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You’ll likely hear the terms home loan and mortgage used interchangeably, but the phrase “home loan” is an umbrella term that covers a variety of mortgages, home refinances, and home equity loans.

It’s helpful to understand the difference between a typical mortgage, used to buy a home, and home equity loans, which are used to tap the equity you’ve gained.

What Is a Mortgage?

Mortgages are loans used when buying a home or other real estate. When you take out a mortgage, your lender is loaning you the money you need to buy a home in exchange for charging you interest. You’ll repay the loan and interest in monthly installments.

Mortgages are secured loans, meaning the property is used as collateral. If you fail to make mortgage payments, your lender can foreclose on the home to recoup its money.

In order to take out a mortgage, you’ll typically need to make a down payment equal to a percentage of the purchase price. Your down payment is the portion of the cost of the home that you aren’t financing and provides immediate equity in the property.

Buyers may put down 20% on conventional mortgages to avoid private mortgage insurance (PMI), but many buyers put down much less. In fact, the median down payment for all homebuyers was 14.7% in 2023, according to a National Association of Realtors® report. A mortgage calculator can help you determine what effect the size of your down payment will have on your monthly payments.

When shopping for a home, you can seek mortgage preapproval. After investigating your financial history, your lender will provide you with a letter stating how much money you can likely borrow and at what interest rate.

Types of Mortgages

There are several types of mortgages available. Mortgage insurance, in the form of PMI or mortgage insurance premiums (MIP), may be part of the deal. It’s good to understand PMI vs MIP.

•   Conventional mortgages are funded by private lenders like banks and credit unions. They are not backed by a government agency. You’ll typically need to pay PMI if you don’t make a 20% down payment; mortgage insurance is canceled when 22% equity is reached. Conventional conforming loans adhere to lending limits set each year by the Federal Housing Finance Agency.

•   Jumbo loans are mortgages that exceed the lending limits set for conventional loans. So a jumbo loan is a “nonconforming” loan. Conventional lenders issue jumbo loans, and the U.S. Department of Veterans Affairs guarantees a VA jumbo loan, possibly with no down payment.

•   FHA loans are made by private lenders and guaranteed by the Federal Housing Administration. You may qualify to make a down payment of as little as 3.5%. Upfront and annual MIPs are required, usually for the life of the loan.

•   USDA loans are backed by the U.S. Department of Agriculture and help low- to moderate-income households buy property in designated rural and suburban areas. No down payment is required. An upfront and annual guarantee fee are required.

•   VA loans are designed for active-duty and veteran military service members and some surviving spouses. VA loans don’t require a minimum down payment in most cases. There’s no MIP; there is a one-time funding fee.

What Is a Home Equity Loan?

A home equity loan is frequently known as a second mortgage. Home equity loans allow homeowners to borrow against the portion of their home they own outright. As with typical mortgages, home equity loans are secured using the home as collateral.

The amount you’re able to borrow will be determined by a few factors, including your credit history and how much equity you’ve built — in other words, the current value of your house less any outstanding debt. The borrower may pay closing costs based on the loan amount.

It’s common for lenders to allow you to borrow up to 80% of the equity you’ve established. The loan arrives in a lump sum. You repay the home equity loan with interest over a set period of time. If you miss payments, your lender can foreclose on the house. (A home equity loan is not to be confused with a home equity line of credit, or HELOC. In the latter, your home equity is collateral, but rather than receiving a lump sum, you have a revolving line of credit and can borrow and repay the debt repeatedly as needed during a given time period — typically a decade.)

Another way to tap home equity is with a cash-out refinance, when you take out a new loan to pay off your old one and free up equity.

Similarities Between a Home Equity Loan and a Mortgage

When you apply for a mortgage as part of the homebuying process, or when you seek a home equity loan as a homeowner, lenders will look into your financial history to help them establish terms and the interest rate for the loan. For example, they will examine your credit reports, often awarding more favorable terms and interest rates to those with higher scores. Mortgages and home equity loans are both secured loans.

Differences Between a Home Equity Loan and a Mortgage

A mortgage must be used to purchase a specific property. There are fewer limitations on the money received from a home equity loan.

