Financial Topics Archives | Page 37 of 808

Nov

2024

Average Car Loan Interest Rate by Credit Score

By Alene Laney | Credit, Money & Life, relay | Comments Off

As of the second quarter of 2024, the average car loan interest rate for a new car is 6.84%. The average interest rate for a used car is 12.01%. This is across all credit scores and loan terms.

However, the averages change quite a bit when broken down by credit score, loan term, and new vs. used car loans. Here’s what auto loan interest rates you can expect, why they vary, and what you can do to get a better interest rate for your next car loan.

Key Points

• Car loan interest rates vary significantly based on credit score. Higher credit scores typically receive lower rates, while lower scores often face higher rates.

• Borrowers with scores above 700 (prime) can secure lower rates, sometimes below 5.00%, while subprime borrowers (scores below 600) may see rates over 10.00%.

• Higher interest rates increase monthly payments and total loan cost, making a good credit score valuable for affordable car financing.

• Interest rates on loans for used cars are generally higher than for new cars, as lenders see more risk in financing older vehicles.

• Improving your credit score, shopping around for rates, and considering a cosigner with good credit can help you secure a lower car loan rate.

Average Used Car Interest Rates by Credit Score

The average auto loan interest rates based on credit score, collected by Experian in the Q2 2024 “State of the Automotive Finance Market,” are as follows:

Credit score	New car interest rate	Used car interest rate
Super prime (781 to 850)	5.25%	7.13%
Prime (661 to 780)	6.87%	9.36%
Near prime (601 to 660)	9.83%	13.92%
Subprime (501 to 600)	13.18%	18.86%
Deep subprime (300 to 500)	15.77%	21.55%

Recommended: What Is the Starting Credit Score?

Factors That Affect Auto Loan Interest Rates

It helps to understand what factors affect auto loan interest rates. If you understand these, you may be able to make choices that can secure a lower APR on your next car.

Credit Score

Your credit score is a key factor in what interest rate you’ll qualify for on an auto loan. The better your score, the better interest rate you can get.

Lender

Lenders play a big role in auto loans, largely due to the financing incentives offered on new car loans. If you’re able to take advantage of zero or low-interest financing, that might be the way to go. Just be sure to negotiate the price of the car before you talk payments with the dealer.

Amount Borrowed

A larger down payment means you’ll borrow less and possibly qualify for a more favorable interest rate.

Length of the Loan

Shorter loans have lower interest rates for new vehicles, but that doesn’t always hold true for used car interest rates. According to Experian data for 2024, here’s the average car loan interest rate based on the length of the loan:

Term	New car interest rate	Used car interest rate
Up to 48 months	3.87%	12.05%
49 to 60 months	5.04%	10.93%
61 to 72 months	6.86%	12.80%
73 to 84 months	9.07%	11.53%
85+ months	9.22%	9.81%

Economic and Market Conditions

Economic and market conditions affect what interest rates are available. When the Federal Reserve Board raises interest rates, those costs are usually passed on to the consumer (you). You’ll see higher interest rates when this happens.

If there’s a high demand for cars, such as in the years following the COVID-19 pandemic, you may see higher rates and fewer incentives, as well.

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How to Get a Better Auto Loan Interest Rate

If you’re looking for a better auto loan interest rate, there are a few strategies you’ll want to try:

• Work on your credit score. If you have time, make some moves to build your credit score. Pay down debt, get your payments on autopay, ask for a credit line increase, dispute inaccuracies, and start regularly checking your credit.

• Look for an incentive. If you have excellent credit, you may find a dealership that offers 0% APR financing for certain models they sell. Just be careful that you’re getting a good deal on the car, too.

• Opt for a shorter loan term. You might see lower interest rates on shorter loan terms, such as those that are 48 months or shorter.

• Put down a larger down payment. If you’re able to put down a larger down payment, you might see a lower interest rate.

• Shop around for a lender. Compare auto loan interest rates for your credit score at banks, credit unions, and online lenders to see which is best for your situation.

How Often Do Auto Loan Rates Change?

Auto loans rates change with fluctuating market conditions. If the prime rate jumps, you’ll see auto loan interest rates jump for new and used car loans.

Incentives for auto loan rates can change with little notice at the dealership, so if you see a 0% interest rate, consider snagging it before the promotion expires.

How to Use Average Car Interest Rates

Average car interest rates can help show you what to expect when you get a car loan of your own. If you don’t see a rate close to the average, you may want to continue shopping around.

Average car interest rates do change based on your credit score, loan term, car make and model, dealer incentives, and whether or not you’re buying a new or used car.

Where Are Auto Loan Rates Heading?

Auto rates are tied to the federal funds rate. When the Federal Reserve Board votes to cut rates, you may see lower interest rates on auto loans. But there are other factors lenders consider — such as delinquencies — before lowering their rates.

Car valuation company Kelley Blue Book expects to see lower APRs on auto loans by the end of 2024. They report a 1% decrease in your auto loan APR results in a 3% decrease in your monthly payment.

