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A charge-off can occur when you don’t pay your credit card’s minimum monthly payment or your installment debt like an auto loan or personal loan. If a creditor decides that a debt is unlikely to be paid after a certain period of time, they may count it as a loss. Then it becomes what is known as a charge-off to the account.

And what happens after that? It’s not a “free money” situation for you. Quite the opposite: A charge-off on your credit report is a negative entry that can stick for a while and cause concern for future lenders.

Here, you’ll learn what exactly a charge-off is in more detail, how it affects your credit, and what steps, if any, you can take to resolve the situation.

What Is a Charge-Off?

When a credit card or installment debt goes unpaid for 120 to 180 days and the lender determines that the debt is unlikely to be paid off, the outstanding balance may be counted as a loss, and the account closed.

But a charge-off doesn’t mean the debt ceases to exist and that the borrower no longer needs to pay it off. Instead, typically the lender either hires a debt collector to pursue the money it’s owed or sells the debt to a collection agency.

Though the lender will take a hit on the money owed — the debt collector will either take a share of any funds recovered, or the bank may sell off the debt entirely to the collector at a reduced rate — the story isn’t over for the borrower.


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

How To See if You Have a Charge-Off

Under federal law, a debt collector must send a debt validation notice within five days of first contacting you. The notice will include details about the outstanding debt, including verification that the notice is from a debt collector, the name of the creditor, the amount owed (including any fees or interest), your rights, and how to dispute the debt, and other information.

A charge-off will also be noted on your credit report. The original creditor may close your account and report the payment status as “collection” or “charge-off,” both negative marks on a credit report.

You can get a free copy of your credit report from each credit bureau annually via AnnualCreditReport.com. It’s a good idea to check your credit report regularly to make sure all information is up-to-date and correct. Requesting a credit report from one of the three credit reporting bureaus every few months allows you to check your credit report three times per year. For example, you could check your Experian® report in January, your TransUnion® report in May, and your Equifax® report in September.

What Happens When You Have a Charge-Off?

After you’re notified of the charge-off, a good first step is verifying the debt is actually yours and the charge-off is valid. You can dispute the posting with the credit bureaus and contact the creditor or debt collection agency with proof that the debt was paid if that’s the case. (Any common credit reporting errors can be brought to the attention of the reporting agency, including invalid charge-offs.)

If you do owe the debt, you have a few options:

•   You could pay it, including working out a repayment plan with the creditor and attempting to come to a settlement for an amount less than the original debt.

•   Doing nothing at all is another option. The collection of debts is subject to a statute of limitations that prevents creditors from pursuing unpaid bills after a certain period of time (the time limit varies from state to state, but is typically between three and six years).

Once that statute of limitations is up, a debt collector can no longer seek court action to force repayment, but the Federal Trade Commission points out that under certain circumstances, the clock can be reset.

Again, though, simply running out the clock on a charge-off does not mean there are no consequences for the cardholder. Read on to learn more about this important aspect of charge-offs.

How Does a Charge-Off Affect Credit Rating?

To understand the implications of a credit card charge-off, it’s worth thinking about how you’re approved for a credit card or loan.

•   Individuals have credit scores, which help credit card companies, lenders, and other institutions determine the risk of making payments. Credit scores are one factor among many used to evaluate an individual’s application for a car loan or mortgage — even an application for an apartment rental or new cell phone account.

•   Some lenders have minimum required credit scores for personal loans, so a person’s credit score not only helps to determine whether they will be approved but also the interest rate they will pay and other terms.

•   A credit score is a snapshot of a consumer’s financial history: their record of bill payments, how much credit they are using, and other such details.

•   Building credit scores takes time, reflecting years of credit habits. As such, any past credit card charge-offs are reflected in a person’s credit score and on their credit report. This can lead to a bad credit score and will let future prospective lenders know they have a history of delinquent or unpaid bills.

The Process of a Charge-Off

While parameters for a charge-off vary from lender to lender, here’s what typically happens:

•   After an individual does not pay at least their credit card minimum payment for six consecutive months, the account becomes delinquent. After the first month of delinquency, the credit account is moved from the “Accounts in Good Standing” section of their report to “Negative Items” or “Negative Accounts,” along with the outstanding balance.

