Paying Down Debt Takes Discipline

This page may include affiliate links. Please see the disclosure page for more information. This blog post is part of the Pay Down My Debt (PDMD) blog tour, sponsored by US Equity Advantage. PDMD is a solution that accelerates debt payoff and helps consumers monitor their credit …

Read More

The post Paying Down Debt Takes Discipline appeared first on Debt Discipline.


Paying Down Debt Takes Discipline was first posted on May 24, 2019 at 6:04 am.
©2019 "Debt Discipline". Use of this feed is for personal non-commercial use only. If you are not reading this article in your feed reader, then the site is guilty of copyright infringement. Please contact me at brian@debtdiscipline.com

Source: debtdiscipline.com

Does Having a Credit Card Balance Hurt Your Credit Score?

Follow these hints from people with credit scores above 800:
Finally, don’t worry too much about small fluctuations in your credit score. Your score can vary from month to month based on the balance you have at the time your creditor reports to the bureaus. Fluctuations are completely normal. Focus on making on-time payments and keeping your balances low, and you’ll build a healthy credit score.

How Your Credit Card Balance Affects Your Credit Score

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community.

  • Payment history (35%)
  • Credit utilization (30%)
  • Average age of credit (15%)
  • Credit mix (10%)
  • Hard inquiries and new credit (10%)

That said, you shouldn’t worry about a balance showing up on your credit report. As long as your balances — both overall and on each individual card — stay below 30%, you’ll be able to build good credit.
There are five things that determine your credit score. These credit score factors break down as follows:
Ready to stop worrying about money?
Here’s where it gets a bit tricky. If you’re regularly using credit, a balance will probably show up on your credit report. That’s because you don’t control when your credit card company reports activity to the bureaus.
Source: thepennyhoarder.com
If your credit utilization ratio is 0% because you never use your credit cards, your score could suffer. When you’re not making regular credit purchases and you don’t have outstanding loans, you aren’t generating activity that’s reported to the credit bureaus. That’s harmful because payment history is even more important than your credit utilization.
You probably know that paying down debt is good for your credit score. But there’s a persistent myth about credit card balances and credit scores. Some people say that carrying a small balance from month to month somehow helps your credit score.

Should You Carry a Credit Card Balance?

That doesn’t mean the average person with a perfect score is carrying a 5.8% balance from month to month. When your creditor reports to the bureaus, they’re simply providing a snapshot of your account at that given moment. Even if you pay off your balance in full each month, it’s likely that your account will show that you’re using up part of your open credit.
There’s no benefit to your credit score when you don’t pay off your balance in full. You’ll also pay unnecessary interest, unless you’re taking advantage of a temporary interest-free window.
Get the Penny Hoarder Daily

  • Make every payment on time. The No. 1 habit of people with exceptional credit scores is that they never miss payments. One late payment will stay on your credit report for seven years.
  • Always keep your utilization below 10%. Most members of the 800 club pay off their balances in full each month, but many say they never let their balances climb above 10%.
  • Keep your oldest card open. As you build good credit, you typically qualify for better credit card rewards. But people with top-notch credit keep those old cards open and use them for a small monthly purchase. Credit scoring models favor customers who have long-term relationships with their cards.

The idea that carrying a balance helps your credit score is totally false. Read on to learn the facts about how your balance affects your credit score.

Privacy Policy <!–

–>




For example, suppose you have a ,000 limit and a zero balance. Then you make a 0 purchase. If your creditor then reports to the bureau, you’ll have a 2% credit utilization ratio (,000/0 = 2%), even if the bill hasn’t come due yet.

Perfect Credit: How to Get an Excellent Credit Score

A perfect credit score is a bit of an elusive target, as it is challenging to figure out the formula for impeccable financial health. But is the maximum number really necessary? And if so, how frequently do people achieve it? Even though lenders generally assure that anything over 700 is a good score, many people strive for the ultimate goal: 850.

After all, a credit score this impressive has countless benefits—it’s a sure sign that you understand how to manage your money and can borrow and spend with confidence. However, reaching that brag-worthy 850 takes more than just financial wellness. You also need a complete understanding of how credit works and the math behind what affects your scores day to day. In this guide, we’ll be answering questions like “what’s considered an excellent credit score?” and “what’s a great credit score?” to help you better understand what’s needed to achieve perfection. Keep reading to learn how to get an excellent credit score or use the links to answer your questions right away.