Ways to Get a Better Car Loan Rate

The best way to get a better car loan rate is to learn how to build credit. There’s a stark difference between borrowers with poor credit scores and those with optimal credit scores. Here’s a comparison of the average car loan interest rate by credit score for the very lowest scores to the very highest:

	New car loan APR	Used car loan APR
Super prime (781 to 850)	5.25%	7.13%
Deep subprime (300 to 500)	15.77%	21.55%

With poor credit, you’ll most likely pay the highest interest rate available. Even worse, you may not be able to get a loan. Only 0.38% of new car loans are issued to borrowers with a deep subprime credit score. Start monitoring your credit score if you’re worried about getting approved for an auto loan.

The Takeaway

You can use the average car loan interest rate to your advantage. Knowing what it is and what your credit score is can arm you with the knowledge to negotiate for the best rate based on your credit score.

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FAQ

What APR will I get with a 700 credit score for a car?

A 700 credit score is considered prime and will receive some of the best APR offers. The average interest rate for someone buying a new car with a credit score in the 700 range is 6.87%, according to Experian’s “State of the Automotive Finance Market.” For a used car, the average interest rate is 9.36%.

What car loan interest rate can I get with an 800 credit score?

An 800 credit score is considered super prime and qualifies for the best APR offers. The average interest rate for someone buying a new car with a credit score in the 800 range is 5.25%. For a used car, the average APR is 7.13%.

What is a good APR for a 72 month car loan?

The average APR for a 72 month car loan is 6.86% for a new car and 12.80% for used. If you’re able to get a better APR than the average, you may consider that good.

Is 7% APR good for a car loan?

A 7.00% APR may be a good APR for a car loan, but it depends on your credit, loan term, and whether you’re buying a used or new car. If you have excellent credit and are seeking a new car loan, 7.00% is higher than the average 5.25% APR you could get. But if you’re buying a used car, 7.00% is a great rate.

What APR is too high for a car?

An APR is too high when it’s over the average APR for your credit score. The APR for people with poor credit averages 15.77% for new cars and 21.55% for used cars, so anything over those amounts would be considered high.

Can you negotiate APR on a car?

Yes, you can negotiate the APR (annual percentage rate) on a car loan. Start by researching current rates based on your credit score and prequalifying with different lenders. Dealers may match or beat offers to close the sale, so leverage competing rates to negotiate a better APR.

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SORL-Q424-018

Nov

2024

What Is the Average Credit Score for a 25 Year Old?

By Sarah Li Cain | Credit, Money & Life, relay | Comments Off

Having good credit can help you reach financial goals such as buying a car or home, or renting an apartment. If you’re in your 20s, it makes sense that your credit score may be lower than that of older friends. That’s because you have a shorter credit history, an important factor in calculating your score.

Still, you can use averages to gauge where you stand credit-wise. Credit bureaus don’t use your age to calculate your score, though there are patterns based on it. Let’s take a look at the average credit score for a 25 year old and see what it could mean for your financial life.

Key Points

• The average credit score for a 25 year old is 680, which falls in the low end of the “good” range.

• Many 25 year olds carry student loans, which can influence their score positively with on-time payments or negatively if payments are missed.

• A shorter credit history contributes to a lower average score, as credit bureaus weigh the length of credit history heavily.

• Younger adults may rely more on credit, increasing utilization rates, which can temporarily lower scores.

• By making consistent payments and maintaining low balances, young adults can steadily increase their credit scores over time.

Average Credit Score for a 25 Year Old

While data doesn’t explicitly show the average credit score breakdowns by age, it does by age ranges. Those who are 25 fall under what are considered Gen Z, and this generation’s average FICO® credit score was 680 in 2023.

Recommended: What Is the Starting Credit Score?

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What Is a Credit Score?

A credit score is a three-digit number, typically ranging from 300 to 850, that predicts your credit behavior. It shows lenders how likely you are to pay back loans on time.

Credit scoring companies like FICO and VantageScore calculate your credit score based on information from your credit history, using factors like payment history, how long you’ve had credit or accounts open, and new credit applications. The higher your score, the less of a risk you are to lenders, as it demonstrates you pay back loans on time.

Recommended: How to Check Your Credit Score for Free

What Is the Average Credit Score?

As of October 2023, the average FICO credit score for all ages was 717. The average VantageScore for all ages was 702 as of March 2024.

Average Credit Score by Age

The average credit score tends to go up the older someone is, which could be attributed to a longer credit history and opportunities to open different types of accounts. The table below shows average FICO credit scores according to Experian data from October 2023.

Age	Average Credit Score
16 to 26	680
27 to 42	690
43 to 58	709
59 to 77	745
78+	761

What’s a Good Credit Score for Your Age?

Even if your credit score is at or above the average for your age range, it doesn’t mean that it’s good or that it’ll help you reach your financial goals. A better way to gauge your credit is by using credit score ranges from FICO and VantageScore. That way, you can understand the likelihood of qualifying for credit cards and other types of loans.

