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If you earn more than $10 in interest on a certificate of deposit (CD), you generally have to report it as taxable income on your tax return. The tax rate you pay on CD interest will be the same as the rate you pay on your ordinary income, which will depend on your marginal tax bracket.

While CDs are considered a safe and reliable investment, and generally pay a higher-than-average interest rate, you’ll want to factor in taxes when you consider how much you’ll really make on your investment. Here’s a closer look at how CDs are taxed, the impact of early withdrawal penalties, and strategies to potentially avoid taxes on CD earnings.

How Are CDs Taxed?

A certificate of deposit (CD) is a type of savings account that pays a fixed annual percentage yield (APY) that’s usually higher than a traditional savings account. In exchange, you agree to leave your money untouched for a set period of time (the CD’s term), which can be anywhere from a few months to several years. On the CD’s maturity date, you can access both the principal and interest earned.

Like any savings account, including high-yield savings accounts, the interest you earn on CDs is typically taxed as ordinary income, whether you receive the money in cash or reinvest it in a new CD. The interest earned is subject to federal income tax and, in some cases, state and local taxes, in the year it is paid.

The bank or financial institution where the CD is held will usually report the interest income to both you and the Internal Revenue Service (IRS) using Form 1099-INT if the interest earned exceeds $10 in a given year. Box 1 shows all the taxable interest paid to you during the calendar year by that financial institution. Even if you don’t receive a 1099-INT form from the bank, you’re required to report interest earnings of $10 or more on your tax return.

The amount of tax you owe on CD interest depends on your marginal tax rate. For example, if you are in the 24% tax bracket, the interest earned on your CD will be taxed at 24%. It’s important to note, however, that CDs held within tax-advantaged accounts, such as individual retirement accounts (IRAs), 401(k)s, or Roth IRAs, may have different tax treatments.

When Do You Pay Taxes on CDs?

Taxes on CD income are due in the year that the income was generated. Here’s a breakdown of how taxes are handled for both short-term and long-term CDs.

Paying Taxes on Short-Term CDs (One Year or Less)

If you purchase a short-term CD (such as a three-month or six-month CD) that matures the same year you purchased it, and it earns $10 or more, you’ll have to pay taxes on it for that tax year. If you invest in a short-term CD near the end of a calendar year and it matures in the following year, you’ll generally need to pay taxes on the interest you earn on two consecutive tax returns.

Regardless of whether you withdraw the money, transfer the money to a savings or checking account, or roll it into another CD, you have to pay tax on CD interest the year it was earned.

Paying Taxes on Long-Term CDs (More than One Year)

Interest earned on long-term CDs (those with terms longer than one year), must be reported and taxed in the year it is earned, even if the CD has not yet matured. This means you’ll pay taxes on a long-term CD over multiple years.

For example, if you opened a three-year CD with $10,000 on January 1, 2024, that pays 4.50% APY, the $450 in interest you earn in 2024 will be taxable in that year. The interest earned in 2025 and 2026 will be taxable in those tax years.

Recommended: CDs vs Savings Accounts Compared

Tax Impact of Early Withdrawal Penalties

CDs are designed to be held until maturity, and withdrawing funds early often incurs penalties. Early withdrawal penalties on CDs can range anywhere from 90 days’ to 365 days’ worth of interest. These penalties also have tax implications. Generally, the penalty amount is deductible on your tax return.

For instance, if you withdraw $10,000 from a CD and incur a $500 early withdrawal penalty, you can deduct the $500 penalty from your taxable income. Any early withdrawal penalties will be included in box 2 of your 1099-INT form from the issuing institution, labeled as “early withdrawal penalty.”

Recommended: Tax Credits vs Tax Deductions: What’s the Difference?

Can You Avoid Paying Taxes on CDs?

One strategy that can allow you to defer or eliminate taxes on CD interest is to open your CD inside a retirement account, such as a 401(k) or IRA. When you invest in a CD as part of your retirement account, your CD enjoys tax advantages and you may not be required to pay taxes on CD interest in the year it is earned.