•   If the credit card company decides to charge off the debt at 180 days, this is then noted on the person’s credit report as a charge-off.

•   Even with a charge-off, the outstanding balance will remain on one’s credit report (noted as a charge-off), unless it is sold to a collection agency. In that case, the balance reverts to zero but the charge-off remains.

Consequences of a Charge-Off

A charge-off stays on a person’s credit report for seven years from the first delinquent payment date, usually, even if they pay off their debt in full or the statute of limitations runs out. In fact, once consumers have a charge-off on their record, it can be difficult to have it reversed.

Among the consequences of having a charge-off on a credit report: It could result in higher interest rates on future lending products, or even being turned down for a credit card or loan.

There are a few scenarios where cardholders might be able to have a charge-off taken off their credit report. If an individual can prove that the charge-off was inaccurate, they can apply to have it removed under the Fair Credit Reporting Act. It can also be helpful to reach out to the creditor directly to try to reach a resolution.

It may be possible to have the charge-off removed as part of a debt settlement agreement or on a goodwill basis in the event of personal hardship or an honest mistake — though there are no guarantees.


💡 Quick Tip: With low interest rates compared to credit cards, a personal loan for credit card consolidation can substantially lower your payments.

What You Can Do About a Charge-Off

Paying off the charge-off or collection may reduce the negative impact on a credit score. It may also be wise to contact the lender to discuss a payment settlement, which may also reduce the credit impact.

If a credit card account is charged off, it may continue to accrue interest until it is paid. Once the balance is finally paid off in full, it will be noted on the individual’s credit card report.

A credit card charge-off on a credit report can make anyone’s financial life more difficult, so prevention may be the best bet.

Contacting the creditor to arrange a payment plan could be an option to keep a charge-off from being reported on your credit report. Switching to a lower-interest credit card or consolidating debt with a credit card consolidation loan may be steps to consider for managing debts before a charge-off affects a credit report.

Developing habits for using a credit card responsibly by setting a budget and ensuring that there’s enough money on hand to cover necessary and discretionary purchases, keeping a close eye on credit card statements, and adhering to payment schedules is a good way to successfully manage your finances. Even if you can’t afford to pay the balance due in full, it’s a good idea to pay at least the minimum on time.

Disputing a Charge-Off

If you’ve determined that the charge-off is not accurate — whether the debt doesn’t belong to you, the amount is incorrect, or the statute of limitations has passed — you can begin the dispute process.

You can begin by filing a formal dispute with the credit reporting bureau. You can mail a dispute form to each bureau or use their online dispute filing process at the following links:

•   Equifax

•   Experian

•   TransUnion

Each credit bureau has its own process for handling disputes, but generally, you can expect a reply within about 30 days. You’ll be able to check the status of your dispute online after setting up an account with the credit bureau.

The credit bureau will begin by contacting the creditor, e.g., the credit card issuer or the lender, requesting them to check their records. If the information that was reported was incorrect, your credit report will be corrected, while any correct information will remain on your report.

After a dispute is completed, the credit bureau will update your credit report with the final outcome, whether that’s deleting the disputed item or leaving it on your credit report because it was found to be a valid debt.

Paying Off a Charge-Off

If the charged-off debt is yours, you are legally responsible for paying it. You have some options for doing so.

•   If the original creditor has not sold the debt to a collector, you can work directly with them to pay the debt. If the debt has been sold to a collections agency, you’ll be working with the agency instead of the original creditor.

•   In either case, you can make a payment plan to pay down the debt, or you could also try to negotiate a settlement for less than the amount owed if you’re able to pay some amount in full.

•   A paid debt will be reported as “paid collection” on a credit report, and a settled debt will be reported as a “settled charge-off.”

•   After the debt is paid in full, asking for a final payment letter is the way to have proof that the debt is no longer outstanding.