FICO

Rating	Credit Score Range
Poor	Lower than 580
Fair	580 to 669
Good	670 to 739
Very Good	740 to 799
Exceptional	800 and higher

VantageScore

Rating	Credit Score Range
Subprime	300 to 600
Near Prime	601 to 660
Prime	661 to 780
Superprime	780 to 850

How Are Credit Scores Used?

Lenders use credit scores as a factor in determining whether to approve you for a loan. Your credit score provides a snapshot of your risk as a borrower and how you use credit. In many cases, the higher your credit score, the more likely you’ll be approved for loans at more competitive rates and terms. Or, you may have access to more loan products, like luxury rewards credit cards.

Factors Influencing the Average Credit Score

There are five factors that affect credit scores:

• Payment history: This aspect of your credit score looks at whether you pay your loans on time, including accounts that may have gone to collections.

• Length of credit history: Having a longer credit history can offer more insights into your credit behavior.

• Credit utilization: Credit utilization is the percentage of available credit you use on revolving accounts. The more you use, the more it could seem you’re overextended on your accounts.

• Credit mix: Scoring models look at the varieties of credit you have like mortgages, credit cards, and car loans.

• New credit: Opening or applying for new credit accounts within a short span of time could affect your credit score.

How to Strengthen Your Credit Score

Credit scores can fluctuate over time due to a number of reasons. If your credit score is lower than you’d like, consider these best practices to build credit:

• Set up automatic payments or reminders to help you pay loans on or before the due date

• Keep your accounts current by paying off past due balances

• Check your credit history reports to see what may have led to a drop in your score

• Fix any errors on your credit reports

• Increase your credit card limits

• Avoid applying for new credit unless necessary

• Keep accounts as long as possible, even if they’re not currently being used

• Watch your credit card balances to make sure they don’t get too high

How Does My Age Affect My Credit Score?

Your age doesn’t directly affect your credit score. Instead, it’s based on factors like your payment history and the length of time you’ve had credit. The earlier you start building your credit, the more opportunities you’ll have to get a good credit score.

Recommended: How Long Does It Take to Build Credit?

At What Age Does Credit Score Improve the Most?

There’s no set age when your credit score will improve the most because it’ll depend on factors such as when you start building credit and whether you pay loans consistently on time. Older generations may have higher credit scores because they have more chances to build their credit. It’s important to focus on where you are at now and what you can do to keep building your credit.

Credit Score Tips

Aside from paying your bills on time, consider other ways you can build credit. While it may be hard to open a new loan or credit card if you have a limited credit history, you can consider products like a secured credit card. A secured credit card has a refundable security deposit that acts as your credit line. Another option is a credit builder loan, where the lender sets aside your loan funds in a separate savings account and you can access the cash once you’ve paid off the loan.

The Takeaway

While looking at the average credit score for a 25 year old may be useful to see where you stand, it’s more effective to look at your credit history to see what you can do to build your score. By regularly monitoring your score, you can see whether the actions you’re taking are helpful.

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FAQ

Can I buy a house with a 633 credit score?

Yes, it’s possible to qualify for a mortgage with a 633 credit score. You may be able to qualify for an FHA loan or a conventional mortgage, but potentially at a higher interest rate.

Can I buy a house with a 613 credit score?

Yes, it’s possible to buy a house with a 613 credit score, though it may limit your loan options and result in higher interest rates. FHA loans, designed for those with lower credit scores, are often a good option, but lenders may require a larger down payment.

What credit score is needed to buy a $300K house?

The credit score you need to buy a $300K house will depend on the type of mortgage you want and other factors, such as your income, available assets, and down payment.

Is 650 a good credit score?

A 650 credit score is considered fair and is slightly below the average credit score.

Is a 750 credit score good at 25?

Yes, a 750 credit score at 25 is considered excellent and indicates strong credit habits for someone in this age group. This high score can help secure favorable interest rates and better loan terms, giving an advantage in achieving financial goals.

How rare is an 800 credit score?

Less than a quarter of U.S. consumers (22%) have a credit score of at least 800. This exceptional score reflects consistent financial responsibility, including on-time payments, low credit utilization, and a long credit history.

Photo credit: iStock/Anchiy

SORL-Q424-027

Nov

2024

What Is Extrinsic Value?

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

What Is Extrinsic Value?

Extrinsic value is the difference between an option’s market price, known as the premium, and its intrinsic value.

Extrinsic value reflects factors beyond the underlying asset’s price that can influence the overall worth of an option. This value fluctuates based on the time to expiration and the volatility of the underlying asset.

Key Points

• Extrinsic value is the difference between an option’s market price and intrinsic value, influenced by time and volatility.

• Longer contracts and higher implied volatility increase extrinsic value.

• Interest rates and dividends affect extrinsic value differently for call and put options.

• Extrinsic value cannot be negative; it represents the portion of an option’s price that exceeds its intrinsic value.

