Some things in life sound too good to be true, and getting cash back for purchases may seem like one of those deals. But an increasing number of credit cards, called cashback cards, offer clients money back when they charge what they buy.
Many people are familiar with the concept of credit card rewards, when lenders give clients a little something back—points, airline miles—as an incentive for using their card.
In the case of cashback cards, that reward is, well, cash.
How Does a Cash Back Credit Card Program Work?
Cashback credit cards reward clients based on their spending, providing a credit that is a small percentage of the total purchase.
If a cashback card provides 1% back, for instance, the cardholder would generally earn 1 cent on every dollar spent, or $1 for every $100 they charge to their card. If, over the course of the year, a person charges $10,000 in purchases to their cashback credit card, they’d earn $100 in cash back for that time period.
Unlike sale items, when an item is discounted at the time of purchase—meaning, of course, the shopper pays a cheaper price—cashback cards work more like a rebate. The customer buys something at the posted rate and gets money back at a later date.
The average American had a credit card balance of $5,315 in 2020, according to Experian. Assuming that full balance is eligible for cash back, it would earn $53.15 with a credit card providing 1% cash back and $106.30 for one giving 2% cash back.
Do All Cashback Credit Cards Work the Same Way?
Yes and no. While all cashback cards typically use the same model—money back based on a percentage of total purchases—the differences are typically in the details.
Things like the rate of cashback earnings, interest rate, the process for redeeming cash back, and so on vary by card and lender. Some lenders may even offer several cashback credit card products with different rates and benefits.
As such, before signing up for a cashback credit card, it’s smart to spend some time researching and comparing cashback cards to find the one that best suits your needs.
What to Look for in a Cashback Card
There are a number of considerations when choosing a cashback credit card that will determine just how profitable the card will be for a specific person.
Because people have different spending habits and financial preferences, the best type of credit card will ultimately depend on the individual. Here are some things to consider.
Rate of Cash Back
Not all cashback credit cards offer the same rate of return, so it’s best to comparison-shop. Though differences in percentages may sound negligible, getting 2% instead of 1% means double the cash back—and those small amounts can add up over time.
Some credit cards also provide different rates of cash back depending on the spending category or how much money the cardholder charges in a year. For example, some credit cards may provide a higher percentage on expenditures such as gas, travel, or groceries and a different rate for other types of purchases.
Tiered cashback cards may provide a higher (or even lower) rate when annual purchases exceed various thresholds.
Some credit cards also offer higher introductory cashback rates.
How a person chooses to redeem cash back may also determine the final payout. A travel rewards card, for example, may provide a higher rate of return for cardholders who redeem the money they earn on flights, and a lesser amount for those who redeem their rewards on statement credits or other purchases.
It can be difficult to tell at a glance how much the cashback percentage rate may actually net an individual, especially when considering categorized and tiered rewards. But when comparison-shopping for a cashback credit card, it is worth crunching some numbers to get an idea.
One way to estimate how much in cashback rewards a card will actually end up earning is to apply the posted cashback rates to previous credit card statements or to the spending allocations within an individual’s annual budget.
Annual Fees
Though some cashback credit cards have no annual fee, others do. It’s a good idea to factor in any annual fee when estimating the cashback rewards based on your spending habits. Calculating the returns on fee vs. no-fee cards can help to assess whether it’s worth shelling out extra.
If a bank charges $99 for a cashback card earning 2%, the bank fees would essentially cancel out the $100 in cash back earned on the first $5,000 in annual spending.
Someone who charged $7,500 annually would net $51 with the 2% cashback card, and $75 with a no-fee 1% cashback card. But if they charged $20,000 annually, the $99/2% cashback credit card would net $301, while the no-fee card would only earn $200 in cash back.
APR
The nearly half of Americans who carry a balance on their credit cards each month will want to pay close attention to a credit card’s annual percentage rate. This is the amount of interest cardholders will have to pay if they do not pay off their credit card balance in full each month.
The average credit card APR was 14.65% in late 2020, according to the Federal Reserve—a rate that can quickly cancel out any cashback benefits.
A good question to ask a lender before signing up for a cashback credit card is “Where can I get cash back?” The terms of redemption can vary across credit card products.
In some cases, cardholders may see an annual one-time credit for the full amount earned. Other cards allow cardholders to redeem their cash back at any time.
