Apr
01
2025
Life Insurance Definitions & Terminology, Explained

Glossary of Life Insurance Terms

By | Life & Career, Terminology | Comments Off on Glossary of Life Insurance Terms

Life insurance terms can be confusing when you first come across them, so learning the language of life insurance can help when you’re thinking about or shopping for a policy.

You may know that for many people, life insurance is important to have, and perhaps you’ve started some initial research into life insurance policies.

Learning common life insurance definitions can help you make an informed decision when looking into coverage options.

Key Points

•   Accidental death benefit provides extra compensation if death occurs due to an accident.

•   Underwriting assesses health, lifestyle, and financial status to determine coverage.

•   Permanent life insurance offers lifelong coverage and builds cash value over time.

•   A beneficiary receives the death benefit upon the policyholder’s passing.

•   Term life insurance provides coverage for a specific duration, usually at a lower cost.

Life Insurance Terms

Discover life insurance definitions, simplified.

Accidental Death Benefit

If a life insurance policy includes an accidental death benefit, the cause of death will be examined to determine whether the insured’s death meets the policy’s definition of accidental. This is often a rider, or additional benefit for an additional fee, attached to the policy. An example of an accidental death could be one caused by a car crash, slip, or machinery.

Annuity

This is a contract in which the buyer deposits money with a life insurance company for investment on a tax-deferred basis. Annuities are designed to help protect the contract holder from the risk of outliving their income.

An annuity may include a death benefit that will pay the beneficiary a specified minimum amount.

Beneficiary

This is the person or entity designated to receive the death benefit from a life insurance policy or annuity contract.

Contestable Period

For up to two years, a life insurance company may deny payment of a claim to beneficiaries because of suicide or misrepresentation on an application — for example, if the insured was listed as a nonsmoker but smoked often and died of complications related to that.

Death Benefit

This term refers to the amount that will be paid to the beneficiary upon the death of the insured. The phrase “death benefit” is common life insurance terminology you’ll see in a life insurance policy.

Evidence of Insurability

In order for you to qualify for a particular policy at a particular price, companies have the right to ask for information about your health and lifestyle. An insurance company will use this information when deciding on approval and rate. If you are overweight, a smoker, or have a history of health problems, your policy will likely cost more than someone without those issues.

Free Examination Period

Also known as the “free look period,” this is a 10- to 30-day window during which you can cancel your new policy without penalty and get a refund of premiums.

Group Life Insurance

This provides coverage to a group of people under one contract. Group contracts are often sold to businesses that want to provide life insurance for their employees. Group life insurance can also be sold to associations to cover their members.

Insured

This is the person whose life is insured by the policy. The insured may also be the policyholder.

Permanent Life Insurance

These kinds of policies can provide lifelong coverage and the opportunity to build cash value, which accumulates tax-deferred. Whole life and universal life insurance policies fall under this umbrella term. Permanent life insurance is more expensive and complicated than term life insurance.

Policy

This is the official, legal document that includes the terms of the policy owner’s insurance. The policy will name the insured, the policy owner, the death benefit, and the beneficiary.

Policyholder

The person who owns the life insurance policy. It can be the person who is insured by the policy.

Premium

The payment the customer makes to the insurance company to pay for the policy. It may be paid annually, semiannually, quarterly, or monthly.

Term Life Insurance

This type of life insurance offers coverage for a set number of years, or “term,” of the insured’s life, commonly 20 or 30 years. If the insured individual dies during the years of coverage, a death benefit will be paid to the beneficiaries. Term life insurance costs less than permanent life insurance.

Recommended: 8 Popular Types of Life Insurance for Any Age

Underwriting

Often viewed as a mysterious process, underwriting is simply when factors are evaluated relating to the applicant’s current health, medical history, lifestyle habits, hobbies, occupation, and financial profile to determine eligibility for coverage as well as what the appropriate premiums should be.

Universal Life Insurance

With this kind of permanent life insurance, policyholders may be able to adjust their premium payments and death benefits. The cash value gains vary depending on the type of universal life insurance policy purchased.