• At-the-money options have the most extrinsic value due to sensitivity to time and volatility changes.

Understanding Intrinsic and Extrinsic Value

The intrinsic value of an option is the difference between an option’s strike price and the current price of the underlying asset, which can be calculated only when the underlying asset is in the money. An out-of-the-money option has no intrinsic value.

Remember, an option that is “in the money” would be profitable for the owner if exercised today, while an option that is “out of the money” would not.

An out-of-the-money option may present an investment opportunity for some, however, because of its potential to become in-the-money at expiration.

Extrinsic value equals the price of the option minus the intrinsic value. As an option’s expiration approaches, extrinsic value usually diminishes since there is less time for the price of the underlying asset to potentially move in a way that benefits the option holder (also known as time decay).

For example, an option that has two weeks before expiry typically has a higher extrinsic value than one that’s one week away. This does not imply it has more intrinsic value, however. It just means there is more time for it to move up or down in price.

Out-of-the-money option premiums consist entirely of extrinsic value, while in-the-money options have both intrinsic value and extrinsic value. Options that trade at-the-money might have a substantial proportion of extrinsic value if there is a long time until expiration and if volatility is high.

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

How Extrinsic Value Works

Simply put, the more time until expiration and the more a share price can fluctuate, the greater an option’s extrinsic value. Extrinsic value demonstrates the time that remains for potential price movement, and the uncertainty in that movement. There are a few different factors that could influence extrinsic value, and understanding them is crucial for evaluating an option’s pricing.

Factors that Affect Extrinsic Value

Two key factors affect an option’s extrinsic value: contract length and implied volatility. In general, the longer the contract, the greater the extrinsic value of an option. That’s because the more time allowed until expiration, the more a stock price might move in favor of the option’s holder. It’s possible, however, that the price moves in the opposite direction; if the holder keeps the option in the hope that the price will rebound, they may lose some or all of their investment.

The second factor that determines extrinsic value is implied volatility. Implied volatility measures the expected magnitude of how much a stock might move over a specific period. Volatility impacts an option’s extrinsic value, and its sensitivity is represented by the Greek letter vega.

1. Length of Contract

An option contract generally has less value the closer it is to expiration. The logic is that there is less time for the underlying security to move in the direction of the option holder’s benefit. As the time to expiration shortens, the extrinsic value decreases, all else equal.

To manage this risk, many investors use the options trading strategy of buying options with varying contract lengths. As opposed to standard option contracts, a trader might choose to buy or sell weekly options, which usually feature shorter contract lengths.

On the opposite side of the spectrum, Long-Term Equity Anticipation Securities (LEAPS) sometimes have contract lengths that measure in years. Extrinsic value could be a large piece of the premium of a LEAPS option.

Some traders will also use a bull call spread, in order to reduce the impact of time decay (and the loss of extrinsic value) on their options.

Recommended: A Beginner’s Guide to Options Trading

2. Implied Volatility

Implied volatility measures how much analysts expect an asset’s price to move during a set period. In general, higher implied volatility means more expensive options, due to higher extrinsic value. That’s because there is a greater chance a stock price could significantly move in the favor of the owner by expiration (or out of favor if the markets shift in the opposite direction). High volatility gives an out-of-the-money option holder more hope that their position will go in-the-money.

So, if implied volatility rises from 20% to 50%, for example, an option holder may benefit from higher extrinsic value (all other variables held constant). On the flip side, an out-of-the-money option on a stock with extremely low implied volatility may have a lower chance of ever turning in-the-money.

3. Others Factors

There is more than just the length of the contract and implied volatility that affect the premium of an option, however.

• Time decay: The time decay, or the rate at which time decreases an option’s value, can greatly impact the premium of near-the-money options, this is known as theta. Time decay works to the benefit of the option seller, also known as the writer.

• Interest rates: Even changes in interest rates, or rho, impact an option’s value. A higher risk-free interest rate pushes up call options’ extrinsic value higher, while put options have a negative correlation to interest rates.

• Dividends: A stock’s dividend will decrease the extrinsic value of its call options while increasing the extrinsic value of its put options.

• Delta: An option’s delta is the sensitivity between an option price and its underlying security. In general, the lower an option’s delta, the less likely it is to be in-the-money, meaning it likely has higher extrinsic value. Options with higher delta are in-the-money and may have more intrinsic value.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Extrinsic Value Example

Let’s say a trader bought a call option through their brokerage account on shares of XYZ stock. The premium paid is $10 and the underlying stock price is $100. The strike price is $110 with an expiration date in three months. Also assume there is a company earnings report due out in the next month.

Since the share price is below the call’s strike, the option is out-of-the-money. The option has no intrinsic value because it is out-of-the-money. Thus, the entire $10 option premium represents extrinsic value, or time value.

As expiration draws nearer, the time value declines, also known as time decay. A trader who takes the long position with a call option hopes the underlying asset appreciates by expiration.