In a traditional IRA or 401(k), for example, investments are made on a pre-tax basis and taxes are deferred until withdrawal, potentially at a lower tax rate. With a Roth IRA, you do pay income taxes on the money you put into the IRA, but the funds grow tax-free and qualified withdrawals are tax-free, provided certain conditions are met.

However, there are a number of rules surrounding retirement accounts, including eligibility requirements, contribution limits, and withdrawal restrictions, so you’ll want to consult a tax accountant before considering a tax-advantaged CD.

The Takeaway

Certificates of deposit (CDs) are a safe and reliable investment option, but understanding their tax implications is crucial for maximizing returns. Like other types of savings accounts, interest earned on CDs is generally taxable as ordinary income and must be reported annually. The timing of when taxes are due depends on when the interest is credited to your CD. Early withdrawal penalties can reduce taxable income, offering some relief. But paying a penalty also reduces your returns on a CD.

Before putting your money into a CD, it’s worth shopping around and comparing CD APYs with the current APYs for high-yield savings accounts. You may be able to find a better deal with fewer restrictions on your funds.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Does cashing in a CD count as income?

Cashing in a certificate of deposit (CD) itself does not count as income, but the interest earned on the CD is considered taxable income. The bank reports the total interest earned on a CD in any given year on Form 1099-INT, which you must include in your taxable income for that year. This interest is subject to federal, and sometimes state and local, taxes. The principal amount you originally invested in the CD, however, is not taxed, only the interest earned on that principal.

How do I report CD interest on tax returns?

You’ll need to report interest earned on a certificate of deposit (CD) on your federal tax return using Form 1040, specifically on the line designated for interest income.

To determine how much interest you need to report, you simply refer to Form 1099-INT, which you should receive from the bank holding your CD. This form details the interest income earned over the year. If you have multiple 1099-INT forms, you’ll need to combine the total interest and report it as a single amount. For state taxes, you’ll want to include this interest according to your state’s tax guidelines, which may vary.

Are any CDs tax free?

Most CDs are not tax-free, but certain strategies can minimize taxes on CD interest. CDs may be placed in a tax-deferred retirement account, such as a 401(k) or individual retirement account (IRA). In this case, taxes on earnings may be deferred until retirement or distribution. A CD held in a Roth IRA can grow tax-free and withdrawals are tax-free, provided certain conditions are met.

There are many rules surrounding retirement accounts, however, including eligibility requirements, contribution limits, and withdrawal restrictions, so you’ll want to consult a tax accountant before considering a tax-advantaged CD.

About the author

Julia Califano

Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

SOBK-Q224-1916744-V1

If you don’t pay your credit card bill, you could face more severe consequences than you might think. Though it will depend on your credit card issuer, you can generally expect to be charged a late fee as well as a penalty interest rate which is higher than the regular purchase annual percentage rate, or APR.

Life happens, and, from time to time, payments are missed, especially if you’re dealing with emergencies such as losing a job or a family crisis. In the event you have skipped a credit card payment, it’s crucial you understand what consequences you may face. That way, you can take steps to reduce the odds of it having a major impact on your financial health.

What Happens If You Don’t Pay Your Credit Card?

Consequences for missed credit card payments could include being changed late fees and possibly losing your grace period. It may also negatively affect your credit score since issuers report your payment activity to the credit bureaus — in most cases after 30 days.

There may be other consequences depending on how late your payment is and whether it’s your first time missing a payment.

Accruing Interest

When you don’t pay your credit card, interest will accrue and will continue to do so as long as you have a balance on your card. In essence, you are paying more for your initial purchase thanks to that interest.

The longer you go without paying your credit card, the more you risk your rate going up. Your credit card issuer may start imposing a penalty annual percentage rate (APR), which tends to be higher than your regular purchase APR. If this happens, you’ll end up paying more in interest charges. The penalty APR may apply to all subsequent transactions until a certain period of time, such as for six billing cycles.

