Why Did My Credit Score Drop After a Dispute?

Why Did My Credit Score Drop After a Dispute?

Under federal law, you are allowed to dispute information that shows up on your credit report both with the company that reported the information and with the reporting bureau that recorded it. There’s no fee for filing a dispute, and the credit reporting bureaus may make changes based on the information that you provide.

This can be great news if your credit report changes in your favor and your credit score gets a boost. However, it is possible that when information on your reports gets changed, your credit score actually takes a hit.

Here’s a closer look at why your credit score may have dropped after a dispute, plus other common reasons your score might drop.

Can a Dispute Hurt Your Credit Score?

When you dispute your credit report, it’s important to understand that the dispute itself does not cause your credit score to drop. In other words, you aren’t punished for questioning the information on your credit report. That said, the information in the dispute could have a negative impact on your score. For example, if the information in your dispute demonstrates that you have a lower credit limit than previously reported, your credit score could take a hit.

Common Reasons for Credit Scores to Drop

As you manage your credit score and work to build credit, there are a number of reasons your credit score may drop. Here’s what to look out for.

Recommended: What Credit Score is Needed to Buy a Car

Late or Missed Payment

Your payment history — whether you have a track record of paying off your debts on time — is a big part of how your credit score is calculated. In fact, it makes up 35% of your FICO score, which is calculated by the Fair Isaacs Corporation. Your score will likely fall if you make late payments or if you miss payments entirely.

Derogatory Remark on Your Credit Report

A derogatory mark on your credit report is a negative item that indicates you didn’t pay back a debt according to agreed upon terms with your lender. These marks tend to remain on your report for a long time, anywhere from seven to 10 years. Examples include bankruptcies, missed payments, debts in collection, foreclosures, and repossessions.

Change in Credit Utilization Rate

Your credit utilization rate indicates how much of your available credit you are currently using. You can find it by dividing your available credit by your current debt. The higher your utilization rate, the more debt you are carrying in comparison to the amount of credit you have, which may suggest that you’re overextended. Banks might get worried about your ability to pay off your loans. That’s why the amount you owe makes up 30% of your FICO score, and why a higher utilization rate can hurt your score.

Reduced Credit Limit

Your credit limit has an impact on your credit utilization rate. If your limit is reduced, your utilization rate could increase, hurting your credit score. You can lower your utilization rate by paying off some of your debts.

You can also ask one of your credit card companies to raise your credit limit. They’re usually happy to do it as long as your account is in good standing.

Closed Credit Card

The length of your credit history comprises 15% of your FICO score. When you cancel credit cards — when consolidating credit card debt, for example — you may be reducing your credit history. You could also be reducing your credit mix, which makes up 10% of your FICO score.

Recommended: 10 Credit Card Rules You Should Know

Paid off Loan

Similarly, paying off a loan might have a slight negative effect on your credit score because it can reduce your credit history and credit mix. That said, it could also have a positive effect on your record if it reduced your credit utilization rate.

Multiple Lines of Credit Opened or Applied for

New credit accounts make up 10% of your FICO score. Banks worry that when a person opens several lines of credit in a short period of time, they are at greater risk of defaulting on their loans. As a result, new lines of credit can ding your credit score.

Not only that, but simply applying for new credit can hurt your score. When you apply for a credit card or loan, your lender will make what is known as a “hard inquiry” to view your credit report. Lenders may see those seeking new credit as more risky, so hard inquiries can also have a negative effect.

Checking your own credit doesn’t lower your score. A credit check that doesn’t hurt your record is considered a “soft inquiry.”

Mistake on Your Credit Report

Mistakes on your credit report can lead to a lower score. That’s why it’s important that you monitor your credit report regularly and report errors to the credit reporting bureaus as soon as possible. You can request a free credit report from each of the credit reporting bureaus — TransUnion, Equifax, and Experian — once a year.

Identity Theft

Monitoring your credit report is also a good way to catch fraudulent behavior. If you’ve been subject to identity theft, bad actors may have used your personal information to open fraudulent accounts, which could have a negative effect on your credit score. Report these accounts immediately.