Tips for Getting the Most Out of a Cashback Card
While signing up for—and using—a cashback credit card is the first step to getting money back on everyday purchases, there are some ways to optimize the returns.
Pay Off Your (Whole) Credit Card Bill on Time
With few exceptions, credit card charges are not subject to interest until after the statement payment due date. But after that payment becomes due, extra interest and fees can quickly add up—erasing any cashback benefits.
Optimize Redemptions
When it comes to redeeming cash back, it’s worth seeking the biggest bang for your buck.
If a card offers different rates of cash back depending on how rewards are redeemed, being strategic when cashing out can result in a greater windfall.
Consider Extra Fees
Though a cashback credit card can make it tempting to charge everything you buy, that’s not always the most cost-effective strategy.
Though it’s generally an exception, some merchants impose surcharges for using a credit card or may provide discounts for paying in cash. In such cases, it’s a good idea to crunch the numbers to ensure the extra fees don’t actually cost more than the cashback reward.
The Takeaway
Free money may be hard to come by—but not if you use a cashback credit card. When choosing a card, It’s best to look at the rate of cash back, any annual fee a card may charge, and the APR if you carry a balance.
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.
Some good news about budgeting: According to a 2020 Debt.com survey, as many as 80 percent of Americans are now doing some form of budgeting. The top reasons for using a budget, according to the survey, include increasing wealth and savings and managing debt.
While not everyone loves the idea of budgeting, taking a moment to assess and prioritize your spending can yield some real rewards. Even a basic monthly budget can help you reach your financial goals, whether it’s to have a financial cushion, put a downpayment on a new home, go on your dream vacation, or all of the above.
The most common reason cited for not budgeting in Debt.com’s survey was making too little money. But the truth is that you don’t have to make a lot to benefit from having a budget. Indeed, budgeting can be particularly helpful when money is tight.
Whether you’re brand new to budgeting or looking to improve your budgeting skills, read on. Below are some simple steps that can help you keep better tabs on your cash flow and improve your financial life.
Gathering All of Your Financial Information
While estimating your income and monthly costs can work in a pinch, to make your budget as complete (and accurate) as possible, you’ll want to start by gathering up at least three months worth of financial documents and receipts.
Here are some documents that may be helpful:
• Pay stubs • Bank statements • Credit card statements • Rent/Mortgage bill • HOA • Electricity bill • Water bill • Internet bill • Cable bill • Childcare/School Tuition statements • Monthly public transportation passes • Recurring healthcare costs like deductibles or prescriptions • Student loan statements • Insurance statements
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Figuring Out Your Monthly Take-Home Income
Although you may be able to rattle off your annual income without thinking, when creating a budget you’ll want to look more closely at your pay stub to determine your take-home pay. That’s how much is left after all of the deductions (such as federal, state, and local taxes, retirement savings, and insurance) are taken out.
If you’re self-employed, you’ll need to subtract your self-employment income tax before calculating your net monthly income.
Determining your take-home pay is important because if you use your annual income to make your budget, you might end up thinking that you have more money available to you every month than actually shows up in your checking account.
If you’re budgeting with another person, you’ll also want to tally up that person’s take-home pay as well. It’s a good idea to also include any additional household income, such as that from investments or social security. All together, these will give you a good idea of how much actual cash you have to budget with each month.
Tallying Up Monthly Expenses
Once you’ve nailed down how much money you’re bringing in each month, it’s time to look at how much money you’re sending out into the world each month. This is where all the paperwork you gathered can really come in handy.
A simple way to start is to write down how much you’re paying for all your fixed (or recurring) monthly bills, such as rent/mortgage, car payments, insurance, health care expenses, utilities, subscriptions.
Once you’ve got your regular bills accounted for, you can look at variable expenses, such as groceries, entertainment, and other discretionary expenses. With variable expenses, it’s helpful to look back at your bank statement, as well as receipts from the previous few weeks or months, and calculate an average.
If you tend not to save receipts, it can be useful to actually track your spending (by carrying a notebook, using a app, or collecting receipts and recording them later) for a week or more in order to better assess your daily spending.
Below are some sample budget categories and expenses that you may want to include:
When it comes to expenses that only occur in certain months, such as tuition for summer camp, you can divide the total by 12 in order to figure out how much you should be saving each month to cover these seasonal costs.
Once you have a list of all your monthly expenses, you may be alerted to trends you might not have noticed before (like $75 a month on morning coffees).
