If you don’t pay your credit card, it can lead to late fees, increased interest rates, being sent to collections, and damage to your credit. It could also result in legal action being taken against you.
Credit cards offer several advantages over debit cards. For example, when you use a debit card, you can only spend as much money as you have in your bank account. With a credit card, you gain access to a line of credit, increasing your purchasing power. A credit card also gives you extra fraud protection. If someone gains access to your account, your personal funds aren’t at risk.
However, if you use your credit card, you also have to make a minimum payment every month. Find out what happens if you don’t pay your credit card on time.
How Credit Cards Work
A credit card is a type of revolving debt, which means your balance and minimum monthly payment change based on your spending habits. For example, if you pay your full balance before the end of your billing cycle, you won’t have a minimum payment due the following month.
Credit card companies usually calculate minimum payments based on your current balance plus a little extra to account for interest. If you have a balance of $3,000 during a 0% interest promotion, your minimum payment may be anywhere from $30 to $90. This assumes your credit card company charges between 1% and 3% of your balance.
Your minimum payment is the lowest amount due during a billing cycle. If you have a large balance, try to pay more than the minimum. Otherwise, interest charges will keep accumulating, making it difficult to pay your debt in full and causing your debt to become more and more expensive.
What Happens If I Don’t Pay My Credit Card on Time?
Failing to make your minimum payment on or before the due date can have some potentially serious consequences. Here’s what happens if you don’t pay a credit card on time.
1. Late Fees
Many credit card companies charge a fee for late payments. As of 2024, the average late fee is $32. In March 2024, the Consumer Financial Protection Bureau finalized a rule that would reduce the typical late fee to $8, but a federal judge has issued an injunction preventing the new rule from going into effect for now.
If you’ve never made a late payment before, you may be able to get your credit card company to remove the fee as a courtesy. Simply call the number on the back of your card and explain what happened. If you’re polite and let the agent know the late payment was a one-time mistake, they may remove it for you.
Although late fees can put a dent in your budget, late payments don’t affect your credit scores until you’re 30 days past due. This is when the consequences of a late payment can really start to hurt you.
2. Delinquency
Once you hit the 30-day mark, your account becomes delinquent. Credit card companies report delinquencies to the credit bureaus, causing your credit to decrease significantly. If you miss multiple payments, your scores will drop even more. Credit.com has a free credit score simulator to help you understand the effects of delinquency on your credit profile.
3. Charge-Off
Eventually, your credit card company stops waiting for you to make a payment. This prompts a charge-off, where a creditor closes your account and writes off your debt as a loss. If you have a charge-off on your credit report, you may find it extremely difficult to get approved for new accounts.
Your credit card company may even issue a 1099-C form for your canceled debt. Depending on your financial situation, you may have to pay income tax on the canceled amount.
4. Collections
A charge-off doesn’t make your debt magically disappear. You still owe what you borrowed, so your credit card company may send your account to collections. Once a collection account appears on your credit report, other lenders can see it. This may make it difficult to qualify for an auto loan, a mortgage, or another credit card.
Collection agencies may contact you frequently, but you have certain legal rights related to debt collection. For example, you can tell a debt collector not to call you at work. If a collection agency violates any state or federal laws, you also have the right to consult with an attorney.
5. Lawsuit
Some creditors are especially aggressive about getting paid what they’re owed. If your credit card company is one of them, you may find yourself on the receiving end of a lawsuit. When a creditor sues you, it’s important to appear in court. Otherwise, the creditor may get a default judgment against you before you even have a chance to tell the judge your side of the story. Then, you’ll have to repay the judgment, which may include interest and fees.
How to Recover From Late Credit Card Payments
Now that you know what happens if you don’t pay your credit card on time, it’s important to avoid additional negative marks on your credit record. Here are four things you can do to improve your financial situation.
Commit to On-Time Payments
Everyone makes mistakes. The important thing is you learn from your mistakes instead of repeating them. If you miss a payment, commit to on-time payments going forward. It may take some time for your credit to recover, but at least you won’t take an additional hit.
Open a Secured Credit Card
If you have several late payments on your record, you may find it difficult to open new lines of credit. Get things back on track by opening a secured credit card. With a secured card, you establish a credit line by making a small cash deposit. For example, if you deposit $500, the issuer may give you a credit line of $500.
A secured card works just like a regular credit card, so you can use it to make purchases at your favorite stores and e-commerce websites. If you don’t make payments as agreed, the credit card company can close your account and keep your deposit.
Pay Down Your Debt
Once you have a late payment on your record, it takes time to rebuild your credit profile. If a creditor won’t remove the late payment from your reports, there are other things you can do to help your credit. For example, try to make all of your future payments on time and in full. It won’t erase the negative impact of the late payment, but it can help your credit while you wait for the late payment to fall off your record.
Negotiate With Creditors
If you’ve never missed a payment before, try negotiating with your credit card company. A creditor isn’t obligated to remove negative information from your credit report, but if you ask nicely, they may be willing to cut you a break. This works best when you have a solid payment history.
The company representative may be more willing to help you if you have a good reason for missing a payment. For example, if a close family member passed away, it’s quite possible you forgot your due date because you were grieving your loss.
To learn more about managing your credit and credit cards responsibly, explore Credit.com’s credit card guide, and get your free credit report card now.
Unsecured credit cards, which don’t require a form of collateral to use them, tend to be the most popular kind of credit card. In addition to helping you build credit, these cards often come with perks and benefits, like cash back rewards or free travel insurance.
To decide if an unsecured credit card is right for your financial situation, read on. You’ll learn what an unsecured credit card is, how it works, and the pros and cons of using one.
What Is an Unsecured Credit Card?
When you think of what a credit card is, you’re most likely thinking of an unsecured credit card. An unsecured credit card is a line of credit that gives cardholders the ability to use credit at their whim. In other words, as a cardholder, you can use your credit up to its limit and pay it off continuously, with no end date. Unsecured credit cards get their name since they don’t require a deposit or collateral, unlike secured credit cards.
Depending on the credit card you qualify for, you might be able to receive some additional benefits and perks with an unsecured credit card like cash back rewards.
How Does an Unsecured Credit Card Work?
You’ll receive a credit limit when you open an unsecured credit card. Your credit limit is the maximum credit you can use on this account. You must pay at least the credit card minimum payment each billing cycle if you’ve used the card. Here are some points to know:
• Your monthly payment will vary depending on how much credit you used during that billing cycle (in fact, some months, you may even have a negative balance on your credit card).
• If you miss a monthly payment, you’ll likely have to pay a penalty or fee for the infraction.
• If you make only the minimum monthly payment, your remaining balance (plus accrued interest based on the APR on a credit card) will carry over until the next month.
So, to avoid penalties, fees, and accrued interest, it’s best to pay your balance in full every month.
But, if this isn’t feasible with your budget, aim to pay more than the minimum every month so you can quickly chip away at your total outstanding balance. Just be sure to keep in mind how credit cards work when deciding how much to pay in a given month.
Pros and Cons of Unsecured Credit Cards
Some of the benefits and drawbacks of unsecured credit cards may be obvious. But, to help you determine the risks and rewards of using this type of credit card, here are some pros and cons to get familiar with.
Pros
Upsides of unsecured credit cards include:
• Higher credit limits: Applicants usually must have a competitive credit score to qualify for an unsecured credit card. For this reason, credit card companies may apply a higher credit card limit since you’ve proved your creditworthiness.
Also, having a higher credit limit can impact your credit utilization ratio, the amount of credit you use compared to the amount of credit you have available. Your credit utilization ratio is used to assess your credit score, and a higher ratio may negatively impact your score. With a higher amount of credit available, it’s easier to maintain a lower ratio.
• Potential to earn rewards: Many unsecured credit cards offer incentives like cash back or airline miles to encourage cardholders to use their credit. They may also offer additional benefits, such as complimentary airport lounge access or hotel credits. So, when comparing your unsecured credit card options, be sure to look at all perks and rewards that may be offered.
• Frequently reports credit history to credit bureaus. Since card issuers take on more risk by lending credit to cardholders, they usually report your credit activity to the credit bureaus on a monthly basis.
Your credit usage is another factor used to determine your credit score, so these regular reports can help you assess how well you’re managing your credit. If you’re managing it well, these frequent reports can help your score.
• An abundance of options: Unsecured credit cards are the most popular type of credit card. Therefore, there’s a vast array of credit card options at your disposal. Because there are so many options, you’ll likely be able to find one suitable to fit your needs.
Cons
While there are many advantages of using an unsecured card, some may come with some downsides, including:
• Varying approval requirements: Every credit card company usually has different credit card approval requirements, and you’ll generally need a higher score to qualify for an unsecured versus a secured credit card.
For example, some secured credit card requirements are a credit score of at least 580; others may require a score of at least 680. Researching requirements beforehand can help you identify the best cards available that you can qualify for with your credit score.
