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Both Buy Now, Pay Later (BNPL) and credit cards are ways to spread out the payment for a purchase over time, but they have a few key differences. Buy Now, Pay Later plans typically have a specific number of payments that are determined upfront. You’ll often pay a portion at the time of purchase, and then make regular payments over time, often with zero interest.

In contrast, when you pay with a credit card, you may not have to make any payment immediately. Instead, the credit card company will send you a monthly statement. You’ll likely need to make at least a minimum payment and will owe interest on any remaining balance. As long as you continue to make at least the minimum payments, there’s no limit to how long you can take to repay your purchase.

Read on for more on the differences between Buy Now, Pay Later vs. credit cards.

What Is BNPL (Buy Now, Pay Later)? And How It Works

BNPL (Buy Now, Pay Later) is a type of installment loan that allows customers to purchase something (either online or in-store) and pay for it over time. In recent years, there’s been a big jump in the growth of Buy Now, Pay Later programs.

Several retailers and even some credit card companies offer Buy Now, Pay Later. The details of these programs vary depending on the merchant, but there are some similarities. With a BNPL plan, generally you make an initial deposit of around 25% at the time of purchase. Then, you’ll make a series of installment payments until your balance is paid off, similarly to how you would with layaway.

Recommended: When Are Credit Card Payments Due

Pros and Cons of Buy Now, Pay Later

Next, consider the pros and cons of Buy Now, Pay Later:

What Is a Credit Card? And How It Works

A credit card is a type of revolving credit that allows you to make charges against your line of credit.

When you apply for a credit card, the issuer will do a hard pull on your credit. If approved, you’ll be given a specific credit limit that is the maximum amount you can borrow.

As you borrow against that limit when using a credit card, your available credit is reduced. Similarly, it’s replenished when you make payments.

Each month, you’ll get a statement listing all of the charges you made that month, plus any outstanding balance. If you pay off the balance in full, you won’t be charged any interest due to how credit cards work. However, if you pay less than the full amount, you’ll owe interest on any remaining balance.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

Pros and Cons of Credit Cards

Credit cards can serve as a useful financial tool when you use them responsibly and adhere to credit card rules. However, they also have the potential to cause harm. Here are some pros and cons of using credit cards:

Difference Between Buy Now, Pay Later and Credit Cards

While Buy Now, Pay Later plans and credit cards have some similarities, they have a few key differences. Here’s a look at BNPL vs. credit card distinctions:

What Is a Buy Now, Pay Later Credit Card?

Traditionally many Buy Now, Pay Later plans were offered by companies that were not traditional credit card companies. However, several issuers are now starting to offer credit cards with Buy Now, Pay Later features available.

With these Buy Now, Pay Later credit cards, you can combine some of the benefits of both options. You can use your credit card like you normally would (including earning rewards) and then identify larger purchases that you’d like to pay for over time with the Buy Now, Pay later card feature.

Among the companies offering such products are American Express, Chase, and Citi.

Choosing a Buy Now, Pay Later Credit Card

Credit card issuers that offer Buy Now, Pay Later credit cards each run their programs slightly differently. You’ll want to look at the terms and conditions of each credit card you’re considering to see which works best for you. If the Buy Now, Pay Later options are similar, you can compare the credit cards themselves to find the best option.

Benefits of Buy Now, Pay Later Credit Cards

These are some of the upsides of BNPL credit cards to consider:

•   Earn credit card rewards on your purchases.

•   You can finance the purchase for a variable length of time.

•   Responsible and on-time payments can help your credit score.

Risks of Buy Now, Pay Later Credit Cards

That being said, there are potential downsides to know about too, including:

•   Buy Now, Pay Later cards may encourage you to spend more than you have.

•   Unlike traditional Buy Now, Pay Later plans without credit or debit cards, you may be charged a fee to pay for your purchase over time.

•   There is likely a minimum purchase amount you must meet to be able to use the BNPL feature of your credit card.

