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A credit card can serve as a fantastic financial tool and offer a number of perks, from the opportunity to build your credit to the chance to rake in lucrative rewards. However, using a credit card responsibly is key to reaping those benefits. Otherwise, a credit card is more likely to harm your financial well-being than help it.

Using a credit card responsibly involves sticking to basic rules like making on-time payments and avoiding practices such as spending more with your card than you can afford to pay off. By learning some tips for how to use a credit card responsibly, you’ll be well on your way toward making the most out of this financial tool.

How Do Credit Cards Work?

A credit card is a payment card that offers access to a revolving line of credit. You can tap into this credit line for a variety of purposes, including making purchases, completing balance transfers, and taking out a cash advance. Cardholders can borrow up to their credit limit, which is largely determined based on their creditworthiness and represents the maximum amount they can borrow.

It’s necessary to make at least a minimum payment by the due date each month in order to avoid a late fee. However, to avoid paying interest entirely, cardholders must pay off their balance in full each month; interest accrues on any balance that rolls over from month to month.

Many credit card companies charge compounding interest, which means that not only will you owe interest on any outstanding balance, you’ll also end up paying interest on the interest. That’s because this interest is calculated continually, then added to your balance, and it may be compounded daily. You may be shocked to see how much credit card interest you’ll pay if you only make the minimum payment each month.

Understanding Your Statement

A crucial component of knowing how credit cards work is understanding your monthly credit card statement. Your statement contains a number of important pieces of information about your credit card account, including:

•   Your account information

•   Your account summary, including your payment due date

•   All purchases made with the card

•   Your total credit card balance

•   The minimum payment due

•   When the credit card payment is due

•   Your available credit

•   Interest charges

•   Rewards summary

Many of these details are key to know in order to ensure you’re using a credit card wisely. For instance, knowing your payment due date will ensure you make your payment on time, avoiding any late fees and a ding to your credit score.

Checking on your available credit can help you ensure you’re not using too much of your credit, which can drive up your credit utilization rate and subsequently drag down your score.

10 Tips For Using a Credit Card Responsibly

To make the most of your credit card, here are several credit card rules to keep in mind — as well as some guidance on what credit card behavior to avoid.

1. Avoid Making Too Many Impulse Purchases

To use a credit card responsibly, you want to avoid overspending with it. How many is “too many” purchases depends upon how much your impulse buys cost and how easily they fit into your budget. If you know you can pay off your credit card balances and otherwise meet your monthly expenses and savings and other financial goals, then that’s an entirely different situation from one in which your impulse purchases are too costly to promptly pay off and/or prevent you from meeting other financial responsibilities or goals.

If you enjoy making spontaneous buys, you may consider including this as a line item in your monthly budget and then sticking to it. This could add enjoyment to your life without causing financial problems down the road.

2. Use the Right Credit Card

There are a variety of different types of credit cards, and depending on how you plan to use your credit card, one option may make more sense than another. Some credit cards are there to help you build your credit, while others pay out generous rewards.

Selecting which card is right for you requires a look at your financial habits and current situation. For example, if you know that you often end up needing to carry a balance, then it may make sense to find a card that prioritizes low interest rates. Or, let’s say you’re a frequent vacationer — in that case, you might benefit from a travel rewards card.

3. Take Advantage of Benefits Offered

Interested in another way to use your credit card responsibly? Signing up for eligible rewards programs can help cardholders make the most of their card. Each type of credit card may have slightly different reward programs. See what the full range perks offered by your card are — and if you’re not sure, check the card’s website or ask the credit card company for specifics. For example, you might need help understanding what unlimited cash back really means in terms of how you might benefit.

Once you know what perks are available, you can use them strategically. You may discover that the card(s) you have don’t provide the best benefits for you. For example, maybe your card offers one of its highest rewards rates for gas purchases, but you don’t do much driving. In that case, you might be better served by a rewards card that offers a flat rewards rate or that prioritizes a category in which you’re a frequent spender.

Finally, if you’re earning rewards points, it’s also important to consider the best way to use them. Sometimes it’s possible to get a bigger bang for your buck if, say, you use your rewards points at an approved store rather than opting for cash back.

4. Sign Up for Automatic Payments

To avoid missing payments or making them late, consider signing up for automatic payments or autopay. By enrolling in autopay, you’ll regularly have money transferred from a linked account each month in order to cover the amount due (or at least the minimum payment required).

