What Is a Gift Tax Return and When Is It Due?

What Is a Gift Tax Return and When Is It Due?

An individual preparing to file a federal tax return will want to think back on gifts given in the prior year. If a gift exceeds a certain threshold, the IRS wants it reported by Tax Day — but only extremely wealthy taxpayers will ever have to pay taxes on their lifetime of gifts.

In 2022, you could have made gifts worth up to $16,000 per recipient without reducing your lifetime exemption, being required to report the gift to the IRS, or paying federal gift tax.

Gifts over that value count toward the lifetime gift and estate tax exemption of $12.06 million (per spouse, if married), rising even higher in 2023.

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What Is a Gift and What Is Not?

According to the IRS, gift tax is applicable when property is transferred from one person to another, with the giver receiving nothing, or less than full value, in return.

The tax applies even when the donor doesn’t consider the transfer a gift.

The IRS defines the federal gift tax broadly, including when the gift is monetary or a physical property, or a donor allowing someone to stay in their property or earn income from the property without getting something equal in return.

Someone who makes an interest-free or reduced-interest loan may also be seen as giving a gift.

When you make a gift other than cash, you must assess the property’s fair market value: the price a willing buyer would pay in the open market. If you’re buying a house from a family member, you might ask for a gift of equity.

Generally, the IRS does not consider these taxable gifts:

•   Gifts that are not more than the annual exclusion for the calendar year

•   Another person’s tuition, as long as payments are made directly to the educational institution

•   Another person’s medical expenses, as long as the payments are made directly to medical service providers

•   Gifts to a spouse who is a U.S. citizen

•   Gifts to a political organization

•   Gifts to IRS-approved charities

Recommended: Rich vs Wealthy: What’s the Difference?

What Is a Gift Tax Return?

Par for the course with the IRS, there’s a form involved if you made a gift exceeding the annual limit: Form 709. It is to be filled out the year after the giving of the gift. So if a relevant gift was given in 2022, the information belongs on the 2023 tax return form.

Information on this form lets the IRS know that a gift has been given that falls within the scope of the gift tax.

Married couples may “split” gifts and essentially double their annual exclusion. If you are married and your spouse consented, you could have given up to $32,000 to an unlimited number of individuals in 2022 with no gift or estate tax consequences. For 2023, that amount rises to $34,000.

Spouses who split gifts always have to file Form 709, even when no taxable gift was incurred.

The gift tax is tied to the estate tax. As of tax year 2022, you can leave up to $12.06 million to relatives or friends free of any federal estate tax. If you’re married, your spouse is entitled to a separate $12.06 million exemption. Clearly this is the province of high earners.

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Who Files the Gift Tax Return: the Giver or the Recipient?

Taxes typically fall on the donor, not the recipient.

There may be special circumstances when the recipient will agree to pay the tax. If you make this agreement, the IRS suggests that you contact your tax professional for guidance on how to proceed.

Annual Exclusion for 2022

You could have made an unlimited number of tax-free gifts in 2022 as long as no one received more than $16,000.

If you held back, just know that you can make an unlimited number of tax-free gifts of up to $17,000 in 2023, when the lifetime gift tax exemption increases to $12.92 million per person.

Tracking gifts you make, and all outlays, is easier with a spending app.

When Do You Need to File a Gift Tax Return?

This follows the regular tax filing deadline, which is April 18 in 2023.

If you need a gift tax return extension when you’re not filing a tax extension for your general income tax return, file Form 8892. This will typically give you a six-month extension.

How to File a Gift Tax Return

First, you use the federal gift tax return Form 709 that’s available online through the IRS. The IRS also provides gift tax return instructions. The agency includes determining if you need to file a form and, if so, for what gifts.

You may need to decide whether you and a spouse will split the gift taxes.

Form 709 is complicated. Whether you’re a seasoned tax filer or filing taxes for the first time, a tax pro could be of great help.

Recommended: How Long Does It Take for the IRS to Mail a Refund?

What Happens If I Don’t File a Gift Tax Return?

You could be fined by the IRS, and the taxing authority is becoming more vigilant in levying these failure-to-pay penalties. The fine equals 0.5% for every month that the tax isn’t paid, based on the amount of the gift. So, as time goes by, the fine gets bigger. If the IRS determines that fraud was involved, the fine can go up to 5%.

If this oversight isn’t discovered in a person’s lifetime, the estate could be assessed the accumulated fine.

How Long Should You Keep Gift Tax Returns?

Keep them indefinitely! They will likely be needed by the executor of your estate.

Recommended: Updates to the Tax Code

The Takeaway

A gift tax return might inspire dread, but it’s simply a way for the IRS to track eligible gifts made in a year and over a lifetime. Most people will never pay gift taxes.

