Nov
14
2022
The Bottom-Dollar Effect, Explained

The Bottom-Dollar Effect, Explained

By | Budgeting & Goals, money | Comments Off on The Bottom-Dollar Effect, Explained

Have you ever noticed that spending money right after your paycheck is deposited feels great, but doing so later in the week, as your resources dwindle, is a lot less satisfying?

You’re not being moody or imagining things. This is a very real financial phenomenon known as the bottom-dollar effect. It explains the human tendency to have more negative associations with a final purchase that depletes one’s allocated budget.

Read on to learn more about:

•   What the bottom dollar effect is

•   When and why it happens

•   Tips that can help you make better purchase decisions

What Is the Bottom-Dollar Effect?

So what does bottom-dollar mean? First, an example: If you allow yourself to spend $500 a year on new clothes, the bottom-dollar effect means that you are more likely to be dissatisfied with the last clothing item you are able to purchase that year with your $500 shopping budget.

Researchers first coined this “bottom-dollar” phrase in an article that appeared in the October 2014 issue of Journal of Consumer Research. Robin Soster, a marketing professor at the University of Arkansas, conducted the study with colleagues Andrew Gershoff (University of Texas at Austin) and William Bearden (University of South Carolina).

According to Soster and her colleagues, the bottom-dollar effect refers to the experience of feeling significantly less satisfied with a product or service purchased with the last of one’s budget, regardless of the quality or cost of that product or service.

People who live paycheck to paycheck may feel the bottom-dollar effect as they near the end of their pay period, when funds are running out. But even those who live more comfortably tend to feel the pain of spending the last of an allocated budget, like the amount they set aside in their monthly budget for dining out. Or perhaps the negative feelings kick in when the funds in a person’s savings account (one allotted for a specific vacation) are drained. This can happen even if the money is earmarked only mentally, not in a separate account.

Recommended: Why Is the U.S. Dollar the Global Currency?

What Causes the Bottom-Dollar Effect?

While scientists may have a few theories about why the bottom-dollar effect happens, they typically boil it all down to how people view their money. Individuals have a tendency to organize their money — whether physically in piggy banks and sock drawers, digitally in different savings accounts, or just mentally (e.g., “I’m limiting myself to $200 for souvenirs on this vacation”).

A researcher named Richard Thaler explained the latter tendency as mental accounting. It means you might mentally view your salaried income differently from bonus income. You may see earned money differently from gifted money in a birthday card, and you might classify money set aside for sports events and movie tickets differently from money set aside from clothes and shoes — even though it’s all the same.

So even though you might have plenty of money in your savings account, if you’ve mentally earmarked $2,000 for a vacation in a travel fund account and you’re down to your last $100 on the final night, you are more likely to find that last vacation expense more painful. (You’re using up the last of your funds, exactly what bottom-dollar means.)

Even if it’s spent on an amazing meal, a once-in-a-lifetime boat ride, or a behind-the-scenes tour of a famous landmark, you may struggle to see as much value in the experience because that $100 seemed more meaningful and important. And you may transfer the negative experience of running out of money with the actual experience (or product) itself. That’s the bottom-dollar effect in action.

Recommended: Tips to Stop Overspending

Where Does the Bottom-Dollar Effect Occur?

The bottom-dollar effect can happen with all types of purchases. If you have a monthly grocery or gas budget, you are probably going to feel frustrated when you buy your last bag of food or fill up your tank one last time at the end of the month. If you live paycheck to paycheck, you may be even more likely to have negative associations with the final purchases you make before your next payment. And if you limit yourself each week, month, or year on certain splurges, you may not enjoy that final splurge as much as you did the first one, even if it’s an objectively “better” purchase.

Recommended: Are You Bad With Money? Here’s How to Get Better

Why Be Aware of the Bottom-Dollar Effect?

Being aware of the bottom-dollar effect may allow you to be less affected by it. Simply reminding yourself that it can represent an irrational emotion could negate the effects.

Being aware of the bottom-dollar effect is also helpful when you first get your paycheck or a new month starts. People are more likely to splurge then. By remembering the bottom-dollar effect, you may help yourself change your spending habits so that you spend more evenly throughout a pay period, month, or year.

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What Does the Bottom-Dollar Effect Say About Our Spending Habits?

The bottom-dollar effect can reflect fairly typical spending habits. When you first get your paycheck or when a new month starts in your budget, you are more likely to spend more money.

The bottom-dollar effect also demonstrates how easily humans can attach emotions to purchases, similar to the ideas of immediate gratification from an impulse buy or buyer’s remorse after a purchase.

In the case of the bottom-dollar effect, dissatisfaction has nothing to do with the actual product or service you purchased but instead related to when you spent the money and how much money you have left.

Do Companies and Organizations Take Advantage of the Bottom-Dollar Effect?