Types of Credit Report Errors to Look out for

When reviewing your credit report, look out for the following errors:

•   Personal information errors. Check your name, phone number, address, etc.

•   Accounts that belong to another person with the same name.

•   Fraudulent accounts that you didn’t open.

•   Account status errors. Check for closed accounts that are reported as still open, accounts incorrectly reported as late or delinquent, incorrect payment information, and the same debt listed more than once.

•   Balance and credit limit information that is inaccurate or out of date.

Correcting Errors on Your Credit Report

If you spot a mistake on your credit report, you can file a dispute with the credit reporting bureau. The mistake may be on your credit report with each bureau, so you may need to file a separate dispute with each.

You’ll need to file your dispute in writing and using the credit reporting bureau’s dispute form if they have one. Include documents that support your dispute, and be sure to keep a record of what you send.

Recommended: What is The Difference Between Transunion and Equifax

The Takeaway

Disputing information on your credit report can be an important part of ensuring that your credit score is as accurate as possible. You won’t be penalized for filing a dispute, though in certain circumstances, it is possible that your credit score will drop if information in your dispute has a negative impact on your credit.

To maintain a healthy credit score, carefully keep track of your finances and be sure to always make payments on time. With SoFi Relay, you can get free credit score monitoring, spending breakdowns, and financial insights to help keep you on track.

Monitor all your account balances in one place with SoFi Relay’s money tracker app.

FAQ

Why Did My Credit Score Go Down for No Reason?

Your credit score likely didn’t go down for no reason at all. It’s possible that a creditor reported new information to the credit reporting bureaus that had a negative impact on your credit report. Or there could be a mistake on your credit report. Regularly monitoring your credit report can help you catch errors.

Why Did My Credit Score Drop After Filing a Dispute?

Your credit score may have dropped after you filed a dispute if information in that dispute had a negative impact on your score. You are not penalized for filing the dispute itself.

Does Losing a Dispute Hurt Your Credit?

Losing a dispute does not necessarily hurt your credit, but it may leave it unchanged if the information you were hoping would boost your score is rejected.


Photo credit: iStock/pepifoto

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.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

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 Starting Credit Score?

What Is the Starting Credit Score?

Contrary to logic, a person’s starting credit score doesn’t begin at zero. In fact, no one’s credit score is zero. The lowest credit score is 300, but that doesn’t necessarily mean that’s a person’s starting score. If a person is just starting and has no credit history, they’re more likely to have no score.

So, for a person just beginning their credit journey, what is the starting credit score? Read on to learn the factors that impact this score from the beginning, and the habits to establish to ensure a better credit score.

How Your Credit Score Is Calculated

There’s no standardized starting credit score. That may be partly due to the factors that influence how a score is calculated. What a person’s done in their young credit history will impact their starting score.

The FICO® Score is widely used in the U.S. to help determine a person’s credit score. This FICO company uses the following to calculate its score:

Payment history

Payment history is the most important factor for any credit score, including a starting credit score. Paying on time and avoiding missed payments account for 35% of a person’s credit score. That’s why it’s important to pay everything from credit card bills to rent on time: Even a single late payment can harm a starting credit score.

Credit utilization

The second most important factor in a credit score is credit utilization, which makes up 30% of a person’s score. Credit utilization is the percentage of their available credit a person actually uses. The ideal credit utilization ratio is 30% or under.

Length of credit history

How long someone’s accounts have been open makes up 15% of their credit score. The longer an account has been open, the higher the credit score.

While it’s out of their hands, consumers who are just beginning to establish credit will likely be negatively impacted by this factor, lowering their starting credit score.

Recommended: How to Get a Personal Loan With No Credit History

Credit mix

Making up 10% of a person’s credit score, credit mix refers to the different types of credit a person has. Generally, the two types of credit are:

•   Installment loans. Think car loans, student loans, and mortgages.

•   Revolving credit. Including credit cards and home equity lines of credit (HELOCS).

If an individual can manage different types of credit without late or missed payments, it reflects well on their score.