An increase in volatility, perhaps due to the earnings report or another catalyst, might push the option’s price higher. Let’s assume the stock has risen to $120 per share following strong quarterly earnings results, and the call option trades at $11 immediately before expiration.

The call option’s intrinsic value is now $10, but the extrinsic value has declined to just $1, in this scenario, since there is little time to expiration and the earnings date volatility-driver has come and gone. In this case, the trader can sell the call for a small profit or they might choose to exercise the option.

Note that if the stock price had instead fallen below the strike price of $110, the call option would have expired worthless and the trader would have lost the premium they paid for the option.

Extrinsic vs Intrinsic Value

Extrinsic value reflects the length of the contract plus implied volatility, while intrinsic value is the difference between the price of the stock and the option’s strike when the option is in the money.

Extrinsic Value Factors (Call Option)	Intrinsic Value Factor (Call Option)
Length of Contract	Stock Price Minus Strike Price
Implied Volatility

Extrinsic Value and Options: Calls vs Puts

Both call options and put options can have extrinsic value.

Calls

Extrinsic value for call options can be high. Consider that a stock price has no upper limit, so call options have infinite potential extrinsic value. The more time until expiration and the greater the implied volatility, the more extrinsic value a call option will have.

Puts

Put options have a lower potential value since a stock price can only drop to zero. Thus, there is a limit to how much a put option can be worth, which is the difference between the strike price and zero. Out-of-the-money puts, when the stock price is above the strike, feature a premium entirely of extrinsic value.

The Takeaway

Understanding the fundamentals of intrinsic and extrinsic value is important for options traders. Although intrinsic value is a somewhat simple calculation, extrinsic value takes a few more factors into consideration — specifically time and volatility of the underlying asset. The more time until the contract expires, and the more a share price can fluctuate, the greater an option’s extrinsic value.

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FAQ

Which options have the most extrinsic value?

At-the-money options typically have the most extrinsic value since their price is closest to the strike price, thus being most sensitive to changes in time and volatility.

Can an option’s extrinsic value be negative?

No. Extrinsic value represents the portion of an option’s price beyond its intrinsic value, so it can never be less than zero. If an option’s market price is lower than its intrinsic value, it can only be as low as zero.

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SOIN-Q324-066

Nov

2024

Available Credit on a Credit Card: What It Is & Why It’s Important

By Brian O'Connell | Credit, credit card | Comments Off

Put simply, available credit on a credit card is how much money a cardholder has left to spend in a billing cycle. Being aware of your available credit is key to managing your money responsibly and ensuring you don’t spend beyond your credit limit. Doing so can lead to having a purchase declined or facing penalties, such as a higher interest rate.

Once you know what available credit means, however, you may find that you have further questions about how much to use and how the balance impacts your financial standing. Learn more about this important topic.

Key Points

• Available credit is the remaining amount a cardholder can spend within a billing cycle after purchases are deducted from the credit limit.

• Regularly checking available credit helps manage spending and avoid exceeding credit limits.

• Maintaining a low credit utilization rate, ideally below 30%, can positively impact credit scores.

• Increasing available credit can be achieved by paying down balances or requesting a credit limit increase.

• Low available credit indicates high usage of the credit limit, which can negatively affect financial standing.

What Is Available Credit on a Credit Card?

Available credit is the amount of money that’s left on a cardholder’s account in the current billing cycle. As a cardholder uses their credit card, the purchase amounts are deducted from their credit limit, which is the maximum amount a cardholder can spend on the card. The remaining amount is what’s known as available credit.

Credit card companies recalculate your available credit every time you make a purchase and when you make a card payment. When you buy something with your credit card, your available payment falls, whereas your available credit rises when you make a payment. One of the key differences between available credit and credit limit is that your credit limit typically remains the same, regardless of your spending or payments.

The Importance of Having Available Credit

Knowing your available credit can have a significant impact on your credit card experience. The more available credit you have, the more you can spend on your card. If your available credit is low, you’ll know that you’re nearing your credit limit.

When you aren’t aware of whether you have available credit, the following scenarios can become a reality depending on how your credit card works:

• You could have a purchase declined if you don’t have the available credit to cover it.

• You could incur an interest rate penalty, meaning your rate will go up.

• You could owe an over-limit fee.

• Your credit card issuer could lower your credit limit or even close your account after multiple overages.

How to Check Your Available Credit

Cardholders can easily check their available credit in the following ways:

• On their monthly credit card statement

• Via the credit card company’s app or website, listed under “accounts”

• By calling their credit card issuer through the number on the back of their card

Calculating available credit is also fairly straightforward. All a cardholder has to do is subtract their current credit card balance from the account’s total credit limit. In other words, the formula is:

Credit limit – current balance = available credit

Make sure to factor in all card-related costs when making this calculation, including account fees and interest charges, which will apply if you’re carrying a balance on a credit card.

Recommended: What Is a Charge Card?

How Much Available Credit Does It Make Sense to Use?