Variable Life Insurance

With variable life, another type of permanent life insurance, the death benefit and the cash value fluctuate according to the investment performance of a separate account fund.

Earnings accumulate tax-deferred. Fees and expenses can reduce the portion of premiums that go toward the cash value.

Whole Life Insurance

Whole life is another type of permanent cash value insurance. The premiums, rate of return on cash value, and death benefit are fixed and guaranteed. The cash value component grows tax-deferred. Whole life tends to be more expensive than other types of permanent insurance.

Recommended: Term vs. Whole Life Insurance

The Takeaway

Life insurance can be an important way to protect your loved ones’ financial future in the event of your death. While its terms can be a mouthful, they don’t have to be confusing. Understanding the definitions of life insurance can help you put a plan in place to protect your family.

SoFi has partnered with Ladder to offer competitive term life insurance policies that are quick to set up and easy to understand. Apply in just minutes and get an instant decision. As your circumstances change, you can update or cancel your policy with no fees and no hassles.

Explore your life insurance options with SoFi Protect.

Photo credit: iStock/mapodile

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.


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.

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.

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Apr
01
2025
What is Deflation and Why Does it Matter?

What Is Deflation and Why Does It Matter?

By | Financial Independence, Growing Wealth, invest, Investing | Comments Off on What Is Deflation and Why Does It Matter?

Deflation is essentially the opposite of inflation. It occurs when the prices consumers pay for goods and services goes down. That means that consumers can purchase more with the same amount of money.

There are many factors that cause deflation, which happens when the supply of goods and services is higher than the demand for them. While deflation can have some benefits to consumers, it’s often a sign of trouble for the overall economy.

What Happens During Deflation?

In addition to knowing what inflation is, it’s important to understand how it impacts the economy. In a deflationary economy, prices gradually drop and consumers can purchase more with their money. In other words, the value of a dollar rises when deflation happens.

It’s important not to confuse deflation with disinflation. Disinflation is simply inflation decelerating. For example, the annual inflation rate may change from 5% to 3%. This variation still means that inflation is present, just at a lower rate. By contrast, deflation lowers prices. So, instead of prices increasing 3%, they may drop in value by 2%.

Although it may seem advantageous for consumer purchasing power to increase, it can accompany a recession. When prices drop, consumers may delay purchases on the assumption that they can buy something later for a lower price. However, when consumers put less money into the economy, it results in less money for the service or product creators.

The combination of these two factors can yield higher unemployment and interest rates. Historically, after the financial crises of 1890, 1893, 1907, and the early-1930s, the United States saw deflationary periods follow.

How Is Deflation Measured?

Economists measure deflation the same way they measure inflation, by first gathering price data on goods and services. The Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS) record and monitor this type of data in the United States. They collect pricing information that they then put into buckets reflecting the types of goods and services consumers generally use.

While these buckets do not include every product and service; they offer a sample of items and services consumed. In the United States, economists incorporate these prices into an indicator known as the Consumer Price Index (CPI).

Then, economists can compare the CPI to previous years to determine whether the economy is experiencing inflation or deflation. For example, if the prices decrease in a period compared to the year before, the economy is experiencing deflation. On the other hand, if prices increase compared to the previous year, the economy is experiencing inflation.

What Causes Deflation?

Deflation comes from a swing in supply and demand. Typically, when demand dwindles and supply increases, prices drop. Factors that may contribute to this shift include:

Rising Interest rates

When the economy is expanding, the Federal Reserve may increase interest rates. When rates go up, consumers are less likely to spend their money and may keep more in high interest savings accounts to capitalize on the increase in rates.

Also, the cost of borrowing increases with the rise of interest rates, further discouraging consumers from spending on large items.

Decline in Consumer Confidence

When the country is experiencing economic turbulence, like a recession, consumers spend less money. Because consumers tend to worry about the direction of the economy, they may want to keep more of their money in savings to protect their financial well-being.

