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If you’re getting a mortgage, one important consideration is the APR, or annual percentage rate, on your loan. This is something different from your interest rate: The home loan APR reveals the overall cost of your mortgage, reflecting both the interest rate and any additional costs that must be factored in.

Knowing the APR on a home loan is a key bit of intel which can influence your overall costs as you move towards homeownership. To help you better understand this concept and how APR is calculated, read on. You’ll likely be better prepared to know which loan offer best suits your needs, today and tomorrow.

What Is APR?

APR stands for annual percentage rate, and it’s used to measure the cost of borrowing money from lenders for various reasons, such as your mortgage loan. While it’s often presented at the same time as your interest rate, it isn’t the same thing.

APR is expressed as a percentage and takes into account not only the interest rate but also many of the costs that are associated with the loan. When it comes to borrowing a mortgage, these costs can include such items as these, among others:

•   Origination fees

•   Application fees

•   Processing fees

•   Discount points.

APR provides a more comprehensive picture of the total cost of the mortgage loan. It gives you an overall view of the fees and costs you would have to pay that are included in the finance charge. If you compare just the interest rate, the additional fees and costs aren’t represented, which could give you an incomplete picture when it comes to determining the actual cost of the loan. That could negatively impact your ability to budget accurately for your home loan costs.

Since not all lenders charge the same fees or interest rates, comparing APRs is usually a better way to compare the total cost of your loan from one lender to another.


💡 Quick Tip: Don’t overpay for your mortgage. Get a competitive rate by shopping around for a home loan.

Why Is APR Important When Taking Out a Mortgage?

Knowing the APR can help consumers be more informed while comparison shopping for loan products. Thanks to the Truth in Lending Act, lenders are required to disclose the APR of their loans, as well as all fees and charges associated with a loan.

The APR should include all finance charge fees, which can make it easier for borrowers to sort through loan comparisons to find the right mortgage.

How Are Interest Rates Calculated?

As we’ve discussed, APR and interest rate aren’t the same, but your interest rate does impact your APR. So, how exactly are interest rates calculated?

Your interest rate is a percentage of your mortgage rate. What that percentage will be depends on what type of mortgage loan you have.

•   With a fixed-rate mortgage, you’ll pay the same interest rate for the entire time you have the loan.

•   With an adjustable rate mortgage, on the other hand, your rate will fluctuate throughout the life of the loan.
Also, keep in mind that any unpaid interest gets added to the mortgage principal. This means you’ll have to pay interest on that interest.

Your lender will determine your specific interest rate based on your financial specifics, such as your credit score, as well as the current economic conditions and market interest rates. Lenders usually use their own unique formula to calculate interest rates, which is why your rate can vary from lender to lender — and why it’s important to shop around for rates.

Recommended: APR vs. Interest Rate: What’s The Difference?

How to Calculate Your APR

When you’re getting a mortgage, you may want to be extra thorough and calculate the APR yourself. There’s a way to make that happen. But be warned, it’s not necessarily a super fun math project, but hey, where there’s a formula, there’s a way, right?

•   To get started, you’ll have to know the approximate monthly Principal and Interest (P&I) payment on your loan. Maybe your lender has already told you what it would be, but if not, you could calculate it with an online mortgage calculator or by hand.

•   You’ll need to have a loan amount, interest rate and a term in years.

•   Once you have the monthly P&I payment calculated, you’ll then be able to calculate the APR, which you can do with an online calculator. Keep in mind that because you don’t know what your applicable APR loan fees will be, it can be wise to use a ballpark estimate. If the loan costs that will impact your APR are 2% of your loan amount and your loan amount is $200,000, your loan costs for calculating the APR will be $4,000.

💡 Quick Tip: Lowering your monthly payments with a mortgage refinance from SoFi can help you find money to pay down other debt, build your rainy-day fund, or put more into your 401(k).

Why You Need to be Careful When Using APR to Compare Mortgages

When you’re getting a mortgage, you will likely have the APRs for all the mortgage offers you’re considering. Your APR is important to consider because it factors in the expense of additional fees over the life of your mortgage. If you’re applying for a 30-year mortgage, those fees are spread over 30 years.