Want to keep tabs on gifts and track all of your money in one place? SoFi Insights provides credit score monitoring, spending breakdowns, budget planning, and more at no cost.

Find financial enlightenment with SoFi Insights.

FAQ

What triggers a gift tax return?

The main trigger is exceeding the annual limit of what you can give without taxation. The annual amount per donee is $16,000 in 2022 and $17,000 in 2023.

Do I have to file a gift tax return if I receive a gift?

In general, it’s the donor of the gift, not the recipient, who pays the tax.

What happens if I don’t file a gift tax return?

The IRS may levy fines. If it doesn’t happen in your lifetime, the situation may be uncovered by the IRS after your death, and fines can be levied on the estate.


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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Wedding Budget Breakdown: Line Item by Line Item

8 Tips for a Budget Dream Wedding with Budget Breakdown

The prospect of getting hitched often gives a couple butterflies — about their enormous wedding budget. But marrying your special someone doesn’t have to mean going into debt. A wedding budget breakdown can help you prioritize which elements matter most to you, so you can achieve the wedding of your dreams without going overboard.

We’ll review the average cost of common wedding items big and small, mistakes to avoid, and cost-cutting tips that will make the whole process easier on your wallet and your peace of mind.

Average Cost of a Wedding

Based on their survey of 15,000 couples who wed in 2021, wedding planning site The Knot projects that the average cost of a wedding in 2022 will be $28,000. That figure doesn’t include the wedding ring, which they claim typically costs around $6,000.

In real life, the average cost of a wedding varies widely based on location. In Idaho, Oklahoma, and Wyoming, wedding expenses total around $16,000. Over in New Jersey, New York, and Washington, D.C., the big day exceeds $40,000.

We’ve rounded up the items that will account for most of your wedding budget.

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Major Costs to Include in Your Wedding Budget Breakdown

Keep in mind that the numbers below reflect average costs nationwide. Yours may be more or less depending on where you live, your taste, and your income.

Average Wedding Costs

Venue $10,700
Engagement Ring $6,000
Live Music $4,300
Photographer $2,500
Rehearsal Dinner $2,300
Flowers $2,300
Videographer $1,900
Wedding Dress $1,800
DJ $1,400
Invitations $530
Wedding Cake $500
Favors $450
Bride’s Hair Stylist $130
Bride’s Makeup $115
Catering $75/person

Mind you, these are the costs incurred by and for the bride and groom. The groomsmen and bridesmaids will incur their own costs for being in the wedding.

Figure Out What You Can Afford

No one is born knowing how to plan a wedding. To set your wedding budget, start by asking yourself a few questions:

•   How much of your savings are you willing to use for your wedding?

•   Are your parents or other relatives planning to contribute financially?

•   How much can you reasonably save each month from your salary?

•   How long will it take to save the amount of money you need?

•   Is a wedding really worth the amount of money you want to spend on it?

Getting clarity on these answers will help you come up with a starting number.

Recommended: What Are the Tax Benefits of Marriage?

Typical Wedding Budget Allocation

Budget allocation involves assigning a percentage of your overall fund to each category. Use the percentages below to get a rough idea of how much you can pay for your venue, catering, etc. According to The Knot, a typical budget allocation looks like this:

Wedding Budget Allocation

Venue 30%
Catering 23%
Live Music 13%
Wedding Rings 7%
Alcohol 7%
Photographer 7%
Flowers 7%
Videographer 6%
Couple’s Attire 6%
Wedding Planner 5%
Lighting & Decor 5%
DJ 4%
Guest Entertainment 3%
Transportation 3%
Stationery 2%
Hair & Makeup 2%
Favors 1%
Cake or Desserts 1%
Officiant 1%
Other 5%

These numbers don’t add up to 100% because alternative options are offered for the same category, such as live music, DJ, or guest entertainment. In combination with the average wedding costs table above, you should be able to project your total budget without any major surprises.

Common Wedding Budget Mistakes to Avoid

•   Not budgeting enough. Many couples underestimate the amount of money they’ll spend on a wedding. When there’s no plan, everything becomes a priority and you’ll go through money faster than you can imagine. Be sure to make both a wedding budget and a savings plan to make it happen.

•   Not communicating with loved ones about the budget. If you have parents or other loved ones helping to cover expenses, be sure to have a conversation with them to avoid overestimating their contribution.

•   Not saving long enough. Once you know how much you’ll need, be realistic about how long it will take you to save that money. You may want to consider pushing back your wedding date to have enough time to save for it. (Too late to save up? Learn about wedding financing options.)

