SoFi

Learning how to achieve and maintain a good credit score is a crucial part of your financial health. Not only can it be a badge that says your financial life is in good shape, it can also help you access credit and get approved for loans and insurance at more competitive rates. Being approved for lower interest rates and premiums can in turn save you tens of thousands of dollars over your lifetime.

A solid credit score can also have other perks, such as helping you get approved for products with better features, such as rewards credit cards.

While there’s no one size fits all solution on how to keep a good credit score, there are some best practices you can follow. Read on to learn more about this topic and actual tactics, including:

•   What is a credit score?

•   How can you maintain a good credit score?

•   What are tips to keep your credit score high?

•   How can new credit card users establish a credit score?

What Is a Credit Score?

A credit score is a three digit number ranging from 300 to 850 that is an indicator of your credit behavior. Your score is calculated based on your credit history from all three credit bureaus — Experian, Equifax, and TransUnion — and is based on how lenders may perceive your risk as a borrower.

What exactly does that mean? By reviewing your past use of credit, your score reveals if you are more or less likely to pay back your loans on time. If you are more likely to repay your debts in a timely manner, the less risky you are.

The higher your credit score, the more creditworthy you are in the eyes of lenders.

What Affects Your Credit Score?

Several factors can affect your credit score, such as your payment history, the number of loan or credit applications submitted, and the age of your accounts you hold. There are also different scoring models, such as FICO vs. VantageScore. Each weighs factors differently to arrive at a credit score. Meaning, there may be some differences in your credit score.

Lenders may look at one credit score or all of them, plus different qualification criteria when deciding whether to approve you for a loan and at what interest rate.

How Is Your Credit Score Calculated?

Though there are different credit scoring models, most use similar financial behaviors to calculate them.

They’re grouped in the following categories:

•   Payment history: This factor is one of the most important factors in your credit score as it assesses whether you’re likely to pay your loan on time. Credit scoring models will look into current and past account activity, including any late or missed payments.

•   Amounts owed or available credit: The percentage of the available balance you’re using is your credit utilization. The more you are using available credit in your revolving accounts (like your credit cards and lines of credit), the more it could appear you rely too much on credit. This can make you look like a risky person to whom to lend.

•   Age of credit history: The longer your credit history, the more a lender can look into your credit behavior. It’s usually considered good to have a long credit history vs. a very short or recent one.

•   Account types: Having a different mix of loans offers more insight into how you handle various accounts. Credit-scoring models may not, however, use this as a major factor when calculating your score.

•   New or recent credit: The more recent applications you submit for new loans or credit accounts, the more risky you may appear to be. That’s because it may look like you need to rely on credit; that you are quickly trying to acquire different forms of access to funds.

(There are some exceptions, such as shopping around for mortgages within a short span of time.)

8 Tips for Maintaining Your Credit Score

Understanding the importance of a good credit score and what goes into it can help you protect the one you have. The following are eight suggestions on how to maintain a good credit score.

1. Pay Your Credit Card Bills on Time

Ensuring you’re on top of your bills (not just your credit cards) will help keep a positive payment history in your credit reports. This is the single biggest contributing factor to your credit score at 30% to 40%. Consider setting up automatic payments or regular reminders to ensure you’re paying on time.

2. Keep Your Credit Utilization Low

Your credit utilization is the percentage of the available limit you’re using on your revolving accounts like credit cards. Basically, you don’t want to spend close to or at your credit limit. A good rule of thumb to follow is to now use more than 30% of your overall credit limit.

So if you have one credit card with up to $10,000 as the limit, you want to keep your balance at $3,000 or lower.

3. Maintain Credit History With Older Credit Cards

Even if you don’t use your older credit cards that often, keeping them open means you can maintain your long credit history. Consider charging a small or occasional amount, whether an espresso or gas station fuel-up, to ensure your account stays open. This can reassure prospective lenders that you have been managing credit well for years.