• Extra fees: Some unsecured cards may come with extra fees, such as convenience fees, cash advance fees, or foreign transaction fees. Keep in mind that not all cards charge these fees, though, so it’s worth it to compare your options based on your needs. For example, if you travel abroad often, you may want to choose a card that doesn’t have foreign transaction fees.
Pros
Cons
Higher credit limits
May charge additional fees such as convenience fees, balance transfer fees, or cash advance fees
Wide range of credit card options available
Different credit requirements for approval
Rewards such as cash back or miles
Usually report to credit bureaus
Unsecured vs Secured Credit Cards: What Are the Differences?
The most significant difference between unsecured versus secured credit cards is that secured cards require a deposit while unsecured cards don’t. Your deposit on a secured credit card usually dictates your credit limit. Depending on the credit card company and your credit score, your deposit may vary between $200 and $3,000, which is far lower than the average credit card limit.
Requiring a security deposit eliminates some of the creditors’ risks; thus, it can be easier to qualify for a secured credit card than an unsecured credit card. Keep in mind, no matter what type of card you have, you’ll find the most favorable terms if you have good credit, such as a good APR for a credit card. Also, you may have to forgo any rewards while you build your credit with a secured card, as they don’t often offer them.
If you fall behind on your payments, your creditor could cancel your card and send your remaining outstanding balance to a third-party collector with either an unsecured or a secured credit card. However, if you have a secured credit card and your payment is past due, your creditor may keep your security deposit to pay off some of the remaining balance.
Beyond these few items, there is no other real difference between the inner workings of a secured credit card and an unsecured credit card.
• Each card allows you to make purchases at locations that accept credit card payments.
• During the billing cycle, you must make at least a credit card minimum payment.
• Otherwise, you may have to pay fees or penalties with your secured or unsecured credit card.
Secured Credit Card
Unsecured Credit Card
Requires a refundable deposit
✓
X
Can qualify with poor credit
✓
✓
Can come with rewards
✓
✓
Requires at least a minimum payment every month
✓
✓
Used to make purchases
✓
✓
Who Should Consider an Unsecured Credit Card?
Since there are plenty of unsecured credit card options available, they can suit the needs of many different types of consumers. If you’re in the market for a new credit card, here’s how to decide if an unsecured card is right for you.
The Budgeter
If you’re big on budgeting, you can use an unsecured credit card as a tool to help you as you make a budget and stick to it. Many credit issuers offer online statements or apps that can make it easy to track all of your spending right on your phone.
But, if you’re going to use your credit card for all of your spending, make sure to keep the interest in mind. While unsecured credit cards can help you budget, they can also hinder you if you get into the habit of overspending.
The Frequent Flyer
Do you love spending your time on the move? Many unsecured credit cards provide travel rewards that help you earn free travel experiences. For example, some cards can come with reward points or miles that you can use toward booking airfare or accommodations.
You may also receive additional perks like annual hotel credits, access to airport lounges, or discounts on flights when using miles.
The Business Owner
Unsecured credit cards are also useful for business owners. Business owners can capitalize on the perks of unsecured credit cards like rewards, sign-up bonuses, and other benefits. Also, an unsecured card can provide short-term funding for business growth. Plus, it can help businesses build credit for future financing endeavors.
Of course, benefits and terms will vary depending on the type of card you choose.
Typical Requirements to Apply for an Unsecured Credit Card
When you apply for an unsecured credit card, you must meet certain criteria to qualify. Some common requirements when applying for a credit card include:
• Be at least 21 years of age. While this is generally the age required to get a credit card, if you’re over 18 and can prove you have an income, you may qualify.
• Provide proof of income to demonstrate you can make the minimum payments.
• Be a U.S. citizen or have the authority to work in the U.S.
• Have an acceptable credit score range per the lender’s requirements.
• Provide personal information such as your name, age, address, Social Security number, and more.
Keep in mind that all credit issuers have different criteria for approval. Some credit issuers may give you the option to pre-qualify. This way, you can see if you may qualify without submitting a hard inquiry on your credit, which can impact your credit score.
The Takeaway
Unsecured credit cards can come with many perks, such as earning cash back rewards and helping you build credit. But, before you apply for just any old card, make sure to compare your options, keeping the average credit card interest rate in mind, and understand the criteria for approval. Identifying an unsecured credit card that’s suitable for your needs might take a little time, but it’s worth it.
Whether you’re looking to build credit, apply for a new credit card, or save money with the cards you have, it’s important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Is it good to have an unsecured credit card?
If you can handle an unsecured credit card responsibly, it can help you build credit. Also, it can be a good way to receive additional benefits, such as cash back or other rewards, for completing your daily transactions.
What credit score do I need for an unsecured credit card?
Typically, if you have a credit score of 579 or less, credit issuers may be reluctant to approve your application. To qualify for the most competitive rates and offers, you typically want to have a credit score of 670 or higher.
How long before I can get an unsecured credit card?
If you’re working on building credit and don’t qualify for an unsecured credit card, you may have to start with a secured card. But, the amount of time you must use your secured credit card before you graduate to an unsecured time can vary from a few months to several years. Ultimately, it will depend on factors like your current credit score and the criteria of the unsecured credit card you’re applying for.
Photo credit: iStock/Zhonghui Bao
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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As you’re growing up, you learn about money from the people who raise you. Their lessons are based on their life experiences, which means there’s likely some bias built in.
That’s not necessarily a bad thing — you may have a savvy aunt who taught herself to manage her own money after a divorce, or a parent who cautioned you about debt because they struggled to pay down theirs. Hearing their stories can spare you from making financial mistakes. Even with all that history, though, you’re likely to make some financial decisions that will cause your relatives to wince.
Credit cards in particular can be a touchy subject in families where older generations avoid them out of the fear of costly debt, while younger generations embrace them for their rewards and convenience. Managing credit cards when it feels like you’re being “bad” can be difficult. Still, it’s totally OK to forge your own financial path based partially on family lore, and partially on your own goals and experiences.
Approach credit cards with care
If you’re a first-generation credit card user, it’s essential to understand how they work — this includes learning about the types of credit cards available, how you’re billed and what happens if you get into debt. Beware of common credit card myths, like the idea that you should carry a small balance from month to month because it’s good for your credit score (there’s no need to pay interest for the sake of your credit score).
Start by using your first credit card for a basic expense or two each month, and be sure to pay the entire balance when it’s due. You can still use cash or a debit card for some expenses, and a credit card for others.
Gloria Garcia Cisneros, a certified financial planner in San Diego, recommends using technology to help you manage your card. Automate payments to avoid missing due dates, and take advantage of apps that track spending so you don’t have to do so manually in a spreadsheet, she says. Also, create the habit of checking your credit card statements each month to review your spending, and avoid saving your credit card information on merchant websites so you’re less tempted to make impulse purchases.
Credit cards are more than a way to spend — they can help you establish your credit history, provide extra protections on purchases and can earn rewards on your everyday spending. Used carefully, credit cards can be a tool that helps you move toward other financial goals.
Lea Landaverde, the founder of the Riqueza Collective, a bilingual financial education and media company, learned this at the age of 18, when she realized she first needed to build her credit history to qualify for a rental home. “I had to learn how a credit card could benefit me.”
Examine the origins of your credit card beliefs
The messages you tell yourself about credit cards were installed in your mind long ago by loved ones who modeled certain behaviors. Credit card-related misconceptions and beliefs get passed down in families, especially when previous generations lived through difficult times. “When parents say debt is bad, they’re coming from a place of fear or trauma,” Landaverde says.
Garcia Cisneros was raised by her grandparents, who had widely different attitudes toward credit. “My grandpa was so against credit cards. He was like, ‘Cash under the mattress, cash is king,’” she says. Meanwhile, her grandmother not only used cards, but also maxed them out. “I didn’t know which one was right or wrong. When I got my first credit card, it was an emotional, impulse decision.”
Even if you’ve been financially independent for years, it’s hard to turn off that voice in your head that repeats relatives’ money beliefs that don’t match your current lifestyle. You can recognize why certain loved ones are credit card-averse, and use that family fear of debt as motivation to manage your credit cards thoughtfully.
Set boundaries with loved ones
Beware of family members who see your credit card as their funding source because they don’t understand how their actions can affect your credit. Garcia Cisneros is willing to help her family financially, but she has learned to set limits after a relative used her card while on vacation. Now, she only provides money for emergencies in the form of a loan with interest.
Celebrate your progress
As you become more confident with your credit card use, keep an eye on your credit score and pat yourself on the back when you see it go up. After all, you’re not just managing your credit card wisely, you’re creating an entirely new money mindset.
If you make a mistake or have to deal with an emergency expense and get into debt, it doesn’t have to derail your money goals forever. “You can start over,” Garcia Cisneros says. “You always have tomorrow.”
This article was written by NerdWallet and was originally published by The Associated Press.
Inside: Are you looking to maximize your rewards and credit card hacks? This guide will teach you the most effective methods for using your hacking, signing up for bonus rewards, and making efficient card purchases.