Another option is to sign up for automatic reminders about payment due dates (by text, for example, or by email). You can do this through the credit card company or via a calendar app.

What’s most important is coming up with a plan that works best for you to ensure you make your payments on time. Otherwise, you could face late fees and adverse effects to your credit score.

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

5. Regularly Check Your Statements

Mistakes do happen on credit card statements and, unfortunately, fraudulent activities could impact your account. Check your statement every month to ensure that you made all the charges that appear, and that any payments you’ve made are accurately reflected.

If something is missing, review the statement dates to see if the transaction may have happened right after the statement cut-off date, for instance. If something seems off, contact your credit card company for clarification. In the case of any potentially fraudulent activity, it’s important to report credit card fraud to your credit card company immediately.

6. Pay More Than the Minimum

You’ve just read about how credit card interest works, so you’ll remember that only making the minimum payment doesn’t get you out of paying interest. To avoid credit card interest charges, you’ll need to pay off your monthly statement balance in full.

Understandably, this isn’t always possible, but even then, it still helps to pay as much above the minimum as you can afford to. This will at least cut down on the outstanding balance that accrues interest.

7. Don’t Close Out Old Cards

While it might seem logical to close out an older credit card you’re no longer using, you’ll want to think twice before you cancel a credit card. That’s because doing so can have adverse implications for your credit.

For starters, canceling a credit card will lower your credit utilization rate, which compares your total outstanding balance to your overall available credit limit. Closing out a card will cause you to lose that card’s credit limit, thus lowering the amount of credit you have available.

Closing an old card could also have an impact if the card in question is one of your older accounts. Another factor that contributes to your credit score is the age of your credit. By closing out an old account, you’ll lose that boost in age.

That being said, there are scenarios where it might make sense to close a card, such as if it charges a high annual fee. Just be mindful of the potential effects it will have on your credit before moving forward.

💡 Quick Tip: Aim to keep your credit utilization — the percentage of your total available credit that you’re using at any given time — below 30% (or lower). This could help you to maintain a strong credit score.

8. Maintain a Low Credit Utilization Rate

Another key tip for responsible credit card usage is to avoid maxing out your cards. Instead, aim to keep a lower credit utilization rate — ideally below 30%. The lower you can keep this utilization rate, the better it is for your credit score.

9. Avoid Unnecessary Fees

Another part of using a credit card responsibly is being aware of all of the fees you could face, and then taking steps to steer clear of those costs. Your credit card terms and conditions will spell out all of the fees associated with your card, as well as the card’s APR (or annual percentage rate) and the rules of its rewards program.

Many credit card fees are pretty easy to avoid. For instance, if you’ll incur a fee to send money with a credit card, simply avoid doing that and look for an alternative route. Similarly, you can avoid late payment fees by making on-time payments, and over-the-limit fees by not maxing out your credit card.

10. Avoid Applying for Too Many Cards

As you get into the swing of things with using your credit card, you may feel tempted to keep acquiring new cards, whether to keep on earning rewards or to capitalize on enticing welcome bonuses. But proceed with caution when it comes to applying for credit cards.

Applying for credit cards too frequently can raise a red flag for lenders, as it may suggest that you’re overextending yourself and desperate for funding. Plus, each time you submit an application for a credit card, this will trigger a hard inquiry, which can ding your credit score temporarily. Consider waiting at least six months between credit card applications.

The Takeaway

When used responsibly, credit cards can be helpful for a whole slew of things, from making online purchases to building your credit. The key phrase to keep in mind is “when used responsibly.” To stay on top of your credit cards, tips like signing up for automatic payments, making the most of the rewards programming, and using the right type of credit card for your needs are all important.

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.

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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Paying student loans on time can have a positive effect on your credit score and help build a good credit history. On the flip side, when you have a late or missed student loan payment, that can be reflected on your credit report as well. Delinquent payments can lower your credit score and have financial repercussions, such as impacting your ability to qualify for a new credit card, car loan, or mortgage.

If you’re wondering how to remove student loans from a credit report, the answer is that it’s only an option if there’s inaccurate information on the report. Student loans are eventually removed from a credit report, however, after they’re paid off or seven years after they’ve been in default. Here’s what to know about student loans on a credit report, what happens when you default on a loan, and how to remove student loans from a credit report if there’s inaccurate information.