Recommended: How to Avoid Interest On a Credit Card

The Takeaway

Buy Now Pay Later and credit cards are two ways to pay for your purchases over time. With BNPL, you’ll usually pay an initial deposit at the time of purchase, and then you’ll make several fixed payments over the course of a few months. With credit cards, you have a set credit limit; each month, you’ll get a statement with your total monthly charges and any outstanding balance. If you don’t pay your statement balance in full, you’ll owe interest on any unpaid amount. Each option has its pros and cons. Another possibility is to get a Buy Now, Pay Later credit card, which combines features from both types of plan.

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

Is Buy Now, Pay Later better than a credit card?

Buy Now, Pay Later and credit cards can both be the right answer depending on your specific situation, so it’s hard to say that one is better than the other for every scenario. Buy Now, Pay Later can be a good option if you want to finance a purchase over a fixed period of time with low interest and fees.

Will BNPL affect my credit score?

Generally speaking, BNPL plans do not impact your credit score as long as you make your payments on time. However, if you do not fulfill your BNPL contract, your outstanding debt may be reported to the credit bureaus, which could have a negative impact on your credit score.

Will BNPL replace the use of credit cards?

While BNPL and credit cards are both financial instruments that allow you to pay for purchases over time, they have some important differences. Since they have different pros and cons, it is unlikely that one will completely replace the other. Instead, it is more likely that both will continue to be used in different situations.

Photo credit: iStock/RgStudio

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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Some credit cards offer a promotional interest rate, as low as 0% APR, for purchases and/or balance transfers. Often, these promotional interest rates are offered for a limited period of time when you apply for a new card, though some issuers offer promotional rates for existing cardholders as well.

If you have a large purchase coming up, or an existing credit card balance that you want to transfer over, these cards can save you a significant amount of interest. You’ll just want to make sure to pay off the full balance by the end of the promotional period, as your interest rate will likely jump significantly when your promotional APR expires.

What Are Credit Card Promotional Interest Rates?

A credit card promotional interest rate is an interest rate that is offered for a limited amount of time, as a promotion. During the promotional period, you’ll be charged a lower interest rate than your typical interest rate.

It’s common for credit cards to offer these introductory promotional interest rates for new members when you open a credit card account. However, it’s also possible for issuers to offer promotional interest rates to existing cardholders.

Recommended: How to Avoid Interest On a Credit Card

How Credit Card Promotional Interest Rates Work

One common scenario for how credit card promotional interest rates work is that an issuer might offer a 0% promotional interest rate on purchases and/or balance transfers for a certain period of time. When you’re using a credit card during the promotional interest period, you won’t pay any interest.

It’s important to note that there are two major types of promotional interest rates, and they vary slightly. With a 0% interest promotion, you won’t pay any interest during the promotional period. If there’s any balance remaining at the end of the promotional period, you’ll begin paying interest at that time. With a deferred interest promotional rate, on the other hand, you’ll pay interest on any outstanding balance back to the date of the initial purchase.

Benefits of Credit Card Promotional Rates

As you may have guessed, there are certainly upsides to taking advantage of credit card promotional interest rates. Here’s a look at the major benefits.

Low Interest Rate During the Promotional Period

One benefit of credit card promotional interest rates is the ability to take advantage of a low or even 0% interest rate during the promotional period. Having access to these promotional rates can give you added flexibility as you plan your financial future.

Ability to Make Balance Transfers

One possibility to maximize a credit card promotional rate is if you have existing consumer debt like a credit card balance. By using a balance transfer promotional interest rate, you can transfer your existing balance and save on interest. This can help lower the amount of time it takes to pay off your debt.

Can Pay For a Large Purchase Over Time

If your credit card has a 0% promotional interest rate on purchases, you can take advantage of that to pay for a large purchase over time. That way, you can spread out the cost of a large purchase over several months rather than needing to pay it off within one billing period.

