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Keeping your credit score healthy is a lifelong endeavor. It’s never too soon to start working on improving your credit score, but it’s also never too late to make progress. If you are in your forties or fifties, you may be wondering, what is the average credit score by age 50? Read on to find out.

Average Credit Score by Age 50

On average, consumers between the ages of 50 and 59 have a credit score of 706, which is considered a “good” credit score. This credit score is partially due to the borrowers having had the chance to build credit over a long period of time. The length of a borrower’s credit history is an important factor taken into consideration by the major credit scoring models.

What Is a Credit Score?

A credit score is a three-digit number issued by a credit scoring agency that provides both you and interested parties with a glimpse of how reliable of a borrower you are. Lenders use these credit scores to get an idea of how likely an applicant is to repay a loan on time. Employers, landlords, and utility companies can also use a credit score to get an idea of your credit history, which helps them better understand how you manage your money.

Your credit report gives a detailed look at your credit history, but a credit score acts as a quick snapshot of how you navigate credit.

Recommended: How to Check Your Credit Score for Free

What Is the Average Credit Score?

Every borrower has a unique credit score, but understandably consumers don’t want to fall behind the average if they want to compete for the best lending products and rates. As of March 2024, the average credit score for all consumers in the United States was 705.

Average Credit Score by Age

To get a better idea of how you compare to borrowers in your age group, let’s take a look at what the average credit score is by age.

What’s a Good Credit Score for Your Age?

Because factors like length of credit history, credit mix, and consistent payments play a role in how high a credit score is (all of which come with years of credit usage), it’s understandable that younger borrowers are at a bit of a disadvantage. It takes time and discipline to build a high credit score. That being said, no matter their age, borrowers should aim for at least a “good” credit score — typically in the 670 to 739 range. Ideally, you will work toward a “very good” (740 to 799) or “excellent” (800 or higher) credit score.

How Are Credit Scores Used?

Credit scores are used in a few different ways, but primarily lenders rely on them to make decisions about which borrowers to work with, how much to lend them, and how much interest to charge them. Your credit score paints a picture for a lender about how responsible of a borrower you are.

If your score reflects that you have a manageable debt load and a history of making consistent on-time payments, a lender is going to be more likely to work with you and offer you favorable loan terms. If your score is on the lower side, that doesn’t mean you can’t qualify for a loan. However, lenders tend to charge borrowers with lower credit scores more interest to help offset their risk.

Factors Influencing the Average Credit Score

One of the best ways to keep your credit score in good standing is to understand how your credit behavior impacts your score. There are five factors that influence your FICO® Score — which is the most popular credit scoring model on the market (VantageScore is another popular model that works similarly). How much of your score is impacted by each factor varies.

Recommended: Differences Between VantageScore and FICO Credit Scores

To strengthen your credit score, you will work on improving each of the five credit scoring factors consistently throughout your lifetime.

•  Payment history: Missing a single payment by just 30 days can harm your credit score. Always aim to make consistent on-time payments.

•  Amounts owed: Lenders like to see that you are keeping your credit utilization ratio low so you can afford to make debt payments.

•  Length of credit history: The longer your credit history is, the better. Many young consumers start their journey with a credit card before moving onto loans.

•  New credit: Applying for too much new credit can make lenders nervous. Keep your hard inquiries to a minimum.

•  Credit mix: Having a healthy credit mix can assure lenders you can handle multiple loan payments at once.

How Does My Age Affect My Credit Score?

One area of your credit score that can be challenging to control is the length of your credit history. The more experience someone has managing credit, the more their score benefits. Applying for credit while young (such as with a credit card) and not closing credit card accounts can help keep that credit history strong.

At What Age Does Credit Score Improve the Most?

Credit scores generally improve the most in a person’s 30s, as they establish a longer credit history, stabilize income, and adopt better financial habits. Consistent on-time payments, reduced debt, and responsible credit usage during this period significantly boost scores, laying the groundwork for strong credit into middle age.

Older borrowers have many factors working in their favor that give them a leg up in the credit world, too. To start, they tend to have many more years of experience paying bills on time. They also tend to have longer credit lengths and a stronger credit mix due to having more time on their side. Borrowers in their 60s have the highest average credit score of 749.

Recommended: How Long Does It Take to Build Credit?