Mortgage interest can be deducted if you itemize your deductions. However, you can only deduct interest on a home equity loan if you use the loan to buy, build, or substantially improve your main or second home. So if you want to buy a boat, that deduction won’t hold water.

When You Should Consider a Mortgage

If you don’t have the cash to buy a home outright, you will have to finance the purchase with a mortgage. However, there are some considerations you may want to take into account. For example, the larger your down payment, the more equity you will have in your home and the smaller your monthly mortgage payments will be.

Because you have more equity in the home, the lender will see you as less risky. As a result, larger down payments also tend to translate into lower interest rates. So, consider putting down as much as you can afford to.

Also, even if you have the cash to pay for a home in full, you may consider a mortgage anyway. You may not want to tie up cash that could be used for other purposes, such as in an emergency. You may be able to invest that money and earn a return that’s higher than the interest rate you’d pay on the loan.

When You Should Consider a Home Loan

Many people choose to take out home equity loans to make home improvements. That can increase the value of your home, putting you ahead if you ever choose to sell.

You may also consider a home equity loan when consolidating other debt, including high-interest credit card debt. The average interest rate for a home equity loan remains significantly lower than the average credit card rate. As a result, it can make financial sense to pay off the more expensive debt with a new, cheaper loan.

The Takeaway

Home equity loan vs. mortgage? One uses a home as collateral on a loan; the other gets a buyer into a home. If you’re looking for a home equity loan, a mortgage, or a refinance, it’s a good idea to compare rates and terms.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Is a home loan the same as a mortgage?

Yes. “Home loan” is an umbrella term that covers a wide variety of mortgages, home equity loans, and home refinances.

Why is a home loan called a mortgage?

“Mortgage” comes from the old French mort gage, meaning a death pledge — a morbid origin for the pledge you make to a lender to pay back the money you borrow.

Is a mortgage cheaper than a home loan?

Mortgages are a type of home loan. Your interest rate will depend on the type and size of your loan, your down payment, and your financial history, such as your credit score.

Photo credit: iStock/Brandon Ruckman

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

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.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

SOHL-Q224-1903077-V1

When you want to sell your house quickly, you need to get it right the first time around. Those with more time to leave their home on the market can enjoy a period of trial and error, but if you’re looking for a quick payout, it’s smart to have a plan, and even a checklist in place. Here are 10 tips that can help increase the appeal of your home, impress buyers and help get your property sold in record time.

1. Clean and declutter

One of the first and most fundamental steps to complete if you want to sell your house fast is to clean and declutter your home. This sounds simple, but it can make a huge difference to prospective buyers. If necessary, you may want to rent a storage unit so you can set aside any belongings that you don’t absolutely need for a showing. A tidy home looks bigger and more appealing, so investing some time and money in a deep clean and even a home staging can help to ensure buyers get a great first impression.

2. Pick a selling strategy

Different buyers will have different needs. For instance, a first-time homebuyer might be ready to purchase, but may not know exactly what they want until they see it. That’s why it’s smart to make sure your selling strategy targets your ideal buyer so you can sell your home quickly. Here are three strategies to consider:

Sell FSBO

Selling your home yourself can be a great way to sell a house fast. The “For Sale By Owner” approach may require a little extra work on your part, but it also lets you avoid agent or broker fees, meaning you can sell the home at a lower price and keep the same profits.

Hire an agent

Of course, going it alone isn’t for everyone. If you don’t fully understand the ins and outs of the market, need a little assistance, or would just prefer for a professional to handle the heavy lifting, hiring a real estate agent may be the better route for you. You may incur some additional fees but having a professional on board can help give you some piece of mind during what can be a very complex and stressful process. An agent can also help you time your sales strategy and planning process if you’re buying and selling a house at the same time.

Try the unconventional

There isn’t any one right way to sell a home. These days, some people harness the power of social media to try to sell a home quickly. Others allow potential buyers to spend a night to see if they fall in love with the home. Virtual tours that allow buyers to “walk through” without ever setting foot in the home are now the norm.

3. Price to sell

A mortgage loan is a major expense so it’s often at the forefront of your potential buyers’ minds. That’s why you may want to think carefully when setting a price point for your home. Setting your sale price higher than other properties in your neighborhood could keep your home on the market longer than you’d like. Choosing to set your sale price lower than those in your neighborhood can help set you apart from the pack and may help speed up the selling process.