What is Credit?

Credit is what allows you to borrow money from lenders. When you apply for a loan, lenders will either approve or deny your request by assessing factors like debt-to-income ratio, employment history, and the amount of the loan. There are several types of credit, including revolving credit, service credit, and installment credit. We’ll go over the three types of credit below.

Revolving Credit

Revolving credit is a line of credit that you can keep using even after you’ve paid off the balance in full. With this kind of credit, you’ll have a limit to the amount of money you can use. For example, if a financial institution approves your credit card for $3,000, you’ll only be able to charge that amount to your account. Like any type of credit, you’ll need to make a minimum payment each month. If you only pay a portion of the amount owed, you’ll continue to revolve your debt until it’s paid off completely.

Service Credit

Service Credit is established by those who provide a service, such as utility companies, phone and internet providers, and gyms. Essentially, it’s an agreement between you and the company offering the service. Let’s take a closer look at gyms as an example. When you apply for a membership, you’ll sign a document that’ll guarantee the use of the facility only if you pay for the service.

Installment Credit

Installment credit is a type of loan that’s used toward a specific purchase. For instance, mortgages, car loans, and student loans.

When thinking of opening a new line of credit, it’s important to take into consideration the type of credit you want to open.

Why is Credit Score Important?

So, why is credit so important? Well, maybe you want to buy a car in a couple of months. To do so, you need to apply for a car loan if you don’t have the cash in hand. Or you may be planning to purchase a house, which most people can’t afford to pay in full. When it comes to making these big purchases, you’re going to want to make sure your credit is in tip-top shape.

A credit score determines if a lender will approve or deny your loan, the interest you have to pay, and the amount due each month. The higher the credit score, the lower your interest and payments will be. The lower your credit score is, the higher your interest rate and monthly payments will be, meaning you’ll end up paying more for whatever you purchased in the long run.

But lenders aren’t the only ones interested in your credit score. Here are a few other people or organizations that take a look at your credit score before making their final decision.

  • Landlords may want to know your credit score to ensure your finances are in good standing and that you can afford to pay rent.
  • Insurance companies may use your credit score to determine the rate of your policy.
  • Utility companies can also look at your credit score to see whether you’re eligible to open an account.
  • Employers often run credit checks to make sure you’re going to be a trustworthy employee.

Your credit score is an essential factor for almost every aspect of your life, whether you realize it or not. A credit score allows you to make significant financial decisions without your wallet suffering the consequences. You’ll be able to spread the costs of big purchases over time, making it more manageable. But it isn’t enough to simply have a credit score. You need a good credit score to reap the benefits.

Credit Score Range

Credit scores range from 300 to 850. The number you see on your monthly credit report is generated by VantageScore or FICO. Each company has its own credit-scoring model to determine your credit score based on several factors, such as payment history, credit history, total debt, and more. Although the scores between the two may differ, they’ll generally follow the ranges below.

  • Anything below 630 is considered a poor or bad credit score
  • Credit scores between 630 and 689 is considered a fair credit score
  • Credit scores between 690 and 719 is considered a good credit score
  • Anything above 720 is considered an excellent credit score

So, what’s a perfect credit score? 850 is considered a perfect score. We’ll be discussing what is the highest credit score and how to reach it later on. Even though you may be content with having a good credit score, there’s always room to improve.

Excellent Credit Score

As mentioned, anything above 720 is considered an excellent credit score, but what exactly does that mean for you as a borrower? For starters, you’ll increase the likelihood of getting approved for the line of credit you want. You’ll also save money during the lifetime of your loan since your interest and monthly payments will be low.

An excellent credit score has numerous advantages for you as it increases your purchasing power and puts you in the best financial position possible. Once you reach this pinnacle of success, where do you go from there?

Perfect Credit Score

According to Nasdaq, roughly 1.2% of Americans had an 850 in 2020. The benefits of an 850 credit score may include lower interest rates, easier approval for home loans or rental applications, and even a greater chance of getting hired by your dream company. But is it essential to have a perfect credit score for these opportunities? Not necessarily. Anything from 790-719 is considered “good,” while 720 and above is an excellent score. However, there’s no harm in wanting to achieve perfection.