A debt being charged off and a debt being sent to collections are related, but different. Here’s a comparison:

Charge-Off	Collections
The creditor removes the debt from its balance sheet because they deem it unlikely to be paid.	The creditor hires a debt collector to attempt collection or sells the debt to a debt collection agency.
Collection attempts may still be made by the original creditor.	Collection attempts are made by the debt collection agency.
Creditor will report the charge-off to the credit bureaus.	Debt collectors must send a debt validation notice within five days of first contacting you about the outstanding debt.
You may be able to work with the original creditor to pay down the debt.	Any payment arrangements or settlement negotiations will be with the collection agency.

The Takeaway

A credit card charge-off may remain on a credit report for years and have a negative impact on your credit score. Preventing a charge-off by developing responsible spending habits, consolidating debt, or trying to arrange a payment plan may be the best bet.

If you are struggling with debt, a debt consolidation loan might help. It’s a personal loan used to consolidate multiple high-interest debts into one with a lower interest rate or with more manageable monthly payments.

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 2024 winner for Best Personal Loan overall.

FAQ

Is paying off charge-offs a good idea?

It can be a good idea, depending on the age of the debt. If the debt is old and beyond the statute of limitations for collection, making a payment on the debt could restart the clock on a time-barred debt.

What is a charge-off vs collection?

A charge-off happens when a creditor deems it unlikely that a debt will be paid. Collections are the next step in the process, whether the original creditor attempts to collect the debt or the debt is sold to a debt collection agency.

How does a charge off affect your credit score?

A charge-off is a negative entry on your credit report which could lower your credit score. It can affect your ability to qualify for future loans, your rental options, and even car insurance rates.

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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.

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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According to the IRS, approximately 90% of tax refunds are issued in under 21 days. However, some tax returns require more attention, which can lengthen the process and push back your tax refund date.

The deadline for filing 2023 taxes is Monday April 15, 2024. If you request an extension, the deadline is Tuesday October 15, 2024. Keep reading to learn more about deadlines for 2023 tax returns, and how to track the progress of your tax refund.

Tax Refund Process, Explained

The process begins when you submit your return to the IRS. The IRS then breaks down the process into three steps: return received, refund approved, and refund sent.

If you file electronically, you should receive an email confirming that your return was received within 24 hours. Paper return filers will have to wait longer.

After the IRS processes your return and confirms the information, your refund will be approved and a tax refund date will be issued. This takes about 3 weeks for electronic filers. Taxpayers who file a paper return by mail will wait at least four weeks.

The last step is when your tax refund is sent out. For filers who provide direct deposit information, your refund should appear in your account almost immediately. Taxpayers who do not include their bank information will have to wait for a paper check to arrive by mail.

💡 Quick Tip: We love a good spreadsheet, but not everyone feels the same. An online budget planner can give you the same insight into your budgeting and spending at a glance, without the extra effort.

Factors Impacting How Long a Tax Refund Takes

Several factors can affect the timing of your tax refund — including your financial organization skills and the accuracy of the information you provide. If you don’t receive your tax refund within 21 days, your return is likely being manually reviewed due to a mistake or complication.

The following factors can also affect your 2023 tax refund date.

How Early You File

Filing early is essential if you want to get your tax refund early. Ideally, you should be able to compile all your tax documents by the end of January. Forms such as W-2s, 1099-Rs, 1098-Es, and 1098s will provide the income information you need to file.

Filing early means submitting your tax return before the official deadline of Monday April 15, 2024, for your 2023 tax return. Since many taxpayers file their returns on the official deadline, filing early allows you to beat the rush.

Similarly, if you requested an extension, filing “early” means before the October deadline. The deadline for 2023 returns is Tuesday October 15, 2024. However, taxpayers can file anytime before October. This way, you’ll avoid the bottleneck that inevitably occurs on the deadline itself.

If You Are Claiming Certain Credits

Claiming certain credits on your tax return can push back your 2023 tax refund date. These include:

•   Earned Income Tax Credit

•   Additional Child Tax Credit

•   Injured Spouse Allocation

•   Child Tax Credit, if you claim the wrong amount

E-filed or Sent By Mail

Whether you do your own taxes by hand, use software to assist you, or hire an accountant or tax preparer, it’s best to opt for electronic filing. E-filed taxes are accepted by the IRS within a day or two, while mailed paper returns can take weeks to arrive.