You may wonder if the bottom-dollar phenomenon is ever used by clever marketers or businesses. When Soster and her colleagues first announced the results of their study, they immediately pointed to the implications for marketing.

In a statement on the University of Arkansas’ news site, Foster said, “If a marketer’s goal is to attract new customers, initial promotions might be better timed at the beginning of a month or immediately after consumers receive tax refunds, to ensure that budgets are not approaching exhaustion at the time of purchase.”

So, being aware of the bottom-dollar effect can be a good thing. It can make you more aware of when you are likely to be receiving more promotions and discounts from marketers. This can help you assess when to shop and when to hold back.

Examples of the Bottom-Dollar Effect

Below are a few examples of the bottom-dollar effect:

•   Paycheck: Assume you live paycheck to paycheck and are paid every two weeks. When your bank account is almost empty near the end of that period, you might be more dissatisfied with purchases, whether they are necessary (like groceries or the electric bill) or splurges (like an ice cream or movie tickets).

•   Needs: Even if you live more comfortably, your budget may allot a certain amount to spend each month on necessities like food and gas. As you near the end of the month and see that your grocery budget is almost depleted, you may be less satisfied when you make your final grocery run. This can happen even though you know you have additional money to pull from if you run out or go over.

•   Wants: If you mentally set aside a fixed amount each month or year for things like video games, shoes, or travel, you may find yourself less happy with purchases made when that money is almost gone.

Recommended: Signs You’re Living Beyond Your Means

Can the Bottom-Dollar Effect Be Avoided?

Avoiding the pain associated with the bottom-dollar effect can be difficult because it is, by definition, an irrational emotion. However, there are a few ways you can minimize the impact, if not avoid it altogether:

•   Be aware of the effect. As you see your allocated budget dwindling, remind yourself of the bottom-dollar effect. Sometimes all it takes is reasoning with yourself. That can make you more comfortable with spending the last of funds that you have mentally set aside for the very purchase you’re making.

•   Add an “unexpected overages” budget line item. If you can afford to budget additional funds each month to cover accidental or unexpected overages, you might feel better as your monthly allowances dwindle. For example, if you have $100 a month allocated to overages, you can draw on that money for something like a family cookout, where you might need to completely exhaust your grocery budget. Knowing that there is an extra $100 just in case makes it easier to spend for the gathering without feeling guilt or frustration.

•   Build more flexibility into your budget. The more rigid your budget is, the more often you may feel the bottom-dollar effect. If you think of each budget item (groceries, gas, entertainment, etc.) as a flexible range instead of one fixed number, you might be able to spend more easily without feeling negative emotions.

Tips for Improving Purchasing Decisions

Mentally reminding yourself that the bottom-dollar effect isn’t rational is one way to improve your purchasing decisions (or at least your satisfaction with your decisions). But how else can you improve and feel better about your purchasing decisions? Here are some ideas:

•   Make a flexible budget. Making a budget is important, but building in more flexibility for life’s unexpected events — from emergency car repairs to a surprise opportunity to travel somewhere new — can keep you from feeling upset about how you spend your money.

•   Research products and services. Dissatisfaction with a purchase because of the bottom-dollar effect is one thing, but dissatisfaction because you actually don’t like the product or service is another. While you’ll never truly know until you buy, researching a purchasing decision before swiping your card can help set expectations — and steer you away from a bad purchase altogether.

•   Get a checking account that works for you. Spending money feels worse when you’re also paying fees just to be able to access that money. Find a checking account without any monthly fees and, better yet, one that offers features like no-fee overdraft coverage and even cash back.

Banking With SoFi

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FAQ

Is the bottom-dollar effect negative?

The bottom-dollar effect can be considered negative, as it makes people feel dissatisfied with products and services that they purchased. Marketers can also use the bottom-dollar effect to their advantage, potentially manipulating consumers into spending money at the beginning of the month, year, or pay period — or at particular times, like tax season.

What are the pros and cons of the bottom-dollar effect?

A benefit of the bottom-dollar effect is that it can prompt people to be more selective with how they spend their money at the end of the month or a pay period. It can help avoid impulse buys when a person needs to save their dollars for bills. However, a downside of the bottom-dollar effect is that a person might overspend when they first get paid and feel as if they have a fresh infusion of money to freely spend.

Is it unethical for companies to use the bottom-dollar effect to their advantage?

Companies can and do use the bottom-dollar effect in marketing practices. Some people may feel that marketing that preys on one’s emotions is unethical, but this is just one of many marketing practices that uses people’s feelings to their advantage.

Photo credit: iStock/Elena Frolova

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

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Oct
24
2022
Guide to Credit Card Outstanding Balance

Guide to Credit Card Outstanding Balance

By | Credit, credit card, Debt Payoff | Comments Off on Guide to Credit Card Outstanding Balance

Your credit card statement can feel like information overload with all of its numbers and terminology. Understanding the definition of terms like outstanding balance, statement balance, and billing cycle can help you to navigate this monthly statement a little more easily.