You’ll also be able to add it all up to see what your overall average monthly spending is. Ideally, this number is less than the amount of take-home pay you calculated above.
Planning and Creating a Budget
Now that you’ve got a grip on how much money you have coming in, and how much is going out, it’s time to actually create a plan for how you want to spend your money–in other words a budget–rather than spending haphazardly.
You can create a budget using pen and paper or a spreadsheet on your computer. There are also a number of budgeting apps, such as SoFi Relay, that can simplify the process.
There are several different ways to approach spending targets and savings goals in your budget.
One commonly recommended guideline it the 50/20/30 budget, which breaks up your spending and saving like this:
• 50 percent on “needs” or essential expenses (such as housing, utilities, auto payments, insurance, repairs, healthcare, childcare, minimum payments on debts, and education). • 30 percent on “wants” or discretionary expenses (e.g., shopping, entertainment, personal care, travel). • 20 percent towards savings (such as an emergency fund, paying more than the minimum on debts, retirement, and other savings).
These percentages are guidelines, however, and you may decide to re-jigger them based on your financial situation, current expenses, and goals.
If the cost of housing is high in your area, for example, you may need to allot more to the “needs” bucket. Or, if you have a big expense or a trip you want to take in six months, you may want to bump up savings, at least temporarily.
If you find that your spending is currently higher than your income, or doesn’t allow for monthly savings or debt reduction, you may need to find places where you can cut back.
It’s often simplest to do this in the “wants” category. For example, you might decide you can cook more and eat out less often, ditch that pricy cable bill, use the library instead of buying digital and audio books, or cut back on clothing purchases.
Once you’ve set up your spending and saving targets, you’ll want to track your progress, either by manually tracking your spending or using an app. Along the way, you may find that you have to adjust your spending to stay better aligned with your budget, or you might find that you need to adjust your budget to make it work better for you.
The Takeaway
A budget can help you achieve your financial goals, whether it’s knocking down debt, saving up for something fun, or funding your retirement.
While the process may sound intimidating, budgeting is really just a matter of figuring out what your current income and expenses are, seeing how they line up (or don’t), and then deciding how you may want to shift your spending in order to reach your goals.
It can also be helpful to remember that even if you have a budget, it will only be useful if you periodically track and update it to reflect any changes in your income, expenses, or financial goals.
If you need help tracking your spending, a checking and savings account with SoFi might be a great choice for you. With SoFi Checking and Savings, you can easily see your weekly spending (and make sure you’re on track with your budget) in your dashboard in the app.
Ready to take your budget to the next level? Find out more about how SoFi Checking and Savings can help you track your spending and budget effectively.
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.
SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).
Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.
As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.
Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.
Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
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We all want to improve our money-management habits, but sometimes the path on how to achieve this goal is a little unclear.
If someone is looking to take their financial health to the next level, they can follow these seven steps to gain control of their spending and money.
Tips for Evaluating Your Personal Finances
1. Determine Your Net Worth
A net worth gives an overarching view of someone’s personal finances. Sitting down and taking time to calculate their net worth each year can help consumers adjust their financial plans as needed. A net worth takes into account everything someone owns and everything that they owe.
To calculate a net worth, take out a pen and paper (or computer document) and make a list with two sides. On one side, they will list the assets that they own. On the other side, they will list liabilities or debts, which is what they owe. Then they’ll subtract their liabilities from their assets.
Assets can include money in savings, checking, investing, or retirement accounts; real estate like one’s home; cars; as well as stakes in businesses; or valuable personal goods like jewelry or art. Liabilities can include student loans, automobile debt, mortgages, or credit card balances.
If someone finds that their assets are greater than their liabilities, that means they have a “positive” net worth. On the flip side, if they owe more than they own, they have a “negative” net worth. If the net worth is negative, they shouldn’t feel bad. They just need to adjust their financial plans in a way that will help them work towards paying off debt and then working to build up more assets.
2. Plan a Budget
One way consumers can improve their financial health is by following a budget that takes their financial goals into account. A budget is a plan that someone can follow that will help determine how much money they spend each month.
Budgeting properly can lead to saving money each month to invest or put towards a large financial goal, like a down payment. A budget should illustrate how much someone makes and how they spend their money.
Budgets come in handy if someone needs help guiding how they spend their money. While some expenses are fixed — like rent — others can be tempting to overspend on — like entertainment, eating out or daily lattes — without a budget in place.