Recommended: Does Net Worth Include Home Equity

New credit

Opening multiple new accounts at a time? This factor accounts for 10% of a credit score. New credit includes “hard inquiries” as well as opening new accounts.

For a person with a starting credit score, they may have all, none, or some of these factors on their credit history. The mix varies from person to person, making it hard to predict one starting credit score for everyone.

Recommended: Should I Sell My House Now or Wait

What Is a Good First Credit Score?

Unfortunately, a starting credit score won’t be the perfect 850. More likely it’s in the Good (670-739) or Fair credit score (580-669) range.

That’s mostly because of their limited payment history. If a person just opened a credit card or started paying back student loans, the credit bureaus don’t see an established history of timely repayment. Even if the consumer has never missed a payment, payment history is limited.

Similarly, the length of credit history is short, perhaps only a few months, which doesn’t give lenders enough data to judge a consumer as low- or high-risk.

Recommended: What Credit Score is Needed to Buy a Car

Ways to Establish Good Credit

While it can be discouraging that a starting credit score is penalized just for being new, it doesn’t take long to build credit with a few simple habits:

•   Paying bills on time will continue to be important, as payment history is a major factor in a credit score.

•   Keeping accounts open and in good standing, even if they’re no longer used, can help lengthen a person’s history.

•   Adding to the credit mix with a personal loan, credit-builder loan, or other types of credit can boost the credit mix.

•   Paying bills in full can help keep the credit utilization ratio balanced at 30% or below.

•   Not applying for too much at once will avoid the pitfall of too many hard inquiries and new accounts, which can have a negative impact.

While an individual can proactively try to improve their score, a good portion of a credit score comes from paying bills consistently over time.

Establishing good habits, and continuing them, will likely lead to a higher credit score.

Recommended: When Do Credit Card Companies Report to Credit Bureaus?

Why Your Credit Score Is Important

It may be just a three-digit number, but a good credit score is a gateway to better financial opportunities. With a Very Good (740-799) or Exceptional (800-850) credit score, borrowers have better odds of being approved for loans and may even have better repayment terms or more favorable interest rates.

Businesses and lenders may pull your credit history to confirm your qualifications for any of the following:

•   Credit cards

•   Mortgages

•   Rental apartments

•   Job applications

•   Car loans

•   Personal loans

•   Student loans

With a low credit score, or no credit score, getting favorable terms or qualifying for anything above could be challenging.

How to Check Your Credit Score

Checking a credit score isn’t just a good way to track progress. It can also highlight any incorrect or fraudulent activity tied to a person’s name.

Monitoring a credit score is free and easy. Anyone can get their free FICO Score annually from Experian using AnnualCreditReport.com. The site allows visitors three free reports annually, one from each credit bureau.

In addition, credit card companies and lenders often offer free credit score reporting on their portals.

Recommended: What is The Difference Between Transunion and Equifax

The Takeaway

Having a starting credit score doesn’t mean starting from zero – or with a perfect 850. Consumers may start at a Fair to Good level. Working to establish healthy credit habits, such as paying bills on time and in full, will raise their credit score. That’s important because the higher your credit score, the more financial opportunities you will have.

SoFi Relay’s money tracker app helps those starting on their credit journey. With free credit monitoring tools, users can track their credit score in real time, with customized insights to help improve their credit.

Getting your financial goals on track starts with your credit score.

FAQ

What are the FICO credit score ranges?

FICO® credit scores range from 300 to 850.

Can you have a credit score without a credit card?

Yes. Credit scores aren’t based solely on credit cards. The score takes into account student loans, rent, and utility payments.

What are the differences between FICO, Experian, and Equifax?

Experian and Equifax are credit bureaus that create credit scores and compile credit histories. FICO® creates its own credit score. All three companies provide slightly different credit scoring models.


Photo credit: iStock/blackCAT

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.
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
.

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.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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What Are Sinking Fund Categories?

What Are Sinking Fund Categories?