So what is an outstanding balance, how is it different from a statement balance, and can it affect your credit score? Put simply, the outstanding balance on a credit card is what the amount of money you still owe to the credit card company is called. Knowing this figure is important to avoiding interest and potential effects on your credit.

What Is an Outstanding Balance on a Credit Card?

Outstanding balance is another way to express current balance. In fact, depending on your credit card issuer, your monthly statement and mobile app may use the term “current balance” instead of “outstanding balance.”

But what is an outstanding balance in credit card terminology? A credit card outstanding balance is simply the amount of money you have not paid to the credit card issuer — i.e., it’s what you still owe.

Your outstanding balance includes any purchases you have made on your credit card but have not yet paid off (from the current and previous billing cycles), but it also includes:

•   Interest earned on previous balances

•   Balance transfers (and any balance transfer fees)

•   Cash advances

•   Any other fees you may owe, like late fees or foreign transaction fees

Recommended: Closing a Credit Card with a Balance

Where to Find Your Outstanding Balance on a Credit Card

You can check your outstanding balance by calling your credit card issuer or accessing your account online or through the mobile app. Depending on the terminology the company uses, you may see the outstanding balance listed as your current balance or simply your credit card balance.

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

Current Balance vs Outstanding Balance

Current balance is simply another term for outstanding balance. Depending on your credit card issuer, you might see one term or the other used. In some cases, it may simply be labeled “account balance” or “credit card balance.”

Recommended: How to Avoid Interest On a Credit Card

Statement Balance vs Outstanding Balance

So what’s the difference between a credit card statement balance and outstanding balance? Your credit card statement balance is the total amount owed after a billing cycle. It can include any purchases made during the billing cycle, plus any balance, interest, and fees carried over from the previous billing cycle.

Once issued, the statement balance amount does not change, even if you continue to swipe your card for more purchases during the grace period (this is the period between statement closing date and due date, during which you won’t earn interest on your unpaid statement balance). As long as you pay off the statement balance in full by the due date, you should not accrue any interest.

Your outstanding balance encompasses everything you owe at a specific moment in time. Sometimes your outstanding balance can be higher than your statement balance; sometimes it may be lower. Consider this example:

Your billing cycle ends, and you now have a statement balance of $1,000. In the next week, you spend $500 more with your credit card. Your statement balance remains $1,000, while your outstanding balance grows to $1,500. But as long as you pay that $1,000 statement balance by the due date, you will not incur any interest — and your statement balance will drop to $0 until the end of the next billing cycle.

Recommended: Tips for Using a Credit Card Responsibly

Remaining Balance vs Outstanding Balance

Remaining balance refers to whatever amount is still due after you’ve made your monthly credit card payment. For example, if your statement balance is $500 but you only pay $300, your remaining balance is $200. This, along with the interest it accrues, becomes a part of your outstanding balance.

You can avoid accruing interest on a remaining balance by paying off your statement balance in full each month rather than only the credit card minimum payment.

Recommended: When Are Credit Card Payments Due

What Is an Average Outstanding Balance?

The typical amount of an outstanding balance can vary widely from person to person — it all depends on how much you use your credit card, what your credit limit is, and whether you carry a balance. That being said, your average outstanding balance is simply the amount you owe on a credit card, averaged over a certain period of time.

The average outstanding balance formula for a statement period would be the total of your balance for each day of the statement period, divided by the number of days in the cycle. This can be helpful to know given most credit card issuers calculate interest on a daily basis, based on your average daily account balance.

Recommended: What is the Average Credit Card Limit

Paying Your Credit Card Outstanding Balance: What to Know

The nuances of credit card balances can be tough to nail down, but understanding how they work — particularly outstanding balances — may help you avoid interest and impacts to your credit score.

Here’s the short version:

•   Paying the minimum balance due each month will help you avoid late fees and negative marks for late payments on your credit report.

•   Paying the statement balance in full by the due date will keep you from accruing interest.

•   Paying down the outstanding balance, or current balance, even outside of your normal payment cycle, can reduce your overall credit utilization, which influences your credit score.

How Interest Contributes to Outstanding Balances

When you make purchases with your credit card throughout a billing cycle, the card issuer has lent you money to cover the expenses. And if you don’t pay the lender the statement balance in full by the specified due date, any remaining balance will become part of your outstanding balance — and it will start accruing interest.

The best way to avoid paying credit card interest is to pay your statement balance in full by each due date.