To create a budget, start by gathering all bills and pay stubs. Alternatively, there are now many mobile apps, such as SoFi Relay(R), which can keep track of your spending and income. Such apps can analyze your financial trends for you and will be easily accessible in your pocket always, but make sure to research the mobile app’s safety and security features since they’ll be holding your personal information.
Subtract any expenses from income to discover how much room if left in a budget. From there, it gets easier to determine what consistent expenses to cut and how much to spend on variable expenses (like clothing or travel). Don’t forget to budget for less visible expenses like saving for retirement, an emergency fund or paying down debt.
After creating a budget, housing costs are likely top of mind since they tend to be one of our largest monthly expenses. Taking a hard look at how much your rent or mortgage payments are taking a bite out of your monthly budget can be helpful.
A general rule of thumb in personal finance is that you shouldn’t spend more than 30% of income on housing costs. This allows individuals to be able to afford other discretionary costs.
If someone is spending more than that on housing, they may want to consider finding a more affordable option so they can make room in their budget to pay down student loan debt or to work towards other financial goals.
4. Determine Your Debt to Income Ratio
Speaking of debt, determining a debt to income ratio can give consumers a better idea of their financial health. A debt-to-income ratio takes monthly debt payments and divides them by gross monthly income.
Lenders often use a debt-to-income ratio to determine if a borrower will be able to make their monthly payments. If someone is planning on buying a home or taking out an auto loan, they’ll want to keep their debt-to-income ratio on the lower side. Working debt payments into a budget is a good way to stay on track towards lowering this ratio.
5. Refine Your Investment Strategy
Investing can be intimidating, which is why it’s important to gain a clear understanding of how it can help you work towards financial goals in a comfortable way. Investing inherently carries some risky because there’s a chance of losing some money rather than simply saving money in an FDIC-insured savings account.
However, those who stash cash away in savings accounts should remember that the value of their money is actually depreciating due to inflation, the tendency for the price of goods to rise over time.
Investments like securities and mutual funds aren’t federally insured and losing the principal amount invested is possible. It’s also possible to profit off investments, and diversifying investments can help mitigate risk. By spreading investments across multiple assets, if one investment loses money it can sting a bit less because a more successful investment may very well make up for that loss.
Diversification can’t guarantee success and if the market drops as a whole, all of a consumer’s investments can suffer as a result, but it can improve the chances of not losing a lot of money or all of it at once.
6. Determine Your Risk Tolerance
To determine which saving and investment products are a good fit, consumers need to understand what their risk tolerance is. For example, if someone is young and has 35 years of working left before they retire, they may feel more comfortable making a riskier investment, such as stocks, that can lead to bigger gains down the road.
Those who are 60 may feel differently and may want to go for a safer bet, such as in the bond market. Generally, if someone is pursuing a short term goal, it’s better not to choose a risky investment as the chances of profiting during a short period of time are not gauranteed.
Consumers can familiarize themselves with their investment options to help determine which they’ll be most comfortable with. There are plenty of investment products to choose from like:
• Stocks
• Mutual funds
• Corporate and municipal bonds
• Annuities
• Exchange-traded funds (ETFs)
• Money market funds
• U.S. Treasury securities
Before making any type of investment, it’s also important to understand what kinds of fees are associated with holding the investment or buying or selling as part of the investment strategy (like when investing in the stock market).
Having a solid investing strategy can make it easier to save for retirement or college and to make hard earned money grow.
7. Set Financial Goals
Once someone has evaluated their personal finances, they’ll have the insight they need to set clear financial goals.
After considering what they want their money to help them achieve (pay for a wedding, vanquish credit card debt, retire early, etc.), they can create a financial plan for reaching those goals by listing their goals by which are most important to them.
They can then put together a timeline, like a monthly savings plan, that will help them meet those goals.
The Takeaway
From mortgages, tuition bills, utility costs to taxes, modern life throws at individuals all sorts of financial obligations that they need to juggle. This has made evaluating one’s personal finances to often be a tricky task.
Individuals can, however, wrestle control over their financial future by tracking spending habits, changing them if necessary, and making thoughtful, realistic budgets.
If overspending is getting in the way of reaching important financial goals, SoFi Relay can help make staying on track easier. Users can work one-on-one with a financial planner to set goals for their money and track their financial habits to make sure they’re on their way to achieving those goals. It also offers free credit monitoring in a way that won’t impact your credit score.
SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.
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Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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Your credit score can affect many areas of your life.
A poor credit score can make it harder to buy a car, get a job, purchase a home, rent an apartment, have the utilities turned on, and even get a cell phone.
It can also cost you money, since credit card companies and lenders typically consider your credit score when determining your interest rate.
Fortunately, if your credit is less-than stellar–or you haven’t yet had a chance to establish much, or any, credit history–there are some simple steps you can take to build or boost your score quickly.
While you can’t typically establish exceptional credit overnight, you may be able to improve your credit score in a matter of months by putting a few good credit habits into practice, building a positive payment history, and avoiding credit-damaging mistakes.
Simple Steps to Build Your Credit Faster
Here are some strategies that can help you establish or improve your credit profile ASAP.
1. Understanding What Goes Into Your Score
One of the most commonly used credit scoring models is the FICO® Score .
FICO has five factors it considers when calculating its credit scores.
• Payment history: 35% of this score is related to your history of payments on credit cards, student loans, mortgages, and other loans. The algorithm looks at the frequency and severity of missed and late payments.
• Credit utilization: 30% of this score is based on how much of your available credit you are currently using.
• Length of credit history: The amount of time you’ve had each credit account open makes up 15% of this credit score. That’s why it’s nearly impossible to have perfect credit when you’re new to credit.
• New credit: 10% of this credit score has to do with opening new credit. (However, opening several new credit accounts at the same time isn’t typically a good way to bump up your score, because that can look like you’re in financial trouble).
• Credit mix: The final 10% of this credit score is based on the different types of credit you have and how you’ve managed them.
2. Checking Your Credit Report and Disputing any Errors
Credit scores are calculated on the information in your credit reports.
That’s why it’s a good idea to get copies of your credit reports from the three major credit bureaus–Equifax , TransUnion and Experian –and to make sure all the information is accurate.
Everyone is entitled to see their credit reports for free once a year at the government-mandated AnnualCreditReport.com site.
When you get your reports, it’s a good idea to comb through them carefully and to look for any inaccuracies, such as payments marked late when you paid on time, wrong account numbers, incorrect loan balances, or accounts that aren’t yours.
If you find an error in one or all your credit reports, you can reach out to the credit bureaus directly to dispute the information.
If you see accounts in your name that you never opened, and believe you may be a victim of identity theft, you can report it to the Federal Trade Commission at IdentityTheft.gov or 877-438-4338.
A mistake on one of your credit reports could be pulling down your score. Fixing it can help you quickly repair your credit.
3. Paying Bills on Time Every Time
Payment history is the single most important factor that affects your credit scores.
Not only that, a past due payment can stay on your report for seven years.
Setting up autopay, either through each provider or company, or through your financial institution, can be a great way to ensure you never miss a bill.
If you do miss a payment by a few days, all is not necessarily lost, however.
There is generally a small window of time to make up a missed credit card payment before any damage to your credit happens.
That’s because late payments are typically not reported to credit bureaus until the payment is at least 30 days late.
The key is to get it in as soon as you can.
4. Becoming an Authorized User on a Credit Card
If you have no credit or a low credit score, you may be able to build it up by becoming an authorized user of a credit card that the cardholder uses responsibly.
An authorized user has permission to use an account, but does not have any liability for debts.
If a friend or family member adds you as an authorized user to their account, the card issuer will then typically report you as an authorized user to the credit reporting companies.
In this way, you gain a credit history from the credit usage of your friend or family member.
5. Opening a Secured Credit Card
Some credit card companies offer “secured” credit cards, which allow you to build credit history with little risk to the credit card company.
Here’s how it works: You pay a cash deposit up front that is equal to the limit of the card. For example, if you put down a $500 deposit, you would have a $500 limit on the card.
You can then use it like a regular credit card.
Using the secured card responsibly–being mindful of the amount you’ve charged in relation to the card’s limit–and paying your bills in full and on time will all be reported to the credit bureaus.
6. Using your credit card regularly
One way to build credit is to display a history of responsible borrowing.
For that reason, you may want to place monthly bills and other expenses on your credit card–being sure to pay the bill in full each month by the due date.
7. Keeping Credit Card Balances Low
This can help move the needle on credit utilization, or the amount of debt you have compared to the total amount of credit that is available to you, and is expressed as a percentage.
After payment history, this is typically the second most important factor that influences your score.