4. Apply for a New Card Only When Important

Consider this as you try to keep a good credit score: Go slow. Since credit-scoring models look at the number of times you apply for new credit, only open one when you really need it. Stay strong in the face of offers to get free shipping or 10% off if you sign up for a card that many retailers promote.

Spreading out your applications is a good idea rather than regularly or heavily putting in a lot of card applications. By moving steadily and choosing a credit card and other types of funding carefully, you likely won’t raise red flags, such as that you need to rely heavily on credit.

5. Frequently Check Your Credit Reports for Errors

Mistakes can happen, and errors in your credit reports could negatively affect your score. You can get your credit reports for free at AnnualCreditReport.com from all three credit bureaus.

It’s wise to check your credit scores regularly, which won’t impact your score. If you see an error — whether it’s an account you don’t own or a bill marked unpaid that you know you took care of — dispute it as soon as possible.

6. Make Payments in Full When Possible

Making payments in full will help you maintain a positive payment history and lower your credit utilization. Both of these can maintain your creditworthiness and save you money on interest charges.

7. Don’t Close Old Credit Cards

Closing your old credit cards could shorten your credit history. It could also increase your credit utilization because it will lower your available credit limit. Even if you make the same amount in purchases, your credit utilization would go up when your credit score updates.

For example, if you currently have an overall credit limit of $28,000 and you have $7,000 in credit card balances, your credit utilization is 25%. If you close a credit card which had a $7,000 limit, you then lower your total available credit to $21,000 your credit utilization will go up to 33%.

8. Live Within Your Credit Means

It can be hard to say no to an invitation to try a pricey new restaurant or not tap to buy when scrolling through social media. But when you let your spending get out of hand, you may use your credit cards too much. It can feel like free money in the moment — but you still have to pay it back. If you overextend yourself, you may find it hard to pay your balance on time and risk a late or missed payment.

Instead, spend only what you can afford and try to avoid lifestyle creep (having your spending rise with your pay increases or even beyond them). That can help provide some guardrails for using credit cards responsibly.

Establishing a Credit Score for New Credit Card Users

Trying to establish a credit score can be a challenge since, ironically enough, you need credit to build credit.

If you are in this situation, there are several options to pursue, such as the following:

•   Open a secured credit card: A secured credit card is one where you’ll put down a refundable cash deposit that will act as your credit line. You can use this to establish credit and apply for an unsecured credit card. Some issuers will upgrade you once you make consistent on-time payments for a predetermined amount of time.

•   Apply for a credit builder loan: These types of loans are specifically geared towards helping you establish and build credit over time. Instead of getting the loan proceeds like a traditional loan, the funds are held in an escrow account until you pay back the loan in full.

•   Become an authorized user: You can ask a loved one, like a parent or even a close friend, if they’re willing to add your name on their credit card account. Doing so means the credit account will go in your credit history. Of course, that doesn’t give you access to use their account without restraint. The guardrails can be established between you and the original card holder.

The Takeaway

Maintaining a good credit score (and keeping that score high over time) comes with perks such as increasing the likelihood of getting approved for loans at more favorable terms. You might qualify for lower interest rates, saving you a considerable amount of money over time.

Using a credit card wisely is one of the ways you can build and maintain your credit score. But that’s not all there is to opening a credit: You also likely want one with great perks.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How can I maintain my credit score?

You can maintain your credit score by consistently making on-time payments, keeping a low credit utilization, and limiting applications for new credit.

Why is it important to maintain a good credit score?

Maintaining a good credit score can help increase the chances of getting approved for loans with more favorable rates and terms. It can also mean lower insurance premiums.

How can I maintain a good credit score without debt?

You can maintain a good credit score by paying off all your credit card balances each month so you don’t carry that kind of debt. Keeping older accounts open and using them occasionally can also contribute to a good credit score.

What can I do to build a good credit rating?