Credit card use extends beyond just making purchases. Savvy credit card users understand that with the right set of hacks and optimal usage, there’s a world of rewards that are ripe for the picking.
Money saved can be money earned, and this simple philosophy forms the cornerstone of these 25 credit card hacks you’ll be learning about today.
Why do credit card hacks matter? Well, I just received a $700 check for credit card rewards. That is enough to pay for a weekend trip away.
What are Credit Card Hacks?
Credit card hacks are creative strategies employed by credit card users to maximize the benefits and rewards offered by their credit cards while also potentially saving more money.
This trend has become more popular in recent years due to the rise in premium travel and cashback cards that offer lucrative ongoing rewards programs. Users who learn about these hacks can save you money on travel or just put cold hard cash back in your wallet.
With strategic approaches, these hacks provide an avenue to optimize rewards and navigate the financial landscape more effectively.
Proven Credit Card Hacks to Maximize Rewards
Tip #1 – Utilize sign-up bonuses
One of the most attractive features of credit cards is the sign-up bonuses they offer, which are essentially rewards that cardholders can earn after meeting a certain spending threshold within a specified timeframe. The bonuses can range from hundreds to even thousands of points, miles, or cash – favorably impacting your rewards balance.
To illustrate, if you take the Chase Sapphire Preferred® credit card, both partners in a household can get up to 50,000 extra points each as part of the sign-up bonus.
Bonus tip: Stagger your applications, so once one person gets the bonus after meeting the spending requirement, the other person can then apply and achieve the next round of bonuses.
Tip #2 – Increase credit limit
The principle behind this is simply buffering your “credit utilization ratio”, which is how much of your total available credit you are utilizing.
To illustrate how a credit limit increase will work, let’s consider an example: with a credit limit of $10,000 and a credit usage of $3,000, your utilization ratio stands at 30%. But once your credit limit increases to $15,000 with the same credit usage, your utilization ratio drops to 20% – which is a noticeable improvement.
Remember, when requesting a credit limit increase, some card issuers might execute a hard inquiry on your credit report, which could temporarily decrease your score. Hence, you should try to find out beforehand whether your issuer is likely to perform a hard or soft credit pull. Soft inquiries won’t affect your credit score, making them the preferable approach.
Tip #3 – Master balance transfers
A balance transfer, executed proficiently, can be an effective way to handle significant credit card debt. By focusing on reducing the cost of debt through lower interest rates, balance transfer can accelerate your debt repayment process while saving you considerable money over time.
This is what one of my clients did and the date when the 0% interest ended was very motivating to pay off their debt.
This process entails the shuffling of debt from one card (usually one with a high interest rate) to another card—preferably with a 0% promotional APR offer. With this interest-free period, you can focus on repaying the principal balance, hence clearing your debt faster.
As a finance expert, make sure balance transfers are only beneficial if you’re mindful of the terms, like how long your 0% rate will last and what fees are involved in the transfer to the new card.
Tip #4 – Purchase prepaid cards with credit
Need a way to spend a certain dollar amount by a certain deadline? Then, look at purchasing prepaid cards with a credit card as a strategy to earn extra rewards points. This method entails buying prepaid cards or gift cards using your credit card, and later using these prepaid cards to cover those expenses you typically will use.
In other cases, customers have reported that their credit card companies have clawed back rewards points that were initially given for gift card purchases. Double check their terms and conditions, many issuers, including American Express, explicitly exclude such transactions from earning rewards. 1
Tip #5 – Harnessing the 15/3 Methodology
The 15/3 Methodology is a credit card hack that intends to optimize your credit utilization ratio—one of the significant factors that impact your credit score.
Here’s how it works: You pay off a majority of your card’s balance 15 days before your statement date, and then pay off the remaining balance three days before the statement date. By doing this, you create the illusion of a lower balance, which can positively impact your credit score.
There is still a debate about whether or not this strategy improves your credit card score. Paying your bill on time will definitely improve your score.
Tip #6 – Strategies to earn additional rewards through third-party programs
An often overlooked but highly effective credit card hack is utilizing third-party apps and websites that offer additional rewards when you shop at participating retailers and restaurants. These rewards are additional to the cash back, miles, or points awarded by your credit card.
One such app is Dosh, a cashback app. By linking your credit card to your Dosh account, you can earn up to 10% cash back from participating retailers on top of the rewards earned from your credit card. Similarly, apps like Drop and Bumped give users points for every dollar spent, and these points can be redeemed for gift cards.
Furthermore, many airlines and hotels participate in dining rewards programs where you’ll earn extra rewards at select restaurants. Airlines like United, Southwest, Delta, and hospitality giant companies like Marriott and Hilton actively participate in such programs.
Tip #7 – Earn a credit card sign-up bonus then canceling the card right away
Also known as credit card flipping or churning, the tactic of earning a credit card sign-up bonus and then canceling the card right away has been employed by some savvy credit card users to maximize rewards.
However, this practice isn’t as easy or beneficial as it appears. While it sounds like an accessible system to generate easy money, it comes with several potential pitfalls that could make it a risky move.
Firstly, numerous card issuers have, over the years, implemented stricter rules to deter this practice. Chase, for instance, has the 5/24 rule indicating you can have only five new credit cards within the last 24 months. 2
Repeatedly opening and closing the same card can result in a declined application or rescinded bonus and hurt your credit score-perceived as credit misbehavior by the issuer.
It can also be viewed as unethical and potentially lead to you being barred from opening accounts with that issuer in the future.
Churning can negatively affect your ability to get approved for future credit cards and loans because lenders may think you’re a risky borrower.”
Tip #8 – Develop a multi-card system
This method aims to cover all your spending by using different cards that offer elevated rewards for certain purchase categories.
For instance, we have one card that pays an unlimited flat rate of 2% on all purchases. Then, another rewards card offering increased category rewards, with travel and gas. Then a there card that rotates through various categories each quarter.
Diversifying your spending amongst several credit cards can help you to earn the maximum possible rewards. However, endowing yourself with several credit cards is not for everyone as it requires careful financial management. In some cases, the potential of overspending can outweigh the benefits.
Tip #9 – Transfer points between multiple cards
Transferring points between cards (provided they are from the same issuer) is another useful strategy whereby you can redeem them at their maximum possible value.
The goal is to make your spending work for you and maximize the rewards you can earn from daily expenses. However, people should employ this strategy responsibly and ensure they’re not overspending just to earn rewards.
In such a strategy, points on traditional cashback cards can be transferred to airline and hotel partners when you also have a transferable points card like the Sapphire Reserve or Sapphire Preferred. So, not only are you earning cashback on your purchases, but you’re also accumulating lucrative points that can be redeemed for travel.
Tip #10 – Don’t use cash
In the world of credit card rewards, cash is no longer king. Whenever feasible, you should consider using your credit cards instead of cash or debit to pay for everyday purchases. This allows you to earn rewards on purchases you’re making anyway.
The best way to implement this is for you to bills with their credit cards instead of cash or debit and set this up on autopay. This serves a dual purpose of potentially earning rewards on these payments whilst also conveying a positive message to the banks about your money management skills, leading to possible credit score improvements.
However, this method works best when your spending doesn’t increase as a result. Only use your credit card for expenses that you’d normally pay in cash and for which you already have the money set aside to pay.
Tip #11: Time your purchasing
Being strategic about when you make your credit card purchases can help you wring out some extra benefits.
One way to optimize your earning potential and maintain a healthy credit score is to plan your large purchases around your credit card’s billing cycle. Making your most significant purchases immediately after your statement date ensures that you have the longest possible repayment period, effectively offering you a short-term, interest-free loan.
Furthermore, if your issuer has a rewards cut-off at the end of a calendar year, you can make larger purchases ahead of time to push yourself into a higher rewards bracket.
Tip #12 – Make Micropayments
Rather than making one full payment, consider making multiple payments over the billing cycle, commonly referred to as ‘micropayments.’ This helps keep your running balance low and, in turn, your credit utilization ratio – the percentage of your available credit limit you’re using – also low, positively impacting your credit score.
Plus it helps to keep your checking account at a more accurate level.
Tip #13: Have your spouse apply for the same credit card
Known informally as the “two-player mode” amongst credit card hacking enthusiasts, having your spouse or partner apply for the same credit card can be an effective strategy to earn double the sign-up bonus. This approach is based on the idea that instead of just adding your spouse or partner as an authorized user to your card, they should apply separately.
For instance, if a card like the Chase Sapphire Preferred® offers a 50,000 points bonus on sign-up, both partners can potentially earn up to 100,000 points collectively, essentially doubling the bonus.
But remember, this hack should be used strategically – you should stagger your card applications and ensure each of you fulfills the spending criteria to qualify for the bonus.
Tip #14 – Importance of prompt payment
Quite possibly the hack with the most significant impact on both your credit score and your pocket, prompt payment of your credit card bill cannot be overstated.
Making on-time payments can drastically improve your credit score since your payment history is the most heavily-weighted factor that credit scoring models consider.
