What Is the Set-Off Clause?

What is a set-off? A set-off clause is a financial agreement that effectively removes unnecessary back and forth payments between two groups. Consider the example of two banks that owe each other for various debits. They would ask, who owes the most money? Is any money owed to them? If so, subtract that amount, and the net difference is the final bill.

The set-off clause gets a little more complicated, however, when applied to banks, borrowers, and outstanding debts. In essence, the set-off clause allows banks to draw from deposit accounts when a debtor owes them money.

Keep reading to explore details of the set-off clause and how it’s used in the everyday world by financial institutions.

Understanding the Set-Off Clause

The set-off clause is a financial agreement made between two parties that allows one group’s debt obligation to be offset by the other group’s debt obligations to them. If two groups both owe money to each another, the one with the largest debt pays the difference between the two debts.

All in all, its purpose is to remove unnecessary payments between two parties. However, the set-off clause is often invoked by banks and financial institutions when a debtor defaults on payments on a loan product or owes an outstanding balance.

Definition and Purpose

Set-off legal definition: A set-off occurs when there are mutual debt obligations between two parties, but one party’s debt is reduced by the amount the second party owes to them.

The original purpose of a set-off clause is to reduce the amount of unnecessary back and forth between two parties. But when it comes to financial institutions, there are many reasons for its existence. One purpose is to provide stability to banking institutions. Because loans are essentially secured through deposit accounts, banks can continue to operate without fear of liquidity issues.

A simpler purpose is that it makes collecting debts a lot easier and faster. Of course, there are many types of debt, which may determine how remittance is pursued.

How Set-Off Clauses Work

Set-off clauses may be invoked by financial institutions when a borrower has checking or savings accounts with the same lender they have a debt with. Should they overdraw or owe unpaid fees to the lender, the lender has the right, via the set-off clause, to pull money from the borrower’s deposit accounts to settle unpaid debts.

Depending on the agreement and local laws, the lender or bank may not even have to notify the borrower when the clause is invoked.

Where You’ll Encounter Set-Off Clauses

You’re likely to find a set-off clause with credit cards, loans, and even bank account agreements.

For banks, this language is often mentioned throughout the account agreement. Many banks exercise their right of set-off to deduct funds from an account holder’s deposit account when that account holder owes an outstanding amount because of fees, overdrafts, or unpaid monthly payments.

But remember: The right of set-off normally only goes into effect when the account holder uses the same institution for their checking and other banking needs.

Legal Basis for Set-Off Clauses

Common law rights apply to set-off clauses when two parties are reconciling debts between them. If party A owes $75 and party B owes $50, both debts can be finalized by party A paying party B $25.

This, in turn, leads into contractual agreements where one party is allowed to deduct money owed to them when those debts go unpaid. However, certain regulatory frameworks must be followed in order for the financial institution to remain compliant.

All financial institutions operating in the United States must adhere to regulatory laws. In general, if you have a complaint, you will want to contact the Consumer Financial Protection Bureau or your state banking regulator.

Implications for Borrowers and Account Holders

A set-off can have a big impact on your personal finances, especially if you’re unprepared for it. Because banks usually don’t have to notify account holders of set-offs, you may suddenly realize your account balances are lower than they should be. That can make you susceptible to overdrawing or not having enough funds to cover necessary expenses.

If you’re vulnerable to a bank invoking the set-off clause, you may want to take the appropriate steps to protect your finances.

Protecting Yourself from Set-Off Actions

To protect yourself from a bank or financial institution invoking the set-off clause, the first step is to understand it. If you’ve already signed an agreement with a set-off clause, you may want to reread through it. If it doesn’t make any sense to you, call the institution and ask to speak with an account specialist who can explain the clause and when it may be invoked.

If you haven’t signed any agreements yet, the terms may be negotiable. While set-off clauses are pretty standard, if your finances are strong, the bank may be willing to rewrite the terms to the contract so they are more favorable to you.

Another option may be to switch banks and close your bank account. As long as the new bank is not affiliated with the original lender, your money may be safe from the set-off clause. However, keep in mind that the lender may be able to take legal action against you. If they do, your assets may be put in jeopardy.

You may be wondering if closing a bank account impacts your credit score. As long as your account has a positive balance, closing it shouldn’t affect your credit score. If you have any automatic payments set up, just make sure you update those accounts so they stay current.

Recommended: How to Split a Joint Bank Account

Alternatives to Set-Off for Banks

When invoking the set-off clause isn’t an option, banks may take other measures, such as sending your debt to a debt collector, restructuring your loan so you can make your payments more easily, or even taking legal action. To avoid any negative consequences, you may want to consider taking out a personal loan for debt consolidation.