How to Build Credit

One of the best ways to start building credit is with a credit card. If you pay your balance in full each month, you don’t have to spend any money to have a credit card and can build your credit score while earning rewards points or cash back.

You can also keep your credit utilization ratio low by paying off the balance in full each month. If you can’t qualify for a credit card due to a lack of credit history, you can have a parent or spouse add you as an authorized user on their credit card.

Credit Score Tips

To keep your credit score healthy, it’s a good idea to practice these good credit habits:

•  Pay on time: Always make payments by the due date to build a strong payment history. Use a money tracker app to keep an eye on your spending throughout the month so you can afford to pay your bills.

•  Keep balances low: Aim to use less than 30% of your credit limit to keep credit utilization within the recommended range.

•  Avoid frequent hard inquiries: Limit new credit applications, as multiple inquiries can lower your score.

•  Maintain old accounts: Keeping older credit accounts open can help lengthen your credit history.

•  Monitor your credit report: Credit score monitoring can help you stay on top of things. Regularly check your credit score and review your credit report for errors and dispute inaccuracies to protect your score.

•  Diversify credit types: A mix of credit types (e.g., credit cards, loans) can positively impact your score if managed well.

The Takeaway

There’s no need to fear getting older when it comes to your credit score — time is on your side here. Practicing decades of good credit habits can result in your gaining access to the best loan rates and terms and make it easier to meet your financial goals.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

How rare is a 700 credit score?

Earning a credit score of 700 is a very realistic goal. The average credit score in America is 705, so many consumers have a “good” credit score.

Does anyone have a 900 credit score?

The FICO credit scoring model tops out at 850. Finding a credit score of 900 isn’t possible.

How rare is 825 credit score?

Having a credit score of 825 is one of the best credit scores a borrower can achieve. This is a rare but not impossible score to obtain.

How rare is an 800 credit score?

Having an 800 credit score is not common and is very impressive. Borrowers can work toward an 800 credit score by always making credit payments on time, keeping a healthy credit mix, and maintaining a low credit utilization ratio.

How common is a 750 credit score?

The average credit score for borrowers of at least 60 years of age is 749 (this is the highest average of any age group). Achieving a credit score of 750 is not impossible but requires a lot of hard work and discipline.

What is a good credit score for a 50 year old?

The average credit score for a 50 year old is 706. Ideally, borrowers in their fifties will want to either have that score or an even higher one if they want to qualify for the best loan rates.

Photo credit: iStock/JLco – Julia Amaral

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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.

SORL-Q424-023

Going for a dip in your own backyard pool can be one of life’s greatest pleasures, but installing one requires a significant financial investment.

To avoid high prices, you might want to go the above-ground pool route. A less-expensive option to in-ground pools, above-ground pools are easier to install. According to HomeAdvisor, the average cost to install an above-ground pool runs between $1,011 and $6,011, with a typical homeowner paying around $3,452. However, the same site reports that if you want an oversized or custom above-ground pool, your total cost may be closer to $11,200.

Don’t have the cash on hand to foot the costs? Here’s a look at different above-ground pool financing options, steps to finance your above-ground pool, and tips to shore up funds for your home improvement project.

Above-Ground Pool Costs

As mentioned, the average cost to install an above-ground pool is $3,452. Swimming pool installation costs depend on a handful of factors:

•   Size: As you might expect, the larger the pool and the higher the wall, the more expensive it is.

•   Shape: The shape of the pool also impacts the price tag. According to HomeAdvisor, rectangular pools are the least costly ($820 to $2,800), followed by round pools ($1,150 to $3,000). Oval pools are the most expensive and can range from $1,290 to $4,840.

•   Material: Above-ground pools can be made of steel, resin, or aluminum. While steel pools are the cheapest, they are also susceptible to corrosion or oxidation. Aluminum pools are the costliest, but they won’t rust. If you’re looking for something in the middle, the resin is rust-resistant and less pricey than aluminum.

Recommended: The Top Home Improvements to Increase Your Home’s Value

Financing Options for Above-Ground Pools

Here are a few above-ground pool financing options to consider:

Personal Loan

A personal loan is also known as a home improvement loan. The major draw of a personal loan is that it can be used for many different kinds of expenses. So if you plan a cluster of home improvement projects to spruce up your place, a personal loan can be used to fund those projects.