What Is a Credit Report?

Before considering the impact of student loans on your credit report, it’s helpful to review what a credit report is. It’s a statement that includes details about your current and prior credit activity, such as your history of loan payments or the status of your credit card accounts.

These statements are compiled by credit reporting companies who collect financial data about you from a range of sources, such as lenders or credit card companies. Lenders use credit reports to make decisions about whether to offer you a loan or what interest rate they will give you. Other companies use credit reports to make decisions about you as well – for example, when you rent an apartment, secure an insurance policy, or sign up for internet service.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

Defaulting on Student Loans

It’s also worth reviewing what happens when a student loan goes into default. One in ten people in the United States has defaulted on a student loan, and 5% of total student loan debt is in default, according to the Education Data Initiative.

The point when a loan is considered to be in default depends on the type of student loan you have. For a loan made under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan (FFEL) Program, you’re considered to be in default if you don’t make your scheduled student loan payments for a period of at least 270 days (about nine months).

For a loan made under the Federal Perkins Loan Program, the holder of the loan may declare the loan to be in default if you don’t make any scheduled payment by its due date. The consequences of defaulting on student loans can be severe, including:

•   The entire unpaid balance of your student loans, including interest, could be due in full immediately.

•   The government can garnish your wages by up to 15%, meaning your employer is required to withhold a portion of your pay and send it directly to your loan holder.

•   Your tax return and federal benefits payments may be withheld and applied to cover the costs of your defaulted loan.

•   You could lose eligibility for any further federal student aid.

And you don’t have to default on your student loans to experience the consequences of nonpayment. Even if your payment is only a day late, your loan can be considered delinquent and you can be charged a penalty fee.

Temporary Relief for Borrowers Behind on Payments

The pandemic-era pause on federal student loan payments that was established in March 2020 finally came to an end in the fall of 2023. After more than three years of having this financial responsibility off their plates, federal student loan borrowers must now fit payments back into their budgets. However, in order to protect financially vulnerable borrowers from facing the steep consequences of missing payments during this transition, the Biden Administration established a 12-month “on-ramp” program to help them adjust.

From Oct. 1, 2023, to Sept. 30, 2024, borrowers who don’t pay their federal student loans will be free of the usual repercussions. Specifically, this means that:

•   Loans will not be considered delinquent or in default.

•   Missed payments will not be reported to the credit bureaus.

•   Missed payments will not be referred to debt collection agencies.

•   Unpaid student loan interest will not capitalize (be rolled into the principal balance) once the on-ramp period ends.

However, payments missed during this period will be due once it ends. Additionally, any missed payments will not count toward forgiveness under income-driven repayment or Public Service Loan Forgiveness (PSLF).

How Long Do Student Loans Remain on a Credit Report?

If you are delinquent on your student loans or go into default, that activity is reported to the credit bureaus. It will remain on your credit report for up to seven years from the original delinquency date.

The good news is that the more time that passes since your missed payment, the less impact it has on your credit score.

The exception to this is a Federal Perkins Loan, which is a low-interest federal student loan for undergraduate and graduate students who have exceptional financial need. This type of loan will remain on your credit report until you pay it off in full or consolidate it.

On the other hand, if you made timely payments on your loan and paid it off in full, it may appear on your credit report for up to 10 years as evidence of your positive payment history and can boost your credit score.

How Do I Dispute a Student Loan on My Credit Report?

It’s a good habit to periodically check your credit report. You can request a free report from each of the three major credit reporting agencies—Equifax, Experian, and TransUnion—by visiting annualcreditreport.com. The bureaus are required by law to give you a free report every 12 months. However, through the end of 2023, you may request your report weekly at no cost.

There are three reasons your student loan might have been wrongly placed in default and reported to the credit bureaus by mistake. Here’s how to begin the process to correct these errors:

1. If You Are Still in School

If you believe your loan was wrongly placed in default and you are attending school, contact your school’s registrar and ask for a record of your school attendance. Then call your loan servicer to ask about your record regarding school attendance.

If they have the incorrect information on file, provide your loan servicer with your records and request that your student loans be accurately reported to the credit bureaus.