The path to reaching that rarely seen 850 score can seem a bit confusing. Even if you pay your bills on time, have a diverse collection of credit accounts, and maintain a clean financial record, many people plateau around the 750-800 mark. So how does one build enough credit to reach the ultimate score? Let’s go through some of the most common contributors to getting the highest credit score below.

What Affects Your Credit Score?

Before we explore how you can improve your credit score, you need to know what factors affect your credit score. If you’re set on achieving an 850 score, these determinants are important to take into consideration.

Multiple Hard Inquiries

Each time you apply for a new line of credit—whether it’s for a car, credit card, or home, for example—lenders perform what is known as a hard inquiry into your history. These are not to be confused with soft inquiries, which are made by prospective employers or lenders checking out your report for preapprovals. Multiple hard inquiries tell a story that may worry lenders.

If you choose to apply for a credit card, shop around to find the best one for you before a hard inquiry occurs.

Frequent Late Payments

On-time payments are essential to your credit score. You agreed upon a specific arrangement when you accepted a loan, and lenders would like to see that you can stick to it. However, some banks allow a pass for missing a payment by a few days once every one to two years; it’s crucial to stay on top of due dates the best you can.

History of Defaulting or Charge-Offs

When late or non-existent payments extend past six months, lenders may charge-off your credit account. This means that the bank no longer trusts you to pay the owed amount. These unfortunate notes can last between six and seven years on your credit report and may lead to lenders denying future applications for new lines of credit.

Closing Old Accounts

Remember that the length of your credit history accounts for a significant portion of your score. Just because you’ve paid off a tricky balance doesn’t mean you should close the card. If this were one of your earliest cards, your history’s length would shrink with the cancellation of your account.

Keeping it Simple

Even if you pay all your balances off each month, sometimes you may get stuck at a mediocre credit score. Reaching the highest credit score will likely require you to show off your credit knowledge. As you diversify your lines of credit, you’ll be able to prove your financial expertise. By only focusing on one line of credit—such as student loans or minimal credit cards— at a time, your credit score could plateau.

Achieving the perfect credit score is all about balance. It’s possible to get in your own way without realizing it. Check in with your finances if you’re falling into any of the common traps mentioned above that could keep your credit score stagnant. Not sure how to get your credit score for free? Mint makes it easy!

How to Raise Your Credit Score

If you’re only a few points away from reaching 850, it can get pretty frustrating seeing the number remain the same month after month. To help you reach your goal, here are five ways you can raise your credit score.

Make Timely Payments

There’s no question that making your credit payments on time each and every month is one of the most important factors for your credit score. This doesn’t necessarily mean that you can’t carry a balance on revolving credit accounts, but late minimum payments incur a fee and remain on your credit report. In the end, it all comes down to creating long-term trust with lenders.

Keep Your Utilization Rates Low

Some financial experts believe that carrying a balance above 30 percent of your credit limit can damage your credit score. Though this frequently quoted 30 percent is seen as the hard and fast rule for credit utilization, experts say it is actually a cap. Carrying a balance below this amount— preferably below 20%— is ideal for raising your credit score.

This is also a reminder that carrying a balance does not negate your chances of hitting that magical 850.

Only Open Necessary Accounts

Though account diversity can help perfect your credit score, opening accounts or cards you won’t use and that have burdensome fees and stipulations can hurt your credit. Only open lines of credit when you need them. However, if you’re tempted to accept your favorite retailer’s credit card offer, for example, be sure you can pay off each purchase in a timely manner.

At the same time, be mindful of closing accounts once they’re opened. Cutting up that credit card simply because you have a new account means lowering your overall credit limit and possibly increasing your utilization rate. A card with a long life also shows your dedication to maintaining the account.

Have a Long Credit History

It’s a little confusing to learn that you don’t begin your credit journey with a perfect score. Credit scores, however, are about building a credit reputation over time. It’s simply impossible to prove how you’ll respond to paying down debt until you do so over several years. If you’ve only just begun to build credit or have minimal accounts, your score will improve as you continue to follow your set payment schedule.