Amounts for personal loans typically range from $500 to $100,000, with terms between two and seven years. As of August 2024, the average interest rate for a 24-month personal loan is 12.33%, but you can expect to find rates anywhere from 8% to 36%.

While personal loans can involve a relatively simple online application, lenders will do a hard pull of your credit, which can temporarily ding your credit score. Plus, you’ll need to look out for fees, such as an origination fee, which is an upfront, one-time cost. If you pay off your loan early, some lenders might also hit you with a prepayment penalty to offset any losses in interest.

A personal loan calculator can show you how much your monthly payments can be based on the loan amount, interest rate, and repayment terms.

Home Equity Loan or Line of Credit

As a homeowner, you can borrow against the equity in your home. A home equity loan or home equity line of credit (HELOC) usually features lower interest rates and lower fees than other types of above-ground pool financing. Plus, there are generally lower credit requirements.

A home equity loan is an installment loan in which you receive the proceeds in a lump sum upfront. A HELOC offers a credit limit and allows you to borrow as you go. The interest on a home equity loan or line of credit is tax deductible when used for home improvement projects. Plus, the application process can be simpler. That said, you should be mindful that you risk losing your home if you fall behind on your payments.

Credit Card

The main advantage of using an existing credit card to purchase an above-ground pool and cover installation costs is that you don’t have to apply for a new line of credit or loan. Plus, there is no hard pull on your credit.

The downside: Credit cards usually have higher interest rates and late payment fees. As of August 2024, the average interest rate on credit cards was 23.27%. If you consider putting your above-ground pool on a credit card, you’ll want to pay off the balance as quickly as possible.

In-Store Financing

Another option for above-ground pool loans is in-store financing or directly from the dealer. One plus of getting your pool financed from the store is that the application process can be fairly quick.

However, you’ll want to be watchful for potentially higher interest rates and fees. Plus, there might be limited financing options or no financing available for the pool you’ve had your eye on.

Savings and Cash Payment

If you can pull funds out of your savings and pay for the pool in cash, you won’t have to worry about applying for a line of credit or being responsible for monthly payments. Plus, you won’t have to pay interest, which can ramp up the total cost of your home improvement project.

However, tapping into your savings means less money for other home improvement projects, financial goals, and emergencies. Consider the opportunity cost.

Pros and Cons of Each Financing Method

Let’s look at the advantages and disadvantages of each financing option:

Personal Loan

While getting funding for a personal loan involves a reasonably simple, speedy application process, the interest rates are usually higher than a home equity loan or HELOC. You’ll likely need a higher credit score to qualify for the best interest rates and most flexible terms.

You’ll also want to be aware of fees, such as prepayment penalties, origination fees, and late fees. Depending on the lender and your unique financial situation, various repayment terms may be available.

Home Equity Loan or Line of Credit

Home equity loans and HELOCs typically have lower interest rates than credit cards and personal loans, but you’re betting on your home.

The credit score requirements are normally lower because these are essentially second mortgages secured by your home. The minimum credit score required for home equity loans is usually 680.

Home equity loans usually have fixed interest rates, so you can expect predictable payments throughout the loan’s duration.

HELOCs, on the other hand, have variable interest rates. That, coupled with the fact that you pay as you go, means your monthly payment can change. However, this financing option might be a good fit for multiple home improvement projects or when the amount is likely to change.

If you miss a payment during the draw period, there may be a grace period after the payment due date. You could be charged a late fee or other penalty if you make a payment during this time. However, the lender may not report the late payment to the credit bureaus. If you fail to make a payment after the grace period ends, the lender will likely report it to the credit bureaus, which can hurt your credit score.

Credit Card

A major advantage of a credit card is that you don’t have to apply for a new loan or line of credit. You can use your current credit card to cover the costs of your above-ground pool. Plus, you need to make only minimum payments. On the other hand, you’ll pay a lot in interest if you make only minimum payments.

In-Store Financing

In-store financing can be a convenient, easy-to-apply option. However, repayment terms might be limited, and financing might be available only for certain pools. Also, interest rates might be higher than other options.

Savings and Cash Payment

If you can fork over the money to cover the cost of installing your pool, you don’t have to fret over repayment plans, meeting lending criteria, and paying interest. However, that’s less money you’ll have stashed away for other financial goals.

Recommended: What Are the Different Types of Debt?