Existing Government Debt

Some taxpayers owe the federal or state government due to unpaid child support, taxes from years past, or student loan payments. Taxpayers facing these issues will receive a reduced refund or none at all, and any refund can take longer than the standard 21-day timeframe after e-filing.

How to Track the Progress of Your Refund

If you’re like most taxpayers, it won’t take long until you start wondering where their tax refund is. Getting hold of a live IRS representative by phone is possible but challenging during tax season.

Fortunately, the IRS’s Refund Status tool provides updates on your 2024 tax refund date just 24 hours after you submit your 2023 taxes electronically.

The tool shows taxpayers one of three statuses: return received, refund approved, or refund sent. After the refund is approved, the IRS will give you a tax refund date. If you mailed your return, you’ll have to wait about four weeks for the tool to provide information on your refund.

What to Do Once Your Refund Arrives

How should I spend my tax refund? It’s a perennial question for taxpayers. Top choices include paying down debt, saving for a vacation, and investing. The important thing is to plan ahead so you don’t spend it all on frivolous or impulsive purchases.

One popular option is to treat your refund like regular income. You can budget the majority of the money for “needs,” by setting up an emergency fund or paying down your mortgage. The rest can be set aside for “wants,” such as a year’s worth of dining out.

An online budget planner can help you decide the appropriate percentages for needs and wants. Likewise, a debt pay off planner can show you how much sooner you’ll be debt-free after depositing some or all of your refund.


💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

What Happens If You Can’t File Income Taxes by the Deadline

Each year, taxpayers unable to file their return on time (usually mid April) can ask the IRS for an extension. The IRS’s Free File tool allows you to electronically submit a request to change your filing deadline to October.

Be aware that taxpayers who want an extension must make an educated guess about the taxes they owe and pay the IRS that amount.

How to File Form 4868 for a Tax Return Extension

Another way to file for an extension is to complete form 4868. You can submit the form electronically or by mail.

The Takeaway

While you cannot predict your exact tax refund date, filing electronically early in the tax season can help you get your refund faster. The IRS sends out most refunds within 21 days of receiving the return. The deadline for filing 2023 taxes is Monday April 15, 2024. If you request an extension, the deadline for filing a 2023 tax return is Tuesday October 15, 2024.

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.

See exactly how your money comes and goes at a glance.

FAQ

When should I expect my 2024 tax refund?

Typically, you can expect to receive your refund within 21 days of filing your return. However, mistakes and special tax credits can slow down the process.

What days does the IRS deposit refunds in 2024?

The IRS deposits refunds Monday through Friday, except for holidays.

How long does it take the IRS to approve a refund in 2024?

Most refunds are issued in 21 days or less from when the IRS accepts your return. However, if there are issues with the return, it may take longer.

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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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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

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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An individual preparing to file a federal tax return will want to think back on gifts given in the prior year. If a gift exceeds a certain threshold, the IRS wants it reported by Tax Day — but only extremely wealthy taxpayers will ever have to pay taxes on their lifetime of gifts.

In 2023, you could have made gifts worth up to $17,000 per recipient without reducing your lifetime exemption, being required to report the gift to the IRS, or paying federal gift tax.

Gifts over that value count toward the lifetime gift and estate tax exemption of $12.92 million (per spouse, if married), rising even higher in 2024.

Recommended: Does Net Worth Include Home Equity?

What Is a Gift and What Is Not?

According to the IRS, gift tax is applicable when property is transferred from one person to another, with the giver receiving nothing, or less than full value, in return.
The tax applies even when the donor doesn’t consider the transfer a gift.

The IRS defines the federal gift tax broadly, including when the gift is monetary or a physical property, or a donor allowing someone to stay in their property or earn income from the property without getting something equal in return.

Someone who makes an interest-free or reduced-interest loan may also be seen as giving a gift.

When you make a gift other than cash, you must assess the property’s fair market value: the price a willing buyer would pay in the open market. If you’re buying a house from a family member, you might ask for a gift of equity.