Plus paying your balance in full each month can help you avoid interest charges and penalties, effectively saving you money in the long run.
Tip #15 – Know What Rewards you Want
Rewards such as travel miles, discounts at partnered retailers, cashback, or access to premium experiences like airport lounges or concert tickets are available, depending on your card.
By understanding and leveraging these varied rewards, you can get the most excellent value out of your credit card expenses.
Cautionary Advice on Credit Card Hacks
While credit card hacks can undoubtedly offer substantial benefits when done right, pitfalls can ensue if one isn’t careful.
Pitfall #1 – Overspending
For starters, these hacks can inadvertently lead to overspending or unnecessary purchases. Be wary of making purchases you don’t need or can’t afford in an attempt to earn more rewards or meet the spend necessary for a sign-up bonus.
Consequently, the pursuit of credit card rewards could also lead to accumulated debt if you’re not diligent about paying off your balance in full each month. The interest that you need to pay on balances carried over can easily eat up the value of any rewards earned.
Pitfall #2 – Impact on your Credit Score
Applying for multiple cards can lead to hard inquiries on your credit report, which can temporarily lower your credit score. Similarly, canceling cards after acquiring the sign-up bonus could harm your credit utilization ratio and your length of credit history, both key factors in your credit score calculation.
Additionally, irresponsible habits like ‘credit card churning’ and ‘paying for everything with credit’ may risk your relationship with card issuers. Some companies might close accounts or even ban individuals from opening new ones if they’re perceived as abusing the system.
While some of the top-tier reward and travel credit cards often come with hefty annual fees, not all of them are worth paying. This is especially true when a card’s annual fees outstrip the value of the rewards earned.
Before you sign up for a credit card with an annual fee, it’s advised to read the fine print and estimate what you can earn from it. You should evaluate whether the perks, bonuses, rewards, and credits offered offset the annual fee cost.
Personally, I don’t use any cards that have an annual fee.
Pitfall #4 – Paying interest
Credit card interest can significantly impact your overall financial health if you’re not careful. The money invested toward paying it off could be better used elsewhere – for saving, investing, or spending on your needs and desires. Hence, one of the best “credit card hacks” out there is to simply stop paying interest.
You want to focus on debt free living.
Pitfall #5 – Avoiding counterproductive habits like “balance surfing”
Balance surfing is a strategy where you continually move credit card debt from one card with an ending 0% APR promotion to another card with a new 0% APR offer. While this approach can potentially delay interest payments, it can become a dangerous cycle if you find yourself simply transferring debt instead of reducing it.
Meanwhile, the total debt remains the same. Without a consistent debt repayment strategy, this method can lead to an endless cycle of balance surfing.
What are some of the best credit card rewards and hacks for 2024?
As we venture into the new year, some credit card reward strategies remain timeless while others evolve in response to new credit card offers and updated reward programs. In 2024, here are some of the best credit card hacks worth considering:
Take Advantage of Updated Card Offers: Credit card issuers frequently update their card offers and rewards programs. Ensure you stay updated on these changes to maximize your card benefits.
Focus on Cards with Flexible Reward Categories: Some cards, like the Bank of America® Customized Cash Rewards credit card, allow you to choose your highest cash-back category (like online shopping, dining, or grocery stores). These flexible category cards can be more advantageous as you can adapt them to your spending habits.
Leverage Rotating Categories: Cards like the Chase Freedom Flex℠ and Discover it® Cash Back offer 5% cash back on up to $1,500 in purchases in various categories that rotate each quarter, once you activate. Plan your spending in advance to leverage these rotating categories optimally.
Remain Alert on Loyalty Program Partnerships: Many credit cards and airlines have partnerships with other brands. This can mean increased rewards when shopping with those brands, so always watch for new partnerships or promotions.
Revisiting Annual Fees: If your credit card perks no longer justify its annual fee due to changes in lifestyle or spending habits, consider downgrading to a no-fee card from the same issuer. This way, you can save on annual fees without closing your account which could potentially harm your credit score.
Diversify Your Rewards: While it may be tempting to concentrate all your spending on a single card, diversifying your rewards can make you earn more. Consider employing a multi-card system to maximize rewards across different spending categories.
Your credit card should be a tool to enhance your financial flexibility, not a burden that leads to financial stress.
Frequently Asked Questions (FAQs)
Deciding whether to focus on paying off a single card or distributing payments over several cards can seem complicated, but there are a couple of methodologies to strategize your payoff.
The Debt Avalanche method suggests focusing on the card with the highest interest rate first. Once you’ve paid this card off in its entirety, you then move on to the card with the next highest interest rate. This can potentially save you more money in the long term as it targets high-interest debt first.
Alternatively, the Debt Snowball method, proposed by financial guru Dave Ramsey, recommends paying off the card with the smallest balance first, then moving on to the card with the second-smallest balance. While you may not save as much money in interest compared to the debt avalanche method, the psychological motivation of paying off a credit card balance entirely may be more important for maintaining consistent repayment.
Either method requires you to make minimum payments promptly on all cards to avoid late fees and possible credit score damage.
Getting credit card points without spending any additional money may seem like wishful thinking, but there are certain strategies that you can employ to achieve this. Strategically managing your credit cards can turn your everyday spending into reward points, miles, or cash back.
Referral Bonuses: Many credit card companies offer referral bonuses to their existing cardholders who refer friends or family members. If the person you referred gets approved for the card, you can earn bonus points.
Cardholder Perks: Credit card companies often run promotions offering bonus points for certain activities. These can range from enrolling in paperless billing, adding authorized users to your account, or completing an online financial education course. Check with your card issuer to view any current promotions.
Shopping Portals: Many credit card issuers, and even airline and hotel rewards programs, have their own online shopping portals where you can earn additional bonus points for every dollar spent. If you were already planning on making an online purchase, consider making it through these portals to earn extra rewards.
Sign-up Bonuses: Some cards offer sizeable sign-up bonuses for new cardholders who meet a required minimum spend within the first few months. Although this technically requires spending money, it doesn’t require spending more money if you use your card for purchases you were already planning to make.
While implementing certain credit card strategies can potentially earn you higher rewards or save money, they can also unintentionally harm your credit score if not executed responsibly.
Several factors can contribute to this potential downfall:
Opening and Closing Accounts: A high frequency of card applications can lead to multiple hard inquiries on your credit report, which might lower your score in the short term. Closing credit cards, especially older ones, can affect both your credit utilization ratio and the age of your credit history, two significant factors in your credit score calculation.
Carrying a Balance: Maintaining a high credit utilization ratio—i.e., carrying a large balance relative to your credit limit—can negatively impact your credit score.
Late Payments: If these deadlines are not strictly adhered to, they could result in late payments, which can seriously harm your credit score.
Excessive Spending: Some tactics lead to unnecessary spending to earn more reward points or meet an initial spend required for a sign-up bonus. Not only can this increase your credit utilization ratio and potentially lower your credit score, it can lead to debt if these balances are not paid off in time.
While both rewards cards and travel rewards cards offer perks to their users in return for spending, the primary difference lies in the kind of rewards they offer and their target user base.
A Rewards Card generally offers cash back, points, or miles for every dollar spent, redeemable in a variety of ways. This is the type of card I prefer. For example, you may redeem your accumulated rewards as cash back into your account, use them to purchase products or services, or exchange them for gift cards. The flexibility of rewards makes these cards are suitable for people with varied spending habits and prefer a variety of redemption options.
A Travel Rewards Card, on the other hand, is designed specifically for frequent travelers. These cards earn you points or miles on specific travel-related expenses, like booking flights or hotel stays. The redeemed rewards are typically used towards further travel-related expenses like airfare, hotel stays, or car rentals. Travel Rewards Cards often offer additional travel-centric perks like free checked bags, priority boarding, airport lounge access, and more.
Consider your spending habits, lifestyle, travel frequency, and preference in terms of reward redemption.
Protecting yourself from credit card fraud is an important aspect of managing your credit card usage effectively.
Monitor Your Accounts Regularly: Keep a thorough watch on your credit card statements for any unauthorized or suspicious charges. Report them to your credit card issuer as soon as possible.
Use Secure Networks: When making online purchases, only shop on secure websites (look for “https” in the web address), and avoid using public Wi-Fi networks for transactions.
Keep Your Personal Information Safe: It’s important to dispose of old credit card statements properly, and avoid giving out credit card information over the phone unless you initiated the call and you trust the recipient.
Protect Your PIN and Password: Don’t share these with anyone, and avoid using easily guessable combinations like birth dates or the last four digits of your social security number.
Enable Account Alerts: Most banks now offer optional security alerts that can be sent via text message or email whenever a charge above a certain amount gets made to your account.
Protect Your Computer and Phone: Make sure your devices are equipped with up-to-date antivirus software and that your phone is locked with a secure password or fingerprint identification.
In case you become a victim of credit card fraud, know the steps to protect yourself – report it to your bank or credit card company immediately, file a report with the Federal Trade Commission, and report it to the three major credit bureaus, requesting them to put a fraud alert or a credit freeze on your account.
