.
You might be keenly aware that you pay your monthly credit card bill to the bank or financial institution that approved your credit card line. However, there are other credit card companies involved in the payments process.
The credit card issuer is the entity that provided you with your credit card. Major U.S. banks, credit unions, and other financial institutions issue credit cards directly to consumers. Some examples include Chase, Capital One and Pentagon Federal Credit Union.
Credit card networks, also called card associations, partner with credit card issuers to act as a middleman that communicates between your bank and the merchant’s bank. Visa, MasterCard, American Express, and Discover are the four major U.S. card networks.
Some networks also act as a card issuer, offering their own credit card products to consumers. The credit card network also typically determines transaction interchange rates (more on this later), relays whether a charge was approved or declined, and identifies potentially fraudulent activity on a credit card.
As its name states, a credit card processor is the company that actually processes the transaction between the issuing bank and the receiving bank. Some examples of credit card processors are Stripe, PayPal, Square, and Elavon.
Additionally, some credit card processors ensure that the merchant and transaction are secure and compliant under the Payment Card Industry Data Security Standard (PCI DSS).
All of the types of credit card companies above work in unison so you can successfully pay for goods and services using a credit card as a cashless payment option. There’s a lot of back-and-forth communication between the three types of credit card companies after you provide your credit card to a merchant.
The process starts with obtaining authorization, which the merchant requests from its payment processor after a customer swipes or taps their card to pay. The card processor then submits your credit card information and transaction details to the card network. Your card’s credit card network routes this information to your issuing bank. The issuing bank either approves or denies the transaction based on your available credit and the status of your account.
If approved, your bank sends the approval to its partner credit card network. The card network then communicates the approval to the merchant’s bank. The merchant’s bank relays the approval to the merchant, so you can finally walk away with your purchase or close the transaction.
Although you walked away with your item or completed the online checkout process, the merchant doesn’t get your payment in their account instantly due to how credit cards work. Instead, the merchant goes through a separate process afterward to settle and receive funds for the authorized transaction. The transaction and payment details of transactions are communicated through the same channels that were used for authorization, involving the credit card network and issuing and merchant banks.
After the issuing bank draws the funds from your credit card account, it transfers the amount to the merchant’s bank, but withholds an interchange fee.
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Credit card companies tack on various credit card charges as part of their business. Below are three ways that credit card companies make money from their customers and from each other.
As you use your credit line, credit card interest charges apply when all or a portion of your statement balance rolls into the following month. This interest is expressed as an annual percentage rate (APR). Credit cards typically have a variable APR that changes depending on market conditions, your creditworthiness, transaction type, and borrowing habits.
Your credit card issuer also makes money from charging you other fees related to your credit card use and borrowing habits. For example, if you open a new balance transfer credit card, making a balance transfer — which involves paying a credit card with another credit card — typically incurs a fee.
Similarly, your card issuer might charge a fee if you authorized a transaction in a different country; this is commonly called a “foreign transaction fee”. It might also charge you annual fees, cash advance fees, returned payment fees, and late fees.
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The acquiring bank, issuing bank, and credit card network all make money by withholding a small percentage of the authorized transaction amount from the merchant.
Called the “merchant discount,” this fee combines various costs, such as interchange fees. The rate per transaction is determined by the credit card network. The merchant’s bank deducts the fee from the authorized purchase transaction amount, sending the remaining funds to the merchant.
This fee is then divided between the acquiring bank, the card network, and the issuing bank. The issuing bank makes the most money from interchange fees because it assumes the most risk throughout the process if you default on the debt.
To avoid credit card interest charges, make a credit card payment for your entire statement balance every month. Additionally, using a credit card responsibly, such as by not exceeding your card limit, can help by avoiding an APR increase.
It’s also worthwhile to examine the features of your existing and future credit cards. Consider cards that impose limited fees, such as those that don’t charge annual or foreign transaction fees, for example. Also don’t forget the credit card rule that you can always negotiate on fees or interest for your credit card.
There are many ways in which credit card companies make money through your purchases, both from you and the merchant you patronize. However, you can reduce how much your credit card companies make off of your purchase by paying your credit card bills on time and in full every month.
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.
A convenience fee charged at the checkout counter is meant to benefit the merchant. Since merchants pay interchange fees for the ability to accept credit card payments, a convenience fee is a way for the merchant to recoup lost funds from credit card transactions. It’s also designed to discourage customers from using their credit card for payment.