But do you plan to live in your home for the full 30 years of your mortgage and never refinance your mortgage? If you sell your home after five years, rather than staying for the duration of your 30-year loan, you’ll still have to pay for the loan fees (such as origination fees).

That’s why it’s important to consider and compare APRs when choosing a mortgage. If you plan on living in the home for a limited time, a lender that offers fewer fees might be a better choice than a lender with a low APR but lots of fees. You may want to consult with your financial advisor before making this decision.

When you’re mortgage shopping, especially if you are a first-time homebuyer, you also may want to proceed with caution when comparing the APRs of fixed-rate and adjustable-rate mortgages if you are using an online calculator. The APR on adjustable-rate loans may not be an accurate representation of the cost of the loan since some calculators cannot anticipate the frequency or amounts of the interest rate changes.

Recommended: Tips When Shopping for a Mortgage

The Takeaway

When getting a home loan, your interest rate and APR, or annual percentage rate, are not the same thing. The APR can reflect the overall cost of the loan, including various fees, for instance.

If you’re ready to take the next step in your home-buying journey, the first step is taking stock of your mortgage options. Comparing each loan’s APR is a quick and easy way to see how your offers stack up although it isn’t the only factor to take into account.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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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If you’re preparing to join the ranks of homeowners, whether you are just starting to daydream about it or are actively scanning listings, it’s important to understand the costs involved. You’ll probably hear a lot of talk about mortgage rates as you enter this realm, and, while your home loan will certainly be a critical expense, it’s just one of the things to budget for.

Here, you’ll learn about all the expenses involved in owning a home, from that mortgage to home maintenance; from homeowners insurance to utilities. Equipped with this intel, you’ll be better prepared for the true cost of having your very own place and making sure you’re ready for your big purchase.

Costs of Purchasing Your Home

When you think of buying a home, you may well be focused on accumulating that bundle of cash known as the down payment. But there are more costs associated with buying your home than simply that expense.

The down payment is probably the largest initial cost you’ll take on, but don’t be blindsided by the additional fees you’ll need to pay. You can find out how much home you can afford with a home affordability calculator or keep reading to learn about the typical costs associated with owning a home.


💡 Quick Tip: Don’t overpay for your mortgage. Get a competitive rate by shopping around for a home loan.

Down Payment

Historically, the magic number for a down payment has been 20% of the home’s value. If you’re thinking that’s impossibly steep, take a deep breath. The median down payment on a conventional loan recently clocked in at about 6% among first-time homebuyers. And conventional home loans can be had with as little as 3% to 5% down.

So 20% may no longer be standard, but, if you put down anything less, you may pay private mortgage insurance (PMI) on top of your monthly mortgage.

PMI can make it possible for many buyers to put down a more affordable down payment while protecting the bank’s investment if you were to default on the loan. The downside of PMI is the additional payments you’ll need to make each month until you are eligible to remove this insurance from your mortgage payment. Typically, PMI is canceled when your principal balance reaches 78% of the home’s original value (meaning the purchase price).

As you think about how much of a down payment to make, it could be tempting to make as large a payment as possible to help minimize your monthly mortgage payment and avoid PMI. Keep in mind that doing so can leave you little wiggle room financially for the additional costs associated with your home down the line. If you make a large down payment, it can help to have money reserved as an emergency fund and for unexpected home repairs.

Closing Costs

Your down payment won’t be the only thing due on closing day. In addition to the down payment, you’ll be expected to cover closing costs. Closing costs typically cover things like:

•  Title insurance

•  Title search fees

•  Appraisal costs

•  Escrow or attorney fees

•  Surveying

•  Lender fees

Closing costs can vary based on factors such as the purchase price of your property, but you can expect to pay an estimated amount somewhere between 3% to 6% of your loan amount in closing costs.

Home Ownership Costs

You may think that being a homeowner involves affording the down payment on a house and the monthly payment of principal and interest on your mortgage, but there’s more to be prepared for. Here are some extra costs you may want to save and budget for.

Mortgage Payment

Your monthly mortgage payment could be just the funds paid to the bank, a combination of principal and interest, or it could be a few different payments rolled into one single bill. Your mortgage payment might include some or all of the following:

•  Principal: This is the repayment of the initial loan you took out to purchase the home. Paying the principal is paying off the remaining balance of what you owe on your home to your lender.