Innovations in Technology

Technological innovation and process efficiency ultimately help lower prices while increasing supply. Some companies’ increase in productivity may have a small impact on the economy. While other industries, such as oil, can have a drastic impact on the economy as a whole.

Lower Production Costs

When the cost to produce certain items, such as oil, decreases, manufacturers may increase production. If demand for the product stagnates or decreases, they may then end up with excess supply. To sell the product, companies may drop prices to encourage consumer purchases.

Why Does Deflation Matter?

Although falling prices may seem advantageous when you need to purchase something, it’s always not a good sign for the economy. Many economists prefer slow and unwavering inflation. When prices continue to rise, consumers have an incentive to make purchases sooner, which further boosts the economy.

One of the most significant impacts of deflation is that it can take a toll on business revenues. When prices fall, businesses can’t make as much money.

The drop in business profits makes it challenging for companies to support their employees, leading to layoffs or pay cuts. When incomes go down, consumers spend less money. So deflation can create a domino effect impacting the economy at many different levels, including lower wages, increased unemployment, and falling demand.

Deflation During The Great Depression

The Great Depression is a significant example of the potential economic impact of a deflationary period. While the 1929 stock market crash and recession set this economic disaster off, deflation heavily contributed to it. The rapid decrease in demand along with cautious money hoarding led to falling prices for goods and services. Many companies couldn’t recover and shut down. This caused record-high unemployment in the United States, peaking at 25%, and in several other countries as well.

During this time, the economy continued to experience the negative feedback loop associated with deflation: cash shortages, falling prices, economic stagnation, and business shutdowns. While the United States has seen small episodes of deflationary periods since the Great Depression, it hasn’t seen anything as substantial as this event.

How to Manage Deflation

So, what can the government do to help regulate inflation? For starters, the Federal Reserve can lower interest rates to stimulate financial institutions to lend money. The Fed may also purchase Treasury securities back to increase liquidity that may help financial institutions loan funds. Those initiatives can increase the circulation of the money in the economy and boost spending.

Another way to manage deflation is with changes in fiscal policy, such as lowering taxes or providing stimulus funds. Putting more money in consumers’ pockets encourages an increase in spending. This, in turn, creates a chain effect that may increase demand, increase prices, and move the economy out of a deflationary period.

The Takeaway

Deflation refers to a period that can be thought of as the opposite of inflation. It occurs when the prices consumers pay for goods and services goes down, which means that consumers can purchase more with the same amount of money.

When the economy is experiencing some turbulence, some investors may choose to keep their money in savings. On the other hand, other investors may see falling prices as an opportunity to purchase securities at a discount, either to hold or to sell when the economy recovers. Like any other investment strategy, investors must base their investment decisions on their personal preferences since there are no guaranteed results.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

About the author

Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.


Photo credit: iStock/eclipse_images

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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

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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Apr
01
2025
What Happened During Tulip Mania?

What Happened During Tulip Mania?

By | Growing Wealth, invest, Investing | Comments Off on What Happened During Tulip Mania?

One of the most famous instances of an asset bubble was the “Tulip Mania” that erupted in Holland during the 17th century. It was the first recorded major financial bubble, during which demand for tulips exploded, and prices for the flowers followed suit.

This led some investors to speculatively purchase tulips, resulting in losses when prices fell back down. Despite Tulip Mania occurring centuries ago, it can still be used as a history lesson for current traders and investors.

What Was Tulip Mania?

Tulip Mania was a speculative frenzy that erupted in Holland during the 17th century. The Dutch were newly independent of Spain and building themselves into prosperous traders. The mid-1600s was a period of wealth for them, as they benefited from rare imports brought through the Dutch East India Company.

Interest in exotic items was at an all-time high, and collectors became fascinated with not just tulips, but “broken” tulips. These tulips came from bulbs and grew into striped or multicolored patterns. As demand grew, more companies began selling bulbs.