How debt consolidation works is simple: Apply for a personal loan and use that loan to pay off your debts at (ideally) a lower interest rate. You’ll likely save money in interest, and you may even have a lower monthly payment, too.

You can take out personal loans for credit card debt, student loans, car loans, or even other personal loans with higher interest rates. You can pay off multiple forms of debt with a personal loan.

Recommended: Beginner’s Guide to Good and Bad Debt

The Takeaway

A set-off clause is legal language that allows a lender to draw from a debtor’s deposit accounts in the event they default on a loan. But typically, it’s only implemented when the debtor uses the same financial institution for their loan as they do their checking and banking needs. To protect yourself against a set-off, read over your loan or account agreement and reach out to your financial institution with any questions. You may also choose to move your bank account to a new bank.

If you’re struggling to make payments, consider taking out a personal loan to pay down your debts. You could potentially get out of debt sooner, save money in interest, and may even save money with a lower monthly payment.

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

Can banks use set-off without notifying me?

The answer to this boils down to your loan agreement and local laws, but in most situations the bank does not have to notify the borrower when it invokes the set-off clause.

Does the set-off clause apply to joint accounts?

A set-off clause shouldn’t apply to joint accounts unless both people are on the loan and are both liable for payments.

Can I dispute a set-off action by my bank?

Yes, a set-off action can be disputed, but the bank may well be within its rights. To determine if the bank acted improperly, you’ll need to read through your loan agreement with the bank. If you’re positive the bank acted illegally, first contact the bank and begin a dialogue with them. If that doesn’t resolve the matter, you may need to file a complaint to the appropriate authorities and seek legal counsel.

How does the set-off clause affect my credit score?

A set-off clause being enacted should not impact your credit score. However, if you’ve been missing payments and are in default, then any late payments will have a negative impact on your credit score.

photocredit: iStock/shapecharge

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SOPL-Q424-022

Building a strong credit score takes time, and there is no time like the present to start working on improving your credit score. Even teenagers can help themselves get a leg up in the financial world by playing the credit game responsibly. What is the average credit score for a 19-year-old? According to FICO, the average Gen Zer (ages 18 to 27) has an average credit score of 680.

Keep reading for more insight into the average credit score of a 19-year-old, what factors affect credit scores, and how to build an impressive score.

Average Credit Score for a 19-Year-Old

All young adults can benefit from taking an interest in their credit score. And no matter your age, it helps to understand what credit score range you should be working toward. What’s the average credit score for a 19-year-old? As we mentioned, the average credit score for Gen Zers is 680.

A 680 credit score is considered good, but ideally teenagers and older consumers want to work toward a “very good” or “excellent” score. A very good credit score falls in the 740 to 779 range, and excellent is a score of 780 or higher.

Recommended: How Often Does Your Credit Score Update?

What Is a Credit Score?

A credit score is a three-digit numerical representation of an individual’s creditworthiness that credit scoring models calculate based on the consumer’s credit history. This calculation takes into account factors like payment history, debt levels, and the length of their credit activity.

Lenders use credit scores to assess the risk of lending money or extending credit. In general, the higher a credit score is, the less risk the borrower poses to the lender, as a high score indicates you are a responsible borrower.

Credit scores and credit reports are not the same thing. A credit report is a detailed record of an individual’s credit history, including information on loans, credit cards, payment history, and any bankruptcies or defaults. A credit score, on the other hand, is a numerical value derived from the information in the credit report.

So when it comes to credit, your goal is to keep your credit report healthy so your credit score reflects that good behavior. You can check your credit score from time to time to ensure you’re making progress.

What Is the Average Credit Score?

There is no one standard credit score a 19-year-old should expect to maintain, but understanding what the average credit score is can help teens know what benchmark to work toward. As of October 2024, the average credit score for U.S. consumers was 717, according to FICO. This is categorized as a good credit score.

Average Credit Score by Age

It takes time to build a strong credit score, so young adults shouldn’t be too worried if their starting credit score is on the lower side. You can see from this table how the average credit score improves over time.

What’s a Good Credit Score for Your Age?

Younger borrowers often face a disadvantage in building a high credit score since factors like having a long credit history, diverse credit mix, and consistent payment history require time to develop. However, borrowers typically aim for at least a “good” score and, ideally, over time can make their way into the “very good” or “exceptional” tiers.

How Are Credit Scores Used?