Just make sure to pay your purchase off completely before the end of the promotional period to avoid paying any interest.

Drawbacks of Credit Card Promotional Rates

There are downsides to these offers to consider as well. Specifically, here are the drawbacks of credit card promotional interest rates.

Deferred Interest

You need to be careful if your credit card promotional rate is a deferred interest rate, rather than a 0% interest rate. Because of how credit cards work with a deferred interest rate promotion, you’ll pay interest on any outstanding balance at the end of the promotional period — back to the date of the initial purchase. This amount will get added to your existing balance, driving it higher.

Penalty Interest Rates

You still have to make the minimum monthly payment on your credit card during the promotional period. If you don’t make your regularly scheduled payment, the issuer may cancel your promotional interest rate. They may even impose an additional credit card penalty interest rate that’s higher than the standard interest rate on your card.

May Encourage Poor Spending Habits

Establishing good saving habits and living within your means is an important financial concept to live by. While it may not always be possible, it’s generally considered a good idea to save up your money before making a purchase. While a 0% interest promotional rate means you won’t pay any interest, it can contribute to a mindset of buying things you don’t truly need.

Recommended: Tips for Using a Credit Card Responsibly

How Long Do Credit Card Promotional Interest Rates Last?

By law, credit card promotional interest rates must last at least six months, but it is common for them to last longer. You may see introductory interest rates lasting 12 to 21 months, or even longer.

Regardless of how long your promotional period lasts, make sure you have a plan to pay your balance off in full by the end of it. Credit card purchase interest charges will kick in once your promotional period is over.

Zero Interest vs Deferred Interest Promotions

Both 0% interest rates and deferred interest rates are different kinds of promotional rates where you don’t pay any interest during the promotional period. However, they come with some key differences:

What to Consider When Getting a Card With a Zero-Interest or Deferred Interest Promotion

One of the top credit card rules is to make sure you pay off your credit card balance in full, each and every month. But if you’re carrying a balance with a promotional credit card rate, you’ll want to make sure you understand if it’s a 0% rate or a deferred interest promotion.

With a 0% promotional rate, you’ll start paying interest on any balance at the end of the promo period. But with a deferred interest promotional rate, you’ll pay interest on any balance, back-dated to the date of the initial purchase.

In either case, the best option is to make sure that you have a plan in place to pay off the balance by the end of the promotional period.

Paying off Balances With Promotional Rates

You’ll want to have a gameplan for how to pay off your balance before the end of the promotional period. That’s because at the end of the promotional period, your credit card interest rate will increase significantly.

If you still are carrying a balance, you will have to start paying interest on the balance. And if you were under a deferred interest promotional rate, that interest will be calculated back from the initial date of purchase.

Watch Out for High Post-Promotional APRs

Using a 0% promotional interest rate can seem like an attractive option, but it can lull you into a false sense of financial security. You should always be aware that the 0% interest rate won’t last forever. Your interest rate will go up at the end of the promotional period, and if you’re still carrying a credit card balance, you’ll start paying interest on the balance.

Exploring Other Credit Card Options

There are some other credit card options besides getting a card with a promotional interest rate. For instance, you might look for a credit card that offers cash back or other credit card rewards with each purchase.

Before focusing on credit card rewards or cash back, however, you’ll want to make sure that you first focus on paying off your balance. Otherwise, the interest that you pay each month will more than offset any rewards you earn.

If you’re carrying a balance, you can also attempt to get a good credit card APR by making on-time payments and asking your issuer to lower your interest rate. By simply securing a good APR, you won’t have to worry about it expiring and then spiking like you would with a promotional APR.

The Takeaway

Some credit cards offer promotional interest rates to new and/or existing cardholders. These promotional interest rates could be a 0% interest rate for a specific period of time, or a lower interest rate to encourage balance transfers.