Sinking funds are tools that people or businesses can use to set aside money for a planned expense. For instance, you may know that you want to take a vacation next year, so you may start putting cash in an envelope in order to save up for that vacation — that, in effect, is a sinking fund. Sinking fund categories, as such, depend on the expenses relevant to each individual. They can include auto repairs, health care costs, gifts, insurance payments, vacation funds, and more.

You can think of sinking funds as a way of “sinking” your money into an account for later use. It’s basically a savings strategy. We’ll get into it more below.

General Definition of Sinking Funds

The term “sinking fund” has its roots in the world of corporate finance, but mostly refers to the way that an individual would utilize them — for setting aside money or income for a future expense.

Sinking funds are smaller offshoots of an overall budget. Putting together a sinking fund entails stashing money in reserve for the future, knowing what that money will eventually be spent on.

For instance, some people like to pay their car insurance in six-month installments. They may sock money away each month in anticipation of the next six-month installment payment, so that they’re not hit with a big expense all at once.

Their car insurance sinking fund contains the money they need, so they don’t have to scramble to cover the cost every six months.

Check your score with SoFi Relay

Track your credit score for free. Sign up and get $10.*


Examples of Sinking Funds Categories

When it comes to sinking funds categories, there are no hard and fast rules. Different individuals have different financial needs and planned expenditures. As such, their sinking funds categories are going to vary. That said, some common sinking fund categories are applicable to most individuals. Here are some examples:

•   Vacations

•   Gifts and holiday-related expenses

•   A new vehicle, or regular maintenance and insurance costs

•   A home purchase, or home maintenance expense

•   Medical and dental costs

•   Childcare costs

•   Tuition expenses

•   Pet expenses, such as veterinarian visits

A sinking fund can be helpful in saving for just about anything.

Recommended: How to Set Your Financial Goals

Sinking Fund Category Calculations

Setting up a sinking fund is easy enough: You can stuff cash under your mattress or use a brokerage account as a savings vehicle. The difficulty for most of us comes in regularly contributing to it. But the trickiest part may be figuring out how much you should be contributing.

A budget planner app can come in handy, as you’ll be able to see how much money you have to dole out to your sinking fund categories after your monthly expenses have been taken care of. Similarly, if you stick to a certain budget type — such as the 50-30-20 rule — that may help determine what you can contribute.

To calculate how much you can contribute to a sinking fund, first you’ll need to decide which sinking funds are the most important. Another consideration is which fund will need to be utilized first – perhaps you have an auto insurance payment coming up before a vacation. Priorities and timing both affect your sinking fund calculations.

In corporate finance, there is an actual sinking fund formula that helps a company figure out how much it needs to put away to pay off a long-term debt in a lump-sum, while paying minimum amounts in the meantime. This can apply to individuals, too.

The formula looks at the amount of money already accumulated, multiplies it by any applicable interest, then divides it by the time period remaining on the loan. Using this calculation can tell you the monthly amount needed to be contributed to a sinking fund to reach a debt-payoff goal.

For individuals, however, it can be as simple as looking at your monthly income and dividing extra cash accordingly into your sinking fund categories.

Types of Sinking Funds

How do you save up a sinking fund? There are a few savings vehicles you can utilize.

The most obvious, and probably the simplest, is to keep the sinking fund in cash, and store it somewhere safe. Of course, that money won’t be earning any interest, and will likely lose value on an annual basis due to inflation, but it’s one way to do it.

Perhaps the best and safest option is to open up individual savings accounts at your financial institution for each of your sinking fund categories. This beats cash because your sinking fund is protected (and insured up to $250,000 by the FDIC), and you will earn a little interest on it, too.

You can also invest your sinking fund. Just know that there are risks involved with that. Your investments could lose value, for one, and your savings could end up being worth less than when you initially invested them. There is likely to be fees involved too. Consider speaking to a financial professional before investing money you will need for a planned expense.

Recommended: Money Market Account vs Savings Account

Best Time to Take Advantage of Sinking Funds Categories

Sinking funds are all about using time to your advantage, by saving up for a planned or known expense well ahead of time. As such, the best time to take advantage of them is when that expense finally does arrive, be it a pricey vacation, a new car, or sending a child to college.