Also remember, credit cards don’t have routing numbers.
Making the Most of Credit Card Hacking
When used wisely, credit card hacks and reward strategies can play a significant role in stretching your budget and rewarding your spending. These secrets of savvy credit card use — from aligning your card to your spending habits, making the most of sign-up bonuses and reward categories, to understanding the ins and outs of your credit card’s rewards structure — can help maximize your potential rewards and save money.
Personally, we use all of our credit card rewards to pay for our travel expenses.
However, it’s paramount to remember that these tips and tactics should not encourage unnecessary spending or carrying a balance. Only spend within your means, ensure you pay off your balances each month to avoid interest charges and remember to safeguard your credit score by handling credit card applications and closures cautiously.
Ultimately, credit card hacks and rewards should fit within your overall financial plan and goals, adding value to your everyday spending habits and rewarding you for well-managed financial practices.
Remember your goal is to reach your FI number.
Source
Reddit. “American Express Clawing Back Points Earned From Gift Card Purchases.” https://www.reddit.com/r/AmexPlatinum/comments/14hywaq/american_express_clawing_back_points_earned_from/. Accessed January 19, 2024.
CNN. “What is the Chase 5/24 rule?” https://www.cnn.com/cnn-underscored/money/chase-5-24-rule#:~:text=The%205%2F24%20rule%20is,your%20approval%20odds%20with%20Chase. Accessed January 19, 2024.
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Negative marks can stay on your credit report for seven or even 10 years. But if you are having trouble managing your finances, don’t panic.
Many people hit a moment at some point when they miss a payment or pay bills late. Or perhaps they face mounting credit card debt or the prospect of foreclosure. If you are grappling with any of these situations, you may wonder how long your credit report will reflect these issues.
While seven years is a typical time period for events to stay on your report and potentially impact your credit score, the time period could be considerably shorter. And as time passes, the effect of these “bad marks” will typically diminish.
Read on to learn more about what can lower your credit score, how long it can take to bounce back, and ways to manage your money responsibly, which can help build your score.
Factors that Can Influence Your Credit Score & Report
A credit score gives a numerical value to a person’s credit history. It can help give lenders a big-picture look at a potential borrower’s creditworthiness. These scores (there isn’t just one) give lenders insight into how reliable a person might be when it comes to repaying their debt.
This can influence a lender’s decision on whether or not to loan a person money, how much money they are willing to lend, and the rates and terms for which a borrower qualifies.
Since credit scores are so widely used, it’s easy to see why some individuals may be interested in improving their credit scores. First, it might be helpful to understand the factors used to actually determine your score. Here’s a snapshot of what goes into a FICO® Score, since that is the credit score used by many lenders right now.
• Your payment history accounts for approximately 35% of your FICO Score, making it one of the most influential factors. Even just one missed or late payment could potentially lower a person’s credit score.
• Credit utilization ratio accounts for 30% of your score. Credit utilization ratio is your total revolving debt in comparison to your total available revolving credit limit. A low credit utilization ratio can indicate to lenders that you are effectively managing your credit. Typically, lenders like to see a credit utilization ratio that is less than 30%.
• The length of your credit history counts for 15%, and that may be a good reason not to close an account that you use infrequently. It might help add to the length of your history.
• Your credit mix accounts for 10% of your score. While not a good reason to go out and open a new line of credit, the bureaus do tend to prefer to see a mix of accounts vs. just one kind of credit.
• The last component, also at 10%, is new credit, meaning are you currently making a lot of requests for credit. The number of hard credit inquiries in your name could make it look as if you are at risk of financial instability and are seeking ways to pay for goods and services.
💡 Quick Tip: Some personal loan lenders can release your funds as quickly as the same day your loan is approved.
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Credit Issues: How Long Do They Linger?
Negative factors like late payments and foreclosures can hang around on your credit report for a while. Generally, the information is included for around seven years.
Bankruptcy is an exception to this seven year guideline—it can linger on your credit report for up to 10 years, depending on the type of bankruptcy filed. Bankruptcies filed under Chapter 7 can be reported for up to 10 years from the filing date. Bankruptcies filed under Chapter 13 can be reported for seven.
While a late payment will be listed on a credit report for seven years, as time passes it typically has less of an impact. So if you missed a payment last month, it will have more of an effect on your score than if you missed a payment four years ago.
These numbers are important to know when you are working to build your credit.
How Long Does It Take For Your Credit Score to Go Up?
Here’s a look, in chart form, at how long it takes for different negative factors to drop off your credit report.
Factor
Typical credit score recovery time
Bankruptcy
7-10 years
Late payment
Up to 7 years
Home foreclosure
Up to 7 years
Closing a credit card account
3 months or longer
Maxing out a credit card account
3 months or longer, depending on how quickly you repay your debt
Applying for a new credit card
3 months typically
Disputing an Error on Your Credit Report
Checking your credit report can help you stay on top of your credit. You’ll also be able to make sure the information is correct, and if needed, dispute any mistakes. There could, for instance, be a bill you paid long ago on your report as unpaid, or perhaps account details belonging to someone else with a similar name erroneously wound up on your report.
There are three major credit bureaus — Equifax®, Experian®, and TransUnion®. Once a year you can request a copy of your credit report from each of the three credit bureaus, at no cost. You can visit AnnualCreditReport.com to learn more. Checking in with each report may feel a little repetitive, but it’s possible that the credit bureaus could have slightly different information on file.
If you find that there are discrepancies or errors, you can dispute the mistake. You’ll have to write to each credit bureau individually. Generally, you’ll need to send in documentation to support your claim. Once you’ve submitted your dispute letter, the bureaus typically have 30 days to respond.
It’s possible that a bureau will require additional supporting documentation, which can lead to some back and forth within or sometimes after the 30 days. It could take anywhere from three to six months to resolve a credit dispute, though some of these situations will take more or less time depending on complexity.
Staying on Top of Efforts to Build Credit
Sometimes, resolving issues on a credit report isn’t enough to build a bad credit score. On the bright side, credit scores aren’t permanent. Here are a few ideas for helping you to build your credit.
Improve Account Management
If you’re struggling to keep up with accounts with a variety of financial institutions, it could be time to simplify. Take stock of your investments, debts, credit cards, and savings or checking accounts. Is there any opportunity to consolidate?
Having your accounts in one, easy-to-check location can make it simpler to ensure you never miss an alert or important deadline. Automating your finances and using your bank’s app to regularly check in with your accounts (say, a few times a week can be a good cadence) can make good money sense as well, helping you keep on top of payment deadlines and when your balance might be getting low. 💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why credit card consolidation loans are so popular.
Make Payments On-Time
Did you know that your payment history (as in, do you pay on time) is the single largest factor in determining your credit score? Lenders can be hesitant to lend money to people with a history of late payments. So make sure you’re aware of each bill’s due date and make your payments on time. One idea? As mentioned above, you could set up autopay so you don’t even have to think about it.
Limit Credit Utilization Ratio
It could help to set a realistic budget that leads to a fair credit utilization ratio, meaning that your credit balances aren’t too high in relation to your credit limit. Some accounts will let you set up balance alerts that can warn you as you inch closer to the 30% guideline of the maximum you want to reach. Another option could be paying your credit card bill more frequently (for example, setting up a mid-cycle payment in addition to your regular payment).
Stratege to Destroy Debt
When it comes to paying off debt, having a plan can help. For example, using a credit card can be an effective way to build your credit history, but if not used responsibly, credit card debt can be incredibly difficult to pay off.
Not only that, it could end up impacting your credit score (say, if your credit utilization ratio creeps up above 30%, as noted above). As a part of your plan to build your credit after negative factors have occurred, you might consider putting a debt repayment plan into place.
Your finances and personal situation will be a major factor in the debt payoff plan that works best for you. If you need some inspiration, the methods below may be helpful to reference in your quest to pay off debt. If you decide that one of these options works for you, here’s how you might go about them.
The Snowball
The snowball method of paying off debt is pretty straightforward.
• To put it into action, you would organize your debts from smallest to largest, without factoring in the interest rates.
• Then you’d continue to make the minimum payments on all of your debts while paying as much as possible on your smallest debt.
• When the smallest debt is paid off, you’d then roll that money into debt payments for the next smallest debt — until all of your debt is repaid.
This strategy is all about changing behavior and building in incentives to help keep you going. Starting with the smallest debt means you’d see the reward of paying it off faster than if you had started with the larger debt. While this method can help keep you motivated and laser-focused on eliminating your debt, it isn’t always the most cost effective, since it doesn’t take into account interest rates.
The Avalanche
The debt avalanche method encourages you to focus on your highest-interest debts first.
• Prioritize debts with the highest interest rates by putting any extra cash towards them.
• Continue to make the minimum payments on all of your other debts.
This technique could help save money in interest in the long run. And it could even help you pay off your debts sooner than the snowball method.
The Fireball
The fireball method combines the snowball and avalanche methods in a hybrid approach designed to help you blaze through costly debt so you can focus on the things that matter most to you.