•  Interest: Depending on the terms of your mortgage, the interest could be fixed or variable. You are paying this every month for the privilege of borrowing the funds to buy your home. It’s one of the ways banks make money.

•  Property Tax: If your mortgage has an escrow account, a portion of your mortgage payment may go towards your annual property tax bill. Property tax is paid to your local government and usually goes towards funding public schools, public works, libraries, parks, city government, and maintenance. The amount of property tax you’ll pay is calculated as a percentage of the value of your property. The percentage varies by location. Some homeowners may pay this separately, directly to their town.

•  Insurance: If you’re paying into escrow, you’ll probably pay a portion of your homeowners insurance policy each month instead of a lump sum once a year. You’ll work with your insurance provider to determine the coverage of the policy, but standard home insurance typically provides protection against certain unexpected events, like damage caused by a fire or a break-in. Policy specifics will vary.

•  PMI: If your initial down payment was under 20%, you may be responsible for PMI, as described above. This payment can be anywhere from 0.2% to 2% of your loan amount per year.

💡 Quick Tip: One answer to rising house prices is a jumbo loan. Apply for a jumbo loan online with SoFi, and you could finance up to $2.5 million with as little as 10% down. Get preapproved and you’ll be prepared to compete in a hot market.

Utilities

Unlike a rental where you may only pay for gas and electricity, when you own a home, you’re on the hook for all utilities, which can include water, gas, heat, electricity, sewer, and trash/recycling. Utilities will vary based on your location, as well as the size of your home, but the national monthly averages are as follows:

•  Electricity: $117.46

•  Water: $45.44

•  Broadband internet: $59.99

•  Gas: $61.69

•  Waste services: $66.20

•  Phone: $114.

These figures vary based on area and activity, but taking steps to save energy on heating and cooling could lower your monthly bills. Depending on where you live, utility providers might offer an option to set a fixed rate for the year, so you’ll pay the same amount each month instead of paying a bill that varies with the change in the seasons (say, soaring in the summer as people switch on the air conditioning).

Improvements & Repairs

Your dream home might just be a few renovation projects away, but remember to factor the cost of those updates into the true cost of owning your home. Not only that, but strategic improvements can greatly increase the resale value of your home.

The cost of home improvement projects vary widely based on what you’re working on. A recent survey by Houzz found that the median cost for a home renovation was $22,000 in 2022.

Maintenance

Home maintenance entails the general upkeep of things like your property’s systems, structures, and appliances.

Upkeep costs can be more predictable than some repairs. One rule of thumb says to budget 1% to 4% of your home’s value for annual maintenance. A variety of these projects might be DIY-ed, but you’ll want to budget in the cost of tools and supplies.

You can’t predict the exact lifespan of your appliances and home systems, but a general idea can make it easier to anticipate future costs. When you buy your home, take note of how old the appliances and other systems are, so you can have a better idea of when you’ll need to replace them.

For example, a refrigerator could last between 10 and 18 years, but you might benefit in terms of energy efficiency by replacing an old power-guzzling appliance sooner. Consider the outside structure of the house as well, such as the roof, siding, and gutters. It may be helpful to get a quote from a contractor for any larger repairs or renovations you plan to complete so you can factor that into the costs of owning a home.

Recommended: The Cost of Buying a Fixer-Upper

The Takeaway

The time and money required to own and maintain a home can be considerable. There are the monthly costs, which can involve mortgage, insurance, property taxes, and utilities, as well as annual maintenance. Plus, sooner or later, you are likely going to have to replace an appliance, repair a roof, or otherwise update your home.

Understanding and estimating the costs of owning a home can be an important step before joining the ranks of homebuyers. It can also impact what size and sort of mortgage you get and from which lender. That’s an important area to wrangle your costs as you think about your overall budget.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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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When you’re struggling with debt, a little bit of help can go a long way — and a lot of help can go even further. But shopping around for debt relief assistance can be confusing. What, exactly, are these organizations offering?

Credit counseling organizations are generally non-profits that are dedicated to not only helping their clients get out of debt, but also creating a sustainable way forward with free or low-cost educational tools and resources. In other words, they’re more holistic about your financial situation, and they’re not in it for your money (though some may charge fees, usually relatively low, for their assistance).