There may be times or periods during the year when it’s more advantageous to save than others. For instance, most people experience a financial crunch during the holiday season — there are gifts to buy, parties to attend, and other demands on your income. So that may not be the best time to “sink” money into a fund.

Instead, think about when you may have some extra money: When you get a tax refund, or receive a cash gift for your birthday. Those are the times when you may want to add something to your sinking funds.

The Takeaway

Sinking funds are designated cash reserves for future expenses. Using a sinking fund means that you’re stashing money away for an upcoming, known expense, and relieving some of the financial pressure of that expense ahead of time. Sinking fund categories can vary, depending on your individual situation. Corporations and businesses also use sinking funds.

Sinking funds are a way to get ahead of your planned expenses, and give yourself some financial wiggle room. A money tracker app can do the same, like the one included in SoFi Relay.

SoFi Relay tracks all of your money, all in one place.

Check out SoFi Relay today!

FAQ

What to put in sinking funds?

You’ll put cash in a sinking fund — cash to use on an upcoming expense at a later time. What that expense is (i.e., a sinking fund’s category) will vary depending on your specific financial needs.

What is a sinking fund leasehold?

A sinking fund leasehold contains funds for repairs or renovations to a rental property. The leaseholder or landlord sets aside a small percentage of the rental money collected every month to build up the fund.

What is the difference between a reserve fund and a sinking fund?

The two are more or less the same. The big difference is that a sinking fund’s contents are designated for a specific purpose or expense, whereas a reserve fund contains funds used for general future expenses.


Photo credit: iStock/Delmaine Donson

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.

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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How to Calculate Gross Monthly Income From Biweekly Pay Stub

How to Calculate Gross Monthly Income From Biweekly Pay Stub

Gross income is the amount of money earned before any payroll deductions for taxes, insurance, retirement contributions, and such. To calculate gross monthly income from a biweekly paycheck, find the gross amount listed on the pay stub (usually the starting number). Multiply that figure by 26 (the number of paychecks received in a year), then divide by 12 (months in a year).

The calculation for gross monthly income can differ depending on paycheck frequency. Below we’ll show you how to calculate your gross pay for different payroll schedules.

How to Calculate Monthly Pay From Biweekly Pay

There are two different monthly pay figures to understand, gross and net. Each is useful in different situations. When you’re applying for a loan, most lenders use gross monthly income to determine your debt-to-income ratio (DTI). However, many people find it easier to budget based on net or take-home pay. A budget planner app can help you decide the best approach for your situation.

As we spelled out above, if you’re paid biweekly (every two weeks), the formula for gross monthly income is:

(Gross pay amount × 26) ÷ 12

Hourly workers can also use this next formula, if they work a consistent number of hours per week:

(Hourly salary × weekly hours worked × 52) ÷ 12

To find net monthly pay, substitute the actual amount of your paycheck for the gross amount in the first formula.

Check your score with SoFi Relay

Track your credit score for free. Sign up and get $10.*


Recommended: Does Net Worth Include Home Equity

How Many Bi-Weeks in a Year

There are 26 biweekly pay periods in a year. Employees who get paid biweekly will receive 26 paychecks from January to December.

It’s important to note that receiving pay biweekly differs from receiving pay twice a month on the same dates. Workers who receive biweekly checks can’t just multiply one paycheck by two to find their monthly salary.

Employees who get paid twice a month — for instance, on the 15th and 30th — can find their monthly gross income simply by adding together the gross figures on their two monthly paychecks.

Recommended: What Is the Biweekly Money-saving Challenge?

The Different Types of Payment Periods

The most common pay periods for employees are:

•   Biweekly: Paid every other week, or 26 paychecks per year.

•   Semimonthly: Paid twice a month on the same dates, or 24 checks per year.

•   Weekly: Paid once a week, or 52 checks per year.

•   Monthly: Paid once a month, or 12 checks per year.

Employees who receive biweekly pay get two checks or direct deposits each month, except for two months of the year when they receive three paychecks. Employees who are paid biweekly might get a paycheck every other Wednesday or Friday, or whatever day their employer chooses.