Steps to Finance Your Above-Ground Pool

To make for a smoother process and scoop up the best rates and terms on your financing, mind the following steps:

Determine your budget. Do your homework to determine the cost of installing an above-ground pool. This involves looking at models of different sizes, materials, and shapes. You’ll also want to get an estimate for shipping and installation costs.

Build your credit score. The better the score, the more options you’ll likely have, and the less expensive the financing. Practice good credit habits, such as making on-time payments, keeping cards you don’t use open, avoiding overspending, limiting credit applications, and keeping your credit usage low.

Research financing options. Researching the financing options for your pool installation can help you find the best loan for your needs, budget, and situation. See if you can get preapproved online from a few different lenders. That way, you can gauge how much you’ll be approved for before officially applying.

Gather the required documentation. Common documents you’ll need to gather before applying include a government-issued ID, such as a driver’s license or passport, proof of address (i.e., a past utility bill), proof of employment and steady income (i.e., a recent paycheck), your Social Security Number or individual taxpayer identification number (ITIN). Some lenders may ask to see your education history.

Apply. Once you’ve narrowed down your financing choices and lenders, it’s time to submit your application. Make sure you’ve provided all the required information and carefully review it for errors.

Tips for Saving Money on Your Above-Ground Pool

To keep your above-ground pool costs in check, look for financing options with lower interest rates, no or low fees, and flexible terms. Flexible terms help you stay on top of your payments. As with any home project, it also helps to keep track of costs to ensure you’re staying within your budget.

If affordability is at the top of your list, consider pools that are smaller in size, rectangular, and made of less expensive materials. This could potentially also lower your pool’s maintenance and energy costs.

Understanding the Long-Term Costs

Beyond the installation, you’ll want to factor in the ongoing, long-term costs of having a pool. This includes maintenance costs such as cleaning the pool, checking the pH and chlorine levels, and maintaining equipment.

And don’t forget to fold in energy costs and what you’ll need to pay for cleaning supplies such as filters. Generally, chlorine pools will bump up the cost of your overall maintenance, as the upkeep costs more than saltwater counterparts.

Apply for a Home Improvement Loan

Home improvement loans often range between $5,000 to $100,000, and you may be able to get funding on the same business day. You can get a loan from many banks, credit unions, or online lenders and, as mentioned, the funds can be used to pay for just about anything.

The Takeaway

You can go many ways to secure above-ground swimming pool financing. To narrow down the best choice for you, do your homework to figure out exactly the type of pool you’d like and the costs involved.

From there, you can explore your options. It’s important not to take on more debt than necessary. After all, that’s a financial responsibility you’ll be on the hook for. By taking the proper steps, you can figure out the best route for you.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

How much does an above-ground pool cost?

According to HomeAdvisor, the average cost to install an above-ground pool ranges between $1,011 and $6,011, and homeowners spend an average of $3,452. However, larger custom pools that you build from scratch can cost up to $11,200.

What credit score do you need to finance?

The credit score you need for above-ground pool financing depends on the type of financing. Generally, the minimum credit score for a home equity loan or HELOC is 620, but lenders like to see a minimum score of 680. Personal loans are usually more accessible if you have less-than-perfect credit, and the minimum credit score can be as low as 580.

How long do most people finance a pool?

It depends on the type of above-ground pool financing. Personal loan repayment terms range from two to seven years, and if you’re taking out a HELOC, the draw period is usually 10 years.

Photo credit: iStock/enigma_images

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.

SOPL-Q424-001

Maybe the asphalt on your driveway is starting to break apart and is more rocky than you’d like. Or perhaps you desire a fresh look and smoother experience going down your driveway.

Whatever the reason, giving your driveway a makeover can add to your home’s overall aesthetic and boost its functionality. Research reveals that 79% of Realtors thought a home’s curb appeal was essential to attracting potential buyers.

That said, driveway paving comes with a hefty price tag. According to estimates from HomeAdvisor, the cost depends on the size and materials, but can be anywhere from $2,000 to $10,000, with $6,000 being the average.

Can you finance a driveway if you don’t have the cash on hand to cover the costs? The good news is yes, it’s entirely possible. In order to figure out the best choice for you, you’ll want to be clued in on your options. Here, we’ll walk you through different ways to pay for a new driveway.