It’s recommended that credit card users regularly check their credit card balance and refrain from overspending in order to maintain a lower credit utilization rate. This rate reflects how much of their overall credit limit they’re using at a given time.

Credit utilization is not only important for household budget considerations — it also impacts credit score. The lower the credit card utilization rate, the better for a cardholder’s credit score. Aim to maintain a credit-to-debt ratio of no more than 30%, meaning the cardholder has 70% of their available credit remaining on the credit card account.

Tips for Increasing Your Available Credit

Cardholders looking to boost their available credit can leverage several action steps to get the job done.

Pay Down Your Card Balances

Perhaps the most efficient way to boost your available credit — short of not using the card at all — is to make regular payments. This will keep your credit card debt as low as possible.

For maximum results, pay your entire balance every month. If that’s not possible, pay as much as your household budget allows each month toward your credit card balance rather than only making the minimum payment. Done regularly, this will help to keep your credit card debt down and your available credit up.

Recommended: When Are Credit Card Payments Due?

Request a Credit Limit Increase

Technically, asking for — and getting — a credit limit increase from your credit card company will also boost your available credit. You’ll need good credit and a solid credit card payment history to gain approval from your credit card company though. Also note that the request for a credit limit hike may lead to a hard credit check, which could negatively impact your credit score for a brief period of time.

If you get approved for a credit limit boost, resist the temptation to overspend now that you have a higher credit limit. To be safe, don’t ask for a credit limit boost unless you’re able to pay off your current balance. That’s a good sign you can handle any potential added credit card debt.

Recommended: What Is the Average Credit Card Limit?

Get a New Credit Card

Say you’ve done a good job of making timely debt payments and have maintained a solid credit score. You stand a good chance of getting approved for a new credit card with a higher credit limit.

If your new credit card doesn’t offer a higher credit limit, you’ll still benefit from the additional available credit earned from the new card. This can help build your credit score, for example. (Just keep in mind that a new account will likely involve a hard credit pull, which will be added to your credit report and could lower your score temporarily.)

Recommended: How to Avoid Interest on a Credit Card

The Takeaway

Knowing how much available credit you have on a credit card expresses how much you still have available to spend. However, you’ll want to avoid using the entirety of your credit limit — which would take your available credit down to $0 — due to the consequences that can have. Not only could that result in a declined credit card or an increased interest rate, a high credit utilization rate can have negative implications for 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

How much available credit should I have?

A good rule of thumb is to have at least 70% of your credit limit available. That will allow you to maintain a credit utilization rate of 30%, which can help you to avoid negative impacts to your credit score.

What does available credit mean on a credit report?

Available credit on a credit report means the amount of credit available to a consumer relative to their outstanding debt. Lenders and creditors want to see consumers with high available credit and low debt balances, as this shows responsible borrowing habits.

Is available credit the amount I can spend?

Yes, available credit is the amount of credit available to a cardholder that they can use. However, you want to keep your credit utilization low (under 30%) and your available credit vs. credit limit high (at least 70%). For this reason, spending all your available credit tends to be an unwise move and can have a negative impact on your credit score and your financial standing.

Why is my available credit low?

Low available credit means you’ve used a large portion of your credit limit. You might aim to spend less in the future to maintain a lower credit utilization rate. In the meantime, keep a close eye on your spending to avoid hitting your credit limit, which can have negative consequences. It can be a wise move to work towards having a credit utilization of no more than 30% of your limit.

Photo credit: iStock/Ridofranz

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 .

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

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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Nov

2024

15 Ways to Save Money on Clothes

By Marcy Lovitch | Budgeting & Goals, Family Finances, money | Comments Off

For many people, clothing is a favorite purchase, and shopping for new looks is practically a hobby. Fashion is a way to express your personal style; a new pair of jeans or boots can be a major mood-lifter.

But let’s face it, clothes can be expensive. If fashion is your weakness, it can take a big bite out of your budget. According to the Bureau of Labor Statistics, the average American household spends $1,945 a year on apparel and related services. But some people spend considerably more, ringing up bigger bills by buying the latest designer clothes, shoes, and accessories. These purchases can add up over time, leading to credit card debt and making it difficult to get ahead and achieve your goals. Here’s a look at some ways to reduce the amount you spend on clothing without giving up your love of fashion.

Key Points

• Save money on clothes by shopping end-of-season sales and hosting clothing swaps.

• Extend clothing lifespan by following proper care instructions and mending minor damages.

• Create a capsule wardrobe with versatile, high-quality pieces.

• Upcycle old clothes and buy or sell used clothing to save money.

• Set a clothing budget and consider no-spend challenges to curb expenses.

Money-Saving Tips for Buying Clothes

There are ways you can cut down on your clothing expenses but still score some pieces you can’t wait to wear. Here’s 15 suggestions on how you can save money on clothes without feeling deprived or out of sync with the latest styles.

💡 Quick Tip: Tired of paying pointless bank fees? When you open a bank account online you often avoid excess charges.