Recommended: Tips for Using a Credit Card Responsibly

How an Outstanding Balance Affects Your Credit Score

When you carry over unpaid balances, you’ll do more than earn interest that you have to pay. You’ll also increase your overall credit utilization, which is the amount of your total available credit you’re using. That’s because your outstanding balance counts toward your credit limit.

For example, if your credit limit is $5,000 and your outstanding balance is $2,500, you’ve utilized 50% of your credit limit. In general, creditors prefer to see a credit utilization of 30% or lower. This signals to them that you can responsibly pay back your debts.

In fact, credit utilization is the second most important factor affecting your FICO credit score. It accounts for 30% of your overall credit score. Thus, carrying a high outstanding balance regularly can adversely affect your credit score.

For this reason, experts typically recommend paying off your full statement balance every month if you’re able. And if you make a large payment on your credit card during a billing cycle that increases your outstanding balance tremendously, you may want to pay it off early to reduce your credit utilization — or else you chance a drop in your credit score.

Recommended: What Happens If You Overpay Your Credit Card?

The Takeaway

Credit cards can be confusing, especially when you’re new to the terminology. But once you understand how your statement and outstanding balances work and can responsibly make payments in full and on time, credit cards can be a great tool for boosting your credit score.

FAQ

Does outstanding balance mean past due?

Having an outstanding balance does not necessarily mean it’s past due. Your credit card requires a minimum monthly payment; if you have satisfied that payment, you do not need to immediately pay your outstanding balance. But keep in mind that you generally need to pay the full statement balance each month to avoid accruing interest.

How do I clear the outstanding balance on my credit card?

To clear the outstanding balance on a credit card, you can make a payment equal to the amount. This should bring the balance down to zero. However, you do not always have to pay your outstanding, or current, balance to avoid interest. Paying your monthly statement balance in full should keep you from accruing interest, even if your outstanding balance is higher.

Why is my outstanding balance negative?

Your credit card outstanding balance can go negative if you pay off the card and then receive a credit for a returned item or claim cash-back rewards from your purchases. If you want, you can request a check from the credit card issuer in the amount of the negative balance. Or, you can apply the negative balance on a credit card toward future purchases on the credit card.

Photo credit: iStock/SARINYAPINNGAM


1See Rewards Details at SoFi.com/card/rewards.

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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Oct
13
2022
Understanding Taxes on Crypto Credit Card Rewards

Understanding Taxes on Crypto Credit Card Rewards

By | Credit, credit card | Comments Off on Understanding Taxes on Crypto Credit Card Rewards

As crypto credit cards gain popularity, it’s becoming critical to understand how crypto credit card rewards are taxed. In some cases, crypto credit card rewards are considered a rebate on spending and therefore not taxable. But in other cases, the cryptocurrency you earn with a credit card may be taxable.

In either case, it’s important to keep in mind that you’ll also pay tax on any gains you make when selling the cryptocurrency you earned as credit card rewards. Keeping good records is important to ensure you accurately pay taxes associated with crypto credit card rewards.

What Is a Crypto Credit Card and How Does it Work?

There are several different kinds of crypto credit cards, and each one might work differently. The most common type of crypto credit card is one that will earn crypto rewards instead of cash back or travel rewards. You might earn cryptocurrency as part of a welcome offer, or on every purchase, or both.

Outside of the involvement of cryptocurrency, crypto credit cards otherwise don’t diverge from how credit cards work usually. Cardholders are extended a line of credit they can borrow against, and they’ll pay interest on balances that carry over from month to month.

Recommended: How to Avoid Interest On a Credit Card

What Are Crypto Credit Card Rewards?

Crypto credit card rewards are a type of credit card reward that you can earn with a crypto credit card. Crypto credit card rewards are similar to cash-back rewards or airline miles that you might earn with a different type of credit card.

With many crypto credit cards, you earn a certain cash percentage with each transaction (e.g. 1.5% back). But instead of getting the actual cash back, the rewards you earn are converted to the applicable cryptocurrency.

Recommended: Can You Buy Cryptocurrency With a Credit Card?

Are Crypto Credit Card Rewards Reported as Income?

The IRS has stated that income generated from any source must be reported on your tax return. That being said, the IRS has also given guidance that most credit card rewards are considered a rebate against spending rather than taxable income.

While most credit card issuers do not issue a 1099 form for credit card rewards, some may. If you receive a 1099 form, you will probably want to report the amount as income, or contact a tax professional for advice.

Are Crypto Credit Card Rewards Taxable?

The IRS has generally given guidance that most credit card rewards are considered a rebate on spending, and therefore not taxable. However, any gain you realize from the cryptocurrency that you earn as crypto credit card rewards is taxable.

If you receive cryptocurrency as a credit card reward, typically your cost basis will be the fair market value of the coins on the date you earn them. That means if and when you sell them, you’ll have to pay tax on the full crypto redemption amount minus your cost basis.

Do You Have to Pay Taxes on Crypto Credit Card Rewards?