Set a timeline for a price reduction

It’s perfectly fine to dream big, but it’s smart to have a plan in place if no one bites at your initial price. Setting a date by which you’ll reduce the price can help to generate renewed interest in your property. Even a small price reduction can entice buyers to give your home a second look.

Consider sales incentives

You may also want to consider other sales incentives. Perhaps the buyer wants a new fence installed or an AC unit replaced. New carpentry and modern appliances can be highly appealing for buyers. Also, offering to partially or fully cover closing costs is another tactic that can entice potential buyers.

4. Handle any quick repairs

Speaking of incentives, it’s wise to make sure you do repairs before buyers see the home. Many of those small things we overlook while living in a house can be a big deal to buyers. Repair scratched floors and damaged walls, tighten up that leaky faucet and pull out the touch up paint. All of these quick repairs can make a huge difference in selling your home quickly.

Recommended: What Are the Most Common Home Repair Costs?

5. Pack up and hire a stager

First thing’s first: Most buyers consider how their own belongings will fit in your home as they walk through, and getting some of your things out of the way can aid in that visualization. If you think your belongings are outdated or detract from the overall appeal of the home, you can research home staging tips or even consider hiring a stager who will know exactly how to make your home look its absolute best. A well-staged home can sell more quickly.

6. Create curb appeal

Thinking about what people see when they first arrive at your house is a smart move when it comes to selling your home quickly. The front lawn, the door, or even a driveway can influence a buyer’s overall impressions. Drive past your home and look at it from a buyer’s perspective to see where your eyes land first. Whatever catches your eye is probably worth investing some time and money into. Also, mowing the lawn and power washing the front of your home can help make it look more inviting.

Recommended: 5 Curb Appeal Ideas for Your House

7. Hire a professional photographer

Pictures, virtual walk-throughs and social media are huge in real estate these days. And professional photographers make it all much more appealing. If you have stunning professional photographs to show prospective buyers, you’re likely to be more competitive when it comes to getting those buyers into your house.

8. Write a great listing description

A listing price and photographs are helpful, but you also need a listing description. Real estate agents are often great at this, but if you need to do it on your own, you may want to start by considering your home’s best features. Also it’s smart to consider keywords that might help your home rank higher. Since you’re trying to sell a house fast, it’s perfectly fine to convey that in the listing. It might also attract buyers who want to buy quickly.

Where to post your listing

Where to list your home for sale often depends on how you’re selling it. If you are selling on your own, you can use sites like Zillow to list the house yourself. If you are working with an agent, however, they will probably prefer to list the house for you on the local Multiple Listing Service (MLS). Of course you can always use your personal social accounts, email, or other means to advertise regardless of whether you have an agent or not.

9. Time your sale right

Timing can play a huge role in how quickly your home sells. However, this can vary widely depending on where you’re located. You may want to start by researching when homes sell best in your area and aim to hit that time frame if you can.

10. Be flexible with showings

Within your ideal time frame, you’ll probably want to be as flexible as possible. Homebuyers can be busy, and if you can accommodate them, they’ll be more likely to view your home. If you can’t, they may look elsewhere.

Hold an open house

An open house is an excellent way to let people see your house. The best part about open houses is that they’re very flexible. People can come and go as they please on their own schedules. Of course, things like cleaning, making repairs and staging will be extra important prior to an open house. If you have an interested buyer but have scheduled an open house, it’s OK to run the open house anyway. Even a home in contingency can still fall through; it doesn’t hurt to have backup offers or other interested buyers in waiting.

The Takeaway

Whether pricing your home below market rate or just adding a fresh coat of paint, when it comes to selling your home quickly there really are no guarantees. Doing your research and knowing your market are the best ways to position yourself for a sale, and incorporating these tips can help speed up that process.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

Photo credit: iStock/OlekStock

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

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.

SOHL-Q224-1903222-V1

With so many options available, choosing a credit card isn’t as simple as signing up for whichever card happens to be popular at the moment. Instead, you should consider things like your credit score, preferred features, and spending habits.