•   Going into debt. Many couples put wedding expenses on a credit card. If the balance isn’t paid off within the month, you’ll end up paying high interest rates on top of what you budgeted.

•   Forgetting to budget for unexpected costs. Surprise bills always come up. Keep a small amount reserved for unexpected wedding expenses.

•   Not keeping track of your spending. With wedding expenses, it’s easy to lose track of which bills you’ve paid. A spending app can help you monitor expenses and stick to your budget.

7 Cost-Cutting Tips When Planning a Wedding on a Budget

If your list of wedding expenses far exceeds your budget, don’t panic. Trimming your costs isn’t so hard if you know how to go about it. These ideas can help.

1. Limit Your Guest List

Consider shortening your guest list to include only close friends and family members. This can be a blessing in disguise for certain types of weddings. For instance, a destination wedding is especially difficult to coordinate for more than 100 people.

2. Host the Ceremony or Reception at Home or Outside

The wedding venue is often your biggest expense — unless you move the ceremony outside or to a private home. You can reserve a park pavilion for around $100. A permit to hold a wedding ceremony at a national park is around $385. Forgoing a fancy venue puts a lot of money back in your pocket.

Recommended: Should I Sell My House Now or Wait?

3. Source Second-Hand Items

Utilizing a few previously owned items is a real budget saver.

•   Wedding decor. Gently used decor is often sold online at a fraction of the cost. Keep your eye on Craigslist, Facebook Marketplace, eBay, and Etsy, for items that work with your theme.

•   Wedding dress. A wedding dress that costs thousands brand-new can be thrifted for a few hundred dollars. If you really want to save money, consider borrowing a dress from a good friend or family member.

4. Ask Friends and Family to Gift Their Skills

Do you have a photographer in your network? What about an aspiring caterer or florist? While it’s worth paying for their skills, you can also try exchanging something of value. Babysitting for busy parents is always a winner.

You can also ask for services in lieu of a gift. Tactfully articulate your desire to start your new life on a budget, while respecting their need to earn a living. If they say they can’t do it, don’t push.

5. DIY Whenever Possible

Many details that cost a fortune to outsource may be pulled together with the help of friends and family.

•   Centerpieces. Your table decor can be made ahead of time by the wedding party or a group of aunties.

•   Invitations. It’s so easy to make your own invitations. Even if you’re unskilled, you can use online tools like Canva to create your design. Save the result as a photo file for cheap printing. Image files cost as little as 19 cents to print. Compare that to formal invitations that typically cost several dollars each to print.

•   Catering. Know someone who makes an incredible main dish or specializes in smoked barbeque? They may be willing to help out for little more than the cost of groceries and supplies.

•   Flowers. Making your own bouquet from flowers sold at the farmer’s market or grocer is an easy way to save a lot of money. Check out a YouTube video tutorial and you’ll be on your way.

6. Use a Dummy Wedding Cake

A dummy wedding cake is one that is made just for appearance. It’s frosted to look like a real cake but underneath it’s just styrofoam or cardboard.

7. Time Your Wedding Strategically

Wedding season traditionally runs from May to October. This is when demand is highest — and prices too. If you can plan a wedding for the off-season (say, December or March) demand and prices are lower. You may be able to get the venue you want for the price you want.

8. Scout Out Vendors

While you’re saving money for the wedding, you might as well suss out suitable vendors and venues at other weddings. Make notes on what you like, and book services way ahead of time for a better deal.

Recommended: The 52-Week Savings Challenge

The Secret to the Wedding of Your Dreams

Your dream wedding doesn’t have to spawn a nightmare budget. Be mindful of what you really want and what you can really afford. If a backyard potluck is all it takes to make you happy, then don’t worry about what other people say you “should” do.

Do what you want — and feel great about sticking to a budget that frees up funds for other purposes, like your first home or a lengthy honeymoon. Because saving for a dream wedding is just the first step in a couple’s life together.

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The Takeaway

Budgeting for a wedding can help you start married life on the right foot financially. First, find out the average costs in your area for major wedding expenses — venue, catering, music, photography. Then determine how much money you can pull together from family, your current savings, and however many paychecks you’ll receive before the big day. Budget allocation (assigning a percentage of your funds to each category) can help you separate your wants from needs. For example, you may want a live band and sit-down dinner for 200, but you only need a DJ and lots of passed hors d’oeuvres. If you scrimp on some items, you can splurge on others.

The right tools can make budgeting a lot easier. SoFi Insights is a free money tracker app that offers a complete picture of your financial health. For saving, investing, and paying off debt, take a look at SoFi Insights.

SoFi Insights makes it easy to know where you stand, what you spend, and how to hit your financial goals — all in one app.

FAQ

How should your wedding budget be broken down?