2. If You Were Approved for Deferment or Forbearance

If you believe your loan was wrongly placed in default, but you were approved for (and were supposed to be in) a deferment or forbearance, there is a chance your loan servicer’s files aren’t up to date. You can contact the loan servicer and ask them to confirm the start and end dates of any deferments or forbearances that were applied to your account.

If the loan servicer doesn’t have the correct dates, provide documentation with the correct information and ask that your student loans be accurately reported to the credit bureaus. Under the Fair Credit Reporting Act, a borrower may appeal the accuracy and validity of the information reported to the credit bureau and reflected on their credit report.

Recommended: Student Loan Deferment vs Forbearance: What’s the Difference?

3. Inaccurate Reporting of Payments

If your loan has been reported as delinquent or in default to the credit bureaus, but you believe your payments are current, you can request a statement from your loan servicer that shows all the payments made on your student loan account, which you can compare against your bank records.

If some of your payments are missing from the statement provided by your loan servicer, you can provide proof of payment and request that your account be accurately reported to the credit reporting agencies.

Recommended: How to Build Credit Over Time

In all three cases, if you believe there is any type of error related to your student loan on your credit report, it’s best practice to also send a written copy of your dispute to the credit bureaus so they are aware that you have reported an error.

Why Your Student Loans Should Stay on Your Credit Report

You generally can’t have negative, but accurate, information removed from your credit report. However, you can dispute the student loans on your credit report if they are being reported incorrectly.

On the bright side, if you’re paying your student loans on time each month, that looks good on your credit report. It shows lenders that you are responsible and likely to pay loans back diligently.


💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

When You’re Having Problems Paying Your Student Loans

If you’re having difficulty making regular payments on your federal or private student loans, there are steps you can take before the consequences of defaulting kick in.

One option is to apply for student loan deferment, which allows you to reduce or pause your federal student loan payments for up to three years. During this time, interest on subsidized loans does not accrue. Or you could pursue student loan forbearance, which allows you to reduce or pause payments for up to a year if you’re facing a temporary financial hardship.

You can also contact your loan servicer to discuss adjusting your repayment plans.

Additionally, if you’re having trouble paying your student loans on time, you may be able to make your loans more affordable through a federal income-based repayment plan. These plans, including the new Saving on a Valuable Education (SAVE) plan, cap your payments at a small percentage of your discretionary income and extend the repayment term out to 20-25 years. Once the repayment period is up, any remaining balance is forgiven (though you may be subject to income taxes on the canceled amount).

Refinancing your student loans may also be an option—if you extend your term length, you may qualify for a lower monthly payment. Note that while these options provide short-term relief, they generally will result in paying more over the life of the loan.

When you start making your payments by the due date each month, you may see that your student loans can become a more positive part of your credit report. Again, while these options provide short-term relief, they generally will result in paying more over the life of the loan.

The Takeaway

While you generally can’t remove student loans from a credit report unless there are errors, it isn’t a bad thing if you make payments on time. If a loan is delinquent, it will be removed from your credit report after seven years, though you will still be responsible for paying back the loan.

If you’re having trouble making loan payments, there are ways to make repayment easier. Borrowers with federal student loans can look into forgiveness, an income-driven repayment plan, or a change to the loan’s terms.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Is it illegal to remove student loans from a credit report?

There’s no legal way to remove student loans from a credit report unless the information is incorrect. If you think there’s an error on your credit report, you can contact your loan servicer with documentation and ask them to provide accurate information to the credit reporting agencies. It’s also a good idea to send a copy of the dispute to the credit bureaus as well.

How do I get a student loan removed from my credit report?

If you paid your student loan off in full, it may still appear on your credit report for up to 10 years as evidence of your positive payment history. It takes seven years to have a defaulted student loan removed from a credit report. Keep in mind you are still responsible for paying off the defaulted loan and you won’t be able to secure another type of federal loan until you do.

How can I get rid of student loans legally?

If you have federal student loans, options such as federal forgiveness programs or income-driven repayment plans can help decrease the amount of your student loan that you need to pay back. If you have private or federal student loans, refinancing can help lower monthly payments by securing a lower interest rate and/or extending your loan term. If you refinance a federal loan, however, you will no longer have access to federal protections and benefits. And you may pay more interest over the life of the loan if you refinance with an extended term.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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Car payments can take a significant bite out of your monthly budget. According to Edmunds, the average monthly car payment in the second quarter of 2023 was $733 for a new vehicle and $569 for a used vehicle.