After all, there are many different types of credit cards meant for different purposes. Making the best choice is about not only knowing your approval odds, but also how you intend to use the card after signing up. Using a step-by-step approach for how to choose a credit card will help you make the right decision for your situation.

Where To Begin When Choosing a Credit Card

Choosing a credit card is a matter of understanding which type of credit card works best for you. You’ll want to consider a number of factors, including:

•   Your credit score

•   How you plan to use your new credit card and which features you’ll need

•   How the card stacks up to other options

•   The card’s interest rates and fees

•   Which rewards you want

•   Any sign-up bonuses offered

Read on to learn more about each of these items and what specifically to look for.

Checking Your Credit Score

Checking your credit score should be one of the first steps you take before applying for a new credit card. One of the best ways to know your approval odds is to check your score.

One way to do so is to use AnnualCreditReport.com . This website allows you to request a copy of your credit report from each of the major credit reporting bureaus: Experian^®, Equifax^®, and TransUnion^®. Federal law allows you to request one copy of your credit report from each reporting bureau per year.

However, you may want to check your credit score more often than once per year, especially if you are in the process of building your credit. Fortunately, several big banks allow you to check your FICO^® score — the most widely used credit score — on a monthly basis.

There are several credit scoring models available, but most lenders use FICO, so getting this score can be a good way to gauge your chance of approval. These checks won’t guarantee you’ll get approved for a credit card, but they can help you get a better sense of where you stand. Plus, pulling your credit report won’t hurt your credit score.

Identifying the Features You Need

There are many different types of credit cards, each of which has its own set of features. Identifying the features you need can help you find the right credit card, as how credit cards work varies depending on the type.

Credit Builder Credit Cards

Some credit cards are meant for those who are working on building their credit. This could include college students, those trying to repair their credit, or anyone with little to no credit history.

In those cases, you might need a secured credit card or a student credit card. Secured credit credit cards require a security deposit, usually around a couple or a few hundred dollars, that is fully refundable. Your credit limit is usually equal to your security deposit, so the card issuer has little risk of losing money. Student credit cards, on the other hand, are usually unsecured and may have special perks for students.

Here are some features to look for in credit builder credit cards:

•   No annual fee: If you are working to build your credit, annual fees could make things more difficult.

•   Credit limit increases: Credit limits often start low with these cards; some offer credit limit increases if you use your card responsibly.

•   Free credit score: Some credit builder cards offer free credit score monitoring to let you know where you stand.

Balance Transfer Credit Cards

Balance transfer credit cards are ideal for consolidating and paying off debt. Thus, the key with this type of card is finding one that keeps fees as low as possible:

•   0% introductory APR: Balance transfer credit cards may come with low or 0% balance transfer APR for a specified introductory period, sometimes lasting a year or more. Some even have a separate 0% APR introductory period for purchases. This can allow you to avoid paying much in interest for a certain period of time and instead put your money toward paying down the principal balance.

•   Balance transfer fees: These cards often charge separate balance transfer fees, which you should be aware of if you plan to transfer large balances.

Rewards Credit Cards

Credit card rules say that you shouldn’t get a card just for the points. However, rewards credit cards may come with a variety of benefits. These include cash back, points and miles, and various perks, such as rental car insurance and airport lounge access. You can redeem points and miles for statement credits, gift cards, flights, and hotels, so you’ll have to decide what’s most important to you.

Here are some rewards credit card features to consider:

•   Sign-up bonuses: Some rewards credit cards include sign-up bonuses that can be worth hundreds of dollars.

•   Low or no annual fee: While some of these credit cards have annual fees, not all of them do.

•   Rewards categories: Rewards credit cards generally let you earn a percentage of your purchases in cash back or points/miles. Some have higher earning rates for certain categories, such as groceries or travel. Look for one that earns a lot of points where you normally spend the most.

•   Other perks: These cards can come with a variety of other perks, from UberEats credits to free hotel nights. If you never travel, for example, you may not be interested in free hotel stays.

Narrowing Your Choices by Doing Research and Asking Questions

The key to how to pick a credit card is understanding how you want to use it. While some credit cards are more like generalists, doing many things somewhat well, others are niche cards that are great in certain scenarios. Consider what’s most important to you and how much you need certain features.