While taking advantage of promotional interest rates can be a savvy financial move if you have existing consumer debt or need to make a large purchase, you’ll want to make sure you have a plan to pay off your balance in full before the promotional period ends. That way, you avoid having to pay any interest.

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

Will my interest rate spike after a promotional deal ends?

Yes, generally credit card promotional interest rates last only for a specific number of months. The way credit cards work is to charge interest on balances that are not paid off. So, while your credit card may charge 0% or a lower promotional rate for a period of time, the interest rate will rise once the promotional period is over and will apply to any outstanding balance on the card.

How does promo APR work?

Promotional APR offers are generally put forward by credit card companies as a way to entice new applicants. Cards may offer a 0% introductory APR for a certain number of months on purchases and/or balance transfers. Once the promotional period is over, your interest rate will rise to its normal level.

Should you close a credit card with a high interest rate?

Having a credit card with a high interest rate will not negatively impact your credit or your finances if you’re not carrying a balance. So, simply having a high interest rate is not a reason, in and of itself, to close a credit card. But if you have a balance on a credit card with a high interest rate, you might want to consider doing a balance transfer to a card with a promotional 0% interest rate while you work to pay it off.

Is my credit card’s promotional rate too good to be true?

Promotional interest rates are a legitimate marketing strategy used by many credit card companies. While you shouldn’t treat them as a scam, you also need to make sure that you are aware of the terms of the promotional rate and how long the rate is good for. Make a plan to completely pay off your balance by the end of the promotional period before your interest rate increases.

Photo credit: iStock/Jakkapan Sookjaroen

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If you’re asked to insert or tap rather than swipe your credit card when you go to pay, you’re using a chip credit card. A credit card chip is a small gold or silver microprocessor that’s embedded in the card and intended to offer greater security for your transactions.

Credit card chips are growing dominant in the plastic payment market. These chips — sometimes known as Europay, MasterCard, and Visa (EMV) chips — comprised about 93% of global credit card transactions in the most recent year studied, though US usage was slightly lower at 87.2%. Overall, there are almost 13 billion cards with these chips in circulation. Read on to learn more about how the credit card chip works.

What Is a Credit Card Chip?

Credit card chips are small microchips embedded in the card that collect, store, and transmit credit card data between merchants, their customers, and participating financial institutions. Each time you use a credit card, these chips generate a unique code that can only be used for that transaction.

Chip credit cards date back to the mid-1990’s, when the three titans of card payment technology — Europay, MasterCard, and Visa — collectively rolled out the first chip-based credit card to the masses. Also known as EMV chips, credit card chips were introduced as a way to enhance payment security over the existing magnetic-strip credit cards.

Today, chip credit cards continue to grow in popularity. Contactless credit cards are another advancement underway.

Magnetic Strip vs Chip Credit Cards

Magnetic-strip cards hold data on the magnetic strip that appears on the back of payment cards. Because these strips hold all of a cardholder’s information needed to make a purchase, this type of card is an easy target for thieves.

With industry-wide concerns over data fraud linked to magnetic stripe cards, credit card companies turned to advanced computer microchips as a solution to credit card data security problems, using EMV technology.

Chip-based payment cards have a big advantage over magnetic-strip cards, as each card payment transaction generates a unique data code. Because the chip’s code is a “one and done” feature that disappears after the transaction is completed, even if data fraud criminals uncover the code, they can’t use it for future transactions.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

How Does a Chip Credit Card Work?

Chip credit cards don’t work on a standalone basis. Merchants who want to conduct card payment transactions need payment processing tools, like card terminals and mobile scanners, that are compliant with EMV chip industry standards.

•   When a consumer inserts a chip credit card into a payment terminal (unlike with a contactless payment), and follows the on-screen prompts to complete the transaction, the chip and the terminal exchange the needed data in an encrypted code.

•   That code is then used to transmit the transaction details to the acquiring bank, which quickly reviews the transaction.