Understanding the Cost of Driveway Paving

Tracking home improvement costs? As mentioned, the average cost of driveway paving is $6,000. The main factors that determine how much you’ll be doling out are the size of your driveway and the type of material you’ll be using. As you might expect, different materials require a different investment of time and labor to install.

For instance, while gravel driveways are the least expensive to install, you’ll need to periodically replenish the gravel — ideally, every few years. On the flip side, driveways made of paved stone have the highest costs initially but can last the longest.

Recommended: Personal Loan Guide

Personal Loans for Driveway Financing

Personal loans can be a relatively easy route to financing a driveway paving. Most personal loan amounts range from a few hundred dollars to up to $50,000, while a few lenders have up to $100,000 available.

The terms of the loan repayment can be anywhere from one to seven years, and the APR, which is typically fixed, ranges between 8% and 36%. As of August 2024, the average interest rate on a 24-month personal loan hovered around 12.33%.

Personal loans usually have lower interest rates than credit cards, but the interest can make for an expensive way to borrow. Plus, there might be upfront fees, such as an origination fee, which is usually anywhere from 1% to 6% of your loan amount, and in some cases as high as 10%. While longer loan terms can mean lower monthly payments, you’ll be paying more interest for the loan.

Some lenders feature preapproval online and can offer a speedy application process that you can also do online. Once you’ve been approved for a personal loan, you may be able to receive the proceeds of the loan as soon as within one business day.

However, you should be aware that a personal loan for home improvement is an installment loan, which means you’ll receive the funds upfront and are responsible for making monthly payments from the start. When you apply, lenders do a hard pull on your credit, negatively impacting your credit score.

Home Equity Loans and HELOCs

If you’re a homeowner, you can borrow against the equity in your home to take out a home equity loan or home equity line of credit (HELOC) to finance a driveway paving. Both are second types of mortgage, so you’re betting against your house. Home equity loans and HELOCs can be good ways to borrow money for a relatively low interest rate and lower fees.

Currently, the average interest rate on a home equity loan is 8.35%, and the average national interest rate on a HELOC is 8.69%.

Like a personal loan, a home equity loan is an installment loan, so you’ll receive the proceeds for the loan in a single lump sum. From there, you’ll have a fixed monthly payment for which you’re on the hook.

A HELOC is a type of revolving loan. Like a credit card, you’ll be approved for a limit and borrow as you need, up to the limit, for the draw period, which usually lasts 10 years. You pay as you go, and might be able to make interest-only payments during the draw period. Because a HELOC lets you borrow funds as needed, it could be a better fit for ongoing or multiple home improvement projects with an undetermined total price tag.

Unlike unsecured forms of credit, home equity loans and HELOCs can be easier to approve. That said, both types of loans require a hard pull of your credit, which may temporarily bring down your credit score by a few points. And because you’re putting up your home as collateral, if you put a halt on your payments, you risk foreclosure and losing your home.

Recommended: The Top Home Improvements to Increase Your Home’s Value

Contractor Financing and Payment Plans

Another option for financing driveway paving is to borrow directly from a contractor. Some contractors partner with a third-party lender that provides financing options. These may include same-as-cash options (which we’ll get to in a bit) or monthly payments that you pay back over the length of the loan.

The pluses of getting financing from a contractor are that it’s convenient and straightforward. The contractor may be able to offer you a flexible plan to meet your needs in financing for driveway paving. The approval process might also be quicker.

However, minuses of contractor financing may include higher interest rates. Plus, you’re tied to the contractor should issues arise during the project.

Credit Cards and Same-as-Cash Options

You can also use a credit card. If you don’t want to jump through the hoops of applying for a new home improvement loan and have a hard pull on your credit, you could use a credit card to finance a new driveway.

That said, credit cards typically have higher interest rates than other types of financing, which ratchet up the costs of your home improvement project. Currently, the average interest rate for credit cards is 21.76%.

Contractors may also offer a “same-as-cash” option. Also known as deferred interest financing, these loans feature a no-interest period, usually between three and six months. However, interest will accrue if you don’t pay off your balance when the promotional period ends. Typical interest rates on “same-as-cash” offers range between 25% to 30%, which makes for an expensive purchase.

If you’re considering the same-as-cash option, you might also want to mull over a zero-balance transfer credit card. Interest also doesn’t accrue on purchases until the end of the promotional period, and these credit cards have zero-interest periods that are up to 20 months, so you could have more time to pay it off.