1. Shop the End-of-Season Sales

Ever notice how spring and summer clothing seems to go on sale in June or July? Or fall and winter clothes in January? The reason is because stores need to sell that merchandise so they can make room for next season’s items. Time it right, and you can scoop up current seasonal clothing at steep discounts. Just don’t go shopping the second that next season’s looks hit the racks.

2. Host a Clothing Swap

You know the saying, someone else’s trash might be your treasure. A cost-free way to get some new pieces is by arranging a clothing swap. The ground rules: Everyone brings clean, gently used clothes they’re looking to unload, and attendees get to sift through other’s clothing and add to their wardrobe for free.

A clothing swap is a great way to combine socializing and “shopping.” If you want to host one, heed this advice:

• Make sure you’ve got a big enough space where everyone can comfortably peruse and try on items.

• Invite people who are roughly the same clothing size.

• Set a minimum number of pieces they need to bring.

• Don’t feel like being the coordinator? Check out Meetup.com and Eventbrite.com to find swaps near you.

3. Ask for a Discount on Damaged Clothing

A handy tip for how to save money when shopping for clothes: If you find something you love but notice slight imperfections such as a small tear, loose thread, or a flaw in the fabric, bring it to the attention of a store employee. You might be able to get some dollars knocked off the retail price. If the salesperson doesn’t offer this, you can politely ask if the price can be lowered to reflect the garment’s condition.

Think it’s not worth the trouble? Remember why saving money is important. Every little bit of extra cash you sock away can be used to pay down debts or go towards a goal like funding a summer vacation.

4. Look for Coupon or Promo Codes

Before making a purchase, do an online search to see if the retailer offers a store coupon or promo code you can use when shopping online. You can find available coupon or discount codes at sites such as Retailmenot.com, Rakuten.com and BeFrugal.com, which all offer cash back for purchases made. Many times, if you are a first-time customer, you can snag a discount and/or free shipping by signing up for emails or text messages.

5. Mend Your Clothes

Are there things hanging in your closet you’re not wearing simply because a button is missing or the garment has a small hole? Instead of taking it to a tailor, buying something new, or avoiding it altogether because it needs repair, try fixing it on your own. Basic mending doesn’t require a lot of tools and is pretty easy.

As long as you’ve got the basics such as a needle, thread, scissors, or buttons (if needed), you’re good to go. If you’re not sure about your hand sewing skills, you can find a slew of how-to videos on YouTube.

5. Buy Generic Brands for the Basics

When it comes to certain articles of clothing, purchasing a generic brand over a name or designer one can save you money without jeopardizing your style. Any item you wear under something, like a tank top or a tee shirt, doesn’t need a fancy label to serve the purpose. Why buy a white tee at a high-priced store for $50 or $90 when a similar one at a national chain retailer costs only $5?

6. Create a Capsule Wardrobe

Having a capsule wardrobe means you’ve created a streamlined clothing collection that features well-made, non-trendy pieces that can all be mixed and matched. The idea is to spend a little more on the items initially. In the long run, however, you save money because these higher quality garments will last longer and not have to be replaced every few months.

A capsule wardrobe also offers timeless, versatile clothing choices instead of a closet full of flash-in-the-pan styles. Not having a large wardrobe can also help reduce the stress of getting ready every day.

7. Wash Your Clothes Properly

Laundry mistakes can damage your clothes. For instance, washing certain fabrics in hot water can cause shrinkage, fading, and wrinkling, as well as cause dye to run. However, using cold water is generally more clothing-friendly, reducing the risk that you will ruin a garment in the wash. You can also save on your gas or electric bill, since around 90% of all of the energy used in your washer goes to heating up the water.

Another way to extend the life of your clothes is by not washing every single item after one wear, with the exception of course, of underwear and socks. Why? Each time you wash your clothes, you’re putting stress on the fabric. By wearing your clothes a few times before washing, you can minimize any damage. As an added bonus, you’ll also spend less on laundry detergent.

💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

8. Borrow from a Friend

Going to a gala event or attending a wedding but have nothing to wear? Consider asking that generous, stylish friend if you might be able to borrow from their closet. This can spare your bank account and allow you to get dressed up in something new and fresh to you. The only cost you might incur is taking the garment to the dry cleaners after.

Don’t have a friend with a fab wardrobe? Consider renting an outfit for your big night out.

9. Figure Out Cost Per Wear

To ensure you get your money’s worth out of the clothing you buy, pay attention to how often things get worn. If a piece is costly and you’ve only worn it once, you’re not reaping its full value.

You can figure out if your money was well spent by calculating the cost-per-wear ratio. Just divide the item’s cost by how many times you wear it. For example, if you buy a coat for $100 and wear it 100 times, your cost per wear is $1. On the flip side, if you’ve only worn it five times, each wear is equivalent to $20 which probably hasn’t given you the most bang for your buck. Before you buy the clothing, take time to do the math to assess how many times you realistically expect to wear it.

10. Upcycle Your Clothes

Upcycling clothing is taking something old, recycling it, and making it into something new to wear. Repurposing clothing is one of the many creative ways you can save money.