•   After the cardholder’s financial data is authenticated and it’s determined the consumer has the funds to cover the purchase, the payment software may run fraud filters to further authenticate the user and the transaction.

•   Then, the transaction is approved by the acquiring bank (or declined if the consumer doesn’t have the funds to cover the purchase or if fraudulent activity is suspected). The appropriate transaction confirmation codes are relayed back to the EMV payment device in real time, thus concluding the transaction.

•   Assuming the transaction is approved, the embedded card chip transmits the approval to the cardholder’s bank, which releases funds to pay for the transaction and sends it to the acquiring bank.

•   The transaction is then settled by the merchant’s payment provider and deposited into the merchant’s bank account.

Types of EMV Cards: Chip-and-Signature vs Chip-and-PIN

If you are using an EMV chip card these days, you probably know that many retailers don’t require a signature or PIN. You just tap, wave, or insert the card, and you’re all done. Many of the major card companies did away with the signature requirement.

However, you may still have another step when you use your credit card, depending on which of the two main types of chip-based cards you have:

1.    Chip-and-signature cards: The most widely used form of EMV card in the U.S. is the chip-and-signature card. With these, the cardholder simply inserts the card into the point-of-sale terminal and then provides their signature to verify the transaction.

2.    Chip-and-PIN cards: With a chip-and-PIN card, the cardholder is asked to enter a four-digit PIN, or personal identification number, at the point of sale. That process authenticates the user and allows for the card transaction process to be completed.

While each type of chip-based payment card model serves the same function — the safe and efficient completion of a transaction — chip-and-pin cards may be the safer alternative.

That’s because with a chip-and-signature card, the cashier or front of the store service provider may not ask to see the back of the card to manually authenticate the signature. That gives fraudsters a leg up, since their signatures may not be checked. With a chip-and-pin card, on the other hand, the thief would need to know the credit card PIN to complete a transaction.

Protecting Yourself From Credit Card Fraud

While chip-based credit and debit cards have been a game-changer in improving payment security, card thieves still have ways to either steal your card or lift sensitive personal data from a payment card.

Here are some ways you can protect yourself against credit card fraud:

•   Review your card statements. One of the important credit card rules to follow is checking your card statements regularly for potential security issues. If something looks suspicious, immediately contact your credit card issuer. In the case of unauthorized charges, report the fraudulent activity and follow the steps recommended by the card company, which could include freezing the card temporarily or getting a new card.

•   Keep physical possession of the card at all times. A cardholder’s best defense against physical card theft is to always know where their card is and only carry it when needed. It’s also a good idea to avoid storing your card account number on a digital device — particularly sensitive information like the credit card CVV number — that could be stolen by a savvy cyber thief.

•   Shred any documents that contain sensitive information. To further protect your account information, shred physical payment card files that include your credit card or account number once you’ve paid your monthly bill. Better yet, sign up for paperless billing, so there’s no paper trail at all.

•   Watch out for email scams. Steer clear of “phishing” scams, i.e., fraudulent emails or texts pretending to be from trusted retailers and financial institutions. If you receive an email requesting sensitive information, reach out to the company directly using the contact information listed on their website or on the back of your card.

Recommended: What Is the Average Credit Card Limit

The Takeaway

The introduction of credit card chips has greatly increased the security of credit card transactions. Credit card chips generate a unique code for each transaction, and that code cannot be used for future transactions. This makes it harder for thieves to intercept your personal data — though that doesn’t mean credit card fraud isn’t still possible.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What is the chip on credit cards?

A credit card chip is a microchip embedded into a credit or debit card that securely stores transaction data. This helps to facilitate safe and efficient payment card transactions.

Are chip-and-signature cards as safe as chip-and-PIN cards?

Not necessarily. That’s because the merchant may not require a signature or verify it against the one on the back of the card. This means it may be easier for thieves to get away with signing on behalf of the actual cardholder. It’s likely more difficult for a thief to get hold of a cardholder’s PIN.