You can build a good credit rating by ensuring you’re making payments on time, not using all your available credit limit, and being careful in applying for new loans (that is, don’t apply for too many lines of credit too quickly). These are some of the best ways to achieve and maintain a good credit rating.

Photo credit: iStock/PeopleImages

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.

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 .

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.

SOCC1023004

Direct deposits and paper checks are both ways to move money from one bank account to another, typically for payroll purposes, but there’s a difference: A direct deposit automatically transfers wages from an employer to an employee’s bank account. While a paycheck is also a money transfer, it involves the employer cutting a check from their bank account. The payee or recipient can then deposit the funds into their bank account or cash the check at a local business.

Although both payment methods help employers pay their employees and conduct other fund transfers, each has its own advantages and disadvantages. It can be helpful to understand the pros and cons so you can decide the best way to receive your salary or move money around.

Read on to learn the details, including:

•   What is direct deposit?

•   What are the benefits and downsides of direct deposit?

•   What are the pros and cons of paper checks?

•   When should you use direct deposit vs. a paper check?

What Is Direct Deposit?

Direct deposit is an electronic transfer of funds to a bank account. By using direct deposit, a payee can automatically send money to another party’s bank account without handling paper checks or cash. It’s quick and convenient for both an employer and employee, whisking funds from one account to another. This method can also help employers cut costs since they don’t have to print and mail checks every pay period.

For these reasons, direct deposit has become very popular. In fact, according to the 2022 “Getting Paid In America” survey, almost 94% of workers receive their paycheck via direct deposit.

That said, receiving a direct deposit from your employer isn’t the only way to use the technique for transferring funds. You can use it for other transactions including:

•   Getting a tax refund

•   Receiving child support

•   Getting Social Security benefits

•   Paying bills like garbage, electric, and water bills (this may be set up through your bank’s “bill pay” option).

Pros and Cons of Direct Deposit

Using direct deposit has its upsides and downsides. First, here are some of this the significant advantages of this financial process:

•   Convenient. Technological advancements have made direct deposits a fast and easy way to receive and send money. The payee and payer don’t need to travel to the bank to write or deposit checks since the funds transfer electronically from one account to the other.

•   Safe. When you exchange cash or a check, there is a possibility that funds can be lost or stolen. Since all direct deposits happen electronically, you don’t have to worry about a thief swiping your money.

•   Efficient. Many employers offer direct deposit because it helps expedite the payroll process. Funds are automatically transferred from their bank account to those of the recipients. There’s no need for an employee to pick up a check, deposit it, and wait for it to clear. The time it takes for direct deposit to go through can be hard to beat.

•   Avoid maintenance fees. Some banks will do away with maintenance fees if you set up direct deposit, which can be a nice financial perk.

•   Boost savings. Sometimes, you can identify a percentage of your paycheck and direct it to be deposited into your savings when you get paid. This way, you can automate your savings and pad that account without thinking about it.

While direct deposit is convenient, safe, and efficient, there are also some downsides you should consider.

•   Risk of cyber crimes. Yes, there are hackers and other sorts of criminals out there. Direct deposits are vulnerable to cyber crimes since all transactions occur electronically. While banks and financial institutions take precautions to keep bank accounts safe online, direct deposits may still be somewhat susceptible to cyber theft.

•   Requires a bank account. Direct deposits usually require the payee and payer to have a bank account. That’s not possible for folks who lack traditional bank accounts. They may need to find an alternative solution to send or receive payments.

•   Fees. Depending on your bank, you may have to pay a set-up fee to initiate direct deposits. Check with your bank to verify any potential costs before you get started.

•   Errors are easily missed. Because payments are 100% electronic, you may not have the opportunity or inclination to review the pay stub as you would with, say, a paper check. Not looking over your paystub regularly can make it easier to miss errors such as an incorrect paycheck amount.

Now, here’s how the pros and cons of direct deposit stack up in chart form:

Recommended: What Is an Electronic Check?

