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Your credit report is an important document: It contains an in-depth record of how you’ve used credit in the past, and it can have a big impact on your life.

For example, when you apply for a loan, lenders usually check your credit report. That information contributes to their decision on whether to lend to you, as well as what interest rate to charge.

You might also have your credit checked by potential employers or when you are applying to get a mobile phone, rent a home, or perhaps connect some utilities.

Since credit reports can be so critical to many aspects of your life, it’s important that they be accurate. Unfortunately, these reports can have more errors than you may realize. An April 2024 Consumer Reports study found that 44% percent of people had errors on their credit reports. These mistakes ranged from relatively minor (like a typo in their name or address) to more significant (such as incorrect debt information that could be unfairly lowering their scores).

With that in mind, read on to learn how you can check your report and work to correct any errors you might find.

Getting a Credit Report

Like going in for a check-up once a year can benefit your physical health, regular credit report check-ups can benefit your financial health.

You can order a free credit report from each of the three major credit bureaus (Equifax®, Experian®, and TransUnion®) as often as weekly at AnnualCreditReport.com, a site run by the government. It’s a good idea to take advantage of this service, and to look over your reports at least annually.

Checking your credit report regularly can also make it easier to notice when the numbers look off or if something’s amiss. This could help you catch fraudulent activity.

Scanning a Credit Report

The best way to find an error in a credit report is to read through it thoroughly.

The Consumer Financial Protection Bureau (CFPB) recommends making sure that the following information is accurate:

•   Name

•   Social Security number

•   Current address

•   Current phone number

•   Previous addresses

•   Employment history (names, dates, locations)

•   Current bank accounts open

•   Bank account balances

•   Joint accounts

•   Accounts closed.

If any of the above is incorrect, the report has an error that you may want to dispute.

Common Credit Report Errors

While there are any number of errors that could crop up on a credit report, some are more likely than others. According to the CFPB, these are among the most common:

•  Typos or wrong information: In the personal information section, names could be misspelled, or addresses could just be plain wrong.

•  A similar name is assigned to your report: Instead of a typo, the credit report might be pulling in accounts and information of a person with a similar name to yours.

•  Wrong accounts: If an account is in your name but unfamiliar to you, this could be evidence of identity theft.

•  Closed accounts are still open: You may have closed a credit card recently, but the report shows it as still open.

•  You’re reported as the owner of the account, when you’re just an authorized user: If you’re simply an authorized user on a credit card, your credit report should reflect that.

•  False late payment: A credit report might show a late or delinquent payment when the account was paid on time.

•  Duplicate debts or accounts: Listing an account twice could make it look like more debt is owed, resulting in an incorrect credit report.

•  Incorrect balances: Account balances might show incorrect amounts.

•  Wrong credit limits: Misreported limits on credit card accounts can impact a credit score, even if they’re only off by a few hundred dollars.

How to Report an Error

Errors on credit reports don’t typically fix themselves. Account owners often have to be the ones to bring the error to the credit bureau’s attention.

Here are steps to take if you find an error in one of your reports.

1. Confirm the error is present on other credit reports.

Credit scores may vary across credit reporting bureaus, but all the core information should be the same. That means if there’s an error on one, it’s best to check if it’s on the other two. You can order free reports from all three bureaus from AnnualCreditReport.com and check each report against the others.

2. Gathering evidence.

To prove an element of the credit report is wrong, there needs to be evidence to the contrary. That means you’ll want to collect supporting documentation that shows the report has an error, whether that’s a recent account statement, ID, or a loan document. Having this documentation on hand can make the process move faster.

3. Report the error to the credit reporting company.

To resolve the error, you’ll want to file a formal dispute with the credit reporting company. You can contact them by mail, phone, or online. The CFPB offers more details on how to file a dispute.

Be sure to include all documentation of the error, in addition to proper identification.

Here’s how to contact each credit reporting company:

Equifax

Online: Equifax.com

Mail:

Equifax Information Services LLC
P.O. Box 740256
Atlanta, GA 30374

Phone: (888) 378-4329)

Experian

Online: Experian.com

Mail:

Experian
P.O. Box 4500
Allen, TX 75013

Phone: (855) 414-6048

Transunion

Online: Transunion.com

Mail:

TransUnion Consumer Solutions
PO Box 2000
Chester, PA 19016

Phone: (800) 916-8800

4. Contact the furnisher (if applicable).

A furnisher is a company that gives the credit reporting bureau information for the report. If the report’s mistake is an error from a bank or credit card company, you can also reach out to the furnisher to amend its mistake. You can contact the company through the mail (the address can be found on the credit report), or reach out to customer service by phone or online.