The Takeaway

Figuring out the best option for financing a driveway improvement means knowing what’s available and weighing the pros and cons of each. Before deciding, estimate how much you anticipate spending on your driveway financing and then pore over your options.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

How much does driveway paving typically cost?

It depends on the size of your driveway and the materials used, but driveway paving typically costs anywhere from $2,000 to $10,000, with an average cost of $6,000.

Can I use a home improvement loan for driveway paving?

You can use a home improvement loan for a driveway paving project. You’ll want to look for a loan with the amount needed plus the lowest terms and flexible rates possible.

Are there government programs for driveway improvement financing?

Government home repair assistance programs exist, and you’ll need to check if you qualify for a home improvement loan. Eligibility criteria may include income, age, location, property type, and if you belong to a specific group.

Further, single-family housing repair loans and grants can be available at the state, county, and city levels. You’ll need to check locally to see what’s out there and how to qualify for a loan or grant to spruce up your home.

Photo credit: iStock/irina88w

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.

SOPL-Q424-005

When investors evaluate which bonds to buy, they often take a look at yield to maturity (YTM), the total rate of return a bond will earn over its life, assuming it has made all interest payments and repaid the principal.

Calculating YTM can be complicated. Doing so takes into account a bond’s face value, current price, number of years to maturity and coupon, or interest payments. It also assumes that all interest payments are reinvested at a constant rate of return. With these figures in hand, they will be better equipped to understand the bond market and which bonds will offer the greatest yield if held to maturity.

What Is Yield to Maturity (YTM)?

The yield to maturity (YTM) is the estimated rate investors earn when holding a bond until it reaches maturity or full value. The YTM is stated as an annual rate and can differ from the stated coupon rate.

The calculations in the yield to maturity formula include the following factors:

•   Coupon rate: Also known as a bond’s interest rate, the coupon rate is the regular payment issuers pay bondholders for the right to borrow their money. The higher the coupon rate, the higher the yield.

•   Face value: A bond’s face value, or par value, is the amount paid to a bondholder at its maturity date.

•   Market price: A bond’s market price refers to how much an investor would have to pay for a bond on the open market currently. The price buyers pay on the secondary market may be higher or lower than a bond’s face value. The higher the price of the bond, the lower the yield.

•   Maturity date: The date when the issuer repays the principal is known as the maturity date.

The YTM formula assumes all coupon payments are made as scheduled, and most calculations assume interest will be reinvested.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

How to Calculate Yield to Maturity

Calculating yield to maturity can be done by following a formula — but fair warning, it’s not simple arithmetic!

Yield to Maturity (YTM) Formula

To calculate yield to maturity, investors can use the following YTM formula:

In this calculation:

C = Interest or coupon payment
FV = Face value of the investment
PV = Present value or current price of the investment
t = Years it takes the investment to reach the full value or maturity

Example of YTM Calculation

Here’s an example of how to use the YTM formula.

Suppose there’s a bond with a market price of $800, a face value of $1,000, and a coupon value of $150. The bond will reach maturity in 10 years, with a coupon rate of about 14%.

By using this formula, the estimated yield to maturity would calculate as follows:

The Importance of Yield to Maturity

Knowing a bond’s YTM can help investors compare bonds with various maturity and coupon rates, and ultimately, what their dividend yield could look like. For example, consider two bonds of varying maturity: a five-year bond with a 3% YTM and a 10-year bond with a 2.5% YTM. Investor’s can easily see that the five-year bond is more valuable.

YTM is particularly useful when attempting to compare older bonds sold in a secondary market, which can be priced at a premium or discounted — meaning they cost more or less than the bond’s face value. Understanding the YTM formula also helps investors understand how market conditions can impact their portfolio based on the investment they select. Since yields rise when prices drop (and vice versa) as seen on a yield curve, investors can forecast how their investment will perform.

Additionally, YTM can help investors understand how likely they are to be affected by interest rate risk — the danger that the value of a bond may be adversely affected due to the changes in interest rate. Current YTM is inversely proportional to interest rate risk. That means, the higher the YTM, the less bond prices will be affected should interest rates change, in theory.