Pros and Cons of Paper Checks

Now, let’s consider the benefits and disadvantages of using time-honored paper checks. First, the upsides:

•   Protects privacy. When you decide to use paper checks, you can keep your banking information private from your employer. For some people, it may provide peace of mind to know that your employer doesn’t have access to your bank account.

•   Save money on banking fees. Some banks charge fees for setting up direct deposit. If you prefer not to pay these fees, you can likely cash your paper checks for free.

•   May include an informative paystub. For some people, looking at their paystub is more convenient with a paper check. They can assess the deductions and other aspects of their wages without going hunting for the information online.

Drawbacks to using paper checks include:

•   Risk of theft. When you carry a physical check, it’s easier to misplace it or have it stolen. If this happens, your employer will likely be able to replace it. However, you may have to wait for the new check to process and pay a fee.

•   Time-consuming. When you receive a paper check, you must deposit it at the bank via a bank branch or online. Either way, it can eat up time that you could spend doing other things.

•   Waiting period. Even if you deposit a paper check right away, it could take several days to clear and hit your bank account, especially if it’s the weekend or a holiday.

Here’s how these advantages and disadvantages compare in chart format:

Recommended: Business Check vs. Personal Check: What’s the Difference?

When to Use Paper Checks Over Direct Deposit

When deciding to use checks vs. direct deposit, here are a few situations where it makes sense to opt for paper checks:

•   You don’t want to share your banking information with your employer. Using checks may make sense for folks who are worried about sharing banking information or who prefer not to put money into a bank account.

•   You distrust banks or don’t want to pay their fees. One of the top reasons millions of Americans choose not to have bank accounts is that they don’t trust banks and don’t want to pay banking fees. If you fall into this category, you may feel more comfortable opting for paper checks you can cash.

•   Don’t qualify for a bank account. Maybe you don’t have enough money or don’t meet the requirements to open an account. Whatever the situation, if you don’t have a bank account, it’s going to be hard to accept a direct deposit. Paper checks might be the only solution to receiving your paycheck.

Recommended: How Do You Write a Check to Yourself?

When to Use Direct Deposit Over Paper Checks

Now consider the flip side: situations in which direct deposit may make more sense than paper checks.

•   You want a quick, easy way to get paid. If direct deposit is a payment option, it could help you receive your wages or salary more quickly than with a paper check. Since funds are transferred electronically, your paycheck will be in your bank account on payday, ready to be used.

•   You struggle to save money. If you have difficulty setting aside savings, a direct deposit may help. Some direct deposit programs let you distribute a portion of your paycheck into your savings, allowing you to boost your emergency fund or another account without lifting a finger.

•   Your bank waives maintenance fees. Some banks waive maintenance fees when you meet specific requirements like setting up direct deposit.

The Takeaway

Paper checks and direct deposits are two payment options that allow your employer to transfer money so you can get paid. When comparing paper checks vs. direct deposit, know that direct deposit is usually the most convenient way for employees to receive their pay. However, employees who don’t have bank accounts or don’t like sharing their banking information may prefer paper checks instead. It’s all about what best suits your banking needs.

If you’re ready to open an online bank account, take a look at what SoFi has to offer. Our Checking and Savings account lets you avoid account fees (like those for direct deposit) and earn a competitive APY Qualifying accounts can get their paycheck up to two days early with direct deposit, too.

FAQ

Do more people use direct deposit or paper checks?

Direct deposit is usually the deposit method of choice. In fact, about 94% of employees prefer to receive wage or salary payments via direct deposit.

Can you change from paper checks to direct deposit?

In many cases, yes. Whether you want to set up direct deposit with the IRS, your employer, or your utility company, you can follow a process to switch from checks to direct deposit.

Can you change from direct deposit to paper checks?

Yes, you can usually ask your employer to switch back to checks. Verify with your employer what the process is so you know what to expect.

Photo credit: iStock/RyanJLane

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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 members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SOBK1222016