Once you’ve decided which type of credit card you want, the next step is to compare some of the best options. For instance, if you want a rewards credit card and don’t want to pay a high annual fee, look for no annual fee rewards credit cards. For balance transfer credit cards, you can look for ones with the lowest fees, including a lengthy 0% introductory APR. Also keep in mind you don’t need to rely on one card to meet all of your needs — here’s a primer on how many credit cards you should have.

Identify a handful of cards that look like good candidates based on your research. Once you have two to three cards that seem like the right fit, you might want to submit a prequalification form. This process will give you a hint about whether you might qualify — and it won’t affect your credit score. Prequalification doesn’t guarantee approval, but it will help you know where you stand.

Familiarizing Yourself With the Interest Fees and Rates

Having a basic understanding of interest rates and fees will help you avoid paying more than expected to use your new credit card.

Different types of credit cards tend to come with varying interest rates. For instance, the minimum annual percentage rate (APR) for travel cards tends to currently range between 18.24% and 29.99%. However, the maximum APR for these credit cards can be slightly lower than the maximum for 0% APR and low-interest credit cards.

Of course, fees also matter. Balance transfer cards might have a 0% introductory period, but a fee may apply every time you initiate a balance transfer. Depending on the card, other fees may be involved, such as late fees and penalties, annual fees, and foreign transaction fees. Be sure to review all relevant fees before signing up for and using a credit card.

Deciding Which Rewards You Want

You also may need to decide which type of rewards you’ll want to earn. There are a few different types of rewards that credit cards can offer:

•   Cash back: With a cash back rewards credit card, you will earn a percentage in cash on each eligible purchase you make with your card. You could get a flat rate across categories, or you may earn a higher rate in specific categories. Or you might see offers for unlimited cash back. If you want to earn rewards across spending categories and don’t want to worry about calculating and converting, cash back might be the right rewards option for you.

•   Points: Another way to earn credit card rewards is through points. You’ll earn a certain number of points for every dollar spent, with the rate and redemption options varying depending on the issuer. The perk of points is that you can redeem them in a number of different ways, including cash back, travel, charitable donations, statement credits, gift cards, and more.

•   Miles: If you’re a frequent flier, you might prefer earning airline miles. Credit cards that allow you to earn miles let you redeem your rewards for flights and other travel-related perks, such as hotel stays or access to airport lounges.

Looking at Sign-Up Bonuses

Some credit cards feature sign-up bonuses to attract new customers. Usually, you have to spend a certain amount in the first three or four months of opening the card. If you meet the minimum spending threshold within that time frame, you’ll receive cash, points, or miles as a reward. The trick is to ensure you can meet the spending threshold on time.

There can be a wide range of bonus amounts; for instance, the Chase Freedom® Student credit card has a $50 bonus for making a purchase in the three months. On the other end of the spectrum is the American Express Platinum Card, which at the time of writing offers 125,000 points after spending $8,000 in the first six months. Most sign-up bonuses, however, fall somewhere in between.

Choosing the Card With the Highest Overall Value

There are several credit cards available that offer similar benefits. In those cases, you will want to compare them directly to one another and find features that give one card the edge. Here are a few things to consider for each type of credit card:

Student and secured credit cards:

•   Credit limit increases: Some student credit cards will automatically increase your credit limit if your account remains in good standing.

•   Flexible credit lines: Some secured credit cards give you access to a larger credit line than your deposit.

0% introductory APR or balance transfer credit cards:

•   No late fees or penalties: Some credit cards waive these fees, which might be helpful when transferring balances.

•   Installment plans: Some balance transfer cards offer installment plans to help you repay your balance over time.

Rewards or travel credit cards:

•   Low spending threshold: Requirements to earn sign-up bonuses can vary; look for one that’s well within your budget.

•   Points transfer: Some travel credit cards let you transfer points to airlines or hotels, which can lead to better redemption rates in some cases.

How Your Credit Score Affects Your Chance of Approval

Your credit score is one of the biggest factors in determining whether you’re approved for a credit card. If you have poor or no credit, you probably won’t get approved for a card that requires very good to excellent credit, regardless of other factors, given what a credit card is and how the approval process works.