Whether or not you have to pay taxes on crypto credit card rewards depends on how you receive your rewards. While the IRS has not ruled definitively on crypto credit card rewards, you may want to consider how the IRS treats non-crypto credit card rewards, like cashback, points or miles.

Generally, one of the credit card rules that the IRS has held is that rewards earned as part of spending are considered a rebate against that spending, and therefore not taxable. However, if you receive a reward (like a sign-up bonus) without having to make any purchase, that may be considered taxable income.

When Are Crypto Rewards Taxed?

In some scenarios, crypto rewards are taxable, while in other cases they are not. If you’re not sure if or how your crypto rewards should be taxed, consult with a tax professional.

When Crypto Are Taxable

If you receive cryptocurrency as part of a sign-up bonus where you did not have to make any purchase to earn that bonus, the cryptocurrency you receive may be considered taxable income.

You also will have to pay capital gains tax when you sell any cryptocurrency, even if you got it as a reward from a crypto credit card. The crypto rewards that you receive from a credit card generally will have a cost basis of the fair market value of the cryptocurrency on the date you receive the rewards. That means that when you sell, you’ll pay tax on any increase in the value.

When Crypto Rewards Are Not Taxable

Generally speaking, any credit card rewards that you receive after making a purchase are considered a rebate against that purchase. That means that in most cases, you won’t need to pay income tax on these rewards. However, you would still need to pay tax on any gains you make when you sell the crypto you earned as a crypto credit card reward.

Recommended: Can You Buy Crypto With a Credit Card

Can You Protect Yourself from a Crypto Tax Audit?

While there’s no strategy that will completely eliminate the chance that you’ll be audited, there are a couple things you can do to help minimize your risk:

•   Make sure that you include any income or information that you receive via an official IRS form, like a 1099-MISC form.

•   Keep detailed and accurate records of all of your cryptocurrency transactions. That will minimize your chances of being audited as well as any interest or penalties you might have to pay if you are audited.

How to Know If You Owe Taxes on Crypto Credit Card Rewards

If you receive cryptocurrency as a bonus without a purchase as a credit card requirement, it will almost certainly be classified as taxable income.

Another indicator to know if you owe taxes will be if you receive an official IRS form like a 1099-MISC. Any income on such a form is reported to the IRS, so you’ll want to declare it on your return or indicate with your return why you are not declaring it.

Finally, remember that you will owe tax on any gains you make when selling cryptocurrency, including crypto that you got as a credit card reward.

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

The Takeaway

Generally, the IRS has provided guidance that credit card rewards earned as part of a purchase are considered a rebate related to that purchase. Rebates on purchases generally are not considered taxable income. On the other hand, any cryptocurrency that you receive as a bonus without making a purchase in order to earn it may be considered taxable income. Consult your tax professional for advice if you’re not sure whether you should pay taxes on crypto credit card rewards.

If you’re looking for a new credit card, consider the SoFi credit card. You can earn unlimited cash-back rewards, which you can use to invest in fractional shares, redeem for a statement credit, or meet other financial goals you might have, like paying down eligible SoFi debt. Learn more and consider applying for a rewards credit card with SoFi today.

Apply for a SoFi credit card!

FAQ

Are crypto credit rewards payouts or rebates?

Whether or not crypto credit rewards are considered a payout or rebate depends on how you earn them. Generally, the IRS has held that credit card rewards received as a result of spending are considered rebates. On the other hand, if you receive crypto credit rewards or any other type of credit rewards without making a purchase, that may be considered income.

Are crypto credit rewards considered virtual currency?

IRS Notice 2014-21 does mention that cryptocurrency (such as Bitcoin) is considered a convertible virtual currency. There are certain tax laws and regulations that deal with virtual currencies, so you’ll want to be aware of that if you receive crypto credit rewards or purchase crypto with a credit card.

What will the IRS do if I do not get audited for my crypto credit card rewards?

The IRS manages tax compliance primarily through taxpayer audits. While the IRS does not publish the criteria it uses to determine who gets audited, there are a few things that you can do to minimize your chances of being audited. But even if you haven’t been audited yet, you may not be out of the woods — the IRS can go back several years in the past. The best thing to do is make sure you keep good records and fully record and report any income that you earn.

Photo credit: iStock/Delmaine Donson


1See Rewards Details at SoFi.com/card/rewards.

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.

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.


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13
2022
What Happens If You Don’t Use Your Credit Card?

What Happens If You Don’t Use Your Credit Card?

By | Credit, credit card | Comments Off on What Happens If You Don’t Use Your Credit Card?

There may come a time when you end up not using one of your credit cards anymore. This can happen because you’ve amassed multiple cards and now have one that offers better rewards, or maybe you have a retail card for a store you no longer frequent. Whatever the reason, it’s valid to wonder what happens if you don’t use your credit card.