Do all retailers accept EMV cards?

A high percentage of global retailers accept chip-based credit and debit cards. Industry figures show that EMV chip cards comprised over 90% of the global credit card transactions in the most recent year reviewed.

Is tapping or contactless credit cards safer?

Both are secure ways to make transactions. That’s because both contactless and chip credit card transactions generate a new transaction code for each purchase.

Photo credit: iStock/Georgii Boronin

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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If you unintentionally overpay your credit card bill, you may see a negative balance on your account. Although overpaying a credit card isn’t ideal — that cash flow could’ve been used toward another expense, after all — it’s usually not cause for concern.

If you overpaid your credit card, interest isn’t charged on the amount; in fact, that amount is owed back to you. What you do next, whether that’s requesting a refund or applying the overpayment to next month’s bill, is your choice.

How Credit Card Overpayments Happen

Since credit cards work by providing you with revolving purchasing power up to your limit, any activity on the account can change your available balance — even after you’re issued a monthly billing statement. This includes new purchases on the account that increase your credit card balance, but also payments or credited amounts that lower the outstanding amount you owe.

If you end up making a payment to your credit card issuer for a higher amount than you owe, for instance, it results in an overpayment. This is also called a negative balance.

Recommended: When Are Credit Card Payments Due

How You Could Have Overpaid Your Credit Card

There are a few circumstances that might result in an overpaid credit card.

Manual Payments

Submitting a manual credit card payment for an amount that’s higher than your actual outstanding balance will push your account into a negative balance. This might happen if you’ve been repaying a large purchase in equal increments each month, but make a math error or have an oversight.

For example, say you used your new 0% APR credit card to purchase a laptop for $2,150 and plan to make manual monthly payments of $500. By month five, you’d only need to make a $150 payment to pay off your card balance. But if you forget what your current balance is, you might accidentally make another $500 payment. The $350 difference would be an overpayment on your account.

Paying attention to your outstanding balance on the day you plan on making a manual payment can help you avoid overpayment.

Additional Payments on Top of Automatic Payments

You might also overpay credit card balances if you made a payment to avoid credit card interest charges, but didn’t realize that you already had autopay enabled on your account.

The scheduled automatic payment will still be processed, regardless of any manual payments, unless you cancel it for the month. For this reason, a double payment can result in an overpaid credit card.

Before making an extra payment, double-check whether you’ve enacted autopay and see how another payment might affect your outstanding balance.

Recommended: How to Avoid Interest On a Credit Card

Receiving Refunds

Another common scenario resulting in an overpaid credit card is if you return a purchase to a merchant or get a refund for a service. If the amount of the purchase was credited back to your credit card and you make a payment based on what’s shown on your statement balance that arrived before this transaction, you’ll overpay your credit card bill.

If you returned an item and received a refund back on your card, remember to adjust your manual payment or autopay to reflect your new balance due.

Guide to Rectify Overpaying Your Credit Card

Now that you know what happens if you overpay your credit card, you may be wondering if there’s anything you can do to fix it. If your credit card balance is under $0, and you’re owed money back, there are a few ways to move forward.

Request a Refund

The Fair Credit Billing Act (FCBA) protects your rights when it comes to how your credit card account is handled. It states that you have the right to request a refund if you overpay your credit card by more than $1.

The credit card rules state that the issuer must give you a refund in the payment method of your choosing within seven business days of receiving your request. Additionally, it must, in good faith, make attempts to return unapplied overpayments that have been on the account for over six months.

When requesting a refund by mail, make sure to send your request through certified mail so you have proof of the date it was received by the bank.

Allow the Negative Balance to Roll Over Next Month

Another way to address a negative balance on a credit card is simply to do nothing. If you don’t explicitly request a refund, the bank will automatically roll over the unapplied credit toward your next statement balance.