Cultivate Account Variety

Whenever you hear about someone achieving the perfect credit score, they often boast their wide range of credit accounts. Each line of credit opened speaks to a different type of spending. Things like student and car loans prove that you can pay off large sums over time, and revolving accounts, such as credit cards, verify that you’re able to manage your monthly budget with confidence.

Even different credit cards can offer a variety of perks. Some people may keep a credit card open for emergencies, while others could use it to accumulate travel points or store credit. When you see each line of credit as a unique tool, you’re more likely to approach credit spending with a healthy mindset. In turn, this shows up in your long-term credit report and helps your score grow.

Summary: How to Achieve Perfect Credit

The perfect credit score is achievable with a little strategy and plenty of patience. The ultimate number—a score of 850—is possible over time and with the proper financial knowledge. Most importantly, understand that credit scores can fluctuate as your life changes. Focus on your overall financial wellbeing and it may be within your reach sooner than you think.

Source: mint.intuit.com

Using Your 401K to Pay Down Debt

You have debt. But you’ve also got a stash of cash in your 401(k).

If you’re feeling overwhelmed by high-interest credit card balances, a student loan, and/or an auto loan, you might think taking money out of your 401(k) is a good way to pay down that debt and get it under control.

But is withdrawing money from your 401(k) to pay off debt a good idea? How would you go about doing it — and then paying it back?

What Are Some Options for Taking Money out of a 401(k)?

There are two basic options for taking money out of a 401(k): withdrawals and loans.

401(k) Withdrawal

A withdrawal removes money from your account permanently. You don’t pay the money back — but you can typically expect to pay taxes on the amount you withdraw. And, depending on your age, you may have to pay an early withdrawal penalty as well.

401(k) Loan

A loan lets you borrow money from your account and then pay it back to yourself over time. You’ll pay interest, but the interest and payments you make will go back into your retirement account.

There are pros and cons for each of these options. And the rules can vary depending on your age and what your employer’s plan allows. Here are some things to consider.

What Are the Rules for 401(k) Withdrawal?

Tax-deferred retirement accounts like 401(k)s, 403(b)s, and others were designed to encourage workers to save for retirement, so the rules aren’t super friendly for those who want to make a withdrawal before age 59½.

But depending on your financial situation, you may be able to request what the IRS calls a hardship distribution .

Employer retirement plans aren’t required to provide hardship distribution options to employees, but many do, so it may be worth checking with your HR department or plan administrator for details on what your plan allows.

According to the IRS, to qualify as a hardship, a 401(k) distribution must be made because of an “immediate and heavy financial need,” and the amount must be only what is necessary to satisfy this financial need. Expenses the IRS will automatically accept include:

•   Certain medical costs.

•   Costs related to buying a principal residence.

•   Tuition and related educational fees and expenses.

•   Payments necessary to avoid eviction or foreclosure.

•   Burial or funeral expenses.

•   Certain expenses to repair casualty losses to a principal residence (such as losses from a fire, earthquake, or flood).

You still may not qualify for a hardship withdrawal, however, if you have other assets you could draw on or some kind of insurance that will cover your needs. And your employer may require documentation to back up your request.

You probably noticed that credit card and auto loan payments aren’t included on the IRS list. And even the tuition expense requirements can be a little tricky. You can ask for a hardship distribution to pay for tuition, related educational fees, and room and board expenses “for up to the next 12 months of post-secondary education” for yourself, your spouse, your children, or your dependents. But you can’t expect to use a hardship distribution to repay a student loan from when you already attended college.

Are 401(k) Withdrawals Subject to Taxes and Penalties?

Even if you can qualify for a hardship distribution, it’s a good idea to plan to pay taxes on the distribution (which is generally treated as ordinary income). And, unless you meet specific criteria to qualify for a waiver , you’ll also pay a 10% early withdrawal penalty if you’re younger than 59½.

So, let’s say you’re 33 years old, and you have enough in your 401(k) to withdraw the $20,000 you need. Right off the top, unless you qualify for a waiver, you can expect to pay a $2,000 early withdrawal penalty. Then, when you file your income tax return, that 401(k) distribution will most likely be counted as ordinary income, so it will cost you even more. And if that added income bumps you into another tax bracket, you could end up paying even more.