In many cases, nothing will happen. However, there may be some instances where not using a credit card will carry consequences. That’s why it’s important to know what happens if you don’t use a credit card.

Recommended: Can You Buy Crypto With a Credit Card

Is It Bad to Have a Credit Card and Not Use It?

Typically, no, it’s not bad to have a credit card that you don’t use regularly. Not using a credit card for a few months is usually not that big of a deal as long as you keep making any necessary payments on any credit card charges you’ve made. However, there may be some unintended consequences of not using a credit card for a longer period of time.

Recommended: What is a Charge Card

What Happens If You Don’t Use Your Credit Card?

If you’re wondering, ‘Is it bad to not use a credit card?,’ here’s a look at some of the potential consequences.

You Might Overlook Fraudulent Charges and Activities

If you don’t use your credit card, you may end up missing transactions that you otherwise would have noticed on your credit card statement. For instance, if your credit card information were to get stolen and used for unauthorized purchases, you might not spot that activity if you’ve stopped checking your statements. The longer the issue continues, the more damage that can be done, given what a credit card is.

You Might Miss Payments

Another possible consequence of an unused credit card that you’re not checking in on regularly is missed payments. If you need to pay an annual fee for the card, for instance, you could forget that you’ll be charged if you’re not often using the card. Missing a payment can have severe financial consequences, which is why making on-time payments is one of the cardinal credit card rules.

Recommended: When Are Credit Card Payments Due

Your Card Issuer May Close Your Account

If you don’t use a credit card for a long period of time — say, at least a year — your issuer may close your credit card. What’s more, credit card issuers don’t have to give you notice when they’re about to close your credit card, so you may only find out when you go to use it.

Exactly what counts as inactivity and the length of time before an account closes will be up to each credit card issuer. If you’re concerned about your card being closed due to inactivity, contact your issuer to find out when they may close your account.

Your Credit Score May Go Down

If your credit card issuer closes your credit card, your credit score could be negatively affected. This is due to a couple different reasons.

For one, the closure of your account will cause your overall credit limit to go down. This could drive up your credit utilization ratio — the percentage of the overall amount you use across the credit limit of your credit cards — which accounts for 30% of your credit score. The higher this ratio, the lower your score can go because creditors tend to take this as a sign you may have issues with handling debt. If the closed credit card had a high credit limit, it could affect your credit utilization even more.

Secondly, the closure of your credit card could impact the length of your credit history, which accounts for 15% of your credit score. Closing a credit card you’ve had for a while could result in a negative impact on your score, marking another way that not using a credit card can hurt your credit score.

Recommended: What is the Average Credit Card Limit

You May Lose Your Rewards

Depending on your credit card, any unused rewards will expire after a certain period of time. What’s more, if your issuer ends up closing your credit card due to inactivity, any rewards you’ve earned on your card up to that point could be lost.

How Long Can You Go Without Using a Credit Card?

How long you can go without using a credit card will depend on your issuer. Some may close your credit card after six months of inactivity, whereas others may only close the card after a year of inactivity or more.

Again, it’s important to check your credit card’s terms and conditions to learn more about how a credit card works. Or, you can contact your issuer to find out what can happen if you don’t use your credit card for a while.

Closing a Credit Card You Don’t Use: What to Know

If you have a credit card you no longer want to use, it might make sense to close it. While the previously mentioned consequences may happen — such as losing your rewards and facing impacts to your credit score — it is still possible to close a card.

Before doing so, determine whether your credit card has a high credit limit and consider how long you’ve had the card. Closing a credit card you’ve had for a while could have a negative impact on your score. Same goes for a credit card with a high limit, since it could significantly raise your credit utilization.

If neither of the above are of concern, then think carefully about whether you’ll likely use the card again in the future. Does this card not help you earn rewards, whereas other ones you own do? Or is this a secured credit card and you can now qualify for an unsecured card?

If there’s no potential major financial impact to closing the card, and you’re sure you won’t use it anymore, then you might consider moving forward with closing it.

Does Not Using a Credit Card Hurt Your Credit Score?

The effect that not using a credit card will have on your credit score depends on whether the issuer closes your account. If the credit card is still open and you’re otherwise responsible for credit that you do use, like making consistent on-time payments, then your credit score most likely won’t be affected.

Keeping Your Cards Active Without Hurting Your Credit Score

Keeping a credit card active is as simple as using the card every few months for regular, small purchases. You might consider using the card to cover a subscription to a streaming service, for example. Or, you could use it to cover another monthly bill.

If you’re worried about checking in frequently enough, you might set up autopay for that credit card. That way, you’ll ensure you’re paying on time.