• The first step in this method is to go through all of your debts and categorize them as either “good” or “bad.”
• “Good” debts are those that tend to contribute to your financial growth and net worth; they also tend to have relatively lower interest rates. Good debt might be a student loan that helps you launch your career or a mortgage that allows you to own a home.
• Debts with high interest rates that don’t go towards building wealth (such as credit card debt) are often considered “bad.” With this method, you can list your “bad” debts from the smallest amount to the largest amount.
• Then you’d take a look at your budget and see how much money you have to funnel toward making extra debt payments. While making the minimum monthly payment on all outstanding debts, you’d direct the extra funds toward the bad debt with the smallest amount due.
• When that smallest balance is repaid in full, you’d apply the total amount you were paying on that debt to the next smallest debt. Then you’d continue this pattern, moving through each outstanding bad debt until they are all paid in full.
An important note: While you are moving through your higher-interest debts, you would still follow the normal payment schedule on your lower-interest debts.
By focusing on the debts with the highest interest rates first, this method could save you some change when compared with the snowball method. And, since you’re then targeting bad debt from the smallest balance to the largest, you could still benefit from the same psychological boost as you see your debt shrink, one payment at a time.
Create a Goals-Based Approach
Having financial goals could possibly help you streamline your efforts. If you’re actively working toward saving for, say, a down payment, you may feel less inclined to spend money elsewhere.
You could try setting short-term, mid-term, and long-term goals. In the short-term your goals might be as simple as tracking your spending and setting up a budget. Or perhaps saving for a big vacation that’s a year or so away. For mid-term goals, you might think about something a little further out, like buying a house or saving for a child’s education. Long-term goals are often things like (you guessed it) saving for retirement.
Writing down your goals and setting a time for when you’d like to reach them can help you set up your plan.
Consolidate Your Debt
If you are working on building your credit and want to pay down your credit card balances, one option could be a personal loan to consolidate that high-interest debt.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
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.
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 .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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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A 401(k) is an employer-sponsored retirement plan that allows employees to contribute a portion of each paycheck. Many employers also match a certain amount of employee contributions. Typically, 401(k) plans are tax-deferred, meaning the money you contribute isn’t taxed until you withdraw from your account.
Our 401(k) calculator below can help you determine what your 401(k) balance will be when you retire.
Estimated 401(k) Balance at Retirement
Contributions
Employer Match
Balance
Results Summary
Current 401(k) balance
Years to invest
Annual rate of return
Annual salary
Expected annual salary increase
Percent to contribute
Your contribution
Your employer’s contribution
Total Contribution
How to Use the 401(k) Retirement Calculator
The 401(k) calculator estimates how much money you will have in your 401(k) by retirement based on your age, current balance, amount you contribute, and employer match. It can help you determine when you will be financially ready for retirement.
In the fields above, use the toggle to adjust the numbers based on your personal information and 401(k) account. Click “Calculate” to see your future balance. You will also be able to see your total contributions and total employer match contributions.
Remember that taxes don’t get factored into this 401(k) calculator. The taxes you’ll pay on your 401(k) depend on the tax bracket you’re in when you withdraw from your account. Additionally, check that you aren’t contributing more than the current IRS contribution limits. For 2023, the contribution limits are $22,500 or $30,000 if you’re above age 50.
Basic Investing Terms to Know
Below are the definitions of the investing terms referenced in the 401(k) calculator:
Current age: Your age as of today.
Retirement age: The age you plan to retire. Currently, Social Security benefits are available at age 66 but rise to age 67 if you were born in 1960 or later.
Current 401(k) balance: The amount of money saved in your 401(k) as of today.
Annual salary: The amount of income you earn from an employer over one calendar year before deductions and taxes. Do not include other streams of income.
Annual salary increase: The percentage you expect your annual salary to increase yearly. On average, employees receive a 4.6% pay increase each year.
Percent to contribute: The percentage of your annual salary you contribute to your 401(k).
Employer match: The percentage of your annual contributions that your employer matches. For example, your employer might match 50% of your yearly contributions.
Employer maximum: The maximum salary percentage your employer will match. For example, your employer might only match up to 6% of your salary, regardless of how much you contribute.
Annual rate of return: The percentage an investment gains or loses. This number will depend on the investments you choose. On average, the S&P 500® has gained 10.7% annually since its conception in 1957. It’s important to note that these rates vary over time and can only be used as an estimate.
Payments per year: The number of pay periods annually.
How a 401(K) Works
A 401(k) is a retirement savings account employers specifically offer as part of a company’s benefits plan. Employees contribute a portion of each paycheck to their 401(k) account, and often, employers match a portion of employee contributions.
You don’t pay taxes on the money that you initially contribute. Once you turn 59 ½, your withdrawals will get taxed as ordinary income. You will incur a 10% tax penalty if you withdraw money from your 401(k) before you reach age 59 ½. To avoid this, make sure you have an emergency fund for shorter-term expenses.
401(k) plans allow you to invest in exchange-traded funds (ETFs), mutual funds, and target-date funds. When maximizing your 401(k), it’s important to have an investment strategy. You can work with a retirement adviser to help create a strategy that works for you.
What Are the Benefits of a 401(k)?
There are two main benefits of investing in a 401(k).The first advantage is that 401(k) plans are tax-deferred, meaning you don’t pay taxes until you withdraw your savings. This lowers your current taxable income. For example, if you currently make $60,000 and contribute 10% of your salary to a 401(k), you are reducing your taxable income by $6,200. As a result, you’ll only get taxed on $54,000 instead of your full salary. This is beneficial because you will likely be in a lower tax bracket after you retire.
The second main benefit of contributing to a 401(k) is the employer matching contribution, meaning that your company contributes a certain amount of money to your 401(k) based on the amount you contribute. The percentage that your company matches, if at all, depends on your specific employer. The most common 401(k) matching formula is 50 cents on the dollar, up to 6% of an employee’s salary.
401(k) FAQs
Below, we’ve answered some common questions regarding 401(k) retirement plans.
How Much Should I Have in My 401(k)?
The amount of money you should have saved in your 401(k) depends on your age. For example, by age 30, you should have the equivalent of your annual salary in your 401(k). Some experts recommend you have 10 times your annual salary by age 67.
What Percentage of My Salary Should Go to My 401(k)?
Most financial experts recommend contributing 10–15% of your income to a retirement plan. In the U.S., individuals contribute a median of 12% of their salary.
How Much Will My 401(k) Be Worth in 10 Years?
To find out how much your 401(k) will be worth in 10 years, plug your specific information into the above 401(k) calculator and set your retirement age as your age 10 years from today.
As you can see, contributing to a 401(k) can allow you to invest your money easily. It’s important to note that while a 401(k) has many benefits, it’s not the only way to save for retirement. Other ways to prepare for retirement include paying off debt, following a budget, and improving your credit score.
Need help managing your credit? ExtraCredit® gives you access to five features that make monitoring your credit a breeze.
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Having no credit or bad credit both present different challenges. Bad credit can prompt frequent collection calls and take a long time to repair, while no credit can reduce your eligibility for most loans.
Whether you’re new to credit or you have years of activity (and a few blemishes on your report), you may wonder, “Is no credit better than bad credit?” No credit and bad credit can both hold you back in their own ways. No credit means that lenders can’t easily review your credit history, while bad credit means you’ve earned derogatory marks on your credit profile.
We’ll explore the nuances of both situations and share ways you can bolster your credit.
Key Takeaways
Everyone starts with no credit until we take an action that must be reported to a credit bureau.
It takes time to increase your credit, whether you have bad or no credit.
There are certain loans that you can apply for with bad credit.
What Are the Impacts of Each?
Credit scores, alongside a person’s employment status and annual income, help lenders decide if they’ll approve an applicant for loans, credit cards, and low interest rates. Borrowers with no or bad credit can still secure loans despite their current credit status, but it helps to know how their prospects might be affected.
The Impact of No Credit
People start to build credit when they make financial decisions that can be reported to a credit bureau. Applying for a credit card, paying down a student loan, or paying rent for a property you’ve leased are just a few actions that would fall under this umbrella.
Lenders may have a harder time getting a sense of a no-credit borrower’s credit risk since the borrower won’t have a credit report. Some effects of having no credit score include:
Ineligibility for most loans: It’s still possible to acquire bad credit loans, but it’s generally much harder to gain substantial funding with no credit history.
Reduced credit card options: Borrowers with no credit history may only be eligible for cards with low limits or higher interest rates.
Renting restrictions: Landlords often ask that renters meet or exceed a specific credit score range.
The effects of bad credit
A person’s credit score can fall for multiple reasons. While certain actions, like applying for new credit cards, can temporarily cause one’s score to dip, long-term financial habits determine credit scores the most.