The rule of thumb is to use no more than 30% of your total credit at any time. This includes access to all credit lines, as well as the percentage on individual cards.
One way to do this is make multiple payments on your credit card throughout the month.
If you’re able to keep your utilization low, instead of letting it build toward a payment due date, it could quickly benefit your score.
8. Keeping Credit Cards Open
It might seem to make good financial sense to close credit cards you never or seldom use.
But from a credit score perspective, it may not be a wise move.
That’s because closing a credit card means you lose that card’s credit limit when your overall credit utilization is calculated, which can lower your credit score.
A better bet might be to keep the card open and to use it occasionally so the issuer won’t close it.
The Takeaway
A credit score in the good to excellent range could provide you access to the most competitive interest rates for loans and credit cards, and also make it easier to rent an apartment, get a cell phone, and land a new job.
Some ways to improve your score quickly include having active open accounts that you are consistently paying on time, keeping your loan balances low, and disputing any errors on your credit reports.
Building good credit is also a matter of establishing good financial habits, such as tracking your spending (so you don’t come up short at the end of the month), and make sure all of your bills are posted by their due dates.
One move that can help you stay on top of your finances is signing up for SoFi Checking and Savings®.
SoFi Checking and Savings is a checking and savings account that allows you to earn competitive interest, spend, and save–all in one account. And you’ll pay zero account fees to do it.
SoFi Checking and Savings also allows you to track your weekly spending right from the dashboard in the SoFi Checking and Savings app.
You can also use the app to set up all of your bill payments to help ensure that payments are never missed or late.
Check out everything a SoFi Checking and Savings checking and savings account has to offer today!
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.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.
Even though common sense might suggest that repaying any loan should be straightforward—that all you have to do is send money until you don’t owe any more—there is actually a fair amount of strategy involved. When it comes to repaying federal student loans, there are many ways to think about taking them on.
Having a game plan for eradicating student loan debt is a good idea: In the United States alone, 45 million borrowers hold more than $1.6 trillion in student loan debt, and payments to tackle that mountain of debt have been slowing, on the whole. Those numbers and that trend underline the necessity that a borrower knows how to shoulder debt while reducing it.
So here’s a guide that offers tips for repaying federal student loans. Are you the calculating sort? Our student loan payoff calculator is a good tool for getting an idea of your loan payoff date. (The Education Department also has a calculator if you want to play around with your numbers.)
As outlined in the CARES Act, and extended by executive order, both the suspension of loan payments and the 0% interest rate on loans held by the Department of Education are set to expire after Aug. 31, 2022.
Repaying Federal Student Loans
1. Taking Advantage of the Grace Period
An important factor to determine your strategy to pay off a federal student loan is when you are expected to make your first loan payment. This deadline can dictate the rest of your actions. According to the Federal Student Aid office , for most student loans, there is a set period of time after a student graduates, leaves school, or drops below half-time enrollment before payments begin.
This grace period could be six to nine months, depending on the program a student received a loan through. As the date of the first payment draws closer, the loan servicer should let the borrower know when the first payment will be due—but it helps to think of how to take advantage of the grace period in advance.
While it might be tempting to view the grace period as a time when you can sink your extra money into other things you want or need, it’s probably smarter to save up for when those payments will start coming due.
If you have a subsidized federal student loan, your loan will not accrue interest while you’re in school or during the grace period, so it helps make paying it off in the longer run less burdensome.
If you have an unsubsidized federal student loan, interest has been accruing since the loan was disbursed, so you could consider taking the time when you do not have to make principal payments to pay down some of the interest that accrued.
For more information on ways to pay off student loans, this link includes tips for budgeting during a grace period and others you can mull over in that time. Interest has a way of sneaking up on borrowers because they might have in mind only the principal amount when thinking about monthly payments.
Also be aware that some federal student loan programs can have an up-front interest rate reduction, which requires making a number of monthly payments on time to prevent the rate from increasing.
So, just as studying is important to one’s academic life, studying up on student debt strategies is important to your overall life.
Borrowers can also learn to harness momentum to pay off student loans faster.
2. Selecting the Right Repayment Plan
Federal student loans come with many options for repayment. The options that might be open to you will depend on the type of loan you took out.
This Federal Student Aid office brochure drills down on the most common plans and loans they apply to, and offers bullet points of comparison.
It also links to information on consolidating federal student loans. Refinancing loans is something else to consider.