Debt relief companies, on the other hand, are for-profit companies that charge you, often steeply, for the service of negotiating and settling your debt with your creditors or with collections agencies. In other words, they’re less about helping you get your money right and more about getting your money.

While both types of organizations can help you find relief from at least some of your debt, their motivations and structures are very different. Let’s take a closer look.

Debt Settlement vs Credit Counseling: What’s the Difference?

As mentioned, debt settlement is usually done by a for-profit debt settlement company that works to negotiate your debts with creditors or collections agencies for a fee. Not all creditors will negotiate with debt settlement companies, but if they will, you may be able to pay a lower overall amount. Keep in mind that it still may not immediately improve your credit score, and in some cases, may even make it worse (which we’ll discuss more in just a moment).

Credit counseling, on the other hand, is usually performed by financial professionals who work at non-profit credit counseling organizations. While they may help you create a debt management plan — potentially even one that might save you money — that’s not all they’re there to help you with.

Even if they don’t negotiate directly with your creditors, credit counselors can help you create or manage a budget, develop a sustainable plan to minimize debt over the long run, and give you access to low- or no-cost resources including workshops and educational materials. While they may assess a fee, it’s usually low, and they may also have options even if you can’t afford to pay them at all.


💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.

How Does Debt Settlement Work?

Debt settlement companies are just that: companies charging you for the service of settling debts. However, since not all creditors will even work with debt settlement companies, they may not actually be able to save you any money. If they can, they’ll be charging you for their service. Their fees may be a lot higher than a credit counselor’s would be.

Pros of Debt Settlement

•   Debt settlement might help you save money on very large debts. If a debt settlement company can successfully negotiate with your creditor, you may be able to get out of debt by paying far less than you would otherwise owe, so long as you can pay it as a lump sum.

•   Legally, your money must remain under your control while you’re saving it. The debt settlement company may require you to save up the lump sum in a special account. But even if they do, those funds must remain under your control until they are used by the company to pay off your debt.

Cons of Debt Settlement

•   Debt settlement is expensive. Even if the settlement is expensive, the company will charge you for their services, which eats into the amount you’re saving on your debts. Keep in mind that debt settlement companies are for-profit organizations.

•   Debt settlers aren’t looking at the whole picture. While a credit counselor may be able to help you come up with a sustainable, holistic plan to manage your money going forward, debt settlers are focused only on, well, settling your debt. This means you could wind up in the exact same place in the future, if your financial habits don’t change.

•   Debt settlement services might actually make your credit worse. Some debt settlement companies may tell you to stop paying your debt until they reach an agreement with the creditor, which could be negatively reflected in your credit score and history.

•   Debt settlement doesn’t always work. Because some creditors won’t negotiate with debt settlement companies, using one may not actually save you any money. (Note: According to Federal Trade Commission rules , a debt settlement company can never charge you for their services before they’re successfully rendered. If you encounter a debt settlement firm that’s trying to take your money up front, you shouldn’t work with them.)

What Is Credit Counseling?

Credit counseling is very different from debt settlement: It’s a holistic approach to money management offered by expert financial planners and advisors at a low cost.

While helping you negotiate and potentially lower your debts with creditors is one potential service a credit counselor may offer (though they may also not), their main concern is getting you set up for a successful financial future in the long term.

Pros of Credit Counseling

•   Credit counseling is built to be affordable. While credit counselors may charge a small fee for their services, they’re usually much lower than you’d pay for financial advice in any other context. Plus, no-cost options are often available for those with demonstrated need.

•   Credit counseling can help you build a sustainable financial future — not just settle a debt. By giving you the knowledge and tools you need to create positive financial habits, credit counseling can help you make a lasting change, not just pay off a bill.

•   Credit counseling can give you access to other educational opportunities and materials. Along with one-on-one credit counseling, these non-profit organizations may host community workshops and classes or provide you with free information.

Cons of Credit Counseling

•   Credit counseling requires you to do some of the work. Although credit counselors will assist you along the way, you’re the one who has to create (and stick to) a budget and form positive credit habits.

How Can a Non-Profit Credit Counselor Help You?