Collections

Depending on your credit card issuer, your missed payments may go into collections if it goes unpaid for a period of time. You’ll still continue to receive notices about missed payments until this point.

More specifically, if you don’t pay your credit card after 120 to 180 days, the issuer may charge off your account. This means that your credit card issuer wrote off your account as a loss, and the debt is transferred over to a collection agency or a debt buyer who will try to collect the debt.

Once this happens, you now owe the third-party debt buyer or collections agency. Your credit card issuer will also report your account status to the major credit bureaus — Experian®, TransUnion®, and Equifax®. This negative information could stay on your credit report for up to seven years.

It’s hard to tell what third-party debt collectors will do to try and collect your debt. Yes, they may send letters, call, and otherwise attempt to obtain the money due.

Some collections agencies may even try to file a lawsuit after the statute of limitations expires. In rare cases, a court may award a judgment against you. This means the collections agency may have the right to garnish your wages or even place a lien against your house.

If your credit card bill ends up going to collections, take the time to understand what your rights are and seek help resolving the situation. Low- or no-cost debt counseling is available through organizations like the National Foundation for Credit Counseling (NFCC).

Bankruptcy

You may find that you have to declare bankruptcy if you still aren’t able to pay your high credit card debt and other financial obligations. This kind of major decision shouldn’t be taken lightly. You will most likely need to see legal counsel to determine whether you’re eligible.

If you do file for bankruptcy, an automatic stay can come into effect, which protects you from collection agencies trying to get what you owe them. If you successfully declare bankruptcy, then your credit card debt will most likely be discharged, though there may be exceptions. Seek legal counsel to see what your rights and financial obligations are once you’ve filed for bankruptcy.

Recommended: Understanding Purchase Interest Charges on Credit Cards

Making Minimum Payments

A minimum payment is typically found in your credit card statement and outlines the smallest payment you need to make by the due date. Making the minimum payment ensures you are making on-time payments even if you don’t pay off your credit card balance. Any balance you do carry over to the next billing cycle will be charged interest. You can also avoid late fees and any other related charges by making a minimum payment vs. not paying at all.

Recommended: Breaking Down the Different Types of Credit Cards

What Happens if You Miss a Payment

If you can’t pay your credit card for whatever reason, it’s best to contact your issuer right away to minimize the impact. Let them know why you can’t make your payment, such as if you experienced a job loss or simply forgot. For the latter, pay at least the minimum amount owed as soon as you can (ideally before the penalty or higher APR kicks in).

If this is your first time missing a payment but you have otherwise paid on time, you can try talking to the credit card company to see if they can waive the late fee.

Some credit card issuers may offer financial hardship programs to those who qualify, such as waiving interest rates, extending the due date, or putting a pause on payments (though interest may still accrue) until you’re back on your feet.

15/3 Rule for Paying Off Credit Cards

The 15/3 payment method can help you keep on top of payments and lower your credit utilization — the percentage of the credit limit you’re using on revolving credit accounts — which can impact your score.

Instead of making one payment when you receive our monthly statement, you pay twice — once 15 days before the payment due date, and the other three days beforehand. This plan is useful if you want to help build your credit history and pay on time.

The Takeaway

Missing your credit card payment may not be a massive deal if it just happens once or twice, but it can turn into one if you continue to ignore your bill. Late fees, a higher penalty APR or, worse still, having your account go to collections could result. That’s why if you are having trouble paying your bill (or simply forget to), you should contact your credit card issuer ASAP.

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

How long can a credit card go unpaid?

The statute of limitations, or how long a creditor can try to collect the debt owed, varies from state to state, which can be decades or more.

What happens if you never pay your credit card bill?

If you never pay your credit card bill, the unpaid portion will eventually go into collections. You could also be sued for the debt. If the judge sides with the creditor, they can collect the debt by garnishing your wages or putting a lien on your property.