If the furnisher corrects the mistake, it could, in turn, update the credit report. But to play it safe, reach out to both parties.

5. Reach out to the FTC to report identity theft (if applicable).

If you notice an error that suggests identity theft (such as unknown accounts or unfamiliar debt), it’s a good idea to sign up with the Federal Trade Commission’s (FTC’s) IdentityTheft.gov site in addition to alerting the credit bureaus. The FTC’s tool can help you create a recovery plan and figure out the next steps.

6. Sit tight and wait for a response.

Once you send a credit dispute to a bureau or furnisher, you can expect to hear back within 30 days, typically by mail.

When a credit bureau receives a dispute, they have one of two choices: agree or disagree. If the bureau agrees, they will correct the error and send a new credit report.

If the bureau disagrees and doesn’t believe there’s an error, they won’t remove it from the report. In some cases, they may not agree there’s an error because there’s a delay in information getting to them. For example, a recently canceled credit card might not show up as canceled in their records yet. Changes like that might take some time.

However, if you’re confident of the error and a credit bureau doesn’t agree, that’s not your last stop.

You can also reach out to the CFPB to file an official complaint . The complaint should include all documentation of the dispute. Once the CFPB receives the complaint, you can keep track of its progress on the organization’s website.

The Takeaway

Checking your credit reports can help you ensure that the information used to calculate your credit scores is accurate and up to date. It can also tip you off to fraud or identity theft.
It’s easy and free to gain access to your credit reports from the three major bureaus. Taking advantage of this service (and reporting any errors you may come across) can be key to maintaining good credit, and good overall financial health.

Another way to maintain good financial health is to pay your bills on time (which adds positive information to your credit reports), and to keep track of your spending. The right banking partner can help with both.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What are common errors on a credit report?

Common errors on credit reports include incorrect personal information (such as addresses or Social Security numbers), accounts that don’t belong to you, late payments that were actually on time, and incorrect credit limits or balances. Errors can also include closed accounts listed as open and duplicate entries.
These mistakes can negatively impact your credit, so it’s important to review your report regularly and dispute any inaccuracies.

Do you have rights when your credit report is wrong?

Yes, you have rights when your credit report is wrong. Under the Fair Credit Reporting Act, you can dispute inaccuracies with the relevant credit bureau(s). The bureau must investigate your dispute, forward the dispute and all relevant information you provided to the company that provided the information about you, and report the results back to you.

How to fix credit report errors fast?

To fix credit report errors quickly, start by obtaining a free copy of your report from all three major credit bureaus. Identify the errors and gather documentation to support your dispute. Submit a formal dispute using the credit bureaus’ online dispute systems for faster processing. It’s also a good idea to send a formal dispute letter to the company that furnished the incorrect information. Follow up with both the credit bureaus and the company to make sure your dispute gets resolved.

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

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOBNK-Q225-076

An interest-only mortgage lets you pay just interest for a set period of time, typically up to 10 years, as opposed to paying interest plus principal from the beginning of the loan term.

While interest-only mortgages can mean lower payments for a while, they also mean you aren’t building up equity (ownership) in your home. Plus, you will likely have a big jump in payments when the interest-only period ends and you are repaying both interest and principal.

Read on to learn how interest-only mortgages work, their pros and cons, and who might consider getting one.

Note: SoFi does not offer interest only mortgages at this time. However, SoFi does offer conventional mortgage loan options.

How Do Interest-Only Mortgages Work?

With an interest-only mortgage, you make only interest payments for the first several years of the loan. During this time, your payments won’t reduce the principal and you won’t build equity in your home.

When the interest-only period ends, you generally have a few options: You can continue to pay off the loan, making higher payments that include interest and principal; you can look to refinance the loan (which can provide for new terms and potentially lower interest payments with the principal); or you can choose to sell the home (or use cash you’ve saved up) to fully pay off the loan.

Usually, interest-only loans are structured as a type of adjustable-rate mortgage (ARM). The interest rate is fixed at first, and then, after a specified number of years, the interest rate increases or decreases periodically based on market rates. ARMs usually have lower starting interest rates than fixed-rate loans, but their rates can be higher during the adjustable period. Fixed-rate interest-only mortgages are rare.

An interest-only mortgage typically starts out with a lower initial payment than other types of mortgages, and, depending on your loan conditions, you can stick with those payments as long as 10 years before making any payments toward the principal. However, you typically end up paying more in overall interest than you would with a traditional mortgage.