By helping you form the long-lasting financial habits that can keep you out of debt or make it easier to follow your monthly budget, working with a credit counselor can change the shape of your financial future.

In short, think of debt settlement agencies as for-profit firefighters: They may be able to help you put out a blazing debt spiral in an emergency, but they’ll charge you for the privilege. Non-profit credit counselors, on the other hand, help you put out the fire and teach you how to keep your financial life flame-free, all for low or no cost.

What Is the Process of Working with a Non-Profit Credit Counselor?

When you sign up to work with a credit counselor, you’ll likely start with an initial consultation session, which may be in person, over the phone, or over a video conferencing service. This initial consultation will likely last about an hour and may include going over your budget and creating a debt management plan.

Depending on your needs, your counselor may recommend follow-up sessions, or may direct you to workshops and resources to help you DIY your own financial education.

What You Should Know About Debt Relief Companies

While both debt settlement companies and credit counseling agencies can help you get out of an immediate debt crisis, rebuilding your credit is always a time-consuming and work-intensive process that takes persistence and patience. A credit counselor can help you tackle that project with support.

Keep in mind that there are ways to tackle a debt spiral yourself, too, such as taking out a personal loan in order to consolidate multiple lines of credit or debts.


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

The Takeaway

Debt settlement is offered by for-profit companies that may charge steeply for their services — and might not even be able to help. Credit counseling, on the other hand, is a more holistic service offered by non-profit organizations that have your best interests and a firm financial future at heart.

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.

FAQ

What is the difference between debt settlement and credit counseling?

Debt settlement is a service offered by for-profit companies who negotiate your debts with creditors and collections agencies for a fee, often a large one. Many creditors won’t work with debt settlement agencies, anyway, so they may not be able to help you in the first place. In addition, under Federal Trade Commission rule, they’re not allowed to charge their fee before their services are successfully rendered.

Is it better to consolidate or settle debt?

While everyone’s financial needs are different, consolidating your debt is a self-directed debt relief strategy that can help you build your credit and positive financial habits that’ll keep you in good standing. Debt settlement agencies are for-profit companies that may charge you steeply for the privilege of helping you negotiate your debt with creditors. They’re unlikely to get you a better deal than you would get by negotiating on your own.

How bad is debt settlement for your credit?

Many factors go into determining someone’s credit history, but debt settlement agencies may advise you to stop paying your bills until their negotiations are over. This can be bad for your credit history, though paying off large amounts of debt, especially debt in collections, can be positive for your credit history. It’s all about creating sustainable habits over the long run.

Photo credit: iStock/Delmaine Donson

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.

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.

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 .

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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Credit counseling services can be a smart way to access professional financial advice at a low cost — or, in some cases, even for free. Usually nonprofits, these organizations can offer educational materials, workshops, and one-on-one counseling with trained financial professionals to help you make an achievable plan to repay your debts, set up a sustainable budget, and more.

It’s important to understand, however, the difference between credit counseling organizations and debt settlement agencies. The latter are usually for-profit companies that may not always be acting with your best interests in mind.

Here’s what you need to know about credit counseling, including how to tell when you might need it.

What Is Credit Counseling?

Credit counseling is a free or low-cost service offered by what are usually nonprofit organizations. Credit counselors can work with you one-on-one to offer fiscal advice and get your finances in order. For example, a credit counselor might help you:

•   Plan a debt repayment strategy

•   Create an overall debt management roadmap

•   Set up or retool your budget

•   Learn how to get a free and accurate copy of your credit report and scores

Many credit counseling services also offer educational resources, like flyers or online information, and workshops or classes that can help many people learn more about how to manage their money at once.

In some cases, credit counselors may offer to reach out to your creditors directly to negotiate with them, which could help you save money. Counselors may be able to get late fees waived, attain a longer repayment period, or ask for lower interest rates.

However, this is not the primary or sole function of credit counseling agencies, and not all credit counselors offer this service.

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

How Does Credit Counseling Work?

Every individual credit counseling agency is different, and they each have their own process that they can walk you through. But in most cases, you’ll be offered an initial consultation with a credit counselor, which may take place online, in person, or over the phone.