Is it true that after 7 years your credit is clear?

After seven years, most negative remarks on your credit report, such as accounts going to collections, are generally removed.

Photo credit: iStock/MStudioImages

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.

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 .

This article is not intended to be legal advice. Please consult an attorney for advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOCC-Q225-010

Are you ready to take your professional growth to the next level in 2024?

Whether you’re hoping to get a raise, clinch that promotion, or switch careers, the beginning of a new calendar year can be a great time to sit down and reflect on where you’ve been, where you want to go, and how you’re going to get there.

Why bother setting professional development goals? Without a specific direction in mind, it can be easy to fall back on what you’ve always done, or just take any opportunity that comes your way without thinking critically about what you want. This can leave you feeling unsatisfied and rudderless in your professional life.

Even if you’re just starting out, you have more agency over your work life than you might think. Setting clear and specific goals can set you on the right path, help you take control of your career, and lead you to the job you’ve always dreamed of.

To help unleash your full potential, here’s a look at four examples of career goals to consider for this year.

Get That Raise

When was the last time you got a pay increase? If it’s been longer than a year, it may be time to speak up. To build a case for a bump up in pay, consider doing some research into the going rates for your job in your area. If your compensation is below par, you can use this information as leverage for requesting an increase.

You can also increase your odds of getting a raise if you can effectively communicate your value to management. Rather than say you need more money, you might point out the hours and dollars you’ve saved the company, how you’ve improved productivity, or the additional responsibilities you’ve taken on since your last pay increase.

Asking for a raise isn’t easy, but you can do it. Even if the answer is no, you’ve started the conversation. This gives you the opportunity to ask what specific actions would be needed to merit a raise. If tight budgets are the issue, you might ask about a one-time bonus, either now or after a set time period.

Recommended: Guide on What to Do When You Get a Pay Raise: 12 Tips

Build Your Professional Network

The saying “it’s not what you know but who you know” has some truth to it. So in addition to polishing your professional skills, consider making 2024 the year you focus on expanding your professional community. You can build your network by attending networking events and connecting with other like-minded professionals via social media. You might also ask colleagues, friends, and family members to introduce you to contacts that may be a good professional fit.

Meeting professionals and keeping in contact with them can help you learn more about the industry, including job opportunities down the line. Individuals in your network may also be willing to serve as mentors and help you develop important career skills.

Climb the Ladder

Earning a promotion enables you to assume a more important role in your company, earn a higher salary, and gain a heightened sense of accomplishment. If your goal is to land one, start taking extra measures to become a prime candidate for your desired position. That might mean going above and beyond in your role, seeking out opportunities to get noticed, and demonstrating your leadership skills.

If you haven’t recently had a performance review with your manager, the new year is a great time to set one up. Let them know that you would like to discuss your career path, and come prepared with data on what you’ve accomplished and a clear ask on where you’d like to go next.

Recognize that while you may not get what you’re asking for tomorrow, you’re taking an important first step in the process. This meeting will allow you to get clear on what you’d need to do to earn a promotion, and discuss a timeline for next steps.

Recommended: Working Remotely Could Hurt Your Chances to Get Promoted

Move On

Not getting any traction on a pay bump or promotion? This might be the year to pursue a more challenging role at a different company. If you’re ready to move on (and, ideally, up), start scoping LinkedIn and networking with recruiters or HR representatives in your field.

Not happy with your current career? Pursuing an entirely different career path might be your main professional goal. You could find greater satisfaction and happiness in a new career, as well as a higher salary and more opportunities. Consider what your ideal career is and how you can reach it from your current job. What challenges seem exciting to you? What are you well-prepared to do, and what would you rather avoid? What other experiences can you draw on as examples of your skill set — for example, previous jobs, volunteer work, side hustles? Reach out to professional connections you have in other industries to determine whether they might be a good fit for you.