But taxes and penalties aren’t the only costs to consider when you’re deciding whether to go the distribution route.

Since compound interest creates the potential for your initial investment to grow significantly over time, every dollar you take out now could mean several dollars less in retirement. Essentially, withdrawing from your 401(k) now is like borrowing money from your future self, because you’re losing long-term growth.

What Are the Costs Associated With 401(k) Loans?

You may be able to avoid paying an early withdrawal penalty and taxes if you borrow from your 401(k) instead of taking the money as a distribution. But 401(k) loans have their own set of rules and costs, so you should be sure you know what you’re getting into.

There are some appealing advantages to borrowing from a 401(k). For starters, if your plan offers loans (not all do), you might qualify based only on your participation in the plan. There won’t be a credit check or any impact to your credit score — even if you miss a payment. And borrowers generally have five years to pay back a 401(k) loan.

Another plus: though you’ll have to pay interest (usually one or two points above the prime rate ), the interest will go back into your own 401(k) account — not to a lender as it would with a typical loan.

You may have to pay an application fee and/or maintenance fee, however, which will reduce your account balance.

Of course, a potentially more impactful cost to consider is how borrowing a large sum from your 401(k) now could affect your lifestyle in retirement. Even though your outstanding balance will be earning interest, you’ll be the one paying that interest. Until you pay the money back, you’ll lose out on any market gains you might have had — and you’ll miss out on increasing your savings with the power of compound interest. If you reduce your 401(k) contributions while you’re making loan payments, you’ll further diminish your account’s potential growth.

Another risk to consider is that you might decide to leave your job before the loan is repaid. According to IRS regulations, you must repay whatever you still owe on your 401(k) loan within 60 days of leaving your employer. If you fail to pay off the outstanding balance in that time, it will be considered a distribution from your plan. And when tax time rolls around, you’ll have to include that amount on your federal and state tax returns, where, typically, it will be considered ordinary income.

If you’re under age 59½ and the loan balance becomes a distribution, you may also have to pay a 10% early withdrawal penalty.

There may be similar consequences if you default on a 401(k) loan.

What Are Some Ways of Minimizing Risks to Your Retirement?

If you decide using a 401(k) to pay off debt is your best (or only) option, here are a few things that could help you lower your financial risk.

•   Not using your high-interest credit cards once you use your 401(k) to pay them off. If you continue to use your credit cards, and then have credit cards and the 401(k) loan payments to make every month, you could end up in even more financial trouble.

•   Continuing to make contributions to your 401(k) while you’re repaying the loan — at least enough to get your employer’s match.

•   Not overborrowing. Creating a budget could help you determine how much you can comfortably pay each quarter while staying on track with other goals. And try to stick to taking only the amount you really need to dump your debt and no more.

Why Do People Use Their 401(k) to Pay Down Debt?

Although there are significant costs involved in taking money out of a 401(k) to pay debt, many people still do it. It can seem like a good option if you have high-interest debt like credit card debt and you have to face those bills every month. If you have lower interest debt like student loans, personal loans, auto loans, or a home equity line of credit (HELOC), then the early withdrawal penalty and other consequences may be a deterrent.

But if you’re paying high interest on your current debt, or if you have debt payments due and no way to cover them, using your 401(k) might seem better than the risks of missing payments on those bills. Late payments can rack up fees, interest, and can ding your credit score. And if you default on a debt, that can have even more dire consequences, potentially including court actions and wage garnishment — depending on the type of debt and the creditor or lender. You can’t exactly wait it out and count on winning the lottery or inheriting money from some long-lost relative.

If your credit score ends up damaged due to late payments, that, too, could have a huge impact on your finances. Having a low credit score can make it more difficult to get loans in the future. You might have to pay a higher interest rate or there might be limits on how much you can borrow.

Given the dire consequences of doing nothing, using your 401(k) to pay off debt might seem like an attractive choice. But before you contact your HR department or plan administrator to request a loan or withdrawal, you may want to take time to look at some other options that could help you repay your debts.

What Are Some Alternatives to Taking Money Out of Your 401(k)

When it comes to paying down debt, your 401(k) isn’t the first or only place you can look for relief. There are some solid alternatives.