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

The Takeaway

It’s normal to not use a credit card if you have other ones that are a better fit. But before closing the card or letting it get shut down due to inactivity, consider making small purchases on it to keep it active. Otherwise, you’ll want to determine whether your credit score can handle potentially taking a dip.

Looking for a credit card with perks you won’t want to lose? Consider the SoFi credit card, where you can earn cash-back rewards on all qualifying purchases, and pay no foreign transaction fees. See what other benefits the card offers and apply for a credit card today with SoFi.

Learn more today about the SoFi credit card!

FAQ

Will I be charged if I don’t use my credit card?

If your credit card typically charges an annual fee, that fee will still apply even if you don’t use your credit card.

What happens if I don’t use my credit card for a year?

Some credit card issuers may close your credit card, even without your knowledge, due to inactivity. This may occur if you don’t use your card for a year or more, though the exact length of time will vary depending on the issuer.

Should I get rid of my credit card if I don’t use it?

You can get rid of your credit card, but know that it may affect your credit score. It’s a good idea to research the potential consequences of closing a credit card before actually doing so.

Do unused credit cards affect your credit score?

Unused credit cards may affect your credit score if you or your credit card issuer closes the account. The account closure could result in an increased credit utilization ratio since your overall credit limit will go down across all of your cards. Plus, if the close credit card is one of your oldest ones, it could diminish the length of your credit history, therefore affecting your score.

Photo credit: iStock/kohei_hara

1See Rewards Details at SoFi.com/card/rewards.

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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Oct
13
2022
Getting a High-Limit Credit Card: How It Works

Getting a High-Limit Credit Card: How It Works

By | Credit, credit card | Comments Off on Getting a High-Limit Credit Card: How It Works

Having a high credit limit can be a good idea for a variety of reasons. First of all, if your credit limit is too low, it may make it hard to use your card for your regular monthly expenses. Having a high credit limit can positively impact your credit score as well. You’ll just make sure that having a credit card with a high limit doesn’t influence you to spend more than your budget allows.

Before you move forward with securing a high-limit credit card, you’ll want to know your options for how to get a high-limit credit card. If you’re worried about securing the highest credit card limit possible, there are a couple factors you’ll want to take into account, too.

What Is a High-Limit Credit Card?

For reference, the average credit card limit for Americans was $30,365 in 2020, according to data from the credit bureau Experian. So if you have a credit card with a limit above that average, you may consider that to be a high-limit credit card.

In general, however, there isn’t a specific dollar amount that makes a credit card a “high-limit” credit card. What’s considered a high credit card spending limit for some people may not be a high limit for others with a different financial situation. Keep in mind that higher credit limits generally require excellent credit to qualify for, meaning a score of 800 and up.

How Can a Higher Credit Limit Help You?

There are two ways that having a credit card with a higher credit limit can help your financial situation.

First, increasing your credit card limit can make it easier to manage your monthly finances. If your credit limit is at or below the amount of your average monthly expenses, you may find it difficult to manage your budget without having to make additional credit card payments.

Second, having a higher credit limit will decrease your credit utilization rate, which can have a positive impact on your credit score. Your credit utilization rate looks at how much of your available credit you’re using, and the less you’re using, the better it is for your credit score. If you increase your credit limit but don’t add to your current balances, you’ll end up using a lower percentage of your available limit.

Factors to Consider

There are a couple factors you’ll want to consider before attempting to get a high-limit credit card.

The Timing

First, make sure that the timing is right for you and your specific financial situation. Your credit card limit is determined by the financial information you provide on your credit card application, especially your income. If you’re in a situation where your income is about to increase (either due to an upcoming bonus, a change in job, or something else), you may want to wait until after your income increases before trying to get a high-limit credit card.

Your Credit Report

Credit card issuers also look at your credit report when choosing whether to issue you a credit card and how much of a credit line to extend. Make sure that you check your credit report before applying and ensure that there are no errors or discrepancies. If there are any errors, you can contact the credit bureaus to have them fixed.

Options for Getting a High-Limit Credit Card

If you think you’re well-positioned to ask for an increase, here are your potential options for how to get a credit card with a high limit — or at least a higher limit than what you currently have.

Contact Your Card Issuer

If you already have a credit card that you enjoy using and want to keep, you can try to contact your card issuer to request a higher limit. You may be able to do so by calling the number listed on the back of your credit card or sending a message online. Explain the credit limit you’re looking for and why you feel that it’s justified.

This approach may be a good idea if your financial situation has improved since you opened the card. This could be due to an increase in income, a new job, or paying down other debt.

Look Out for Automatic Increases

Many card issuers will regularly review the accounts of their cardholders. In some cases, they’ll automatically and proactively increase your credit limit if you’ve been using your credit card responsibly. This is especially common for cards with lower initial limits and cards designed for those with a less robust credit history.

If your issuer has not already increased your credit limit, you can contact them and ask for a higher limit.