Because the primary use of credit scores is during the credit application process, it’s easy to overlook the fact that credit scores can impact different areas of your life. Yes, primarily lenders use credit scores to help determine if they want to lend money to a borrower and at what terms. But potential employers and landlords can also use credit scores to get an idea of how responsibly you handle money.

Factors Influencing the Average Credit Score

Building and maintaining a good credit score is an ongoing task. Consumers who want to keep their credit score nice and high for many years to come can benefit from learning what factors influence their 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. What affects your credit score? Your FICO Score, the most widely used credit scoring model, is influenced by five key factors. These factors include: payment history, amounts owed, length of credit history, types of credit used, and recent credit inquiries.

The impact of each factor on your overall score varies, with payment history and amounts owed typically playing the largest roles. Other models like VantageScore work in a similar way but may weigh these factors differently.

How to Strengthen Your Credit Score

You don’t have to have perfect credit habits to improve your credit score, but trying to master as many of these factors as you can will help boost your FICO Score over time.

•   Payment history: Missing a payment can negatively affect your score, so always make payments on time. This is the most important factor to stay on top of. If you struggle to stick to a budget, use a spending app to monitor your spending so you can afford to pay off your balances in full at the end of the month.

•   Amounts owed: Keep credit utilization low to show lenders you can manage debt.

•   Length of credit history: A longer history reflects reliability.

•   New credit: Avoid making frequent credit applications in a short amount of time, as doing so can temporarily lower your credit score.

•   Credit mix: Having a diverse mix of credit types suggests strong financial management.

Use a free credit score monitoring tool to track your improvement efforts.

How Does My Age Affect My Credit Score?

How long does it take to build credit? Being older may work in your favor when it comes to credit scores, but unfortunately you can’t speed up the clock.

As you age, you can expect some areas of your credit report to improve. For example, a 40-year-old has had much more time than a college student to build a long credit history, responsibly manage a mix of credit types, and make consistent, on-time payments.

What Factors Affect My Credit Score?

As we discussed, there are a number of factors that go into your credit score. Your payment history, credit utilization ratio, length of credit history, credit mix, and recently opened credit accounts all impact how high or low your credit score is.

At What Age Does Credit Score Improve the Most?

Because so many credit scoring factors rely on the benefit of time to improve naturally, it’s not surprising that we see that older consumers make a lot of credit score progress. Baby Boomers, in particular, may see a dramatic increase in their score compared to younger generations. As of 2023, consumers aged 59-77 have an average FICO Score of 745. Meanwhile, Generation X consumers (ages 43-58) have an average score of 709.

How to Build Credit

It can be challenging to obtain credit unless you already proved you can responsibly handle a loan or credit card. You can use a credit card to start your credit journey. While borrowers with high credit scores qualify for better cards with more favorable rates, you can find credit cards to qualify for with any credit score (even if you need to use a secured credit card to build credit).

Making timely payments is key here — a money tracker app can help you manage bill paying. Also, pay off your balance in full each month to keep your credit score happy and to avoid pesky interest charges.

Credit Score Tips

To maintain a healthy credit score, practice good habits like paying bills on time, keeping account balances under 30% of your credit limit, and avoiding frequent credit applications.

It’s also important to keep older accounts open to build credit history, maintain a diverse mix of credit types, and regularly check your credit report for errors. If you spot discrepancies, be sure to dispute them. These actions can help strengthen your creditworthiness and protect your score over time.

Recommended: Why Did My Credit Score Drop After a Dispute?

The Takeaway

Taking good care of your credit score makes it easier to obtain favorable borrowing rates and terms. Consistency is key here. If you can master good credit habits at age 19, it gets easier and easier to keep your credit score nice and healthy.

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 to raise your credit score 200 points in 30 days?

Raising your credit score by 200 points in 30 days is challenging but may be possible in some situations. To start, pay off any outstanding balances, particularly high-interest ones, and reduce credit card utilization below 30%. Lowering this ratio is one of the fastest ways to see credit score movement. You can also consider disputing any inaccuracies in your credit report for a quick fix (if an error occurred that is harming your credit score).

Is a 650 credit score good at 18?

Having a credit score of 650 at the age of 18 is very impressive. While this is only a “fair” credit score by FICO standards, it’s a strong step in the right direction, and most teenagers don’t have an immediate need for a super high credit score.

How to get 800 credit score in 45 days?

Achieving an 800 score in 45 days is difficult unless you already have a very high credit score. To make swift progress, focus on paying off existing debt, reducing credit utilization, and ensuring all payments are made on time.

How to get a 600 credit score at 18?