Yes, credit card companies still make money even if you pay off your balance each month. They achieve this through various fees. For example, a card issuer might still charge you an annual fee to use its card product or a foreign transaction fee if you use your card abroad. Similarly, a credit card network and credit card processor charges the merchant fees for the benefit of accepting credit card payments.
Despite offering you cash back on your card purchases, credit card issuers can make money through fees and interest charges charged to merchants and consumers. They will charge you interest if you’re unable to pay your statement balance in full each month, and you could face fees, such as a balance transfer fee, late fee, annual fee, or foreign transaction fee, depending on what may apply to your situation.
Photo credit: iStock/Talaj
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.
SOCC-Q224-1909366-V1
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While you may think of your credit card as what tends to break a budget, it’s actually possible to budget with a credit card to spend smarter. In fact, there are a number of advantages of budgeting with a credit card. If you spend only what you can afford to pay off each month, you can enjoy earning rewards, building your credit score, and accessing other perks without accruing interest.
It isn’t always easy to set — and then stick to — a budget though, and a credit card budget is no different. Read on for tips on budgeting with a credit card.
Although credit cards can have downsides — especially when someone tends to overspend — they also offer benefits that you can’t get when you pay with other methods. This includes:
• Fraud protection: It can be easier to dispute charges and fraudulent activity on a credit card as opposed to a debit card or cash.
• Opportunity to improve your credit score: When a credit card is used responsibly, it can build a person’s credit score.
• Credit card rewards: Credit cards often come with perks like travel points or cash back.
• Travel insurance: Some credit cards offer specialty protection benefits like travel insurance.
While you may think of your credit card as what tends to break a budget, it’s actually possible to budget with a credit card to spend smarter. In fact, there are a number of advantages of budgeting with a credit card. If you spend only what you can afford to pay off each month, you can enjoy earning rewards, building your credit score, and accessing other perks without accruing interest.
It isn’t always easy to set — and then stick to — a budget though, and a credit card budget is no different. Read on for tips on budgeting with a credit card.
Recommended: Does Applying For a Credit Card Hurt Your Credit Score?
Whether using a bank account or credit card, a monthly budget is an essential part of financial wellness. Budgeting can:
• Help to reach financial goals, such as establishing an emergency fund or saving for a downpayment for a home.
• Alleviate financial anxiety that can come from uncertainties around finance.
• Improve credit history through a record of on-time payments and responsible spending.
At first glance, budgeting may seem like a limiting factor, but it actually allows you to spend guilt-free. When budgeters know how much they can spend on certain categories each month and adhere to those guidelines, they don’t have to worry about overspending.
There’s no one-size-fits-all budgeting method. However, here are some popular methods that you might consider trying if you’re interested in creating a personal budget.
In a zero-sum budget, every dollar has a job. However, that doesn’t mean an account should be $0 at the end of the month. Instead, it means that every dollar earned should be allocated to a specific category, with no money left unassigned by the end of the month.
Each time an after-tax paycheck comes in, a zero-dollar budget will assign it to a category, starting with necessities like rent, food, student loan payments, and insurance. The rest goes toward discretionary spending or saving.
Zero-sum budgeting means taking a critical look at each dollar entering a bank account, which can feel frustrating for some but helpful for others. Depending on your preferences, this could be the right type of budget for you.
A spreadsheet or line-item budget groups spending and purchases into categories balanced against monthly post-tax income. In its most basic form, the spreadsheet budget is a list of expenses, shown line by line and grouped by type. Income covers expenses, with surpluses going toward additional savings or debt payoff.
Apps and other digital tools make budgeting as easy as creating a log-in and connecting existing accounts to track spending. You can also set up budgets for upcoming purchases.
An online tool can be helpful for those who feel intimidated by budgeting prep or prefer a more passive look at spending.
Using a credit card to budget isn’t so different from a traditional budget. Keep these 11 tips in mind when building a credit card budget.
To figure out take-home pay each month, budgeters can consult their bank account or look at paystubs from their employer (typically through an online portal). If your income varies each month, take the average income over the past year to get a rough ballpark figure.