Spend according to your values. If you value how you look, allocate a large portion of your budget to the dress, tuxedo, hair stylist, and makeup artist. If you value memories created by a video, allocate enough budget for that service. It all comes down to priorities. Spend more money on the things that are important to you, and save money on things that are incidental, and you’ll most likely be happy with your decisions.

What is a good budget for a simple wedding?

Since tastes and costs vary so much, it’s hard to offer an exact number for a simple wedding budget. Getting married doesn’t have to cost much more than the marriage license fee, but if you want to celebrate with loved ones, you’ll need to save money to make it happen. With a little creativity, it’s possible to make your wedding ideas come to life on any budget.

What is a low budget for a wedding on average?

For a low-budget wedding where no meals are provided for guests, plan on spending a few hundred dollars. At the very least, you need to pay a fee for a marriage license and an officiant. You can wear something you already have, eat a potluck meal, and take your own pictures — and it will still be magical.


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SoFi’s Insights tool offers users the ability to connect both in-house 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. 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 provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
*Terms and conditions apply. (Must click on the link to be eligible.) This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the Rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed into SoFi accounts such as cash in SoFi Checking and Savings or loan balances, Stock Bits, fractional shares and cryptocurrency subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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What Is the Qualified Dividend Tax Rate for Tax Year 2022?

What Is the Qualified Dividend Tax Rate for Tax Year 2022?

Dividends are payments that investors can receive from stocks, exchange-traded funds (ETFs), and mutual funds. These earnings count as income and may be taxable, depending on your income and filing status.

We’ll investigate dividend tax rates and the difference between ordinary and qualified dividends.

Defining Ordinary and Qualified Dividends

The IRS divides stock dividends into two categories: ordinary and qualified. The federal tax rate is different for each category. A qualified dividend is one that qualifies for a lower tax rate based on the concept of capital gains. An ordinary dividend, meanwhile, is one that doesn’t that doesn’t qualify for a lower rate.

When a company declares a dividend payment, your dividend is ordinary if you’ve held their stock for less than 61 days over a 121-day period. If, however, you make the stock purchase on or before the date that it’s declared, and then hold it for at least 61 days, it is considered qualified.

The timing also matters. Let’s say that you own stock in Company A, and they announce that a dividend will be paid on December 1. The day before, November 30, is called the ex-dividend date, or ex-date. If you bought your shares of stock 60 days or fewer before November 30, then your dividend is ordinary. But if you bought the stock more than 60 days before November 30, your dividend is qualified.

Recommended: Does Net Worth Include Home Equity?

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Recommended: What Is a Dividend?

Qualified Dividend Documentation

When it’s tax time, you’ll receive a 1099-DIV. This is the form that financial institutions use to report dividends to the IRS and relevant taxpayers. Box 1a shows the total ordinary dividends you received during this tax period. Box 1b shows your qualified dividends. The form will also show any federal or state income tax that was withheld. You can use this information plus the federal dividend tax rate to determine what you owe.

Financial institutions must issue a 1099-DIV to shareholders who receive more than $10 in dividends and other distributions for the year. For more on tax documentation, read our story on the most common types of tax forms.

Tax Information for Ordinary and Qualified Dividends

The ordinary dividend tax rate is the same as an individual’s income tax bracket for the year.

The qualified dividend tax rate for 2022 is calculated using capital gains tax rates. This may be 0% depending on your taxable income and filing status:

•   Less than $41,676 for single or married filing separately.

•   Less than $55,801 for head of household.

•   Less than $83,351 for married filing jointly or qualifying widow(er).

The qualified dividend tax rate rises to 15% for the next tax brackets:

•   $41,676 to $459,750 for single filers.

•   $41,676 to $258,600 for married filing separately.

•   $55,801 to $488,500 for head of household.

•   $83,351 to $517,200 for married filing jointly or qualifying widow(er).

Once your household income exceeds the 15% bracket, you’ll pay a 20% tax rate on any qualified dividends. There may also be a 3.8% net investment income tax. Consult your accountant or financial advisor regarding your situation.

Recommended: 2022 IRS Tax Refund Dates

Dividend Tax Rate 2021

The thresholds can change by year. For example, the dividend tax rate for 2021 was as follows:

•   0% dividend tax rate:

◦   Single filers, up to $40,400

◦   Married filing jointly, up to $80,800

•   15% dividend tax rate:

◦   Single filers, $40,401–$445,850

◦   Married filing jointly, $80,801–$501,600

•   20% dividend tax rate:

◦   Single filers, $445,851+

◦   Married filing jointly, $501,601+

Dividend Tax Rate 2023

Looking ahead, we’ve got some insights into the 2023 tax year. A married couple filing jointly won’t pay taxes on qualified dividends until their income is above $89,250. Above that amount, the tax rate will be 15%. The tax raise will go up to 20 percent when a couple earns more than $553,850.