Generally, the IRS does not consider these taxable gifts:

•   Gifts that are not more than the annual exclusion for the calendar year

•   Another person’s tuition, as long as payments are made directly to the educational institution

•   Another person’s medical expenses, as long as the payments are made directly to medical service providers

•   Gifts to a spouse who is a U.S. citizen

•   Gifts to a political organization

•   Gifts to IRS-approved charities

💡 Quick Tip: When you have questions about what you can and can’t afford, a spending tracker app can show you the answer. With no guilt trip or hourly fee.

What Is a Gift Tax Return?

Par for the course with the IRS, there’s a form involved if you made a gift exceeding the annual limit: Form 709. It is to be filled out the year after the giving of the gift. So if a relevant gift was given in 2022, the information belongs on the 2023 tax return form.

Information on this form lets the IRS know that a gift has been given that falls within the scope of the gift tax.

Married couples may “split” gifts and essentially double their annual exclusion. If you are married and your spouse consented, you could have given up to $34,000 to an unlimited number of individuals in 2023 with no gift or estate tax consequences. For 2024, that amount rises to $36,000.

Spouses who split gifts always have to file Form 709, even when no taxable gift was incurred.

The gift tax is tied to the estate tax. As of tax year 2023, you can leave up to $12.92 million to relatives or friends free of any federal estate tax. If you’re married, your spouse is entitled to a separate $12.92 million exemption. Clearly this is the province of high earners.

Who Files the Gift Tax Return: the Giver or the Recipient?

Taxes typically fall on the donor, not the recipient.

There may be special circumstances when the recipient will agree to pay the tax. If you make this agreement, the IRS suggests that you contact your tax professional for guidance on how to proceed.

Annual Exclusion for 2023

You could have made an unlimited number of tax-free gifts in 2023 as long as no one received more than $17,000.

If you held back, just know that you can make an unlimited number of tax-free gifts of up to $18,000 in 2024, when the lifetime gift tax exemption increases to $13.61 million per person.

When Do You Need to File a Gift Tax Return?

This follows the regular tax filing deadline, which is April 15 in 2024.

If you need a gift tax return extension when you’re not filing a tax extension for your general income tax return, file Form 8892. This will typically give you a six-month extension.

How to File a Gift Tax Return

First, you use the federal gift tax return Form 709 that’s available online through the IRS. The IRS also provides gift tax return instructions. The agency includes determining if you need to file a form and, if so, for what gifts.

You may need to decide whether you and a spouse will split the gift taxes.

Form 709 is complicated. Whether you’re a seasoned tax filer or filing taxes for the first time, a tax pro could be of great help.

Recommended: How Long Does It Take for the IRS to Mail a Refund?

What Happens If I Don’t File a Gift Tax Return?

You could be fined by the IRS, and the taxing authority is becoming more vigilant in levying these failure-to-pay penalties. The fine equals 0.5% for every month that the tax isn’t paid, based on the amount of the gift. So, as time goes by, the fine gets bigger. If the IRS determines that fraud was involved, the fine can go up to 5%.

If this oversight isn’t discovered in a person’s lifetime, the estate could be assessed the accumulated fine.

How Long Should You Keep Gift Tax Returns?

Keep them indefinitely! They will likely be needed by the executor of your estate.


💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

The Takeaway

A gift tax return might inspire dread, but it’s simply a way for the IRS to track eligible gifts made in a year and over a lifetime. Most people will never pay gift taxes.
Want to keep tabs on gifts and track all of your money in one place? A money tracker app may be able to help.

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.

See exactly how your money comes and goes at a glance.

FAQ

What triggers a gift tax return?

The main trigger is exceeding the annual limit of what you can give without taxation. The annual amount per donee is $17,000 in 2023 and $18,000 in 2024.

Do I have to file a gift tax return if I receive a gift?

In general, it’s the donor of the gift, not the recipient, who pays the tax.

What happens if I don’t file a gift tax return?

The IRS may levy fines. If it doesn’t happen in your lifetime, the situation may be uncovered by the IRS after your death, and fines can be levied on the estate.