If you have a larger statement balance than your credit during the following month, the overpayment credit will be applied and the remaining balance you owe is reduced. However, if your credit is greater than your new statement balance, your adjusted credit amount will roll over again.

It will continue this way until you’ve effectively used all of your account’s overpayment credit or you ask for a refund.

Enable Autopay on Your Credit Card

If you’re not already enrolled in automatic payments, enabling autopay for your credit card bill can help prevent overpayments due to manual payment errors. Leveraging your card’s autopay feature is a responsible way to use a credit card since it ensures you pay the correct amount on your account on time.

If you set up autopay to always pay your statement balance or outstanding account balance, it also helps you avoid credit card debt that’s getting increasingly harder to pay off.

Does an Overpaid Balance Affect Your Credit Score?

Having an overpaid credit card balance is better than having a positive balance on your account. Credit card companies report negative balances as a “zero balance” when forwarding your card activity to the credit bureaus.

A zero balance lowers your credit utilization, which impacts your credit score calculation. Although it can build your credit compared to carrying an outstanding balance, the effect of an overpayment is the same as making a payment for the correct amount to reflect that you owe $0. In other words, it won’t help you build your credit score.

The Takeaway

Although overpaying credit card balances is a common occurrence, following the tips above can help you avoid a negative balance. Paying attention to this can help prevent your discretionary cash flow from getting tied up with your card issuer unnecessarily — a key to smart credit card habits.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What happens if I overpay my credit card?

If you overpay your credit card, the amount is reflected as a negative balance on your account balance. You can request a refund or let the bank apply it to your next statement.

Does a negative balance have an effect on my credit score?

No, a negative balance doesn’t affect your credit score. Your bank reports it as a zero balance.

How long do you have to dispute a credit card charge?

You have 60 days to dispute a credit card charge, starting from the date it appears on your statement. The bank is legally required to acknowledge your dispute within 30 days of receiving it. A resolution must be enacted within two billing cycles or a maximum of 90 days from your dispute date.

How can I request a refund after overpaying my credit card?

Send a notification to your bank requesting a refund and specifying the method in which you’d like to receive it, such as a check or other method. Check with your bank about how to submit it. The bank is required to provide your refund within seven business days of your request.

Photo credit: iStock/Really Design

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

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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A wrap-around mortgage is a form of seller financing that benefits the seller financially and helps buyers who can’t qualify for a traditional mortgage.

There are risks associated with this kind of creative financing, and alternatives to consider.

Note: SoFi does not offer wrap around mortgages at this time.

What Is a Wrap-Around Mortgage?

Traditionally, a buyer weighs the different mortgage types and obtains a mortgage loan to pay the seller for the home. The seller’s existing mortgage gets paid off, with any extra money going to the seller.

With a wrap-around mortgage, a form of owner financing, the original mortgage is kept intact, and the funds a buyer needs to purchase the home are “wrapped around” the current balance.

How Does a Wrap-Around Mortgage Work?

First, the seller must have an assumable mortgage and lender permission to wrap the mortgage. The seller and buyer agree on a price and down payment.

The buyer signs a promissory note, vowing to make agreed-upon payments to the seller. The seller might transfer the home title to the buyer at that time or when the loan is repaid.

The seller continues to make regular mortgage payments to their lender, keeping any monetary overage.

To make this feasible and worthwhile to the seller, the buyer typically pays a higher interest rate than what’s being charged on the original loan (on which the seller is still making payments).

Let’s say you want to sell your home for $200,000, and you still owe $75,000 on your mortgage at 5%. You find a buyer who is willing to pay your price but who can’t get a conventional mortgage approved.

Your buyer can give you $20,000 for a down payment. The two of you will then sign a promissory note for $180,000, at, say, 7%. You’ll make a profit on the spread between the two interest rates and the difference between the sale price and original mortgage balance.

If you’re crunching numbers, a mortgage payment calculator can help.