The only way to have a credit score of 600 at 18 is to hit the ground running. Your parents can help you build your credit score before turning 18 by making you an authorized user on their credit card, or you can open a secured credit card when you turn 18. And be sure to make consistent, on-time payments to the card.

Can you get a 700 credit score in 6 months?

Achieving a 700 credit score in six months is possible, but how realistic this goal is depends on your current credit score and how committed you are to improving it. Focus on paying down high-interest debt, keeping credit utilization low, making all payments on time, and ensuring your credit report is accurate.

What is the starting credit score for an 18-year-old?

The starting credit score for an 18-year-old is 300 (unless their parents helped them build a credit history before they turned 18). To make it easier to build their credit score at a young age, 18-year-olds can open a credit account, such as a secured credit card. That way, they can start building their score by making responsible payments.

About the author

Jacqueline DeMarco

Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.

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*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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .


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

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.

SORL-Q424-034

A 457 plan — technically a 457(b) plan — is similar to a 401(k) retirement account. It’s an employer-provided retirement savings plan that you fund with pre-tax contributions, and the money you save grows tax-deferred until it’s withdrawn in retirement.

But a 457 plan differs from a 401(k) in some significant ways. While any employer may offer a 401(k), 457 plans are designed specifically for state and local government employees, as well as employees of certain tax-exempt organizations. That said, a 457 has fewer limitations on withdrawals.

This guide will help you decide whether a 457 plan is right for you.

What Is a 457 Retirement Plan?

A 457 plan is a type of deferred compensation plan that’s used by certain employees when saving for retirement. The key thing to remember is that a 457 plan isn’t considered a “qualified retirement plan” based on the federal law known as ERISA (from the Employee Retirement Income Security Act of 1974).

These plans can be established by state and local governments or by certain tax-exempt organizations. The types of employees that can participate in 457 savings plans include:

•   Firefighters

•   Police officers

•   Public safety officers

•   City administration employees

•   Public works employees

Note that a 457 plan is not used by federal employees; instead, the federal government offers a Thrift Savings Plan (TSP) to those workers. Nor is it exactly the same thing as a 401(k) plan or a 403(b), though there are some similarities between these types of plans.

How a 457 Plan Works

A 457 plan works by allowing employees to defer part of their compensation into the plan through elective salary deferrals. These deferrals are made on a pre-tax basis, though some plans can also allow employees to choose a Roth option (similar to a Roth 401(k)).

The money that’s deferred is invested and grows tax-deferred until the employee is ready to withdraw it. The types of investments offered inside a 457 plan can vary by the plan but typically include a mix of mutual funds. Some 457 retirement accounts may also offer annuities as an investment option.

Unlike 401(k) plans, which require employees to wait until age 59 ½ before making qualified withdrawals, 457 plans allow withdrawals at whatever age the employee retires. The IRS doesn’t impose a 10% early withdrawal penalty on withdrawals made before age 59 ½ if you retire (or take a hardship distribution). Regular income tax still applies to the money you withdraw, except in the case of Roth 457 plans, which allow for tax-free qualified distributions.

So, for example, say you’re a municipal government employee. You’re offered a 457 plan as part of your employee benefits package. You opt to defer 15% of your compensation into the plan each year, starting at age 25. Once you turn 50, you make your regular contributions along with catch-up contributions. You decide to retire at age 55, at which point you’ll be able to withdraw your savings or roll it over to an IRA.

Who Is Eligible for a 457 Retirement Plan?

In order to take advantage of 457 plan benefits you need to work for an eligible employer. Again, this includes state and local governments as well as certain tax-exempt organizations.

There are no age or income restrictions on when you can contribute to a 457 plan, unless you’re still working at age 73. A 457 retirement account follows required minimum distribution rules, meaning you’re required to begin taking money out of the plan once you turn 73. At this point, you can no longer make new contributions.

A big plus with 457 plans: Your employer could offer a 401(k) plan and a 457 plan as retirement savings options. You don’t have to choose one over the other either. If you’re able to make contributions to both plans simultaneously, you could do so up to the maximum annual contribution limits.

Pros & Cons of 457 Plans

A 457 plan can be a valuable resource when planning for retirement expenses. Contributions grow tax-deferred and as mentioned, you could use both a 457 plan and a 401(k) to save for retirement. If you’re unsure whether a 457 savings plan is right for you, weighing the pros and cons can help you to decide.

Pros of 457 Plans

Here are some of the main advantages of using a 457 plan to save for retirement.