While knowing the average car payment can be helpful, keep in mind that the actual amount you’ll pay on a car loan will depend on multiple factors, including the loan amount, interest rate, type of car you buy, your credit score, and the length of the loan.

So how do you know if you’re getting (or you got) a good deal? Read on to learn more about average car payments and what to do if you’re paying too much — or more than you can currently afford.

What Is a Good APR on a Car?

Every auto loan has an annual percentage rate (APR), which is the annual cost you’re charged by the lender for borrowing money. A loan’s APR includes the loan’s base interest rate plus any added fees, so it represents the true cost of the loan.

In the second quarter of 2023, the overall average auto loan APR was 7.1% for new cars and 11% for used cars.

The actual APR you receive for an auto loan will be based on several factors, including your income, credit history, and credit score. Typically, your credit score will have the greatest influence over the rate you’ll get, since lenders use it to gauge how likely you are to repay the loan. Generally speaking, the higher your credit score, the lower your car loan APR will be.

For example, the average APR for someone with a credit score between 781 to 850 is 5.18%, whereas the average rate for someone with a credit score between 300 and 500 is 14.08%


💡 Quick Tip: A low-interest personal loan can consolidate your debts, lower your monthly payments, and help you get out of debt sooner.

What to Do if Your Car Payments Are Too High?

If you’re paying more than the average car loan payment, or simply more than you can comfortably afford, here are some ways you may be able to lower your payment.

•   Refinancing When you refinance a car loan, you replace your current loan with a new one and hopefully lower your car payment in the process. You may be able to qualify for a lower APR on a new loan and/or extend your loan term, which can lead to a lower monthly payment. Keep in mind, though, that if you extend your loan term, you may end up paying more in total interest over the life of the loan.

•   Selling or trading in your car If your car is beyond your budget, you might consider selling it and then buying a cheaper car. Trading it in at a dealership can be the simplest option, though you might get a better price with a private sale. Just keep in mind that selling a car that has a loan attached to it can be complicated. You‘ll want to check with your lender to make sure you aren’t breaking any terms of your loan contract.

•   Making extra payments whenever you can Consider putting the occasional windfall (such as a tax refund, bonus at work, or cash gift) toward your loan principal. This will reduce the total amount that you owe, which, in turn, can lower your monthly payments. Before you try this tactic, however, make sure your lender will apply extra payments directly to your loan’s principal and not to interest.

Recommended: Smarter Ways to Get a Car Loan

What if Your Car Payment is Lower Than Average?

If your car payment is lower than the average, that doesn’t necessarily mean you won’t benefit from refinancing. This is especially true. If your credit has improved or rates have dropped since you originally took out your car loan.

You might also be able to lower your monthly car payments if you initially received your loan from the dealer. APRs offered by car dealers tend to be higher than those offered by banks and credit unions. If you took out your initial loan through dealer-arranged financing, refinancing with a different lender could potentially get you a lower rate, and a lower monthly payment.

If your budget is stretched and you really need to lower your payments, refinancing to a longer repayment term can help lower your payments, even if you don’t get a lower interest rate. Just be aware that you’ll pay more in total interest because you are extending the length of the loan.


💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

Using a Personal Loan to Refinance an Auto Loan

Many people assume that the only way to refinance an auto loan is with another auto loan. But that’s not necessarily the case. In fact, taking out a personal loan can be an option worth considering, particularly if you have excellent credit and can qualify for low APRs.

Personal loans are available through banks, credit unions, and online lenders and can be used for virtually any use, including debt consolidation, home repairs, and other large purchases. This makes it different from an auto loan, which can only be used to pay for a car.

If your auto loan rate is higher than the rate you can receive on a personal loan, using a personal loan to refinance your auto loan may be a way to lower your car payments.

Another reason you might refinance with an unsecured personal loan is that these loans don’t require that you use your car as collateral. That means if you’re unable to make your payments, you won’t lose your vehicle (though your credit score will likely take a significant hit).

Also, if you plan to sell your car, it can be complicated to sell a car with an auto loan attached. If you use a personal loan to pay off your car, you’ll receive the title from your auto lender, which enables you to sell it more easily.

For a personal loan to make sense for an auto loan refinance, however, you’ll need to qualify for a low rate. Just like you shopped around for an auto loan, it’s a good idea to compare personal loan rates, terms, fees and borrowing limits to ensure you find a lender that will best fit your needs.