Luxury credit cards, for example, may require a credit score of 670 or higher. If your score is higher, you might be approved for one of these cards (though approval is not guaranteed). If your credit score is below 670, however, your approval odds will probably be quite low.

While a credit score and credit card offers are intertwined, that may not be the only factor a card issuer considers. Issuers might also look at things such as your employment status and income. This is one of the reasons that a good credit score doesn’t guarantee approval.

Still, a better credit score can help you secure the credit card you want. As such, you might consider taking steps to build your credit score before applying for a credit card, such as by making on-time payments or lowering your credit utilization ratio.

What Comes Next After Choosing a Credit Card?

If you’ve already submitted prequalification forms, you should have some idea about your approval odds for each card. As mentioned, those forms do not guarantee approval but can serve as a valuable guideline.

Once you have chosen a credit card, it’s time to apply. Some general steps are to:

1.    Visit the card issuer’s website and click apply.

2.    Fill in the required information.

3.    Submit your application.

In some cases, you may receive instant approval (or denial). In others, the card company will need more time to review your application. If approved, you can usually expect to receive your card in the mail in seven to 10 business days.

If you are denied, you can call the card’s reconsideration line and provide additional information. Perhaps you forgot some additional sources of income that could help your case. Anything that may help is worth mentioning.

Recommended: Does Applying for a Credit Card Hurt Your Credit Score?

The Takeaway

Deciding which credit card is best for you can be a long and arduous process. However, once you have a better understanding of what you need, the process of choosing a credit card doesn’t have to be so complicated. Some credit cards are simply better than others, and picking them is a surprisingly easy choice after comparison shopping.

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 does your credit score determine the card to choose?

Your credit score is one of the most important factors in deciding which credit card to choose. For example, if your credit score is poor, you probably won’t be approved for a premium card with excellent rewards that requires good to excellent credit.

How do you choose a credit card for the first time?

In most cases, the best choice for your first card should have no annual fee. Some good choices are student credit cards (for students) or secured credit cards. These cards are ideal for building credit and often have low fees.

What is the most important factor when choosing a credit card?

The most important factor when choosing a credit card is probably how you intend to use it. For example, a premium credit card may offer excellent benefits for the frequent traveler, but someone who just wants to earn cash back on groceries may not benefit from travel perks.

Photo credit: iStock/Eva-Katalin

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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In most cases, it isn’t possible to overdraft a credit card, or spend above your credit limit. If you opt in to over-the-limit charges, it may be possible to exceed your limit. However, “overdraft” usually refers to overdrawing a bank account, not a credit card.

It’s more likely that your purchase will be denied rather than your account “overdrawn.” If the charge does go over the limit, you might get hit with additional fees, and your credit could suffer as a result.

What Does It Mean to Overdraft a Credit Card?

Each time you use your credit card, your balance increases, which is part of how credit cards work. If you aren’t making payments against that balance, it will move closer and closer to your credit limit. Eventually, your balance could get high enough that you run up against that limit.

Usually, though, you won’t be able to go beyond your credit card spending limit. Instead, your card will be declined if you attempt to make a purchase that would put you over the limit. This is the result of the CARD Act of 2009.

Since the CARD Act, you can’t go over your card’s limit unless you specifically opt in to allow overages. In that case, it may be possible to go beyond your credit card’s limit.

The average credit card limit is the U.S. is currently approximately $29,855.

Recommended: When Are Credit Card Payments Due?

What Happens If You Overdraft Your Credit Card

What happens when you try to overdraft your credit card depends on whether you have opted in to over-limit charges. If you haven’t, your card will likely be declined; otherwise, you could incur fees and a hit to your credit.

Declined Transactions

By default, most credit cards today should not allow you to go over your credit limit. Instead, your card will probably be declined.

For example, imagine you have a credit limit of $5,000 with a current balance of $4,800. If you try to spend $250, in most cases it will not result in a $5,050 balance on your card. Because your limit is $5,000, your card will probably be declined when you attempt to complete the transaction for the $250 purchase.

Over-Limit Fees

Since the CARD Act of 2009, you can’t be charged over-limit fees unless you opt in to them. In that case, you will be charged an over-the-limit fee that is usually up to $35. However, the fee is limited to the amount you exceed your limit. For example, if you go $15 over your credit limit, the over-limit fee can’t be more than $15.