Generally speaking, the most popular repayment plan for federal student loans is the Standard Repayment Plan. Part of the reason it’s the most popular is—wait for it—is that it’s the default plan borrowers will be designated for unless they request otherwise.
The Standard Repayment Plan affords borrowers up to 10 years to repay, with an expectation of fixed monthly payments of at least $50 during that time.
There’s also the Graduated Repayment Plan, which starts with lower payments that increase every two years. Under the plan, a borrower makes payments for up to 10 years.
With the Extended Repayment Plan, a borrower can take up to 25 years to pay the loan. There are specific eligibility requirements. The plan requires lower monthly payments than the 10-year Standard plan, though you will wind up paying more in interest for your loan than you would have over 10 years.
Then there are income-driven repayment plans, which are geared toward monthly payments that are intended to be affordable based on discretionary income and family size. These are meant to further lighten the financial burden for individuals who have additional ongoing expenses or obstacles.
As such, they offer a greater degree of flexibility on their terms—like the Income-Contingent Repayment Plan. With that plan, any outstanding balance will be forgiven if the borrower hasn’t repaid the loan in full after 25 years. (Income tax may still be owed on the amount that was forgiven.) Again, more details on each of these payment plans—and others—can be found in this Federal Student Aid office publication .
Some of these plans are good options if you are seeking Public Service Loan Forgiveness—circumstances that apply if you are employed by a U.S. federal, state, local, or tribal government or nonprofit organization.
Many of the income-driven repayment plans may be good options if Public Service Loan Forgiveness is a light at the end of your federal student loan debt tunnel.
The Income-Based Repayment Plan is worth a mention, as monthly payments would be 10% to 15% of discretionary income, and payments are recalculated each year to factor in family size and discretionary income.
It’s normal to feel a little confused with so many numbers being thrown around. Our guide on fast ways to pay off debt makes a good addition to everything discussed so far.
3. Student Loan Consolidation
A Direct Consolidation Loan allows a borrower to consolidate multiple federal education loans into one loan at no cost. It’s just a way to minimize the headaches—and ulcers—that can stem from the obligation to make monthly payments on different loans.
It’s not usually a way to save money, as the new interest rate you get with a Direct Consolidation Loan is a weighted average of all your loans’ interest rates rounded up to the nearest eighth of a percentage point.
There is another asterisk in considering this option: Private student loans cannot be consolidated with federal student loans into a Direct Consolidation Loan. You can, however, pursue refinancing both types of loans with a private lender.
If you have solid credit and a stable income, among other personal financial attributes, it’s possible to qualify for a new loan at a lower interest rate.
But there’s an asterisk to this asterisk, which is that refinancing with a private lender can make you ineligible for the federal benefits and protections offered to qualified federal student loan borrowers, like Public Service Loan Forgiveness, income-driven repayment, deferment and forbearance.
4. Paying More Than the Minimum
A strategizer knows that there’s more to it than paying the lowest amount required every month on student loans.
A big reason to pay more than the monthly minimum is that student loan repayment is structured around amortization—a word you heard if you took an accounting or economics class that basically means a portion of fixed monthly payments goes to the costs associated with interest (what the lender gets paid for the loan) and reducing your loan balance (paying off the total amount owed).
Paying more than the minimum means you can accelerate reduction of the amount you owe rather than covering the interest—which is effectively the lender charging you for the privilege of having the loan in the first place.
That privilege isn’t exactly bragworthy, so it’s smart to make more than the minimum payment—however little more it might be.
One plan of attack for borrowers to consider is signing up for automatic payments through their federal loan servicer so the payments are taken directly from their bank account as they’re due.
The payment amount to be withdrawn can be customized, and there’s a discount for doing so: Those who have a Direct Loan will get an interest-rate reduction while participating in automatic debit.
Getting Student Loans Under Control
Nobody really enjoys thinking about student loans, but the upshot of that is the pain points associated with them are well known—and there are proven strategies to ease the pain and manage the process of repaying government student loans, whether going for a special payment program, consolidating, or refinancing.
All it takes is a little planning and a willingness to adapt those plans to the ways your life unfolds after you have that degree.
SoFi student loan refinancing offers flexible terms and low fixed or variable rates. There are no application or origination fees. And getting prequalified online is easy.
Check your rate today.
SoFi Student Loan Refinance Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
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.
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.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