As you compare lenders, consider a SoFi Personal Loan. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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.

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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Loan sharks get their name from the predatory sharks of the sea, only they set their sights on borrowers in desperate need of money instead of schools of fish. Loan sharks often use threats of violence (and, in some cases, actual violence) to intimidate borrowers into paying back their loans — often at criminally high interest rates.

Loan sharks are illegitimate lenders, and even if you’re in serious and immediate need of cash, there are other options available to you.

Loan Shark Definition

So what is a loan shark? A loan shark is a person who loans money at unlawfully high interest rates and may use intimidation, primarily threats of violence, to ensure borrowers repay their debts. In some cases, a loan shark may be connected to a criminal organization or might at least imply this to intimidate borrowers.

People who borrow from loan sharks often believe they have no other options, and in fact, loan sharks might work hard to create that illusion. By lending without conducting background checks and reviewing credit reports, loan sharks also make it easier for borrowers to get money from them rather than through traditional channels.

Recommended: Guide to Financial Hardship Loans

Are Loan Sharks Illegal?

Loan sharks who use threats of violence or charge unlawfully high interest rates are breaking the law and can face criminal charges.

Though it varies by state, there are laws limiting how much interest a lender can charge on various types of loans. The maximum interest rate is called the usury interest rate — and loan sharks, by definition, charge rates higher than this.

Lenders should be licensed and, when legitimate, offer financial disclosures and have underwriting standards. Illegitimate lenders like loan sharks operate outside these requirements.

How Does a Loan Shark Work?

Loan sharks have access to a large amount of capital to offer loans to borrowers who feel like they have no other options. Rather than running credit checks and calculating a fair interest rate within legal limits based on a person’s financial history, loan sharks offer money with the threat of violence to the borrower — and their family — as an assurance that the debt will be repaid.

While we often think of loan sharks as being seedy individuals in low-lit, smoke-filled back rooms (thanks, Hollywood), in reality, a loan shark could be any individual who uses threats and intimidation to collect a debt. What’s more, any predatory lenders who charge interest rates above the legal limit are also considered loan sharks.

What Can I Do About a Loan Shark Debt?

If you have loan shark debt, the lender has no legal right to your money. They did not follow the law in lending to you, so they cannot use the law (i.e., take you to court) to ensure you pay them back.

However, they may threaten violence if you don’t pay up. And in some cases, they could follow through on that violence.

If you are concerned about your and your family’s safety, you can contact the police. Loan sharks can face both civil action complaints and criminal prosecution.

Loan Sharks vs. Predatory Lenders

A loan shark is a type of predatory lender, but not every predatory lender is a loan shark. It’s the old “all squares are rectangles, but not all rectangles are squares” lesson.

So what is predatory lending? Predatory lending broadly refers to any type of lending practice that misleads consumers to take out loans they can’t afford, often through questionable and aggressive advertising and sales tactics. Those loans are often high in fees and interest.

Unlike loan sharks, some predatory lenders — including actual financial institutions — technically operate within the law. Instead of charging unlawful interest rates, they may pile on fees, build balloon payments into a loan, convince you to purchase unnecessary products or services, or pressure less educated consumers to refinance their homes, even when it’s not in their best interest.

These lenders often intentionally target underbanked demographics and communities where there’s less access to alternative credit access. They can do this with targeted mailers, TV ads, phone calls — you name it.

Common examples of predatory loans include:

•  Payday loans

•  Auto title loans

•  Subprime personal loans

And, of course, loans from loan sharks.

Loan Shark Alternatives

No matter how dire your financial situation is, taking money from a loan shark is generally considered a bad idea. Loan sharks typically operate outside of the law and often use threats of violence to ensure borrowers pay back their loans with very high interest.

If you’re in need of money, consider your alternatives. Here are some to keep in mind:

Friends and Family

Borrowing money from friends and family is never easy, but if it means avoiding a loan shark, it may be worth asking your loved ones for help. Be prepared for them to say no, and always thank them for listening.

Personal Loan

If you can’t borrow the money from a loved one — or aren’t comfortable asking — a personal loan may be your next-best option. Depending on the lender, you can get personal loans for as little as $500 or $1,000 or as much as $100,000 or more.