Upcycling clothes can include sewing, cutting, dyeing, or even updating a cardigan with new buttons. Fun examples of upcycling include hand-painting a jean jacket, cutting a pair of jeans into shorts, creating a tote bag from a sweatshirt, or transforming a wool blanket into an autumn coat or cape.

Upcycling is also eco-friendly. According to the Council for Textile Recycling, the average American throws away 70 pounds of clothing and other textiles every year. Not only does upcycling help you buy less and keep excess fabric out of landfills, it’s a way to save money and live sustainably.

11. Retool Your Clothing Budget

One way to stop overspending on clothing is to figure out how much you’re actually shelling out each month and then set a limit. There are several different budgeting techniques, such as the 50-30-20 rule. This divides your take home money into three categories: needs (50%), wants (30%) and savings and debt repayment (20%).

The needs category encompasses expenses you can’t avoid like groceries, housing, and utilities. Generally, clothes fall into the discretionary wants group along with entertainment, dining out, and monthly subscription expenses. Some financial experts suggest limiting clothing spending to 2 to 2.5% of your take-home pay which equals between 6% and 8% of the 30% wants category. If you make $4,000 a month after taxes, 30% of that amount equals $1,200: 6% to 8% of that figure equals an allotment of $72 to $96 a month for apparel. If that doesn’t sound like enough, you’ll want to see what other non-essentials in the wants category you can scale back.

Recommended: 50/30/20 Budget Calculator

12. Go Shopping in Your Own Closet

Do you really know what’s in your closet or tucked into all your dresser drawers? Go through your entire wardrobe, and you might find things you forgot you had or thought you got rid of years ago. Unearthing items you haven’t seen or worn in awhile can spark creativity with clothing combinations and stretch your wardrobe.

On the other hand, you may realize some pieces lingering in the corners of your closet hold no interest. If that’s the case, keep reading for details on how you might get some money for them.

13. Buy and Sell Used Clothing

There’s no question you can save money by shopping for second-hand clothing. You can find bargains at a variety of places, including thrift stores; consignment shops; garage, yard, or stoop sales; and even for free through community groups such as Buy Nothing. Two sites, among others, where you can sell your old stuff are Poshmark and Depop. There are also vintage and used clothing shops that buy clothing from people like you. Check out Buffalo Exchange and Crossroads Trading; you might get cash for your gear or be able to swap it for pieces you love.

14. Try a No-Spend Challenge

One way to curb clothes spending is to put a temporary kibosh on shopping for these items. For example, you might commit to a 30-day no-spending challenge on shopping for anything to wear. During the challenge, try not to put yourself in situations where you may feel the urge to shop; instead, explore alternative activities (like taking a walk with a friend, doing a hobby, or reading) to stay busy. At the end of the 30 days, you may notice you have more money, less credit card debt, and really don’t miss the items you didn’t buy. This can encourage you to spend less on clothing moving forward.

15. Learn When Retailers Have Their Biggest Sales

You can save significant money on clothing by timing your purchases right. Start paying attention and you’ll see a pattern as to when major retailers host their big sales. Holiday weekends such as Martin Luther King Jr.’ Day, Memorial Day, Labor Day, and the Fourth of July are popular times for stores to feature great buys along with Black Friday. For online shopping, check out deals on Cyber Monday (the Monday right after Thanksgiving) and Amazon Prime Day.

You can also ask a salesperson at your favorite stores to give you the inside scoop on when certain items might be going on sale.

The Takeaway

Clothes shopping can be a fun and creative outlet, but if you’re not mindful, it’s easy to rack up the bills and possibly find yourself mired in unnecessary debt. By shopping with more intention, looking for the best deals, and making the pieces you have last longer, however, you can still feel good about what you wear without spending as much.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with 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.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

How can I stop spending money on clothes?

One of the best ways to save money on buying clothes is to simply remove the temptation, especially if you’re prone to impulse spending. If you like to shop online, unsubscribe from retailer emails so you won’t be alerted to new items and sales. Feel the itch while scrolling your phone? Put it down; pick up a book, or watch a movie instead. When you’re out and about, resist going into your favorite stores. Vow to commit to a 30-day shopping sabbatical and see how much money you’re able to save as a result.

Are there ways I can take better care of my clothing so they’ll last longer?

Yes, you can make your clothes last longer by following the washing instructions carefully, letting items air-dry when possible (instead of exposing them to a hot dryer), and storing them in a cool, clean, and dry environment out of the sunlight (which can cause fading). It’s also a good idea to fold heavy sweaters instead of hanging them to prevent the fabric from stretching.

Should I only buy cheaper clothes?

Not necessarily. Sometimes spending more means you’ll get a well-made, high-quality garment that will last for years. This can end up costing less than buying cheaper clothes that you only wear for one season. You might look for these pieces on sale at major department stores and at discount retailers.

Photo credit: iStock/Phiwath Jittamas

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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

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