The CARD Act also says that banks must disclose over-limit fees in your credit card contract. If for some reason you have opted into over-limit fees, you should be able to opt out of these fees at any time.

Impact on Credit Score

If you go over the limit for your credit card, your credit score might take a hit. While there’s no magic number for credit utilization, the rule of thumb is usually that you should limit your utilization to 30%. Many financial experts suggest keeping it closer to 10%.

Your utilization is your outstanding balances divided by your credit limit. Because your balance for the credit card in question is greater than the limit, your ratio would exceed 100%. That might negatively impact your credit score until you lower the ratio.

One thing to keep in mind is that credit utilization is calculated using all of your outstanding credit. In other words, if you have five different credit cards, your utilization takes all of their balances and credit limits into account. If you have many credit cards and most of them have no balances, going over the limit on one credit card won’t necessarily hurt your credit score significantly.

Either way, it’s best to avoid this situation due to the over-limit fees. This is also why it’s important to discuss spending habits with any authorized users on a credit card to avoid hitting your limit.

Recommended: Pros & Cons of Charge Cards

How to Avoid Overdrafting Your Credit Card

If you go over the limit on your credit card, there are several steps you can take to rectify the situation.

Make Additional Repayments

One of the most important credit card rules is that you should pay more than the minimum amount due each month. Indeed, paying more than you normally pay might be a good idea, especially if the credit card that’s over its limit is a significant part of your total credit picture.

Perhaps you have a minimum payment of $40, and you might normally pay that amount each month. In that case, consider upping your payment to $50 instead. Anything you can pay above the minimum will help you reduce your credit utilization; the more you can pay, the better.

This can also help you from falling into credit card debt, which can be a hard situation to get out of.

Request a Credit Limit Increase

Another way to reduce your credit utilization is to request a credit limit increase. For instance, if you have a total credit balance of $5,000 and a total credit limit of $10,000, your utilization is 50%. If you currently have a credit card you don’t use often with a limit of $3,000 and no balance, your utilization there is 0%. Your total credit utilization is therefore $5,000 out of $13,000, or 38.5%.

You could request an increase to that unused card’s limit to $5,000. In this case, your total credit limit becomes $15,000, and $5,000 out of the new combined $15,000 limit brings your utilization down to 30%. Hence, even if your balances stay the same, your credit utilization ratio will drop.

Contact Your Provider

Sometimes, credit card issuers will increase your credit limit automatically, such as you if you’ve used your credit card responsibly over time. If not, you can call your card issuer and ask them to increase your credit limit. Usually, it’s best to do this after you’ve had the card for at least a few months.

When you make the request, the credit card issuer may review one or more of your credit reports. Keep in mind that this could result in a hard inquiry into your credit history; these checks cause a temporary dip in your credit score. The card issuer may also request proof of income, employment status, or monthly rent or mortgage payments.

Recommended: Tips for Using a Credit Card Responsibly

The Takeaway

It usually isn’t possible to overdraft a credit card. Your card is typically declined if you try to charge above your credit limit. You may be able to go over the credit limit, but only if you opt in to over-limit fees. If you do opt in, your credit could take a hit, and you might have to pay additional fees if you exceed your credit card’s limit.

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

FAQ

Do credit cards allow overdrafts?

Credit cards usually do not allow overdrafts. In fact, “overdraft” is usually a banking term that refers to your checking or savings account balance dropping below $0. With credit cards, it may be possible to go over the limit if you opt in to over-limit fees.

Can you overdraft with no money on your card?

With credit cards, your balance increases as you make purchases. Hence, in this scenario, it would only be possible to overdraft a credit card if a single purchase would put you over the limit. And even then, you must have opted in to over-limit charges; otherwise, the transaction will simply be declined.

Can you overdraft a credit card at an ATM?

In most cases, you won’t overdraft a credit card at an ATM. You might be able to overdraft when requesting a cash advance, but even then, it may not be possible unless you have opted in to overdraft protection.

How can you ask for a credit limit increase?

Sometimes, credit card companies will increase your limit automatically. If that doesn’t happen and you want an increase, you can call your credit card issuer directly and ask for an increase.

Photo credit: iStock/AsiaVision

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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