Personal loan rates and terms vary. You may be more likely to get approved for a better loan if you have a strong credit score. However, if you have poor credit (more common for borrowers seeking out loan sharks), you might be stuck with personal loan lenders who charge high fees and average APRs for smaller loan amounts.

The average personal loan interest rate varies by credit score, but other factors, such as debt-to-income ratio and your employment status, can impact the APR you’re offered.

Recommended: Is There a Minimum Credit Score for Getting a Personal Loan?

Credit Card

If you have access to a credit card with a high enough credit limit — and the person or company you owe accepts credit card payments — it’s better to pay with plastic than a predatory loan.

Sure, credit card APRs can be high, and you might risk slipping deeper into credit card debt. But credit card issuers are bound by strict state usury interest rates that, theoretically, should be lower than the illegal limit set by a loan shark.

Payday Loan

Payday loans are a common last resort for people in a bind and one you may want to think twice about. While these loans often don’t require credit checks and can get you cash fast, they often come with high interest rates and other potential fees that can make them exorbitantly expensive. In fact, payday lenders often earn exceptions from state governments that allow them to charge extremely high annual interest rates (sometimes up to 400%) without breaking the law. (In that way, they’re technically different from loan sharks.)

The Takeaway

Loan sharks take advantage of borrowers who feel they’re at the end of their rope, offering loans with unlawfully high interest rates and often using threats of violence to ensure borrowers pay up. Borrowers looking for a way out may feel like they have nowhere else to turn, but there are options such as personal loans, loans from loved ones, and even credit cards.

Instead of seeking out a loan shark, consider a SoFi personal loan. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

What is a loan shark?

A loan shark is someone who lends money to desperate borrowers at exorbitantly high interest rates, well above the legal limits. Loan sharks don’t run credit checks, which can make them appealing to borrowers with bad credit. In some cases, loan sharks may threaten — or occasionally use — violence to make sure borrowers repay their debts.

Why are loan sharks so bad?

Loan sharks are considered bad because they offer loans at unlawfully high interest rates — sometimes more than 400% — to borrowers who feel like they have no other option. They may also use threats of violence when collecting debt.

What are alternatives to loan sharks?

No matter how much money you need, there are alternatives to loan sharks that are worth exploring. Some options include asking family and friends for help, taking out a personal loan, paying with a credit card, or even taking out a payday loan, though the latter option has its own share of drawbacks.

Photo credit: iStock/Hammarby Studios
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.

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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A soft pull personal loan means that the lender only requires a soft credit check for preapprove or approval, which won’t impact your credit score. With a soft pull, a lender is able to look at information in your credit report without leaving a negative mark. It differs from a hard credit pull, which does have an impact on your score.

Read on for a closer look at what soft pull personal loans are and what skipping a hard pull means for borrowers.

What Is a Soft Credit Inquiry?

A soft credit inquiry (or pull) is a type of credit check that isn’t tied to a formal credit application and does not impact your credit score. It occurs when a creditor, employer, landlord, or other authorized individual looks over your credit report to see how you manage your debt. When you access your own credit report, it’s also considered a soft credit check.

A soft credit check can take place without your consent, or even your knowledge. If you’ve ever received a prequalified credit card offer in the mail, the company making that offer did a soft pull on your credit to prescreen you for the card.

If you apply to prequalify for a loan, the lender will also do a soft credit pull. If you like the rate and terms in your offer, you can then decide to officially apply for that loan, which will require a hard credit pull.

Other instances of a soft credit check can include renting an apartment or applying for a job. Getting a look at how you manage your money can prove reliability and bring peace of mind to an employer, landlord, or creditor.

How Soft Credit Checks Work

During a soft credit check, a lender or other third party reviews your credit report to gather specific information about your creditworthiness. Unlike a hard credit check, which requires your explicit consent and can impact your credit score, a soft pull is typically used for informational purposes or prequalification.

For example, let’s say you’re shopping around for personal loan offers and want to check your rate. Lenders may perform a soft pull to assess your creditworthiness and determine if you meet their initial criteria. This initial evaluation helps lenders provide you with personalized loan offers without affecting your credit score.

Information Provided for a Soft Pull

A soft credit pull generally provides a snapshot or a modified version of your credit report. Exactly what a third party will see depends on the purpose of the soft pull. A creditor will likely be able to see:

•  Your overall credit history

•  Your current debts and payment behavior

•  The length of your credit history

•  The types of credit accounts you have

Do Soft Pulls Affect Your Credit Score?