The most famous tales about Tulip Mania sound like something out of a book. People of all walks of life bought the flowers in a frenzy at sometimes extremely high prices. They hoped for significant returns and to escape their social classes, but they met financial disaster. Those investors fell into ruin when the tulip bubble burst in 1637 – similar to the dotcom bubble in more recent times – and some of the stories even detail tragic endings; people losing everything and drowning themselves in the canals. All because a tulip-incited mass hysteria that created a financial crisis.

But, is it really true?


💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

What Really Happened During Tulip Mania?

The “mania” in the story of Tulip Mania comes from an 1841 account by a Scottish author named Charles MacKay. His Memoirs of Extraordinary Popular Delusions and the Madness of Crowds detailed a “tulipomania” where people poured years of salaries into the speculative tulip trade. From farmers, to nobles, to chimney-sweeps, he documented every class buying in. Then, the memoir described mayhem following the market collapse in 1637. Ultimately, MacKay created a dramatic tale that was more fiction than fact.

There was a Dutch tulip bulb market during the Dutch Golden Age. However, traders were limited to buyers with the finances to invest in luxury items. Typically, this group included merchants, artisans, and the upper class.

Additionally, the price increase was not consistent. Between December 1636 and February 1637, some highly sought-after bulbs experienced a price spike. Some of the most expensive went for 5,000 guilders, which equaled the value of a nice home in 1637. Or, there is evidence that the highest bid totaled out to 5,200 guilders. That matched 20 times the yearly salary of a skilled worker. But these prices were the exception, not the rule.

That leaves the final part of the story: the fallout.

Tulip Mania Bubble Burst

Tulip Mania is the classic and most well-known historical example of a financial bubble.

Traders bought into the bulbs with the intent to resell and earn a profit. However, the flowers’ held no inherent value. Their status as a luxury item determined their prices and pushed demand. In fact, demand grew so high that professional traders began bidding on the product on the Stock Exchange of Amsterdam. People even used margined derivative contracts to increase the number of tulips they could buy despite their financial limits.

But before spring even hit, the bubble burst. The mania fell away after the tulips lost their value when the supply of tulips increased due to warmer weather. With so many of the crops, bulb traders realized the product wasn’t as rare as they thought. An auction in Haarlem in February of 1637 seemed to solidify the thought when the auctioneers failed to sell any bulbs.

When the prices dropped, traders had to sell their holdings for a lower value. However, this led to a few broken relationships and lost reputations, not any tragic deaths.

So, there was no morbid end when the Tulip Mania bubble burst. MacKay reported that Holland’s national economy fell apart due to the volatile market crash, but those claims appear exaggerated. The bubble only impacted those who were involved in the Tulip trade, and most investors were in an easily salvageable position. They financially recovered relatively quickly. On the other hand, growers did struggle to replace the lost buyers when certain contracts fell through.

What Tulip Mania Reveals About Financial Markets

While the story is more straightforward than MacKay made many believe, it is still a valuable moment in economic history. It became a parable that explains the nature of bubbles and the crashes that occurred throughout the history of the stock market.

Part of its value as a lesson stems from its moment in time. Multiple bubbles followed Tulip Mania, including the railroad mania bubble during the 1840s, where commentators encouraged investors to buy into U.K. railway stocks or in the early 2000s when Americans began speculating in residential housing before that bubble burst.

The dynamics behind each of these events is similar to the dynamics of the tulip bubble. Speculators drive up the price of an asset beyond its intrinsic value until the bubble eventually busts and those who bought at the top of the market end up losing money in the market downturn.

The Takeaway

Tulip Mania is perhaps the penultimate example of a market bubble, which still resonates today, even though it occurred in Holland centuries ago. Bubbles can also occur in the pricing of individual securities, sectors, or the broader stock market, eventually leading to a crash in prices.

A stock market crash is an alarming time that can send many investors into a panic. They see the drop and move immediately to selling. However, panic selling in the face of market volatility can have disastrous effects on a portfolio. Either you sell when the market is struggling and earn lower returns as a result, or you miss out on the market rebound.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

About the author

Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.


SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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

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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Apr
01
2025
How to Cash a Postal Money Order

How to Cash a Postal Money Order

By | Financial Independence, relay, Terminology | Comments Off on How to Cash a Postal Money Order

Anyone can use a money order to send or receive money. While money orders aren’t the most common tool, they’re usually simple to obtain and cash. To cash a money order at no charge, visit your local post office branch and present your money order at the window.

In this article, we outline where to cash postal money orders and what the process looks like.

Key Points

•   Money orders can be cashed at various locations, including banks, credit unions, post offices, and retail stores.

•   Some places may charge a fee to cash a money order, so it’s important to compare fees before choosing a location.

•   To cash a money order, you typically need to endorse it and provide identification.

•   It’s important to keep the receipt or a copy of the money order in case it gets lost or stolen.

•   If you don’t have a bank account, you can still cash a money order by using a check cashing service.

What Is a Postal Money Order?

A postal money order is a type of financial certificate issued on paper by the post office. Similar to a paper check, the document is worth the amount of money determined by the person or company that purchased it. While you can obtain a regular money order from almost any bank, only the United States Postal Service (USPS) issues postal money orders.

Unlike a check, a postal money order is prepaid by the party sending it, so it can’t bounce. Money orders also never expire. A receipt is provided to the purchaser in case the money order is lost, stolen, or damaged. As a result, you can use a postal money order to securely send a payment through the mail.

Another advantage of money orders is that they are difficult to counterfeit. You can make a payment of up to $1,000 with a single order.

To send a money order, you must pay for it ahead of time using cash, a debit card, or a traveler’s check. Although it is possible to buy a regular money order with a credit card, you cannot put postal money orders on a credit card.

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Recommended: What Is a Niche Bank?

How to Cash a Postal Money Order Step by Step

If you receive a postal money order, you can redeem its face value by cashing it. There is no advantage in keeping a postal money order long-term, since it doesn’t earn interest and cannot be used directly to make a purchase.

Here’s how to cash a money order at the post office for free:

1.    Bring the money order and a photo ID to a post office service counter.

2.    Sign the money order in view of the postal worker (do not sign it ahead of time).

3.    You will immediately receive the cash value of the money order.

Where to Cash a Postal Money Order

You can cash a postal money order in certain places outside the post office. Many banks will cash postal money orders, as long as you have an account there. Some grocery stores and retailers will cash money orders, too.

Because proof of ID is required, you cannot deposit money orders via a mobile banking app.

List of Places That Cash Money Orders

Here are some locations that may cash a postal money order:

•   Most banks. Check with your local branch.

•   Check-cashing retailer. Consumers without a bank account or nearby post office may cash money orders here for a fee.

•   International postal office. The post office offers special international money orders that can be cashed at banks and post offices in some other countries.

•   Rural mail carrier. Some mail carriers may cash money orders for rural customers if they have enough cash on hand.

•   Some supermarkets and major retailers. Search online for “places to cash a money order near me.”

Recommended: Alternative to Traditional Banks

How to Identify a Fake Postal Money Order

You’ll want to examine your money order before attempting to deposit it in order to ensure it’s authentic. Here are a few ways to spot a fraudulent postal money order:

•   Look closely at the paper. Valid postal money orders have special markings and designs to prevent fraud. Visit USPS.com to view a sample money order.

•   Review sum amount. If the dollar amount is faded, too large, or not printed twice on the paper, it could be fraudulent. All postal money orders must be under $1,000 and have the sum printed twice on the paper. International postal money orders cannot exceed $700, or $500 for El Salvador and Guyana.

If you think your postal money order is fake, contact the U.S. Postal Inspection Service at 1-877-876-2455.

Recommended: 7 Ways to Cash a Check Without a Bank Account

The Takeaway

Cashing a USPS money order is a straightforward process. Your local post office can cash a postal money order at no cost to you. You may also be able to cash a postal money order at a bank branch if you have an account there, or at your local supermarket.

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

See exactly how your money comes and goes at a glance.

FAQ

Can you mobile deposit a USPS money order?

Unfortunately, you cannot use mobile deposit for USPS money orders. Instead, you must deposit it in person with a valid ID.