What Are the Advantages of a Wrap-Around Mortgage?

Here are ways that a wrap-around mortgage can benefit the buyer as well as the seller.

Benefits for the buyer:

•   A carry-back loan allows you to buy a house that you might not otherwise qualify for, perhaps because of low credit scores.

•   As long as a seller is willing to sell to you under this arrangement, your financing is essentially approved without your needing to do anything else.

•   You’ll pay no closing costs on the loan.

•   If you are self-employed, you likely won’t need to provide statements from past income as you would with a traditional mortgage lender. The seller may only be interested in your ability to pay now.

Benefits for the seller:

•   You don’t need to wait for a buyer to be approved for financing.

•   You can charge a higher interest rate than what you’re paying, allowing you the opportunity to create steady cash flow and make a profit.

•   In a buyer’s market, where the supply of homes for sale is greater than demand, your willingness to offer a wrap-around mortgage can make you stand out.

Are There Risks With Wrap-Around Mortgages?

Yes. Wrap-around mortgages come with risks for both buyers and sellers.

Risks for the buyer:

•   You’ll likely want to pay an attorney to review the agreement. If you don’t, then you’re assuming more of the risks as described in the next two bullet points.

•   You are putting your trust in the seller. If they don’t keep up the mortgage payments on the original loan, the home could go into foreclosure. (You could ask to make payments directly to the lender, which the seller may or may not agree to.)

•   If the seller has not told their lender about the arrangement, this could lead to problems. If the original mortgage has a due-on-sale clause, the financial institution could demand payment in full from the seller.

Risks for the seller:

•   The buyer may not make payments on time — or could stop making them altogether. If this happens, you still owe mortgage payments to your lender.

•   Any lag in making your payments can have a significant negative impact on your credit scores, making it more challenging to get good interest rates on loans.

•   Suing the buyer for past-due funds can get expensive, and if the buyer doesn’t have the money to pay you, this may not provide you with any real mortgage relief.

If you’re shopping for a mortgage, it can make sense to explore alternatives. A home loan help center is a good place to start.

Alternatives to Wrap-Around Mortgages

Alternatives can include the following:

•   FHA loans

•   VA loans

•   USDA loans

Here’s an overview of each.

FHA Loans

With loans insured by the Federal Housing Administration, FHA-approved lenders can offer low down payments while easing up on credit scores required to qualify.

VA Loans

The U.S. Department of Veterans Affairs offers low-interest-rate VA loans directly to qualifying borrowers (based on service history and duty status) and backs loans made by participating lenders.

USDA Loans

The U.S. Department of Agriculture guarantees USDA loans for qualifying rural Americans who have low to moderate levels of income. The USDA also offers funding to improve homes to safe and sanitary standards.

The Takeaway

A wrap-around mortgage could sound enticing, but buyer beware. Taking time to repair damaged credit or looking into other types of loans might make more sense. If you do enter into this transaction, you’ll probably want to involve a lawyer to make sure your interests are protected.

FAQ

Is a wrap-around mortgage a good idea?

This type of mortgage has benefits and risks for both the buyer and the seller.

What is an example of a wrap-around mortgage?

Let’s say a buyer can’t get traditional financing but agrees to purchase a $250,000 house from the seller, with some down payment. The seller still owes $50,000. The buyer agrees to make payments to the seller on the purchase price, and the seller uses a portion of that money to make the usual mortgage payments. The seller profits from charging a higher interest rate than that of the original mortgage.

Who is responsible for a wrap-around loan?

The buyer will be responsible for making payments to the seller according to the agreement signed by the two parties. The seller will be responsible for continuing to make payments on the original mortgage until it is paid off. So both parties have responsibilities to fulfill.

Can wrap-around loans help a buyer purchase a home?

Yes. The key benefit for buyers is that seller financing helps them purchase a home that they otherwise may not have been able to own.

Photo credit: iStock/Tatiana Buzmakova

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