With semimonthly pay, an employee might get paid on the 15th and 30th of every month. So there are always two paydays, for a total of 24 per year instead of 26.

An employee who gets paid twice a week is on a semiweekly schedule. This would entail eight paychecks each month.

Pros and Cons of Biweekly vs Semimonthly Pay

For employees, there are pros and cons to biweekly pay. Depending on their expenses and savings strategy, someone might prefer a biweekly or semimonthly schedule.

For most workers, the main pro to biweekly pay is the third “bonus” check they receive two months out of the year. By budgeting for two paychecks every month, workers can designate the occasional third check for special line items like vacations, holiday gifts, paying off debt, or boosting savings.

For others, biweekly checks just make budgeting and managing expenses more challenging. Semimonthly pay is preferable because it offers an accurate reflection of real monthly income.

Also, each semimonthly check can be dedicated to particular expenses. For example, the second check of the month can go to rent, utilities, and other housing costs, which are often due the first of the month.

Compared to weekly paychecks, both biweekly and semiweekly checks require better cash management on a weekly basis. For someone who lives paycheck to paycheck, biweekly pay periods might mean they run out of money before the next check arrives.

The Takeaway

To calculate gross monthly income from a biweekly paycheck, find the gross amount listed on the pay stub, multiply by 26, then divide by 12. (Do not use this formula if you’re paid twice a month on the same dates, rather than the same days of the week.) For your monthly net pay, substitute your net or take-home pay for the gross amount in the same calculation.

Understanding your monthly income is key to budgeting and saving. If you’re looking for help keeping track of your income and expenses, one great money tracker tool is SoFi Relay.

See all your financial information in one simple dashboard with SoFi Relay.

FAQ

How do you convert biweekly pay to monthly income?

To calculate gross monthly income from a biweekly paycheck, find the gross amount listed on the pay stub (usually the starting number). Multiply that figure by 26 (the number of paychecks received in a year), then divide by 12 (months in a year).

How do I calculate my gross monthly income?

Gross monthly income is the total of all paychecks and income received in a month, including any side hustles, rental income, etc., but before taxes and other deductions.

How do you calculate gross income from a W-2 form?

Gross wages cannot always be found on a W-2 form, due to various pre-tax deductions. Instead, look at the gross amount listed on the employee’s final paycheck for the year.


Photo credit: iStock/Eva-Katalin

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.
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 Earned Income vs Unearned Income

What Is Earned Income vs Unearned Income?

There are two basic types of income: earned and unearned. Earned income is the money you make from working, and unearned income is money you receive that isn’t tied to a business or job.

The difference between these two types of income is very important when it comes to saving for retirement and paying your taxes. Here’s what you need to know about each of them, and how they affect your finances.

What Is Unearned Income?

Unearned income is a type of passive income. It’s money you make without working or performing some kind of professional service. For example, money you get from investing, such as dividends, interest, and capital gains is unearned income.

Other types of unearned income include:

•   Retirement account distributions from a 401(k), pension, or annuity

•   Money you received in unemployment benefits

•   Taxable social security benefits

•   Money received from the cancellation of debt (such as student loans that are forgiven)

•   Distributions of any unearned income from a trust

•   Alimony payments

•   Gambling and lottery winnings

Dividends from investments in the stock market and interest are two of the most common forms of unearned income. Dividends are paid when a company shares a portion of its profits with stockholders. They may be paid on a monthly, quarterly, semi-annual or annual basis.

Interest is usually generated from interest bearing accounts, including savings accounts, checking accounts, money market accounts, and certificates of deposit (CDs).

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How is Earned Income Different From Unearned Income?

Earned income is the money you make from a job. Any money you earn from an employer — including wages, fees, and tips in which income taxes are withheld — counts as earned income.

If you’re part of the freelance economy and the companies you work for don’t withhold taxes, those wages still count as earned income. These could be wages earned by performing professional or creative services, driving a car for a ride share service, or running errands.

Money you make from self-employment — if you own your own business, for example — also counts as earned income, as does money you earn from a side hustle.