Apply for a New Card

Another option is applying for a new card. If you’re not happy with your current credit card or if your current card issuer will not increase your credit limit, getting a new credit card can be another option.

Before applying, make sure that you have checked your credit report for any inaccuracies and paid down outstanding debt if possible. That will help improve your odds of getting a higher credit limit.

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

How High Should Your Credit Limit Be?

There is not a set amount for how high your credit limit should be. Instead, it depends on your specific financial situation.

Aim for a credit limit that is at least twice the average amount you spend on your credit card each month. That will help keep your credit utilization percentage low. And remember that the absolute best thing you can do to help your credit score is to pay your statement off in full, each and every month.

Recommended: What is the Average Credit Card Limit

Choosing the Best High-Limit Credit Card

Many premium and luxury credit cards will offer relatively high credit limits, especially if you have a high credit score and a high income. So instead of looking for the credit card that gives you the absolute highest limit, you might instead consider the overall perks and benefits of each different card. When evaluating different cards, some things to look out for include:

•   Rewards: Take a look at whether a credit card offers rewards and if so, in what form. Perhaps you’d prefer to earn cash-back rewards for the simplicity over credit card points. From there, compare to see which card offers a more generous rewards rate and has better redemption options.

•   Annual fees: You’ll also want to look at whether a card charges an annual rate. If it does, do the math to see if the rewards you’ll earn can offset this cost.

•   Customer service: If you were ever to have an issue with your credit card, it’s important to have a reliable customer support team to turn to. When weighing which card to get, take into account the reputation of their customer support and general customer satisfaction.

•   Luxury or travel perks: Beyond rewards, many credit cards also offer an array of other benefits. This can include rental car insurance, travel insurance, discounts for Global Entry or TSA PreCheck, airport lounge access, hotel stays, and more.

•   Sign-up bonuses: A generous welcome bonus can also help you decide between two otherwise comparable cards. Some credit cards offer bonus cash-back rewards or points when cardholders spend a certain amount within a specific period of time after opening the card.

Recommended: What is a Charge Card

Alternatives to High-Limit Credit Cards

If you’re not able to qualify for a high-limit credit card or simply aren’t sure it’s the right route for you, there are other options to explore instead.

Recommended: How to Avoid Interest On a Credit Card

Home Equity Loan or Home Equity Line of Credit

Depending on what you’re using your credit card for and why you want a high credit limit, you might consider a home equity loan or home equity line of credit (HELOC). Both a home equity loan and a HELOC allow you to capture some of the equity in your home. You can then use that money for other expenses.

Business Line of Credit

If you have a business that’s looking for extra flexibility with accounts receivable and ongoing payments, you might consider a business line of credit. While there are business credit cards that offer high limits, you might be better off with an actual business line of credit. Business lines of credit often base their credit limits based on the monthly or annual gross or net income of the business.

Personal Loan

Another option to consider might be a personal loan, especially if you have good credit and/or a relatively high income. Qualifying for a personal loan can give you money upfront in exchange for regular monthly payments. You can then use that money for whatever projects or expenses make sense for your situation.

Recommended: When Are Credit Card Payments Due

The Takeaway

There can be advantages to having a high-limit credit card, like added flexibility in managing your monthly finances as well as the possibility of improving your credit score. Just make sure that you remain focused and diligent in paying off your statement in full, each and every month. You don’t want a higher credit limit on your credit card to encourage you to spend more.

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

Can you get an unlimited credit limit?

Unless you are ultra-wealthy or have a very special relationship with your credit card issuer, you’re unlikely to get a credit card with no limit at all. There are, however, some credit cards (like the American Express Platinum card) that have no preset credit card spending limit. That means that instead of a standard credit limit, your limit is flexible and may go up and down as your spending habits change.

Should I get a credit card with a higher limit?

Before deciding to get a credit card with a higher limit, you should ask yourself why you want to increase your limit. Is it to better manage your monthly finances? Are you trying to lower your credit card utilization? These can both be good reasons to increase your credit limit. But if you’re just trying to increase it to use as a status symbol or “just because,” you may want to think twice before doing it.

What is the highest credit card limit?

There isn’t a definitive and published answer for the highest possible credit limit. Credit limits are issued to individuals and businesses based on their credit history and income. It’s not unreasonable to think that there are credit cards with a six- or even seven-figure limit. As a data point, the average credit card limit for Americans was $30,365 in 2020.

How can I get a higher credit limit?

The best way to see if you qualify for a higher credit limit is to contact your issuer. You can call the number on the back of your card or reach out via your online account. If you’ve been regularly using your card and paying your bill in full, your issuer may agree to increase your limit. If your income or other financial situation has changed, that’s another reason to contact your issuer and see if you can get a higher credit limit.

Photo credit: iStock/Prostock-Studio

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 .

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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