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Photo credit: iStock/VioletaStoimenova

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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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After attending college, you might have a hefty student loan you need to pay off, and you might also have some credit card debt you’re ready to eliminate.

Having two (or more) separate payments each month, as well as more than one interest rate, can get messy, and could negatively impact your credit if you don’t make all the minimum payments required. You may be wondering if it’s possible to consolidate student loans and credit card debt together to make things easier.

We’ll look at the differences between debt consolidation, debt refinancing, student loan consolidation, and student loan refinancing, plus explore your options to lower your interest rates and possibly get one single payment for all your student loan and credit card debts.

What Is Debt Consolidation?

There are two different ways you can change what your debt looks like: debt consolidation and debt refinancing.

It’s important to understand that when it comes to loans and credit cards, consolidating is different from refinancing. Refinancing refers to changing the financial terms of a debt. Maybe when you took out your student loan, for example, interest rates were higher than they are now. You might be able to refinance your loan with current, lower rates or you could refinance to extend the loan term.

Debt consolidation, on the other hand, refers to combining more than one debt into a new loan with a single payment. Maybe you have three different credit card balances and you take out a new loan to pay them off. Now, those three credit cards have a zero balance and you’re left with a single monthly payment and a new interest rate and terms with the new loan.

But is consolidating credit cards and student loans together possible? Or are they two different animals?

Consolidating Student Loans

The U.S. Department of Education offers what’s called a Direct Consolidation Loan, which consolidates all your federal education loans that qualify into one new loan with a single interest rate, typically the average of the loans you’re consolidating. When you consolidate federal student loans, you keep federal benefits, such as income-driven repayment plans and student loan forgiveness.

Student loan consolidation may be useful if you have federal loans from different lenders and are making more than one payment per month. However, your interest rate won’t necessarily be lowered, nor will you be allowed to consolidate private student loans or credit card debt.

So, what can you do if you have private student loans you want to consolidate or other loans that don’t qualify for the Direct Consolidation Loan? And what if you want to consolidate student loans and credit card debt together?

Before we get to the solution, let’s talk about consolidating credit cards.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Consolidating Credit Cards

Just like with student loans, you may have multiple credit cards each with their own balance, interest rate, and minimum payment due each month. This can make paying off all this debt next to impossible and feel like you’re treading water as you pay the minimum amount due on each card.

With credit card consolidation, you take out a new personal loan and pay off all outstanding credit card debt.
You then have one payment and one interest rate (which may often be significantly lower than some astronomically high rates for credit cards). You’re now making one monthly payment for all your credit card debt. Sounds good, right?

How to Consolidate Student Loans and Credit Card Debts

As discussed, with a Direct Consolidation Loan, you can’t add credit card debt to the consolidation loan. Direct Consolidation Loans are reserved for federal student loans only.

However, if you’re wanting to consolidate both student loans and credit card debts, there are options you can consider.

Personal Loan

One way to pay off different types of debt is with a personal loan. While personal loans may have higher interest rates than you’re paying for your student loans, the rates for personal loans may be significantly lower than credit card interest rates if your credit is good.

By taking out a personal loan, you may be able to pay off all of your student loans and credit card debt. Your debt is now rolled up into one monthly payment with one interest rate.

The higher your credit score, the lower the interest rate you may qualify for with a personal loan. But even if you don’t get a fantastic rate, you can extend the loan term to make your payments more manageable. And, of course, you can usually pay off a personal loan early without penalty, which can cut down on what you’d otherwise pay in interest.

Balance Transfer

If a personal loan isn’t for you, check to see if you have a credit card with a balance transfer offer. Often, credit cards will offer a promotion of 0% on any balances from other credit cards or loans transferred. Take note though: often these promotions end after a year, and then you’re stuck with the interest payment on the remaining balance.

A balance transfer makes sense if you know you can pay off your debts within a year. If you have a large amount of credit card debt or a high student loan, this may not be the best solution if you can’t pay it off quickly. Instead, you might consider transferring the amount of your debts that you know you can pay off within the timeframe.

Alternatives to Consolidation

If you’re hoping to consolidate student loans and credit card debt together, taking out a personal loan or using a transfer balance are two options to explore.