For example, refinancing your debt might be an option. When it comes to things like student loans or auto loans, you might be able to get a lower interest rate than you’re currently paying.

This may be especially true if your credit score or income has improved since you first took out your loan. If you took out educational loans when you were still a student, for example, you’re likely making more money now and might have built up a credit history that could make you eligible for a better deal.

If you have federal student loans and are still working toward that dream job (and salary), you could look into income-driven repayment plans that limit the amount that you pay each month to a certain percentage of your monthly discretionary income — which could help keep your monthly payments more manageable.

Many of these plans will also forgive any remaining balance on your federal student loans after 20 to 25 years of qualifying, on-time payments — something that you won’t be able to take advantage of if you pay off your loans with your 401(k).

If you still need help, you could look into whether you qualify to have your federal student loans put into forbearance or deferment (although you’ll want to consider these programs carefully, as you may still be responsible for any interest that accrues).

If you have credit card debt or other high interest debt, you could look into a credit card consolidation loan. Debt consolidation loans are loans designed to pay off your current loans or credit cards, ideally at a lower interest rate or with more favorable terms.

You can get these loans from a bank, credit union, or online lender, often by filling out a quick form and sending a few scanned documents. But it’s important to remember that this is still taking on debt, even if it’s debt with different terms.

One critical thing to remember when using a personal loan to refinance or consolidate debt is that you may have the option to extend the length of your loan, which may reduce your monthly payments and free up some near-term cash flow.

While extending your loan term means you’ll likely pay more in interest over the life of your loan, it might be a worthwhile move to ensure you can cover your debt payments.

The Takeaway

It may not have ever crossed your mind, when you opened your 401(k), that you’d use it for anything other than retirement. And though it may be tempting to tap it now, especially if you’re facing a daunting amount of expensive debt, that’s a decision with both short- and long-term consequences. Before you use your 401(k) to pay off debt, you may want to consider other available alternatives. With a SoFi Personal Loan, for example, you might be able to get a do-over on that debt and a more manageable monthly payment.

Learn more about personal loan options with SoFi for consolidating debt.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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’swebsite .
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
SOPL18140

Source: sofi.com

Should I Invest if I Still Have Debt?

As you start to establish yourself financially, you may come to a crossroads: should you pay off debt or invest in your future? It can be confusing to know what to do in this situation, especially if you have multiple financial goals you’re saving toward.

The first step is to look at the numbers, then to consider your preferences. There is no one “right” answer to this question. Let’s start by taking a look at the numbers around major financial milestones like your student loan, buying a home, and saving for retirement.

Let’s say your student loan is $75,000. Buying a new home might cost $350,000, and you might plan to need $2,000,000 for a comfortable retirement. Everyone’s numbers will look a bit different, so feel free to take some time to calculate yours.

Once you’ve put your estimated numbers on a page, what jumps out at you? It’s hard not to notice that retirement is quite a bit more expensive than the others. This isn’t too much of a surprise if you consider what retirement is: living for decades with no salary.

While you might be tempted to put all your extra income immediately into your retirement fund, it’s not necessarily the winning decision when it comes to whether to pay off loans or invest. Let’s look deeper.

How Important is Paying Off Your Student Loans?

If you’re like the average student, you’ve borrowed $30,000 or more to pursue a bachelor’s degree . If you went on to graduate school, your student loan debt may be even higher.

Most federal student loans have a repayment period of 10 to 30 years. You may opt to make the minimum payment each month for the duration of your loan repayment plan, or you might decide to pay yours off early.

One benefit to paying off a student loan early is that you reduce your debt to income ratio (that’s how much debt you have compared to how much income you have). This might raise your credit score and help you qualify for other financial solutions.

Or, you might decide to continue paying your student loan while investing in other areas of your life, like retirement or buying a home.

Know Your Student Loan Interest Rates

Before you can decide whether to pay off student loans or save for other things, look at what you’re paying in interest for your student loans. If the rate you locked in when you took out your loan is higher than current rates, you might consider refinancing. If you have multiple student loans, you could potentially consolidate and refinance them for a lower interest rate.