No, soft credit inquiries do not impact your credit score. They are not visible to other creditors, and they do not leave any trace on your credit report. Soft pulls are considered “soft” because they are only visible to you when you review your own credit report.

If you want to view the soft inquiries on your credit reports, you can request a free copy of your report from each major credit bureau (Experian, Equifax and TransUnion) at AnnualCreditReport.com. Keep in mind that each report could have different inquiries. A soft inquiry is only added to the credit report that was checked.

Soft Pull vs Hard Pull

Whether you’re shopping around for a personal loan or looking for a new apartment, it’s important to understand the difference between soft vs, hard credit inquiries. Here’s a quick summary of how the two compare.

The key difference between soft vs. hard credit inquiries is that soft inquiries don’t have any impact on your credit scores. Hard inquiries, by contrast, may remain in your credit reports for about two years and can impact your credit scores.

The impact of hard inquiry, however, is typically small, as well as temporary. As long as no additional negative information is added to your credit report, your credit scores will typically rebound within a few months.

While multiple hard inquiries in a short time frame can do more significant damage to your scores, scoring models will typically combine multiple inquiries that occur within one or two months to avoid unfairly penalizing people who are rate shopping.

What to Know About Personal Loans With Soft Credit Pulls

Some personal loan lenders look at your credit report using a soft pull, allowing them to prequalify you while letting you know your approved interest rate. This can be beneficial for both sides — the lender gets information about your creditworthiness while you get important information that can help you make borrowing decisions.

While prequalification for a personal loan with a soft pull isn’t a guarantee you’ll get approved for a loan, it can give you a good idea of the loan amount, rate, and terms you may be able to qualify for. If you choose to then apply for the loan, the lender will then do a hard credit pull.

Some lenders advertise that they will only do a soft pull, even when you apply for the loan. But you’ll want to approach these lenders with caution. If a lender doesn’t require a hard credit check, they will often make up for the increased risk involved by charging exorbitant interest rates and fees.

Be Aware of Predatory Loans

If you’re looking at soft pull personal loans, it’s important to be aware of predatory loans that may take advantage of individuals with limited credit history or poor credit.

Predatory loans, such as payday loans, often target individuals who may have difficulty obtaining traditional loans. However, these loans often come with high-interest rates, excessive fees, and unfavorable terms. When looking at this type of loan, you’ll want to be sure to research reputable lenders and read reviews to ensure you’re working with a legitimate and trustworthy institution.

Also be sure to read the loan agreement carefully and make sure you fully understand all the terms before proceeding.

Common Soft Inquiries

Soft inquiries are commonly used in various scenarios, including:

•  Prequalification for credit cards or loans

•  Employment background checks

•  Rental applications

•  Insurance quotes

•  Credit monitoring services

•  Checking your own credit

Compare Personal Loan Offers With SoFi

A personal loan is a flexible kind of financing that you can use the funds to cover virtually any type of expense, including home renovations, credit card consolidation, medical costs, a wedding, and more.

If you’re interested in exploring your loan options without triggering a hard credit pull, SoFi can help. SoFi personal loans offer competitive, fixed rates and a variety of terms, and checking your rate won’t affect your credit score. Plus, it only takes just one minute.

FAQ

Do personal loans do hard or soft credit inquiries?

Personal loans can involve both hard and soft credit inquiries. When you apply for a personal loan, the lender may perform a hard credit inquiry, which can temporarily lower your credit score. However, some lenders also offer prequalification or preapproval processes that involve soft credit inquiries. These soft pulls do not impact your credit score and provide lenders with a basic overview of your creditworthiness.

Do lenders see less of your credit history with a soft pull?

With a soft inquiry, a lender or creditor will typically see a modified version of your credit report. They likely won’t be able to see information like your account numbers but will see things like your payment history and if you have any accounts in collections.

Can a soft credit pull affect your credit score negatively?

No. Soft inquiries are not visible to other lenders and do not leave a trace on your credit report. They are used for informational purposes or prequalification and do not have any direct impact on your creditworthiness. Only hard credit inquiries, which occur when you apply for credit or a loan, may temporarily lower your credit score by a few points.

Photo credit: iStock/Hispanolistic
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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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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