You might also look at a debt reduction strategy, such as the Avalanche Method or the Snowball Method.

The Avalanche Method

The Avalanche Method focuses on paying off your debts with the highest interest rates first. Once those are paid off, you put that money toward the debts with the next highest interest rates, and so on and so forth, until they are all paid off.

The Snowball Method

With the Snowball Method, you focus on the largest balance first. Put extra money toward paying that off, then when it’s paid off, move to the next largest balance.

Continue Payments

Whatever strategy you choose, the key is to keep making payments. And if possible, pay more than the minimum amount due. Even paying an additional $25 a month on a debt will help you pay it off faster and reduce the total amount of interest you pay overall.

Student Loan Refinance Tips from SoFi

Because student loans are often the largest debts people carry (even if they don’t have the highest interest rate), you may want to have a separate strategy for paying off your student loans.

When you refinance student loans, look for loans that offer a longer time period if you want a smaller monthly payment. However, keep in mind that with a longer loan term, you’re likely to pay more in interest over the life of the loan.

Also, if you plan on using federal benefits, it’s not recommended to refinance with a private lender. Instead, look into a Direct Consolidation Loan or refinance your student loans once you’re no longer using federal benefits.


💡 Quick Tip: When rates are low, refinancing student loans could make a lot of sense. How much could you save? Find out using our student loan refi calculator.

The Takeaway

While it may be challenging to consolidate student loans and credit card debt together, you may be able to do so with a personal loan or a credit card balance transfer. Using one of these methods allows you to transfer these debts into a single loan with a single payment and interest rate.

However, if a personal loan or balance transfer credit card isn’t an option, you could consider refinancing your student loans to possibly lower your interest rate and save money each month. The money you save could then be put toward paying off your credit card debt.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Do I lose my credit cards if I consolidate?

Consolidating credit card debt does not cause you to lose your credit cards. It merely wipes out the debt on each card you include in the consolidation.

Will consolidating my student loans lower my credit score?

If you use the Direct Consolidation Loan, this will not impact your credit score. However, if you consolidate your student loans with a personal loan or through student loan refinancing, it may impact your credit.

Can my student loans be forgiven if I consolidate?

If you consolidate your loans with a Direct Consolidation Loan, you’re still eligible for student loan forgiveness. However, if you refinance your student loans with a private lender, you are no longer eligible for federal benefits, including loan forgiveness.

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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.

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

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Dividends are payments that investors can receive from stocks, exchange-traded funds (ETFs), and mutual funds. These earnings count as income and may be taxable, depending on your income and filing status.

We’ll investigate dividend tax rates and the difference between ordinary and qualified dividends.

Defining Ordinary and Qualified Dividends

The IRS divides stock dividends into two categories: ordinary and qualified. The federal tax rate is different for each category. A qualified dividend is one that qualifies for a lower tax rate based on the concept of capital gains. An ordinary dividend, meanwhile, is one that doesn’t that doesn’t qualify for a lower rate.

When a company declares a dividend payment, your dividend is ordinary if you’ve held their stock for less than 61 days over a 121-day period. If, however, you make the stock purchase on or before the date that it’s declared, and then hold it for at least 61 days, it is considered qualified.

The timing also matters. Let’s say that you own stock in Company A, and they announce that a dividend will be paid on December 1. The day before, November 30, is called the ex-dividend date, or ex-date. If you bought your shares of stock 60 days or fewer before November 30, then your dividend is ordinary. But if you bought the stock more than 60 days before November 30, your dividend is qualified.

Qualified Dividend Documentation

When it’s tax time, you’ll receive a 1099-DIV. This is the form that financial institutions use to report dividends to the IRS and relevant taxpayers. Box 1a shows the total ordinary dividends you received during this tax period. Box 1b shows your qualified dividends. The form will also show any federal or state income tax that was withheld. You can use this information plus the federal dividend tax rate to determine what you owe.

Financial institutions must issue a 1099-DIV to shareholders who receive more than $10 in dividends and other distributions for the year. For more on tax documentation, read our story on the most common types of tax forms.