Of course, it’s important to keep in mind that refinancing federal student loans means you’re no longer eligible for federal benefits and protections, like income-driven repayment or loan forgiveness programs, so it makes sense to weigh the potential benefits and risks of refinancing before taking the plunge.

Comparing interest rates is an exercise in opportunity cost. Any decision to pursue one goal means you’re missing out on something else, but ideally, we look to minimize opportunity costs when assessing financial trade-offs. In this instance, the opportunity cost is leaving potential investment earnings on the table.

Let’s say you recently refinanced your student loan from 5% to 3.5%. Given the competitive rate on your newly refinanced student loan, you could consider continuing to make the monthly payment on your loan and allocating the extra cash flow elsewhere — like investing for retirement or buying a home.

Remember, we want to think about interest rates in terms of opportunity cost. What would it look like if you paid off your loan early? Your student loan costs you 3.5% annually, and that’s what you’ll “save” if you accelerate your payoff by $500 per month.

Once you paid off the loan early, you could invest your money in an asset class — such as the stock market — with the potential to earn a rate of return that’s higher than 3.5%. Historically, the stock market has returned an average of 10%. This investing can be done within a retirement account, whether a 401(k) or an IRA.

That said, stock market returns are erratic, and the annualized return figures you often hear quoted are just that — an average. Investing is risky, and there is always a chance that returns over the next five, 10, or 20 years will not outpace the interest that you are currently making on your student loan payment.

No one, not even a financial planner, has a crystal ball and can see into the future. This is why we also need to take into account your personal preferences.

If you feel like you are truly missing out on investing in an IRA or saving for a home, then investing in those things might be the right path for you. If your student debt makes you feel burdened and miserable, you could focus on that instead.

Paying Off Student Loans vs. Investing

“So, should I pay off student loans or invest,” you ask.

The answer is…it’s complicated.

Student loans often come with low interest rates, which means you’re not paying a huge amount of extra money over the years (like you would with a credit card, for example). So it’s low-cost debt. That means that if you want to invest in other areas of your life, such as saving for retirement or to buy a house, you may be able to do both.

Contributing to a Retirement Account

Many Americans are vastly under-saving for retirement, and with so many employers offering a 401(k) matching program, not contributing is like throwing money down the drain.

There is no standard for match programs — they can range from meager to generous. Between your contributions and your employer’s, it is often recommended that you save between 15% and 20% of your salary for retirement. You can do this by contributing the full allowable amount to your 401(k), which is $19,500 in 2021.

If you don’t have access to a 401(k) — perhaps you’re self-employed — you can save for retirement with other investment accounts like an online IRA or a brokerage account. No matter which account you use, you might want to consider putting that money to work with a long-term investment strategy. For example, you might choose to deploy a strategy of low-cost mutual funds that invests in stocks and bonds.

Buying a Home

Financial planners don’t all agree on whether a home is a good investment. That is not to say that a home is not a good financial goal; if it’s a priority to you, then it’s great. This is simply a commentary on whether a home produces a good return on investment.

Although a house may not have as high an investment return as other asset classes, such as the stock market, a house provides something that a stock or bond cannot — immediate utility. You cannot sleep and eat inside a stock or a bond.

While home values do typically grow over time, you must also take into consideration the costs of buying and owning a home, such as the interest paid on the mortgage, property taxes, and repairs and maintenance. That said, homeownership can be rewarding, and can pay major dividends down the line. One big benefit is having no monthly housing expenses (like rent or a mortgage) in retirement.

The Takeaway

There is no hard and fast rule when it comes to investing while juggling debt. Undoubtedly, the biggest ticket item you’ll need to invest for is retirement — but whether you invest in retirement before or after paying down debt depends on your personal preferences and situation.

One thing to remember: Financial tradeoff decisions don’t always have to be all-or-nothing. You might choose to split the difference by putting a little here and a little there. For example, you might contribute $300 per month to your 401(k) and $200 to a high-yield savings account for your down payment for a house, all while paying off student loans.

With SoFi Invest®, you can invest in traditional and Roth IRAs, crypto, or ETFs, with hands-on active investing or automated investing. The choice is yours — based on your personal situation, goals, and preferences.

Find out how to invest for your future with SoFi Invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
WM17116B

Source: sofi.com