Consistently making late payments, exceeding your credit limit, and neglecting your oldest accounts can lead to a bad credit score. Bad credit can present some of the same challenges that no credit can, as well as unique hurdles, including:
Collection agencies: If you owe a significant amount of debt, a collection agency may repeatedly call and ask you to pay your outstanding debt. Knowing your debt collection rights can help if an agency threatens to seize your assets or ask for more money than you owe.
Credit limit decreases: A bank can reduce a borrower’s credit limit if their score drastically decreases. These terms are usually outlined in the cardholder agreement you sign when first acquiring a credit card.
Stress: Bad credit can decrease morale and raise stress by making it much harder to secure loans and decrease your interest rates. Depending on the severity of your debt, improving your credit can take a long time.
5 Ways to Build Credit
Whether you have bad credit or no credit history whatsoever, you have the power to improve your scores—and your financial opportunities as a result. The following five recommendations can bolster your credit over time.
Make Payments on Time
Payment history influences 35% of your FICO® credit score, which is the model most lenders rely on. Consistent, on-time payments will demonstrate financial responsibility and gradually raise your credit.
Limit Applications for New Credit
Each time you apply for new credit cards or loans, your profile receives a hard inquiry that temporarily lowers your score. Applying for too much credit all at once can significantly hurt your score.
Regularly Check Your Credit Report
Reviewing your credit report grants you insight into your financial habits, as well as errors or inconsistencies. Credit.com offers a free credit report card that reviews your financial habits in five categories, including the number of inquiries on your account and the diversity of your credit mix.
Apply for a Credit Builder Loan
A credit builder loan helps no- or poor-credit borrowers improve their credit by paying down a small amount of debt. These loans usually cap out at $1,000 and have 6- to 24-month repayment terms. Check if a loan’s interest rate or repayment terms will fit within your budget before you sign any agreements.
Maintain Your Oldest Accounts
Keeping your oldest credit card accounts open will typically benefit your credit, even if you don’t use them anymore. This is because your oldest accounts help boost your credit age, and they can also help you keep your credit utilization ratio lower, both of which have a positive effect on your overall credit health.
How to Find Credit Cards for Bad Credit
With a bit of effort and the right know-how, you’ll find multiple avenues to get credit cards for bad credit. Signing up for a credit monitoring service is a great first step. You’ll get strategies for handling debt and recommendations for credit cards and loans based on your current circumstances.
Many commercial banks offer at least one credit card for low-credit applicants. These cards often have low credit limits and may not have premium features like cashback or reward points. Nevertheless, responsibly using and paying down these cards will help display your creditworthiness over time.
The best credit cards and loan options become available with a higher credit score. As you take positive steps to build your credit, you’ll be eligible for more favorable offers—which can further enhance your credit profile. Resources like Credit.com can help you better understand your overall credit profile.
Work on Your Credit With Credit.com
Challenges are par for the course on any person’s credit journey, whether they have excellent credit or no credit history whatsoever.
Credit.com’s free credit report card can help you navigate those challenges by reviewing your credit age, payment history, and account mix—then offer advice that you can implement when managing your credit.
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations.
Debt collectors send debt validation letters show what debts you owe, the amount, and to whome you owe it to.
While a debt collector contacting you can be stressful, it’s important to pause and remember your rights as a debtor. Before paying the debt collector, verify that the debt is actually yours. The debt collection industry is subject to mishaps and mistakes, with some individuals being asked to pay debts they don’t owe.
That’s why you should receive a debt validation letter from the debt collector proving the debt is yours. If you still don’t recognize the debt, you can send a debt verification letter requesting more information or disputing the debt.
In this article, we’ll discuss the importance of debt validation letters and what information they should include. We’ll also provide a debt verification letter sample and a free template to help you get started.
Key takeaways:
Debt collectors are legally required to send you a debt validation letter within five days of initially contacting you.
A debt validation letter should include information about the debt, such as the amount you owe and the original creditor’s name.
If you’re unsure if the debt is accurate, send a debt verification letter to dispute the debt or ask for additional details.
Table of Contents:
What Is a Debt Validation Letter?
What Should a Debt Validation Letter Include?
When to Send a Debt Verification Request
Debt Verification Letter vs. Debt Validation Letter: What’s the Difference?
Debt Verification Letter Template + Sample
How Long Does a Creditor Have to Respond to a Debt Verification Request?
What to Do If a Debt Collector Doesn’t Respond to a Debt Verification Request
What Is a Debt Validation Letter?
A debt validation letter is written correspondence that debt collectors are legally obligated to send you that provides information about the debt they’re collecting. The letter should include details about the debt, the original lender, and the debt collector’s authority to collect the money.
The creditor should send a debt validation within five days of their initial contact with you. If you don’t receive a debt validation letter, the debt collector could be an illegitimate person attempting to scam you. Therefore, you should avoid providing sensitive information to the debt collector until you’ve verified they’re legitimate.
What Should a Debt Validation Letter Include?
According to the Consumer Financial Protection Bureau (CFPB), the debt validation letter should include:
The amount of debt you owe
The name of the original lender requesting payment
The account details associated with the debt
An option to dispute the debt within a 30-day time period
An opportunity to request more details about the original lender
A statement acknowledging that the collector will provide verification if you dispute the debt
When to Send a Debt Verification Letter
If after receiving the debt validation letter and you’re still unsure of whether the debt is accurate, you can send a debt verification request to the debt collector. A debt verification request is a letter that you, as the consumer, can send to the debt collector to ask for information about the debt they’re collecting.
Typically, you have 30 days to send your debt verification request after receiving the debt validation letter. If you don’t send the letter within this time frame, the debt collector will assume the debt is valid and legally continue their efforts to collect.
Debt Verification Letter vs. Debt Validation Letter: What’s the Difference?
It’s important to understand the difference between a debt verification letter and a debt validation letter:
A debt verification letter is a correspondence that you, the consumer, send to the debt collector requesting more information about the debt.
A debt validation letter is a document the debt collector sends to you, providing details about the debt.
Debt Verification Letter Template + Sample
When writing a debt verification letter, it’s important to be clear and concise. State that you’re disputing the debt and list what information you’re requesting from the debt collector.
Below is a debt verification letter sample and a template to help you get started. Remember to use your own information where there is bolded text.
[Name]
[Address]
[Today’s date]
[Name of the debt collector]
[Address of the debt collector]
Re: [Debt account number, if it was provided to you]
Dear [Name of the debt collector]:
I’m replying to your communication regarding a debt you’re attempting to collect. You reached out to me via [phone/mail] on [date] and provided the following account details:
[Account number, if provided]
[Name of the original creditor, if provided]
I am informing you that I dispute the debt you’re claiming I owe.
If you have reason to believe that I’m still responsible for this debt, kindly provide the following details to ensure I have all the necessary information:
The creditor’s name and address who is currently requesting payment
The original creditor’s name and address (if different from above)
The amount owed
The account number
Documentation that proves there is a legitimate reason you think I owe the debt, i.e., a copy of the original contract
The most recent billing statement the original creditor sent to me
An itemized list of any additional interest or fees
An itemized list of any payments since the most recent billing statement
If you’re providing this data to a credit bureau, please report that I’m disputing this debt.
Sincerely,
[Your name]
How Long Does a Creditor Have to Respond to a Debt Verification Request?
There isn’t a specific time frame in which creditors must reply to a debt verification request. However, if you send the debt verification letter within 30 days of receiving the validation letter, they must cease all collection efforts until they respond to your letter and provide verification.
What to Do If a Debt Collector Doesn’t Respond to a Debt Verification Request
If the debt collector doesn’t respond to your debt verification request, it could be due to one of the following reasons:
The debt collector requires additional time to gather the information you’ve asked for.
The debt collector cannot verify the debt.
The debt is beyond the statute of limitations, so the debt collection agency cannot file a lawsuit.
You were dealing with a debt collection scammer.
If you sent the debt verification letter within the 30-day time frame, the debt collector cannot attempt to collect until they provide the information you requested. If the debt collector continues with attempts to contact you, you can submit a complaint with the CFPB, your state’s attorney general’s office, or the Federal Trade Commission.
Debt validation and verification letters can help you exercise your rights and avoid potential debt collection scams. If the debt collector fails to verify your debt, be aware that it may be wrongfully hurting your credit. Check your credit report for inaccurate information and report errors to the credit bureaus to potentially remove the accounts from your credit report.
It’s important to monitor your credit so you can get alerted if inaccurate information is hurting your credit. Try ExtraCredit® for free today for help managing your credit.
Advertiser Disclosure: Credit.com has partnered with CardRatings for our coverage of credit card products. Credit.com and CardRatings may receive a commission from card issuers.
Editorial Disclosure:Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.
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Additional Details
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Full Review of Capital One SavorOne Cash Rewards Card
What You’ll like About It
The Drawbacks
Is It Worth It?
FAQ
Full Review of Capital One SavorOne Cash Rewards Card
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What You’ll Like About It
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Even if you’re not eating out, this card allows you to earn 3% cash back on grocery store purchases. (Excluding some stores like Walmart and Target. creditworthiness, income and existing debt.