Individual filers won’t pay 15% until their income is greater than $44,625. They’ll pay 20% when income exceeds $492,301.

Why Are the Two Types of Dividends Taxed Differently?

Qualified dividends are more favorably taxed as an incentive to investors to hold onto stocks for a longer period of time. This is based on the concept of capital gains.

Recommended: Short-term vs. Long-term Investments

Additional Qualified Dividend Requirements

Besides the holding period described above, the dividend must have been paid by a corporation in the U.S. or a qualifying foreign one. Plus, the payment can’t be a dividend in name only. For example, payments given by tax-exempt agencies don’t qualify.

If a payment doesn’t satisfy all three requirements, then it can’t be a qualified dividend. It may be an ordinary dividend or another type of income.

The Takeaway

There are two broad types of dividends: ordinary and qualified. Qualified dividends are taxed at a lower rate than ordinary dividends. For a dividend to be qualified, an investor must hold the stock for at least 61 days during a particular time frame. A 1099-DIV will break out dividends into qualified and ordinary for the taxpayer’s information. There are three tax rates for qualified dividends. The lowest tax brackets pay nothing. The next brackets pay 15%, and the highest brackets pay 20%. Ordinary dividends are taxed as regular income.

To seamlessly track your finances, consider our spending app, SoFi Insights. You can set up a budget, pay bills, categorize your spending, and more. All for free.

SoFi Insights money tracker app makes it easy to know where you stand, what you spend, and how to hit your financial goals — all in one mobile app.

FAQ

What is the tax rate on dividends in 2022?

The ordinary dividend tax rate is based on your tax bracket. With a qualified dividend tax rate, it depends on your filing status and your income. The lowest tax brackets pay nothing, the middle brackets pay 15%, and the highest brackets pay 20%.

How do I calculate my qualified dividends?

Investors receive form 1099-DIV from their financial institution, which provides the amount of ordinary and qualified dividend income received during the year. The IRS also provides a worksheet.

Why are my qualified dividends being taxed?

Dividends are a type of income, and investors who receive them typically pay taxes on them. It’s true that individuals who make less than $41,676 pay no tax on qualified dividends. However, taxpayers in higher brackets must pay 15% or 20%.


Photo credit: iStock/AsiaVision

SoFi’s Insights tool offers users the ability to connect both in-house 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. 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 provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
*Terms and conditions apply. (Must click on the link to be eligible.) This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the Rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed into SoFi accounts such as cash in SoFi Checking and Savings or loan balances, Stock Bits, fractional shares and cryptocurrency subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Does Paying for Your Car Insurance Build Credit?

Does Paying for Your Car Insurance Build Credit?

You might think that paying for your car insurance each month affects your credit in the same way that paying other recurring bills does. In most cases, paying for car insurance does not help build credit. This is mostly because car insurance is not an installment loan, so it isn’t reported to the major credit bureaus.

However, if your insurance account goes delinquent and is sent to collections, that could have a negative impact on your credit score. In this way, car insurance does have the potential to affect your credit score.

How Does Paying Car Insurance Work?

Like most types of insurance, car insurance works by making monthly (or annual) premium payments to the insurance company. Then, if you are in an accident that is covered by your policy, the insurance company may pay to repair or replace your vehicle, subject to the deductible listed on your policy.

Every car insurance policy is different, so work with your agent to make sure you understand how your particular policy works.

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Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

Paying Car Insurance With a Credit Card

Many insurance companies do allow you to pay for your car insurance with a credit card. However, it’s possible that your company may only allow payment by cash, check, or bank transfer.

If you do pay for your car insurance with a credit card, make sure that you are including that amount in your monthly budget. That way, you can make sure to have enough money in your bank account to pay your credit card statement in full.

How Your Credit Score Can Be Affected by Paying Car Insurance

While your regular and on-time car insurance payments likely will not have an effect on your credit score, that doesn’t mean your score can’t be impacted by paying car insurance. Specifically, your credit score can be affected by not paying your car insurance premiums. If your insurance agency sends your account to a debt collection agency, that could result in negative impacts to your credit score.

Does Paying Car Insurance Help Build Credit?

As we’ve mentioned before, paying your car insurance does not usually help with building credit. So if you’re hoping to do so, you’ll need to look at other avenues, like making regular on-time payments to your creditors. Additionally, paying off a debt affects your credit score by lowering your debt-to-income ratio and your overall credit utilization, so that could be another avenue to consider.