Recommended: New Year, New Goals: Set and Achieve Your Career Resolutions

Tips to Achieve Your Career Goals

Whatever your professional objective for the coming year, here are some steps that can help you get there.

•   Write down your goal and steps involved. It’s important to get your goal out of your head and down on paper. In addition, think through and list out the steps you’ll need to achieve it. This will help you remember and accomplish each step. Post your list where you will see it often.

•   Set deadlines. Turn “some day” into a specific day by setting deadlines for each step in your plan. Deadlines will keep you on your toes, and give you a sense of accomplishment as you meet your targets.

•   Reward yourself. Taking steps toward your career goals requires hard work and commitment. Think of small rewards to give yourself when you complete any step to help you stay motivated and on task.

•   Have a goal partner. Consider recruiting a friend or coworker to help you stick to your plan. Discuss your goals, and check in with them when you complete steps. If possible, do the same for your partner.

•   Connect with a coach. If you’re feeling unsure about your career direction, a professional coach can be a big help. Coaches are skilled at asking impactful questions to help you reflect and build more self-awareness. A coaching experience can provide clarity on what’s important to you and empower you to set realistic, flexible career goals.

The Takeaway

Setting — and working towards — goals isn’t easy, especially when it comes to your career. But the process can really pay off, both literally and figuratively.

Creating clear professional objectives prompts you to think about what you want, so you can pursue a position or career that truly satisfies you. While you may not achieve your goal overnight, simply having professional goals can give your work direction and purpose — you have an action plan and are working towards something you really want to achieve in your life.

To explore more work topics, check out SoFi at Work’s resource hub.

About the author

Julia Califano

Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.

If you’re a soon-to-be homeowner, your lender might mention that you’re required to purchase hazard insurance. You may wonder, Is hazard insurance the same as homeowners insurance? In fact, hazard insurance is a part of your standard homeowner’s insurance policy.

Let’s look at the ins and outs of hazard insurance, including what it covers and what it doesn’t, and how much you can expect to pay for it.

Is Hazard Insurance the Same as Homeowners Insurance?

A common misconception is that hazard insurance is the same as homeowners insurance when, in fact, the former is a part of the latter. That’s because people sometimes refer to homeowners insurance as hazard insurance. You can think of it as a piece of fruit in a fruit and cheese basket — not the entire kit and caboodle.

Hazard insurance typically refers to the protection of the structure of your home and additional structures on the property (like a shed, deck or detached garage), whereas homeowners insurance as a whole also includes coverage for liability, additional living expenses, and personal belongings.

Recommended: What Does Flood Insurance Cover?

What Is Hazard Insurance?

Hazard insurance is part of homeowners insurance, and it typically covers the structure or dwelling, but not liability, personal belongings, or additional living expenses. Because it’s a part of a standard homeowners insurance policy, it cannot be purchased as a standalone policy. Rather, it’s folded into your homeowners insurance.

Hazard is often confused with catastrophic insurance, which is a standalone policy that covers against perils that aren’t included in a standard homeowners insurance policy, such as floods, earthquakes, and terrorist attacks.

Recommended: What Does Flood Insurance Cover?

What Does Hazard Insurance Cover?

Should there be damage to the actual structure of your home, the hazard insurance portion of your homeowners insurance policy will offer a payout. This usually includes damage to or destruction of the actual building of your home from natural events, such as extreme weather or a natural disaster.

However, the specifics of hazard insurance coverage will depend on whether it’s a “named perils” or an “open perils” policy. Read on for more details on what those entail.

Named Perils

Named perils essentially means events, incidences, or risks that are “named” or “listed” under your plan as covered. In other words, if it’s not listed, then it’s not covered.