Where can I cash a money order for free?

You can cash a postal money order for free at your local post office. You may also be able to cash it at your local bank branch.

Can you cash a money order online?

Since you need proof of ID to deposit a postal money order, you usually can’t deposit it online.

About the author

Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.


Photo credit: iStock/Delpixart

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

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


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

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Apr
01
2025

Why Did My Credit Score Drop When My Credit Card Balance Decreased?

By | Credit, credit card | Comments Off on Why Did My Credit Score Drop When My Credit Card Balance Decreased?

Paying down your credit card debt is a huge win for your finances, but you might see your credit score go down even after you lower your balance. While this can be confusing, the drop is often due to other factors, like the types of credit you have and the length of your credit history.

Read on to learn why your credit score may have dropped after paying off debt and how you can boost it.

Why Your Credit Score May Drop When a Credit Card Balance Decreased

While you might expect your credit score to go up after paying off debt, there are a few reasons why it could dip instead. 

Worst case scenario: If someone uses your personal information to open a new credit account, or makes charges on your cards without your approval, your credit score may take a hit. The longer the fraud goes unnoticed, the harder it becomes to fix the issue.

More likely, closing your account after paying off a credit card balance can affect your credit score. This changes the overall picture of your credit usage and history, which might cause a small, temporary drop.

Remember that credit scores can fluctuate for many reasons, and a drop isn’t always a bad sign. You can keep track of your score with credit score monitoring.

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Credit Score Factors

Let’s dive deeper into the factors that can affect your credit score. We’re focusing on the FICO credit scoring model, which most lenders use to make their decisions.

Payment History

A history of on-time payments has the biggest impact on your credit score, making up 35% of it. If you’ve recently missed a payment or two, your credit score might be negatively affected. On the flip side, staying on top of due dates, whether with a money tracker app or a calendar, can help you keep your credit score healthy.

Credit Utilization

Paying off your credit card balance and then closing the account could cause your credit score to drop. That’s because it increases the percentage of credit you’re using compared to the total amount available — also known as credit utilization. Lenders typically want you to have a credit utilization ratio under 30%. If yours is higher than that, rest assured there are ways to lower your credit card utilization.

Length of Your Credit History

Length of credit history refers to the average amount of time your credit accounts have been open. In general, the longer your credit history, the better your credit score may be. Closing a credit card account, especially one you’ve had for a long time, can bring that average down, and you may see a drop in your credit score as a result. So think carefully before you decide to close an account.

Credit Mix

Paying off certain types of debt might also lower your credit score because it reduces the variety of your credit types. Lenders like to see that you can responsibly handle different kinds of debt, such as installment loans and mortgages. When you pay off a car loan or other type of debt, it can decrease the diversity of your credit mix, which could lead to a drop in your credit score.

If you paid off both your credit card debt and a loan simultaneously, this might explain the drop in your score. Also, if you closed the credit card account after repayment, your credit mix may be impacted.

New Credit Card Applications

When you apply for a new line of credit, like an auto loan or credit card, the issuer usually performs a hard inquiry on your credit report, which can temporarily lower your score. Lenders check your credit to see if you’re a responsible borrower. Even requesting a credit line increase on an existing card can trigger a hard inquiry.

A soft inquiry is different. It just means you or another company looked at your report, but it doesn’t impact your score. If you’ve recently applied for credit, that hard inquiry could be the reason for the dip. It can be helpful to learn more about soft credit inquiries vs. hard credit inquiries.

Recommended: 10 Strategies for Building Credit Over Time

How to Pay Off Debt and Help Your Credit Score

To pay off debt and help your credit score, here are a few steps to follow:

•   Create a budget. By tracking your income and expenses, you can understand where your money is going. This will help you find ways to save money and put more toward paying off debt. A spending app can help automate budgeting.

•   Prioritize debts. Depending on your situation, you may want to focus on paying off high-interest debts first, such as credit cards, while making minimum payments on lower-interest debts. Doing so could help you save money on interest in the long run.