Interest-Only Loan Pros and Cons

Before you choose to take out an interest-only mortgage, it’s a good idea to carefully weigh both the benefits and drawbacks.

Pros

•  Lower initial payments The initial monthly payments on interest-only loans tend to be significantly lower than payments on other mortgages, since they don’t include any principal.

•  Lower interest rate Because interest-only mortgages are usually structured as ARMs, initial rates are often lower than those for 30-year fixed-rate mortgages.

•  Frees up cash flow With a lower monthly payment, you may be able to set aside some extra money for other goals and investments.

•  Delays higher payments An interest-only mortgage allows you to defer large payments into future years when your income may be higher.

•  Tax benefits Since you can deduct mortgage interest on your tax return, an interest-only mortgage could result in significant tax savings during the interest-only payment phase.

Cons

•  Costs more overall Though your initial payments will be smaller, the total amount of interest you will pay over the life of the loan will likely be higher than with a principal-and-interest mortgage.

•  Interest-only payments don’t build equity You won’t build equity in your home unless you make extra payments toward the principal during the interest-only period. That means you won’t be able to borrow against the equity in your home with a home equity loan or home equity line of credit.

•  Payments will increase down the road When payments start to include principal, they will get significantly higher. Depending on market rates, the interest rate may also go up after the initial fixed-rate period.

•  You can’t count on refinancing If your home loses value, it could deplete the equity you had from your down payment, making refinancing a challenge.

•  Strict qualification requirements Lenders often have higher down payment requirements and more rigorous qualification criteria for interest-only mortgages.

💡Quick Tip: When house hunting, don’t forget to lock in your mortgage loan rate so there are no surprises if your offer is accepted.

Who Might Want an Interest-Only Loan?

You may want to consider an interest-only mortgage loan if:

•  You want short-term cash flow A very low payment during the interest-only period could help free up cash. If you can use that cash for another investment opportunity, it might more than cover the added expense of this type of mortgage.

•  You plan to own the home for a short time If you’re planning to sell before the interest-only period is up, an interest-only mortgage might make sense, especially if home values are appreciating in your area.

•  You’re buying a retirement home If you’re nearing retirement, you might use an interest-only loan to buy a vacation home that will become your primary home after you stop working. When you sell off your first home, you can use the money to pay off the interest-only loan.

•  You expect an income increase or windfall If you expect to have a significant bump up in income or access to a large lump sum by the time the interest period ends, you might be able to buy more house with an interest-only loan.

Recommended: Tips for Shopping for Mortgage Rates

Qualifying for an Interest-Only Loan

Interest-only loans aren’t qualified mortgages, which means they don’t meet the backing criteria for Fannie Mae, Freddie Mac, or the other government entities that insure mortgages. As a result, these loans pose more risk to a lender and, therefore, can be more difficult to qualify for.

In general, you may need the following to get approved for an interest-only loan:

•  A minimum credit score of 700 or higher

•  A debt-to-income (DTI) ratio of 43% or lower

•  A down payment of at least 20%

•  Sufficient income and assets to repay the loan

The Takeaway

An interest-only mortgage generally isn’t ideal for most homebuyers, including first-time homebuyers. However, this type of mortgage can be a useful tool for some borrowers with strong credit who fully understand the risks involved and are looking at short-term ownership or have a plan for how they will cover the step-up in payment amounts that will come down the road.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

When should you use an interest-only mortgage?

There are several situations in which it may make sense for homebuyers to consider an interest-only mortgage. If they are anticipating a windfall or increase in income before the initial interest-only period is up, these loans could allow them to buy a more expensive house. If they’re looking for a second home to retire to, they can eventually use the proceeds from the sale of their primary home to pay off principal. And if they plan to move and sell the house before the interest-only period ends, an interest-only loan may be practical.

What is a main disadvantage of an interest-only loan?

Interest-only loans have several potential disadvantages. Most notably, borrowers typically end up paying more interest over the life of the loan than they would with other loans, they do not build home equity during the initial, no-interest period, and when they do start paying principal, the size of the payments may be larger than they anticipated.

Do banks still do interest-only mortgages?

Not all banks offer interest-only mortgages, but some do. Be aware that banks that offer the loans may have more demanding criteria for borrowers, like a credit score of 700 or more, a DTI ratio of 43% or less, and a down payment of at least 20%.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOHL-Q225-068

You’ve likely heard about the “one percenters” — those people whose net worth is among the top 1% in the nation. Just how wealthy are these individuals? To be part of the top 1% in the U.S., your net worth needs to be at least $11.6 million. If you’re looking strictly at income percentile, the threshold for joining the top 1% of earners in the U.S. stands at $787,712.