No Penalty for Early Withdrawals

Taking money from a 401(k) or Individual Retirement Account before age 59 ½ can result in a 10% early withdrawal tax penalty. That’s on top of income tax you might owe on the distribution. With a 457 retirement plan, this rule doesn’t apply so if you decide to retire early, you can tap into your savings penalty-free.

Special Catch-up Limit

A 457 plan has annual contribution limits and catch-up contribution limits but they also include a special provision for employees who are close to retirement age. This provision allows them to potentially double the amount of money they put into their plan in the final three years leading up to retirement.

Loans May Be Allowed

If you need money and you don’t qualify for a hardship distribution from a 457 plan you may still be able to take out a loan from your retirement account (although there are downsides to this option). The maximum loan amount is 50% of your vested balance or $50,000, whichever is less. Loans must be repaid within five years.

Cons of 457 Plans

Now that you’ve considered the positives, here are some of the drawbacks to consider with a 457 savings plan.

Not Everyone Is Eligible

If you don’t work for an eligible employer then you won’t have access to a 457 plan. You may, however, have other savings options such as a 401k or 403(b) plan instead which would allow you to set aside money for retirement on a tax-advantaged basis. And of course, you can always open an IRA.

Investment Options May Be Limited

The range of investment options offered in 457 plans aren’t necessarily the same across the board. Depending on which plan you’re enrolled in, you may find that your investment selections are limited or that the fees you’ll pay for those investments are on the higher side.

Matching Is Optional

While an employer may choose to offer a matching contribution to a 457 retirement account, that doesn’t mean they will. Matching contributions are valuable because they’re essentially free money. If you’re not getting a match, then it could take you longer to reach your retirement savings goals.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

457 Plan Contribution Limits

The IRS establishes annual contribution limits for 457 plans. There are three contribution amounts:

•   Basic annual contribution

•   Catch-up contribution

•   Special catch-up contribution

Annual contribution limits and catch-up contributions follow the same guidelines established for 401(k) plans.

The special catch-up contribution is an additional amount that’s designated for employees who are within three years of retirement. Not all 457 retirement plans allow for special catch-up contributions.

Here are the 457 savings plan maximum contribution limits for 2024 and 2025.

^*This option is not available if the employee is already making age-50-or-over catch-up contributions.

457 vs 403(b) Plans

The biggest difference between a 457 plan and a 403(b) plan is who they’re designed for. A 403(b) plan is a type of retirement plan that’s offered to public school employees, including those who work at state colleges and universities, and employees of certain tax-exempt organizations. Certain ministers may establish a 403(b) plan as well. This type of plan can also be referred to as a tax-sheltered annuity or TSA plan.

Like 457 plans, 403(b) plans are funded with pre-tax dollars and contributions grow tax-deferred over time. These contributions can be made through elective salary deferrals or nonelective employer contributions. Employees can opt to make after-tax contributions or designated Roth contributions to their plan. Employers are not required to make contributions.

The annual contribution limits to 403(b) plans, including catch-up contributions, are the same as those for 457 plans. A 403(b) plan can also offer special catch-up contributions, but they work a little differently and only apply to employees who have at least 15 years of service.

Employees can withdraw money once they reach age 59 ½ and they’ll pay tax on those distributions. A 403(b) plan may allow for loans and hardship distributions or early withdrawals because the employee becomes disabled or leaves their job.

Investing for Retirement With SoFi

When weighing retirement plan options, a 457 retirement account may be one possibility. That’s not the only way to save and invest, however. If you don’t have a retirement plan at work or you’re self-employed, you can still open a traditional or Roth IRA to grow wealth.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

How does a 457 plan pay out?

If you have a 457 savings plan, you can take money out of your account before age 59 ½ without triggering an early withdrawal tax penalty in certain situations. Those distributions are taxable at your ordinary income tax rate, however. Like other tax-advantaged plans, 457 plans have required minimum distributions (RMDs), but they begin at age 73.

What are the rules for a 457 plan?

The IRS has specific rules for which types of employers can establish 457 plans; these include state and local governments and certain tax-exempt organizations. There are also rules on annual contributions, catch-up contributions and special catch-up contributions. In terms of taxation, 457 plans follow the same guidelines as 401(k) or 403(b) plans: Contributions are made pre-tax; the employee pays taxes on withdrawals.

When can you take money out of a 457 plan?

You can take money out of a 457 plan once you reach age 59 ½. Withdrawals are also allowed prior to age 59 ½ without a tax penalty if you’re experiencing a financial hardship or you leave your employer. Early withdrawals are still subject to ordinary income tax.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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.


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.

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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