A person can’t budget with a credit card if they don’t have a budgeting method in mind. Consider one of the aforementioned methods or an alternative like the 50/30/20 budget, where you allocate 50% of your budget to needs, 30% to wants, and the remaining 20% to savings.
Some budgeting methods are specific about how spending should be tracked. However, you can easily track your spending with pen and paper, a spreadsheet, or a spending app. No matter the method, it’s important to track each purchase.
When it comes to how to budget credit card payments, it helps to look back at your spending first. Gather financial statements from credit cards and bank accounts for the past month. Break each transaction into a category, such as needs, wants, savings, or something more specific.
With an idea of historical spending, now’s time to put a plan into place moving forward.
Armed with a structure and an understanding of your past spending, now comes the time to plan for the future. When creating a plan, consider:
• Recurring expenses
• Savings goals
• Debt repayment goals
• Annual subscription costs
• Emergency savings needs
A top priority when budgeting with a credit card should be paying yourself first. That means that when money hits a bank account, it should go toward personal savings goals, an emergency fund, or an accelerated debt repayment plan.
It’s important to prioritize paying yourself first, as many try to budget with the reverse in mind, only setting aside what’s left over at the end of the month. This approach can lead to falling short on savings goals.
After setting aside money for savings, it’s time to break down the remaining income into monthly expenses. This includes necessities like rent or mortgage payments and wants like dining out or entertainment.
If monthly income can’t cover all of the anticipated expenses, it may be time to cut back on spending. Is there slack in the budget from underused subscriptions? Or can grocery spending go down?
Figuring this out before you swipe can help you to avoid overspending on credit cards.
The difference between credit card budgeting and traditional budgeting comes when the credit card bill is due. If someone has been primarily spending on a credit card, it’s unlikely they’ll see their bank account change most of the month. However, that changes when the bill comes due.
With each transaction on the card, the budgeter should have enough money in their check or savings to cover the cost. Planning for this debt means avoiding the scramble that sometimes comes with a credit card due date.
Missing a credit card bill can harm a credit score and add financial stress to a person’s budget. Mark credit card due dates on the calendar each month, and consider paying the bill early or breaking it into multiple payments throughout the month.
The benefit of budgeting with a credit card comes from the various credit card rewards you can earn. Remember to cash in on cash back perks every few months for a discounted bill or redeem the travel miles you’ve earned for an upcoming trip.
Carrying a balance on a credit card could indicate an imbalanced budget due to how credit cards work. When a credit card bill isn’t paid in full, the remaining balance can accrue interest, leading to a ballooning balance that becomes harder to pay.
That’s why upfront planning is essential to budgeting with a credit card. Without a plan in place, there’s a bigger risk of overspending, which can snowball into credit card debt. If you’re using a credit card, it’s important to stick to one of the most important credit card rules of always trying to pay off your balance in full.
Recommended: How to Avoid Interest On a Credit Card
There are benefits and drawbacks to credit card budgeting, including:
| Pros | Cons |
|---|---|
| Opportunity to earn credit card rewards and cash back from spending | Possible to more easily go over budget with a higher credit limit |
| Improved credit score with responsible spending | Exceeding budget could mean incurring interest charges and additional debt |
| Option to set up account alerts to better stay on top of account spending | Potential to harm credit score with missed or late payments |
There are advantages of budgeting with a credit card, such as earning rewards, gaining access to credit card perks like travel insurance, and building your credit score if you use your card responsibly. By setting up a credit card budget, you can better prevent yourself from spending more than you can afford and ending up owing interest when you can’t pay off your statement balance in full.
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.
Budgeting with a credit card isn’t different from budgeting without one. The key to budgeting credit cards is not to spend more on a credit card than you can afford to pay off at the end of the month.
If someone can stick to a traditional budget, then budgeting with a credit card might make sense. The difference is remembering to stay up to date with payments, as missing a credit card payment can negatively impact a credit score.
Budget should have a pretty serious hold on a credit card. When people can’t pay their credit card bill in full, they’ll incur interest charges, which can cause them to fall into debt over time and potentially drag down their credit score.
If a budgeter isn’t paying attention when using a credit card, it’s easy to overspend. This can result in putting more on a credit card than you have available in cash to pay it off. As a result, you may end up paying more than the sticker price for your purchases due to interest, leaving you less money leftover for your other needs and savings goals.
Photo credit: iStock/Mirel Kipioro
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 .
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