Factors to Consider When Paying Car Insurance With a Credit Card

The biggest factor to consider if you want to pay your car insurance with a credit card is whether or not your insurance company accepts credit card payments. While many insurance agencies do, some do not. If your agency does not take credit card payments, you’ll have to find an alternative way to pay your bill.

Additionally, you’ll want to make sure that you have the money budgeted to pay off your credit card balance in full when it comes due. That way, you’ll avoid accruing interest on your car insurance payment if you used your credit card to cover it.

Recommended: How to Avoid Interest On a Credit Card

Consequences of Missing a Car Insurance Payment

If you’re significantly late with a car insurance payment and your account is sent to collections, that can negatively impact your credit score. However, the biggest consequence of missing a car insurance payment is that you may not be covered if you get into an accident. Generally, car insurance covers you only if your premium payments are up-to-date.

Additionally, if you live in a state where car insurance is required and your insurance has lapsed, you may face civil or criminal charges.

Recommended: What is a Charge Card?

Do Car Insurance Payments Appear on Your Credit Report?

Generally, car insurance payments do not appear on your credit report. This is in contrast to other types of recurring payments like mortgages or loans. However, if you make significantly late payments, your insurance company may report those late payments to the credit bureaus.

Recommended: When Are Credit Card Payments Due?

Does Your Credit Score Impact Car Insurance Rates?

While paying your car insurance does not usually impact your credit score, the reverse is not true. Your credit score can (and often does) impact the rates that you are charged for car insurance.

A lower credit score can mean that your insurance premiums are higher. That is yet another reason to work on improving your credit score by following solid financial practices.

Factors That Determine Your Car Insurance Rate

Here are some of the major factors that can determine your car insurance rate:

•   Age

•   Gender

•   Make and model of your car

•   Location (ZIP code) where you typically park your car

•   Your driving habits, including how much you drive and your driving record

•   The type of coverage you choose, as well as the limits and deductibles

•   Your credit score

If you’re looking to lower your car insurance costs, making changes in some of the above areas can help. This could include improving your credit or driving record or reviewing your coverage needs.

Recommended: What is the Average Credit Card Limit?

Other Ways to Build Credit

Although paying your car insurance on time does not usually impact your credit, there are a few other ways you can build your credit.

Paying Your Bills On Time

One of the best ways to build your credit is by paying your bills on time, each and every month. Set up a budget and make sure that your monthly expenses are less than your monthly income. Work toward having an emergency fund to help cover you when you have unexpected expenses. Organize your bills and make sure that you pay them by their due dates.

Recommended: How Paying Off a Car Loan Affects Your Credit Score

Responsibly Using a Credit Card

Another way of establishing credit is by responsibly using a credit card. Most credit card payments and balances are reported to the major credit bureaus. Responsibly using a credit card and paying it off in full each month can help you build credit.

Additionally, some credit cards, like the SoFi Credit Card, offer rewards, such as cash-back rewards, with each purchase. Those rewards can serve as a bit of extra income each month to help you meet your financial goals.

Recommended: Tips for Using a Credit Card Responsibly

Taking Out a Personal Loan

When potential creditors look at your credit report, many of them are looking for evidence that you can be trusted to pay your debts. If you don’t have many items on your credit report, lenders may not be sure if you’ll be responsible with additional debt. Taking out a personal loan (and then responsibly paying it back in full) can be one way to build your credit.

The Takeaway

While having and paying for car insurance is important if you regularly drive a vehicle, it usually won’t have much of an impact on your credit score. However, if you don’t pay your insurance premiums when they’re due, your account might be sent to collections, which can negatively impact your credit score. If you’re looking for ways to build your credit, you might consider getting a personal loan or opening and responsibly using a credit card.

When you’re ready for a new credit card, you can consider a cash-back rewards credit card like SoFi’s credit card. With the SoFi credit card, you can earn unlimited cash-back rewards if you’re approved. Then, use those rewards as a statement credit, invest them in fractional shares, or put them toward other financial goals you might have, like paying down eligible SoFi debt.

Apply for a SoFi credit card today!

FAQ

Can unpaid car insurance affect my credit score?

Yes, unpaid car insurance can negatively affect your credit score. If you make significantly late payments, your insurance company might report the late payments to the credit bureaus. If your account becomes too delinquent, it may be sent to collections, further impacting your credit score.

How does my credit score impact my car insurance rate?

Many insurance companies do consider your credit score and credit history when determining the rates you pay for car insurance. As with many financial products, having a good credit score can help you to pay lower monthly premiums for car insurance.

Can I get car insurance with low credit?