•   Make regular payments. Consistently pay at least the minimum amount due on all your debts. Whenever possible, pay more than the minimum, which can help reduce your debt faster.

•   Consider debt consolidation. If you have multiple high-interest debts, you may want to consider consolidating them into a single loan with a lower interest rate. This can simplify your debt management efforts and potentially reduce overall interest costs.

•   Use credit responsibly. Aim to keep your credit utilization ratio below 30% by not maxing out your credit cards.

How Do I Keep My Credit Score From Dropping?

It can take a while to build up your credit, so you’ll want to take steps to protect it. Here are some tips to help you keep your credit score from dropping after you pay off debt:

•   Pay your bills on time. Sending bill payments on time is important because it’s such a big part of your credit score. If you need a hand, set up autopayments to make sure your lender or creditor gets your payment on or before the due date.

•   Think twice before closing an account. After you pay off a credit card, try not to close it unless you really have to. If you’re worried about spending, you can cut up the card. Keeping older accounts open helps maintain the length of your credit history, which is good for your score.

•   Avoid new credit applications. Every time you apply for new credit, it can result in a hard inquiry on your report, which might temporarily lower your score.Try to avoid opening new lines of credit unless you really need to.

•   Check your credit report. Regularly check your credit report for any errors or signs of fraud. (There are ways to check your credit score without paying.) If you spot something unusual, be sure to dispute any inaccuracies right away.

How Long Does It Take for Your Credit Score to Improve After Paying Off Debt?

Lenders usually update account activity with the three major credit bureaus — Experian, Equifax, and TransUnion — at the end of the billing cycle. This means it can take 30 to 45 days for any changes to impact your credit report.

It’s a good idea to check your credit report at least once a year. You can get a free report from AnnualCreditReport.com. Remember that checking your credit report and score won’t hurt your credit score.

Ways to Increase Your Credit Score After Paying Off a Loan

To help give your credit score a boost after paying off debt, stay on top of your other credit accounts by paying bills on time and using credit wisely. For example, if you have a credit card, use it for small purchases like gas or groceries, and pay off the balance each month. It proves to lenders that you can manage credit well.

Also try to keep the amount of credit you’re using low compared to your total credit limit. Remember, creditors usually like to see a ratio below 30%. This means using less than 30% of your available credit. Paying off smaller debts may help improve your overall debt-to-income ratio.

How to Get Credit Score Monitoring

Credit monitoring can help you keep an eye on your accounts and catch issues early. It tracks your accounts and alerts you to any unusual activity so you can address problems right away. 

Many financial companies offer free credit monitoring, so it’s a good idea to contact your bank or credit card to see if you qualify. If you’ve been part of a data breach, you might get credit monitoring for free. Otherwise, you can sign up for it yourself, typically for a monthly fee of $10 to $30. Alternatively, you can take a DIY approach and monitor your credit for free.

Recommended: Why Did My Credit Score Drop After a Dispute?

The Takeaway

After paying off credit card debt, it’s possible to see your credit score dip. While this drop is usually short-lived, it can be due to changes in your credit mix, history length, utilization ratio, or a combination. To boost your score, focus on responsible credit management. Consider strategies like setting up autopay to ensure you make timely payments, and avoid taking on more debt. These habits can help you maintain a strong credit score.

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

See exactly how your money comes and goes at a glance.

FAQ

Why has my credit score gone down when nothing has changed?

Your credit score might change even if everything seems the same. Certain factors like report updates, identity theft, variations in credit usage, and new information from creditors can impact your score. By regularly reviewing your credit report, you can catch and address changes and errors.

Is a decrease in credit balance good?

It’s usually best to pay your credit card bill in full instead of carrying a balance, as carrying a balance doesn’t help your credit score. Aim to keep your balances below 30% of your total credit limit to maintain a healthy credit score.

Why is my credit score going down if I pay everything on time?

Even if you pay everything on time, your credit score might still go down because of things like using more of your available credit or applying for new credit. Closing old accounts or having a short credit history can impact your score, too.

About the author

Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.


Photo credit: iStock/milan2099

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