During this meeting, the counselor will likely ask a series of questions about your financial standing, and may help you develop a budget or create a debt repayment plan on the spot. Depending on your needs, follow-up appointments may be offered, and you may also get invitations or access to free classes, workshops, educational resources, and more.

In all cases, a credit counseling agency should have your best interests at heart, and should be willing to offer you free information about their services. If a credit counseling agency requests you to pay high fees or pay up front, or refuses to work with you if you can’t afford to pay, you should look for a different organization.

Credit Counselors vs Debt Settlement Agencies

It’s easy to get credit counseling organizations mixed up with debt settlement agencies, but the two are very different — and the difference is critical. Whereas credit counselors are usually non-profit organizations that offer free or low-cost help, debt settlement agencies are very much for-profit companies.

Furthermore, debt settlement agencies charge for the service of negotiating debt settlements with your creditors or collections agencies, rather than offering a more holistic financial education or plan.

Unfortunately, many creditors refuse to negotiate with debt settlement agencies, so hiring one is often a waste of your time. If you do choose to work with a debt settlement agency, remember that under Federal Trade Commission rules , you can’t be charged for their services until they are rendered successfully. Because, again, many creditors simply won’t talk to these companies. If you pay up front, you could be out of luck). In other words, if a debt settlement agency attempts to charge you up front, take your money and run.

Alternative Options for Managing Credit Card Debt

While working with a credit counseling organization can be a great way to access low-cost help in many different financial areas, it’s not the only way to eliminate credit card debt. There are plenty of self-directed strategies that can help you get your money right, right from home.

For instance, debt consolidation is one tactic that may help you get a handle on your credit card debt. Here’s how it works.

To consolidate credit card debt, you’d take out a new loan or a new credit card that allows balance transfers at a 0% interest rate. (Yes, it sounds counterintuitive to fix credit card debt by taking out another loan or line of credit, but hear us out.)

Then, you pay off all of your credit card debts with the personal loan, or transfer all of your balances onto the new credit card. In either case, you’ll now be left with a single monthly payment rather than multiple payments, which can be hard to keep up with and easy to forget about.

Both tactics can also help you save money on interest, too, which can help you get out of debt faster and more efficiently. Different types of personal loans often have lower interest rates than credit cards do, and if you go the balance transfer route and choose a card with a 0% rate, you may save yourself from paying any additional interest at all.

Beware, though: Those 0% balance transfer rates are usually only promotional, and wear off after a certain period of time, like a year. At that point, if you hadn’t paid off the balance in full, you’d likely be stuck paying double-digit interest on whatever was left over once again.

💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.

The Takeaway

If you’re struggling with credit card debt or simply looking for professional financial help from a budget-friendly source, pursuing credit counseling can be a smart step to take. These nonprofit organizations offer a variety of different workshops, services, and materials that can help you fashion a more sustainable financial future.

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.

FAQ

What is the purpose of credit counseling?

Credit counseling exists to help people find better ways to manage their money and to create sustainable budgets and debt management strategies. Usually nonprofit organizations, credit counseling agencies may offer workshops, educational materials, and one-on-one counseling services at a low cost, or even for free, to people who need some help getting their money right.

What is the credit counseling process?

While each credit counseling organization is different, in most cases, you’ll be offered an initial credit counseling consultation appointment that may last about an hour and take place in person, on the phone, or through a video conferencing platform. You may be offered follow-up appointments as well as educational resources and workshops. While most credit counselors are part of nonprofit organizations, there still may be some fees associated with their services, though these are usually much lower than a professional financial advisor’s fees.

Do you need credit counseling?

Only you can decide if you need to pursue credit counseling, but if you’ve been struggling with credit card debt and found yourself unable to create or stick to a sustainable debt repayment strategy, credit counseling could help.

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The nature of work is no longer what it used to be. Gone are the days of working for just one employer for an entire career. Now, it’s more common to move between lots of jobs.

According to a recent study by the Bureau of Labor Statistics, the average person will have more than 12 jobs during the course of their career. That’s a lot of jobs – and potentially, a lot of 401(k) accounts.

That’s because instead of the pensions that many workers in previous generations had, the average worker today is likely to have self-funded retirement accounts like 401(k)s through each new employer.