A named perils policy typically protects against 16 specific types of perils, including:

•   Windstorms or hail

•   Fire or lightning

•   Explosions

•   Riots or civil disruption

•   Smoke

•   Theft

•   Falling objects

•   Vandalism or malicious mischief

•   Damage caused by vehicles

•   Damage caused by aircraft

•   Damage from ice, snow or sleet

•   Volcanic eruption

•   Accidental discharge or overflow of water or steam from HVAC, a plumbing issue, a household appliance or a sprinkler system

•   Accidental cracking, tearing apart, burning or bulging of HVAC or a fire-protective system

•   Freezing of HVAC or a household appliance

•   Accidental damage from electrical current that is artificially generated

A homeowners insurance policy that is a named perils insurance policy is usually less expensive than an open perils policy.

Open Perils

While a named perils policy will only cover what’s listed in your policy, an open perils policy will provide coverage unless something is specifically excluded and noted as such in your policy.

Typical exclusions under an open perils policy include:

•   War

•   Nuclear hazard

•   Water damage from a sewer backup

•   Damage from pets

•   Power failure

•   Mold or fungus

•   Damage due to an infestation of animals or insects

•   Negligence and general wear and tear

•   Smog, rust or corrosion

An open perils policy tends to be for newer homes or homes in low-risk areas. Additionally, because an open perils homeowners insurance policy tends to be more comprehensive, they typically cost more compared to a named perils policy.

Recommended: How Much Is Homeowners Insurance?

What Isn’t Covered by Hazard Insurance?

Now that we’ve looked at what hazard insurance may cover, here’s what typically isn’t covered.

Flood Coverage

Flood coverage isn’t part of a standard homeowners insurance policy, so you’ll need to take out a separate policy if you want it. In fact, if you live in an area that’s a designated high-risk flood zone, you may be required to take out flood insurance.

The cost of the policy generally hinges on how much of a risk your home is, which factors in your location, and the age of your home.

Earthquake Coverage

Earthquake coverage is another item that hazard insurance doesn’t offer, so if you live in an area that’s subject to earthquakes, you may want to get an earthquake insurance policy. This can either be tacked on to an existing policy as a rider or purchased separately.

When you purchase earthquake coverage, your home is usually protected against cracking and shaking that can damage or destroy buildings and personal possessions. But if there’s water or fire damage because of an earthquake, then that generally would be taken care of by a standard homeowners insurance policy.

How Much Does Hazard Insurance Cost?

As hazard insurance is part of a standard homeowners insurance policy, you won’t need to pay anything extra. According to the most recent data from the Insurance Information Institute (III), the average cost of a homeowners policy in the U.S. is $1,411.

Keep in mind that the cost can vary depending on a host of factors: the location of the home, the cost to rebuild, the size and structure of your home, your age, your credit score, your deductible, and the type of policy and amount of coverage you desire.

Do You Need Hazard Insurance?

In short, yes. As you will need to get homeowners insurance if you are taking out a mortgage on your home, and hazard insurance is folded into homeowners insurance, then you’ll need hazard insurance.

When shopping around for hazard insurance, think about what is required by your mortgage lender, and what coverage amount would be suitable for your home and situation. Play around with different deductibles and coverage amounts to see how they would impact your premium, and don’t forget that discounts can also lower the cost of your insurance.

The Takeaway

Hazard insurance and homeowners insurance aren’t the same thing. Rather, hazard insurance refers specifically to coverage for the structure of your home and is an element of homeowners insurance. What your hazard insurance policy will cover depends on whether you have a named or open perils policy, though it generally won’t extend to damage from earthquakes or floods.

If you’re taking out a mortgage on your home, you’re generally required to get homeowners insurance — and, by extension, hazard insurance.

If you’re a new homebuyer, SoFi Protect can help you look into your insurance options. SoFi and Lemonade offer homeowners insurance that requires no brokers and no paperwork. Secure the coverage that works best for you and your home.

Photo credit: iStock/MicroStockHub

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

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

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

SOPRO-Q225-023

If you are thinking about closing a credit card you don’t use, know that while it may eliminate a fraud risk, doing so can negatively impact your credit. It can shorten your credit history and lower your credit limit, which in turn could increase your credit utilization ratio. Both of these factors can lower your score.