Yield to Maturity vs Yield to Call

With a callable, or redeemable bond, issuers can choose to repay the principal amount before the maturity date, halting interest payments early. This throws a bit of a wrench into the YTM calculation. Instead, investors may want to use a yield to call (YTC) calculation. To do so, they can use the YTM calculation, substituting the maturity date for the soonest possible call date.

Typically a bond issuer will call a bond only if it will result in a financial gain. For example, if the interest rate drops below a coupon rate, the issuer may decide to recall the bond to borrow funds at a lower rate. This situation is similar to when interest rates drop and homeowners refinance their home loans.

For investors that use callable bonds for income, yield to call is significant. Suppose the issuer decides to call the bond when the interest rates are lower than when the investor purchases it. If an investor decides to reinvest their payout, they may have a tough time finding a comparable bond that offers the yield they need to support their lifestyle. They may feel it necessary to take on more risk, looking to high-yield bonds.

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Yield to Maturity vs Coupon Rate

While a bond’s coupon rate is another important piece of information that investors need to keep in mind, it’s not the same as yield to maturity. The coupon rate tells investors the annual amount of interest that a bond’s owner is set to receive — the two may be the same when a bond is initially purchased, but will likely diverge over time due to changing economic and market conditions.

Limitations of Yield to Maturity

The yield to maturity calculation does have limitations.

Taxes

It’s important to note that YTM calculations exclude taxes. While some bonds, like municipal bonds and U.S. Treasury bonds, may be tax exempt on a federal and state level, most other bonds are taxable. In some cases, a tax-exempt bond may have a lower interest rate but ultimately offer a higher yield once taxes are factored in.

As an investor, it can be especially helpful to consider the after-tax yield rate of return. For example, suppose an investor in the 35% federal tax bracket who doesn’t pay state income taxes is considering investing in either Bond X or Bond Y. Bond X is a tax-exempt bond and pays a 4% interest rate, while Bond Y is taxable and pays 6% interest.

While the 4% yield for Bond X remains the same, the after-tax yield for Bond Y is 3.8%. While it seemed like the less lucrative of the two options up front, Bond X should ultimately yield a higher return after taxes.

Presuppositions

Another YTM limitation is that it makes assumptions about the future that may not necessarily come to fruition. Specifically, it assumes that a bondholder will hang on to the bond until its maturity date, which may or may not actually happen. It also assumes that profits from the investment will be reinvested in a uniform manner — again, that may or may not be the case.

The Takeaway

Using the yield to maturity formula can help investors compare bond options with different coupon and maturity rates, market and par values, and determine which one offers the potential for a higher yield. But calculating the YTM is not an exact science, especially when you’re gauging the return on a callable bond, say, or adding the impact of taxes to the mix.

YTM is just one tool investors can use to determine which bond may best serve their financial needs and goals. One alternative to choosing individual bonds is to invest in bond mutual funds or bond exchange-traded funds (ETFs). Investors can also speak with a financial professional for guidance.

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FAQ

What is a bond’s yield to maturity (YTM)?

A bond’s yield to maturity is the total return an investor can anticipate receiving if the bond is held to its maturity date. YTM calculations assume that all interest payments will be made by the issuer and reinvested by the bondholder at a constant rate of interest.

What is the difference between a bond’s coupon rate and its YTM?

A bond’s coupon, or interest, rate is fixed from the moment an investor buys it. However, the same bond’s YTM can fluctuate over time depending on the price paid for it and other interest prices available on the market. If YTM is lower than the coupon rate, it may indicate that the bond is being sold at a premium to its face value. If it’s lower, it may be that the bond is priced at a discount to face value.

What is yield to maturity and how is it calculated?

Yield to maturity refers to the total return an investor can expect or anticipate from a bond if they hold it to maturity. It’s calculated using variables including the time to maturity, a bond’s face value, its current price, and its coupon rate.

Why is yield to maturity important?

The yield to maturity formula can give investors an idea of what they can expect in terms of returns from their bond holdings. But again, there are some assumptions the calculation takes into account, so an investor’s mileage may vary.

Is a higher YTM better?

A higher YTM may be better under certain circumstances. For example, since a higher YTM may indicate a bond is being sold for less than its face value, it may represent a valuable opportunity to invest. However, if the bond is discounted because the company that offered it is in trouble or interest rates offered by other investments are more appealing, then a high YTM might not be such a good thing. Investors must research investments carefully and understand the full story before they buy.

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