This means that as employees move between jobs, many will be left with a hodgepodge of old 401(k)s and other retirement accounts.

Is it best to leave them as they are, or to consolidate 401(k) accounts? And if so, how do you consolidate them?

Read on to learn how to consolidate 401(k) accounts, along with the pros and cons of the most popular consolidation options.

What You Need to Know About 401(k) Plans

A 401(k) is a workplace-sponsored retirement plan. If you sign up for a 401(k), contributions are deducted from your paycheck to go into your 401(k) account. Often 401(k) plans are offered to employees as a workplace benefit, like vacation days and healthcare coverage.

Some companies offer a 401(k) match. This is where a company contributes money to an employee’s 401(k) to match the amount of money the employee has contributed, up to a certain amount. A company match program can make a 401(k) a lucrative way to save money for retirement.

In addition, 401(k) plans are considered an advantageous way to save retirement money because they have certain tax advantages. For instance, 401(k) accounts are referred to as “tax-deferred” because income taxes are deferred until later, when you take the money out in retirement.

The taxation of retirement accounts is an important consideration in long-term financial planning. Taxation also acts as a guide for knowing what retirement account types can be combined, and which types cannot be combined with other retirement account types.

Because all 401(k) accounts share the same tax status (tax-deferred), they can be combined. Traditional IRAs are also tax-deferred and can be combined with a 401(k) account. This process is called a rollover.

A Roth IRA is another popular retirement account type. A Roth IRA cannot be rolled over or combined with a 401(k) or a traditional IRA account, however, because it has a different tax status. With a Roth IRA, you pay the taxes upfront (meaning you make the contributions with after-tax dollars) and your qualified withdrawals are not taxed


💡 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.

Should I Combine My 401(k) Accounts?

You might be at the point during your career where you’ve got at least one 401(k) account from a previous job that you’re no longer contributing to. If you are wondering whether to consolidate your 401(k) accounts, here are a few of your options:

1.    Transfering the 401(k) account(s) into your active 401(k), meaning the one you have with your current employer).

2.    Rolling the 401(k) account(s) into a Traditional IRA at an institution of your choosing.

3.    Doing nothing, and leaving the account(s) as is.

Everyone’s financial situation is different, so evaluate the pros and cons of each option when trying to decide what is best for you. When weighing your options, here are some things you might consider:

Option 1: Rolling Over into Your Active 401(k)

Your first option with a 401(k) with a former employer is to transfer the money into your active 401(k) account with your current employer.

Pros:

1. A single place for your tax-deferred money

By transferring old 401(k) accounts into an existing 401(k), you are consolidating those tax-deferred accounts in one place. You may find managing just one account an ideal scenario.

2. Consolidating your investment strategy

Consolidation may make it easier to keep track of your money and manage a cohesive investment strategy. It can be challenging to manage a bunch of different retirement accounts.

Cons:

1. Limited investing options

Sometimes 401(k) plans have limited investing options. If this is the case with your current active 401(k), consolidating your other 401(k)s into the plan may limit your investing choices overall. Look at the investment option information provided by your plan to help make an informed decision.

2. Additional fees

Some 401(k) accounts have additional fees on both the accounts and investments themselves. Check to see if fees are assessed at a flat rate, or if they are assessed as a percentage of the amount invested. This may influence your decision to transfer your other 401(k)s into your active 401(k).

How to do it:

How to consolidate 401(k) accounts starts with contacting the institution that holds your old 401(k) and requesting a rollover to your active 401(k). The customer service representative should likely be able to help you on the phone or direct you to the paperwork online. It can be smart to clarify that this is a rollover to another tax-deferred account.

Ideally, the company is able to transfer the funds electronically to your active 401(k). If they are not able to do this, they may request an address to send a check. Get the address of the financial institution where your 401(k) is located and have it ready before making the call.

Option 2: Rolling into an IRA

Rolling old 401(k) accounts into a Traditional IRA of your choosing is a popular choice that allows you maximum control over the investments within the account.

Pros:

1. You choose the institution

You get to choose where to open your individual retirement account. By selecting the institution, you can choose a place that fits your needs. You will have control over your investment choices and whether to use an institution that charges for certain services.

This may be especially important if the institution that holds your current 401(k) charges account maintenance fees or only offers high-cost investment products.