So before you cancel an unused credit card, make sure you understand how that can alter your credit score. That will allow you to make an informed decision that is best for your specific financial situation.

How Do Unused Credit Cards Affect Your Credit Score?

There are a few factors that make up your credit score. Two of the components of your credit score are your utilization ratio (how much of your available credit you’re using) and your average age of accounts. Closing an unused credit card can impact both of these.

Credit Utilization

Your credit card utilization is defined as the amount of your available credit that you are currently using. So if you have a card with a $10,000 limit and you have an average balance of $1,000, your utilization is 10% ($1,000 divided by $10,000). A low utilization is a positive indicator for your credit score. So closing any credit card account will lower the total amount of available credit you have. This will raise your utilization percentage and possibly lower your credit score.

Recommended: How to Read a Credit Report

Credit History Length

Another factor that makes up your credit score is the average age of your accounts. Having credit accounts that have been open for a long time is generally considered more positive for your credit score than having only recent accounts. So if you close an unused credit card, especially one that you’ve had open for a long time, it can lower your average age of accounts and possibly also hurt your credit score. The account may stay on your report for a while, but when it eventually drops off, your score could decrease.

Recommended: 10 Advantages of Credit Cards

Are There Risks to Keeping Unused Credit Cards?

So while it can make sense to keep your unused credit cards open, there are a few risks of keeping unused credit cards. If you no longer are monitoring your account, there is a higher risk that someone might commit credit card fraud with your account. So you’ll want to make sure that you are regularly looking at your accounts, and maybe even make an occasional purchase on each credit card that you have.

When Is It Better to Cancel a Credit Card?

There are also some situations where it’s better to just cancel a credit card. One reason to cancel a credit card is if it comes with an annual fee.

•   If you’re not using a credit card and not getting any value from its benefits, it usually won’t make sense to pay the annual fee, especially when there are so many credit cards that offer good rewards with no annual fee.

•   Another situation where it might make sense to cancel a credit card is if you’re having trouble controlling your spending. If having a credit card is causing you to go into debt or spend more than you earn, it might make sense to do a bit of a financial reset.

Using a debit card or moving to paying with cash might help you get to a better spot, financially speaking.

Recommended: 10 Advantages of Credit Cards

Can You Cancel a Credit Card Without Hurting Your Credit Score?

If you’re thinking about canceling a credit card without impacting your credit score, there are a few things that you can do to help mitigate the hit to your credit score.

•   One thing is to make sure to pay down any balance on the card before you close it.

•   Another possible option is to call your credit card company and see if you can move some of your available credit to another credit card. That might help keep your credit utilization ratio high.

The Takeaway

If you have a credit card that you no longer use, you might be tempted to just cancel the card so you don’t have to think about it anymore. However, there may be some reasons where it can make more sense to keep the card open, even if you never or rarely use it. Keeping it open may help build your credit score, and, if you close a card you’ve had for a long time, it can impact your credit score.

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

Do unused credit cards close automatically?

An unused credit card generally won’t be closed automatically, at least at first. However, most credit card companies do reserve the right to close your account for any reason, including if you don’t use your credit card. So if you want to keep a credit card account open, it may make sense to occasionally make a purchase or two.

Does canceling an unused credit card hurt your credit?

Canceling an unused credit card can lower the total amount of your available credit. This may raise your credit utilization ratio, which is one of the major factors that make up your credit score, and a higher number can ding your score. You may also shorten your credit history, which can negatively impact your score as well. Make sure that you understand any possible impacts to your credit score before you cancel an unused credit card.

Is it bad to have an unused credit card?

No, in most cases it is not bad to have an unused credit card. In some cases, it can even help to keep your credit card accounts open, even if you’re not actively using the card. This is because having an open account increases your available credit and it may raise your average age of accounts. Both of these are factors that go into calculating your credit score.

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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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