Yes, it is possible to get car insurance with low credit, though your monthly premiums may be higher than those of a similar applicant with better credit. If you’re looking at lowering your car insurance, one option is to raise your credit score. You could accomplish this through paying down debt, examining your credit report for inaccuracies, or being more regular about making on-time payments to your creditors.


Photo credit: iStock/Believe_In_Me

1See Rewards Details at SoFi.com/card/rewards.
SoFi cardholders earn 2% unlimited cash back rewards when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back rewards when redeemed for a statement credit.1
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.
The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
Members earn 2 rewards points for every dollar spent on eligible purchases. If you elect to redeem points for cash deposited into your SoFi Checking or Savings account, SoFi Money® account, fractional shares or cryptocurrency in your SoFi Active Invest account, or as a payment to your SoFi Personal, Private Student, or Student Loan Refinance, your points will redeem at a rate of 1 cent per every point. If you elect to redeem points as a statement credit to your SoFi Credit Card account, your points will redeem at a rate of 0.5 cents per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

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Does Financing a Car Build Credit? How Car Loans Affect Credit

Does Financing a Car Build Credit? How Car Loans Can Affect Your Credit Score

If you’re like the millions of Americans who have an outstanding auto loan, you may be wondering how your car loan affects your credit. Applying for and having a car loan does affect your credit, as long as the loan is reported to one of the major credit bureaus.

Like with most other debt obligations, responsibly making on-time payments can help your credit score — in this, way financing a car can build credit. On the other hand, making late or missed payments can hurt your credit score, as can the hard pull of your credit report that potential lenders conduct when you apply for an auto loan.

Recommended: When Are Credit Card Payments Due?

How Does Car Financing Work?

While it is possible to pay for a new car with cash, it’s common for many potential auto buyers to use car financing. You may get a car loan for the full purchase price, or make a down payment and get a loan for the rest of the amount.

The lengths of car loans vary but are commonly 48, 60, or 72 months. After making your payments for the balance of the loan, the loan is paid off and you take full ownership of the car.

Note that your car acts as collateral for an auto loan. This means that if you fail to repay the amount borrowed, the lender can take your car to recoup its losses.

How Financing a Car Can Affect Credit Positively

Most car loans are reported to the major credit bureaus, and your payment history and balance is usually included on your credit report. Making on-time payments on your car loan can have a positive impact on your credit. Potential lenders want to see a history of reliably paying your debts, and making payments on a car loan can help with establishing that.

Another factor that makes up your credit score is having a healthy mix of different types of credit. This can be another reason why having an active auto loan can help build credit, as it adds to the types of credit you have.

Cash in on up to $250–and 3% cash back for 365 days.¹

Apply and get approved for the SoFi Credit Card. Then open a bank account with qualifying direct deposits. Some things are just better together.


How Financing a Car Can Affect Credit Negatively

Just as making on-time payments on your car loan can have a positive impact on your credit score, missed or late payments can affect your credit negatively.

Additionally, when you initially apply for an auto loan, the lender will conduct a hard pull on your credit report to verify your creditworthiness. This can drop your credit score by a few points, though those drops usually only last a few months. If you’re working with multiple lenders, keep in mind that hard credit pulls by multiple lenders in a short period of time will usually get combined.

And while paying down debt is often a good idea, paying off a car loan affects your credit in some additional ways. If you don’t have other debts or loans, it’s possible that paying off your loan can have a negative impact on your credit score. This is because your on-time payments no longer get reported, and you’ll have one fewer type of credit to your mix. Additionally, if you took out your car loan a while ago, paying it off can impact the average age of your open accounts, which also influences credit.

Factors That Influence Your Credit Score

The biggest factor that influences your credit score is your payment history. Potential lenders want to see that you reliably pay your debts, and making on-time payments is one way to show that. Other factors that influence your credit score are:

•   Your average age of accounts

•   Credit mix

•   How much you owe

•   How many recent inquiries appear on your credit report

Tips to Build Your Credit Score

If you’re wondering, ‘does a car payment build credit?’, then you’re likely hoping to boost your score. Here are some tips to consider to build credit:

•   Make sure that you always pay your bills on time.

•   As you apply for new debt or credit, only apply for loans that you know you have the financial ability and discipline to pay.

•   Aim to keep your credit utilization — the amount of your total credit you’re using — at 30% or lower. Having a higher credit utilization rate can negatively affect credit.

•   Remember to check your credit report at least once a year. Not only can this help you to monitor your credit health and understand the impacts of various activities on your credit, it can help you spot any errors or fraudulent activity.