2. You’ll control it

You open a Traditional IRA on your own and without an employer—therefore, a Traditional IRA is yours. Some people may find it helpful to think of a Traditional IRA as a “home base” for their tax-deferred money. As you move through your career, you can roll old 401(k) accounts into a Traditional IRA that’s not going anywhere—it’s your home base.

3. More investment options

As compared to some 401(K) plans, a Traditional IRA opened at an institution of your choosing may have more options for investing.

Some 401(k) plans may require that participants choose from a pre-selected list of options. If you open a Traditional IRA at a brokerage firm or other financial institution, you’ll have the benefit of a broker’s wisdom and experience should you wish to use a broker. Asking the right questions is key to making sure a broker is the right fit for you.

Cons:

1. You may still have multiple accounts to maintain

Even if you open a Traditional IRA, you may still want to contribute to your active 401(k). Therefore, you will need to maintain at least two retirement accounts. (And perhaps three, if you have a Roth IRA, which cannot be combined because it has a different tax status.)

(Still, having two accounts—an active 401(k) and a Traditional IRA—might be better for you than having many multiple 401(k) accounts scattered around at different financial institutions.)

2. It may complicate a “backdoor” Roth IRA

A backdoor Roth IRA is a way to contribute to a Roth IRA when your income is too high to contribute to one directly.

Though you’ll want to check with a tax professional, it is generally understood that a backdoor Roth IRA might be complicated if your Traditional IRAs contain a mix of pre and post-tax money that you put in.

If you want to pursue a backdoor Roth IRA, you may want to roll your old 401(k) assets into your current 401(k), or leave the account as it is. The greater the balance in your Traditional IRA, the greater the tax liability for the backdoor Roth IRA contributions since you can only contribute money that’s already been taxed to a Roth IRA.

How to do it:

If you do not already have one, you may want to open an IRA account at a financial institution of your choosing. This could be at a bank or other financial institution.

Once your Rollover IRA is active you can roll funds from your 401(k) into the Rollover IRA. The process is generally similar to that of rolling assets into an active 401(k) as noted above.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Option 3: Doing Nothing

Lastly, you may opt to leave your 401(k) accounts exactly as they are. Here are some pros and cons of this strategy.

Pros:

1. You are happy with the financial institution and/or investments

If you like your current investment allocation and investment options and want to continue using them, you may choose to leave your 401(k) as it is.

Cons:

1. Difficult to manage

It could be hard to manage a cohesive investing strategy across multiple accounts. This may be the case for someone that has multiple accounts at different institutions.

2. Cannot add money to an old employer-sponsored 401(k)

It is not possible to contribute new money to an old 401(k) account that was previously tied to an employer. New money must go into a current 401(k) or some other self-directed retirement account, such as a Solo 401(k), Roth IRA, or Traditional IRA.

If you do not currently have access to an employer-sponsored 401(k), you may want to seek out another retirement account for which you can make contributions.

3. Possible maintenance fees

Old 401(k) accounts may charge monthly or annual fees such as account maintenance fees. By consolidating, it may be possible to eliminate all or most of these fees.

For example, a person could roll old 401(k) accounts that charge a maintenance fee into an account that has no such fee, whether that be their current 401(k) or a Traditional IRA.

4. Limited investing options

Because a person does not get to choose the bank that holds their employer-sponsored 401(k), they don’t get to determine the plan’s investing options, either. Therefore, it’s up to you to decide whether the available investment options in your old 401(k) are sufficient.

The Takeaway

People may benefit from consolidating their 401(k) accounts into their current 401(k) or into a Traditional IRA, if for no other reason than to consolidate their money under one roof.

It can be hard to manage a bunch of different accounts at different institutions, and may only get harder as individuals progress through their careers and end up with even more 401(k) accounts.

In general, a Traditional IRA can provide more flexibility and investing options than a 401(k). It means that you’ll be managing two accounts, yes, but it might be worth it to keep a Traditional IRA as a home base to roll all old 401(k) accounts into over time.

When you open an IRA, you’ll want to find a bank or financial institution that meets your needs. Many investors prefer institutions where they will not be charged with unnecessary fees and have access to low-cost investing options.

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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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