Other types of earned income include benefits from a union strike, disability benefits you receive before you reach full retirement age, and nontaxable combat pay.

This guide can help you learn about all the different types of income there are.

How Income Types Affect Taxes

All earned income is taxed at your usual income tax rate.

Taxes on unearned income are more complicated and depend on what type of unearned income you have, including:

Interest

Interest, which is unearned income from things like bank accounts and CDs, is taxed the same as earned income that you work for.

Dividends

Dividends from investments fall into two categories: qualified and non-qualified. Generally speaking, qualified dividends are those paid to you by a company in the U.S. or a qualified foreign company, and are taxed at a lower rate. Non-qualified dividends don’t meet IRS requirements to qualify for the lower tax rate and are taxed at the same rate as ordinary income.

Capital Gains

Investments that are sold at a profit are subject to capital gains taxes. If you held the investment for less than a year, your profits are subject to short-term capital gains rates, which are equal to your normal income tax rate. If you kept the investment for a year or more, it’s subject to long-term capital gains rates, which means it will be taxed at 0%, 15% or 20%, depending on your income. The higher your income, the higher your rate.

Social Security

If your income is more than $25,000 a year for individuals or $32,000 a year for married couples filing jointly, you will pay federal income tax on a portion of your Social Security benefits. You’ll be taxed on up to 50% of your benefits if your income is between $25,000 and $34,000 for an individual, or $32,000 to $44,000 for a married couple. And you’ll be taxed on up to 85% of your benefit if your income is more than that.

Alimony

As a result of the Tax Cuts and Jobs Act of 2017, alimony payments that are part of divorce agreements made after January 1, 2019 are not taxable by the person who is paying the alimony, nor are they taxable for the person receiving the alimony.

Gambling Winnings

Money you earn from gambling — including winnings from casinos, lotteries, raffles, and horse races — are all fully taxable. This applies not only to cash, but also to prizes like vacations and cars, which are taxed at their fair market value.

Debt Cancellation

If you have a debt that is canceled or forgiven for less than the amount you were supposed to pay, then the amount of the canceled debt is subject to tax and you must report it on your tax return.

If you have debts to pay off, debt payoff planning can help you pay what you owe.

How Earned vs Unearned Income Affects Retirement Savings

Retirement accounts, including 401(k)s, IRAs, and the Roth versions of both, provide tax advantages that help boost the amount that you are able to save.

For example, 401(k) contributions are made with pre-tax dollars, which can then be invested in the account. The investments are then allowed to grow tax deferred until withdrawals are made in retirement, and then they are subject to income tax. Contributions to Roth accounts are made with after-tax dollars. These grow tax free, and withdrawals made in retirement are not subject to income tax.

You must fund your retirement accounts with earned income. You cannot use unearned sources of income to make contributions.

There are certain exceptions to this rule. If you’re married and you file a joint return with your spouse and you don’t have taxable compensation, you may be able to contribute to an IRA as long as your spouse did have taxable compensation.

Recommended: 3 Easy Steps to Starting a Retirement Fund

The Takeaway

The difference between earned income and unearned income is an important distinction to comprehend, especially when it comes to paying your taxes. Unearned income, which is income you make not from a job but through other means, such as investments, can be taxed at different rates, depending on what type of unearned income it is. Make sure you understand yours — and the tax implications. Doing so can have a big impact on how you save for your future.

Keep tabs on all the types of income you have by tracking your checking, savings, investment, and retirement accounts in one place with SoFi Relay’s money tracker app. It allows you to organize your accounts on a single dashboard, as well as monitor your credit score and budget for financial goals.

With SoFi Relay you can track your money like a champion!

FAQ

Why do I need to know the difference between earned and unearned income?

It’s important to understand the difference between earned and unearned income because the two may be taxed differently. Also, in most cases, you must use earned income to fund your retirement accounts.

What is an example of unearned income?

Unearned income is money you receive without working for it. Interest, such as that from a bank account, and dividend payments are two of the most common types of unearned income.


Photo credit: iStock/FluxFactory

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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.
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