Recommended: Credit Score Needed to Buy a Car

Mistakes to Avoid When Financing a Car

One of the biggest mistakes that you can make when financing a car is applying for a higher loan amount than you can afford. When you take out a car loan, you’re making a multi-year commitment to make those monthly payments. If you take out a loan for more money than you can reasonably afford, you run the risk of destabilizing your overall financial situation and ending up in a situation where you make late payments or, even worse, miss payments.

Recommended: Average Payment for a Car

Is a Car Loan a Wise Option to Build Credit?

A car loan can be a good option to build up your credit. Remember, what potential lenders are looking for when they look at your credit report is a history of meeting your debt repayment obligations. A car loan that you regularly pay on-time can be a great way of showing that you are reliable.

Follow our tips for getting a car loan to give you a head start toward building your credit.

Other Ways to Build Credit

Aside from turning to car financing to build credit, here are a few other ways to build credit that you might consider.

Become an Authorized User

Another way that you can build credit is by becoming an authorized user on someone else’s credit card account. When you are an authorized user on a credit card account, you’re not financially responsible for paying the statement, but it still shows up on your credit report. Keep in mind that how the primary account holder manages their account can affect your credit score, either positively or negatively.

Recommended: Tips for Using a Credit Card Responsibly

Consider a Personal Loan

Another option to build credit is by taking out a personal loan. Unlike a car loan, which is considered a secured loan since the car itself acts as collateral for the lender, a personal loan is an unsecured loan. That means that there is no collateral for the lender to seize if you stop making payments.

In certain situations, this can make a personal loan a great option for building credit. In fact, if an auto loan isn’t the right option, you can consider getting a personal loan for a car.

Apply for a Credit Card

Responsibly using a credit card and paying it off in full each month is another way that you can establish credit. Your credit card balance and payment history are typically reported to the major credit bureaus.

Additionally, some credit cards, like the SoFi Credit Card, offer rewards, such as cash-back rewards, with each purchase. Those rewards can be a boost to your monthly budget.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?l

The Takeaway

If you take out an auto loan to buy a new or used car, it will typically get reported to the major credit bureaus. That means making on-time payments on your auto loan can help you build credit. Similarly, late or missed payments can have a negative impact on your credit score.

Applying for a credit card and making regular payments can be another way to build your credit. When you’re ready for a new credit card, consider a cash-back rewards credit card like SoFi’s credit card. With the SoFi credit card, you can earn unlimited cash-back rewards if you’re approved. You can use those rewards as a statement credit, invest them in fractional shares, or put them toward other financial goals you might have, like paying down eligible SoFi debt.

Apply for a SoFi credit card today!

FAQ

Does paying off a car loan help build credit?

While making regular payments on your car loan helps you build credit, paying off your car loan doesn’t always have the same impact. When you pay off your car loan, you no longer have the monthly payment history showing up on your credit report. Still, paying off a car loan can be a good financial move since it helps lower the total amount of your debt.

How can I keep my payment within my budget when financing a car?

The monthly payment amount of your car loan will depend on a variety of factors — the total purchase price of the car, your down payment, the length of the car loan and your interest rate. If you want to keep your monthly payment below the average payment for a car, you can get a cheaper car, make a higher down payment, or take out a longer loan. You can also work on raising your credit score to hopefully qualify for a lower interest rate.

Recommended: How to Avoid Interest On a Credit Card

How fast can a car loan raise my credit score?

While taking out a car loan can possibly build your credit, you shouldn’t count on an immediate positive impact. In the short-term, it’s possible that your credit score may decrease from the new credit inquiries and the additional debt that shows up on your credit report. However, over time, making regular and on-time payments on your auto loan could improve your credit score.

Does leasing a car build credit?

Most lease payments are reported to the major credit bureaus. That means that regular, on-time payments can help you build your credit in a similar manner to buying a car with a car loan. However, if you make late payments or miss payments on your lease, it can have a negative impact on your credit score.


Photo credit: iStock/Zorica Nastasic

SoFi cardholders earn 2% unlimited cash back rewards when redeemed to save, invest, or pay down eligible SoFi debt. Cardholders earn 1% cash back rewards when redeemed for a statement credit.1
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.
The SoFi Credit Card is issued by The Bank of Missouri (TBOM) (“Issuer”) pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
1See Rewards Details at SoFi.com/card/rewards.
Members earn 2 rewards points for every dollar spent on eligible purchases. If you elect to redeem points for cash deposited into your SoFi Checking or Savings account, SoFi Money® account, fractional shares or cryptocurrency in your SoFi Active Invest account, or as a payment to your SoFi Personal, Private Student, or Student Loan Refinance, your points will redeem at a rate of 1 cent per every point. If you elect to redeem points as a statement credit to your SoFi Credit Card account, your points will redeem at a rate of 0.5 cents per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

SOCC1122007

Read more
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