How Soon Can I Increase My Credit Limit After Being Approved for a Capital One SavorOne Cash Rewards Card?
Typically, most credit card issuers require at least 6 months of on-time payments before considering you for a credit limit increase. You can improve your chances of getting an increase by paying your bills on time and managing your credit well.
How Good is a Capital One SavorOne Cash Rewards Card for Building Credit?
Like most credit cards, Capital One will report on-time payments to the credit bureaus, which could help you build up good credit over time. However, if you have a low credit score and are looking to build your credit back up with on-time credit card payments, this may not be the best option. If you’re concerned about whether or not your credit is strong enough to be approved for this card, it may be better to start out with a secured credit card that will help you upgrade to another “unsecured” credit card.
Learn more about how to sign up for a Capital One SavorOne Cash Rewards Card
Advertiser Disclosure: Credit.com has partnered with CardRatings for our coverage of credit card products. Credit.com and CardRatings may receive a commission from card issuers.
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations.
The average household credit card debt in America is $9,654, and the states with the largest amount of credit card debt are Alaska, Hawaii, and New Jersey.
Between the first quarters of 2022 and 2023, The Federal Reserve Bank of New York reported that the credit card debt in America rose by $145 billion. As of June 2023, we saw a 12-month inflation increase of 3%, the smallest year-over-year increase since March 2021.
By understanding American credit card debt statistics, you’ll better understand where you stand and what you can do to potentially lower your debt. Credit card debt increases your credit utilization ratio, which can hurt your credit and ultimately cost you more money in interest.
We surveyed over 1,100 Americans to learn more about credit card debt statistics in the United States. This data covers the average debt by state, average interest rates, and more. While many of the statistics from our other sources look at the situation as a whole, our data helps us see what’s happening on an individual level.
Despite the national average of Americans having over $9,000 in credit card debt per household, only 14% say they’re “very worried” about their debt.
67% of respondents said they have less than $2,000 in debt, which may indicate that only a concentrated number of people have high amounts of credit card debt.
20% of respondents don’t know how long they’ve been in debt.
The majority of respondents (56%) say their credit card debt is due to unexpected expenses.
74% of respondents said at least one collection agency has contacted them about a past due debt.
In this article, we’ll also provide tips on how to get out of debt and work toward better credit.
Table of contents:
Key Credit Card Debt Statistics
Many factors play into credit card debt, such as the average interest rates, which cards have the best offers, and the balance people carry on their card. These statistics will help you compare your own credit card balance to the national average and see if you’re getting a good deal with your current cards.
Here are the standout findings of various debt statistics:
The average American household has over $9,000 in credit card debt. (WalletHub)
Mississippi has the least credit card debt at $5,259 per person. (Credit Karma)
Alaska has the most credit card debt on average at $8,139. (Credit Karma)
Credit cards 90 days or more past due rose to 4.57% in 2023. (FRBNY)
Individuals making $184,000 or more per year have the most credit card debt at an average of $12,600. (Federal Reserve)
The total credit card debt in America as of Q3 2022 was $910 billion. (Experian®)
How Many Credit Cards Carry a Balance
The American Bankers Association releases a quarterly report for consumer credit conditions, and the most recent data comes from the third quarter of 2022.
In America, approximately 43% of credit cards carried a balance, 23% were dormant, and 34% were used but paid off each month. Those who pay off their credit card balance are able to keep a low credit utilization ratio and prevent the accumulation of debt.
Tip: Use our credit card payoff calculator to estimate when you’ll be debt free.
Average Interest Rates for New Credit Card Offers
LendingTree analyzed the terms and conditions of 200 credit cards from upwards of 50 different credit card companies, banks, and credit unions. With this data, they were able to gather an assortment of information involving annual percentage rates (APR).
The APR is the amount of interest consumers pay for their purchases, and the following table is broken down by credit card type.
The following table is based on data from July 2023.
Average Credit Card Debt by State
In February 2023, Credit Karma gathered data from 74 million of their members to see which states had the most and least amount of credit card debt. Below, we’ve compiled a complete list based on Credit Karma’s data that contains the average credit card debt for each of the 50 states alphabetically.
Top 10 States With the Most Credit Card Debt
The following states had the most credit card debt, with Alaska having the highest average credit card debt in America at $8,139 per person.
State
Average credit card debt
1.
Alaska
$8,139
2.
Hawaii
$7,444
3.
New Jersey
$7,306
4.
Maryland
$7,248
5.
Virginia
$7,174
6.
Connecticut
$7,032
7.
New York
$7,029
8.
California
$6,952
9.
Washington
$6,869
10.
Florida
$6,783
Top 10 States With the Least Credit Card Debt
The major credit bureau, Experian, tracks credit card debt data as well and found that between 2021 and 2022, overall credit card debt in the U.S. increased from $785 billion to $910 billion—a 16% increase. The average debt also increased in many states, according to Credit Karma’s report.
State
Average credit card debt
1.
Mississippi
$5,259
2.
Kentucky
$5,455
3.
Wisconsin
$5,593
4.
Arkansas
$5,600
5.
Indiana
$5,601
6.
Alabama
$5,647
7.
West Virginia
$5,674
8.
Iowa
$5,732
9.
Idaho
$5,737
10.
Maine
$5,788
Average Credit Card Debt by Age
Credit Karma’s report with the state-by-state data also broke down credit card debt by age group. Currently, Generation X carries the most credit card debt, while Generation Z carries the least.
Age group
Average credit card debt
11-26 (Generation Z)
$2,781
27-42 (Millennials)
$5,898
41-58 (Generation X)
$8,266
59-77 (Baby Boomers)
$7,464
78-95 (Silent Generation)
$5,649
Average Credit Card Debt by Income
The following data comes from the Federal Reserve’s Survey of Consumer Finances (SCF) and was most recently updated in 2019. The Federal Reserve completed a new survey at the end of 2022 and will have updated data later in 2023.
As you’ll see, higher-income individuals have much more credit card debt than those who make less. This makes sense because high-income individuals are able to get much larger credit lines. But when you look at the debt-to-income ratio, lower-income households have much more consumer debt compared to the amount of money they make.
Percentile of Income
Average credit card debt
Less than 20%
$3,800
20%-39%
$4,700
40%-59%
$4,900
60%-79%
$7,000
80%-89%
$9,800
90%-100%
$12,600
Average Household Credit Card Debt
A recent study from WalletHub found that while total credit card debt in the United States rose 14.1% between 2022 and 2023, household credit card debt only rose by 8.39%.
Their data shows that the average household credit card debt at the end of the first quarter in 2023 was $9,654 adjusted for inflation, which is $738 higher than the same time the previous year. WalletHub’s chart goes back to 1986, and the highest household credit card debt was in 2007 when it was $12,221 on average per household.
Average Credit Card Debt by Race or Ethnicity
Research from Annuity.org shows that Black and Hispanic Americans are less likely to feel financially stable and less likely to have a bank account. This information can help us better understand what’s happening in the financial lives of different communities.
This data comes from the Federal Reserve’s 2019 SCF.
Race
Average credit card debt
White (non-Hispanic)
$6,940
Black or African American (non-Hispanic)
$3,940
Hispanic or Latino
$5,510
Other or multiple races
$6,320
Credit Card Delinquency Rates in America
When someone is at least 30 days past due on their credit card payment, their status becomes delinquent. The number of delinquencies in the United States can be a measure of people’s ability to pay down their credit card debt.
To track this data, Experian conducted a study between 2021 and 2022:
Accounts 30 to 59 days past due increased from 1.04% of total accounts to 1.67%.
The delinquency rate of accounts 60 to 89 days past due increased to 1.01%.
Accounts 90 to 180 days past due rose to 0.63%.
How to Get Out of Credit Card Debt and Improve Your Credit
Credit card debt in America is something many individuals struggle with, and when your debt isn’t under control, it can affect your credit. A lower credit score leads to higher interest rates, which means you’re paying more for your purchases. It can also lead to being denied new credit lines.
Here are some simple steps you can take to start getting out of debt sooner rather than later:
Reduce additional credit card spending: You don’t want to add to your current debt if you don’t have to.
Create a budget: Cutting your spending can help you save additional funds to pay down your debt.
Use the snowball method: Each month, pay off your smallest debt in full. This can help you build momentum as you chip away at your overall debt.
Try debt consolidation: Consolidating your debt may help reduce the interest rate and keep your debt in one place rather than with different creditors.
Get a balance transfer card: Balance transfer cards allow you to transfer credit card debt to a different account, which may have a lower interest rate and will also help you consolidate your debt.
If you need help getting your debt under control and improving your credit, Credit.com has resources to help you learn to better manage your finances. To begin managing your credit, sign up for a free credit report card and check out ExtraCredit®. Our services can help you learn how to work on your credit and educate you about managing your finances so you know how to work toward the life you want.
Methodology for Credit.com data: This survey was conducted for Credit.com using Suzy. The sample consisted of a total of 1,154 responses per question and is statistically representative of the general population. This survey was conducted in December 2022.