💡 Quick Tip: We love a good spreadsheet, but not everyone feels the same. An online budget planner can give you the same insight into your budgeting and spending at a glance, without the extra effort.

Tax Information for Ordinary and Qualified Dividends

The ordinary dividend tax rate is the same as an individual’s income tax bracket for the year.

The qualified dividend tax rate for 2023 is calculated using capital gains tax rates. This may be 0% depending on your taxable income and filing status. Here are the latest figures from the IRS:

•   Less than $44,625 for single or married filing separately.

•   Less than $59,750 for head of household.

•   Less than $89,250 for married filing jointly or qualifying widow(er).

The qualified dividend tax rate rises to 15% for the next tax brackets:

•   $44,625 to $492,300 for single filers.

•   $44,625 to $276,900 for married filing separately.

•   $59,750 to $523,050 for head of household.

•   $89,250 to $553,850 for married filing jointly or qualifying widow(er).

Once your household income exceeds the 15% bracket, you’ll pay a 20% tax rate on any qualified dividends. There may also be a 3.8% net investment income tax. Consult your accountant or financial advisor regarding your situation.

Recommended: 2023 IRS Tax Refund Dates

Dividend Tax Rate 2022

The thresholds can change by year. For example, the dividend tax rate for 2022 was as follows:

•   0% dividend tax rate:

◦   Single filers, up to $41,675

◦   Married filing jointly, up to $83,350

•   15% dividend tax rate:

◦   Single filers, $41,676–$459,750

◦   Married filing jointly, $83,351–$517,200

•   20% dividend tax rate:

◦   Single filers, $445,851+

◦   Married filing jointly, $517,201+

Dividend Tax Rate 2024

Looking ahead, we’ve got some insights into the 2024 tax year. A married couple filing jointly won’t pay taxes on qualified dividends until their income is above $94,054. Above that amount, the tax rate will be 15%. The tax raise will go up to 20 percent when a couple earns more than $583,751.

Individual filers won’t pay 15% until their income is greater than $47,025. They’ll pay 20% when income exceeds $518,901.

Recommended: Guide to Filing Your Taxes for the First Time

Why Are the Two Types of Dividends Taxed Differently?

Qualified dividends are more favorably taxed as an incentive to investors to hold onto stocks for a longer period of time. This is based on the concept of capital gains.

Additional Qualified Dividend Requirements

Besides the holding period described above, the dividend must have been paid by a corporation in the U.S. or a qualifying foreign one. Plus, the payment can’t be a dividend in name only. For example, payments given by tax-exempt agencies don’t qualify.

If a payment doesn’t satisfy all three requirements, then it can’t be a qualified dividend. It may be an ordinary dividend or another type of income.


💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

The Takeaway

There are two broad types of dividends: ordinary and qualified. Qualified dividends are taxed at a lower rate than ordinary dividends. For a dividend to be qualified, an investor must hold the stock for at least 61 days during a particular time frame. A 1099-DIV will break out dividends into qualified and ordinary for the taxpayer’s information. There are three tax rates for qualified dividends. The lowest tax brackets pay nothing. The next brackets pay 15%, and the highest brackets pay 20%. Ordinary dividends are taxed as regular income.

To seamlessly track your finances, consider a spending app, which allows you to handle tasks like budgeting, paying bills, and more.

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.

SoFi helps you stay on top of your finances.

FAQ

What is the tax rate on dividends in 2024?

The ordinary dividend tax rate is based on your tax bracket. With a qualified dividend tax rate, it depends on your filing status and your income. The lowest tax brackets pay nothing, the middle brackets pay 15%, and the highest brackets pay 20%.

How do I calculate my qualified dividends?

Investors receive form 1099-DIV from their financial institution, which provides the amount of ordinary and qualified dividend income received during the year. The IRS also provides a worksheet.

Why are my qualified dividends being taxed?

Dividends are a type of income, and investors who receive them typically pay taxes on them. It’s true that individuals who make less than $47,025 in 2024 pay no tax on qualified dividends. However, taxpayers in higher brackets must pay 15% or 20%.

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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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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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