If you are curious about what it takes to be among the 1% or have your sights firmly set on joining their ranks, read on. Here’s a closer look at how the wealthiest people in America got there, plus some of their most effective strategies for financial success.

What Does it Mean to be in the Top 1%?

Many people might think “top 1%” and immediately imagine a CEO whose salary is in the tens of millions. But the term “top 1%” is often used to refer to net worth, rather than income, which means one percenters aren’t necessarily the people who earn the most.

Net worth refers to the value of the assets a person owns (which includes balances in bank accounts, the value of securities such as stocks or bonds, real property value, the market value of automobiles, etc), minus their liabilities (or debt, like mortgages, loans, credit card balances, they owe).

A deeper view of the top 1% indicates that this wealth accumulation is spurred by more than one source and includes income, investments, tax breaks that can help the wealthiest keep more of their money, property, and more. All of these help make up the resources a household or individual has socked away as net worth.

Recommended: What Is Discretionary Income?

The Income and Savings of the 1%

Having a high net worth isn’t just a matter of earning more. It can also mean saving more. While the average savings rate in the U.S. was just 4% of income in 2024, the average saving rate for the top 1% was a whopping 38%.

Of course, those who are earning more can afford to save more, since less of their income is taken up by housing, transportation, food, and other necessities. However, the savings rate of the top 1% shows that savings habits — and not just income — have a big impact on wealth. A high savings rate is one reason why the rich are so rich.

To build wealth over time, financial advisors generally recommend saving at least 20% of your income. This includes putting 15% of pretax income into retirement savings (including any employer match) and 5% into a shorter-term savings vehicle like a high-yield savings account.

Is There a Formula for Becoming Part of the 1%?

There’s no one formula for joining the 1%, but several factors appear to play a role in the rise of many one-percenters. These include:

•   Saving. As mentioned above, savings rates are a key difference between the one percenters and everyone else. If you aren’t contributing the max amount to your 401(k), consider gradually increasing your contributions. You also want to be sure you take full advantage of any employer matching contributions — this is essentially “free money” and can help you build your net worth faster.

•   Starting early. “The sooner you can start investing, the quicker you can take advantage of compound returns,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “Compounding helps you to earn returns on your returns, which can help your earnings grow exponentially over time.”

•   Income consistency and growth. The more you earn and the more that grows over time, the more likely your household will be to enter the top 1% of wage earnings. There are some in-demand careers that pay huge salaries. But regardless of your particular job, staying consistently employed and saving is a path to building wealth, versus leaving the work force or deciding to forego savings for a few years to, say, travel more.

•   Frugality. You may have heard that Warren Buffett wears outdated suits and lives in a house he paid $31,500 for in 1958. He’s worth approximately $158.4 billion. He also buys reduced-price cars, doesn’t spend big on expensive hobbies and he even clips coupons. Not all 1% are spending lavishly on yachts and third and fourth homes. If you want to be a part of the 1% and you didn’t invent the best thing since sliced bread, it may be helpful to stay motivated to save money vs. overspending.

•   Family history/luck. Having a head start can certainly help. However, research indicates that 79% of 1%-ers are self-made. Finding the right solution for a big problem at the right moment can lead to a big windfall in a new company. In other words, starting the next Facebook or Amazon takes a combination of skill and luck.

Recommended: How to Stop Overspending

Moving Towards the 1%

Thomas Stanley, author of The Millionaire Next Door, identified the seven characteristics of people who become big accumulators of wealth — and thus have a chance to build the wealth it takes to be in the top 1%. These common traits include:

1.    They live below their means.

2.    They allocate their money, energy, and time in ways that contribute to building wealth.

3.    They believe that financial independence itself is more important than appearing to have a high social status.

4.    Their parents did not provide money for their basics in adulthood.

5.    Their adult children are self-sufficient economically.

6.    They understand how to target economic opportunities.

7.    They choose the right occupation.

Not all of these are factors one can fully control — and not everyone has a knack for targeting economic opportunities. In addition, many people choose an occupation around a passion, not around wealth-building. But that doesn’t mean you can’t get there — or get close.

The Takeaway

Being part of the 1% appears to take a combination of luck, talent, hard work, and determination. Being diligent about saving is also a key way to grow your net worth over time. The more you can sock away, the better off you will likely be in the future.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is top 5% net worth?

Based on the most recent government statistics, the top 5% of households have a net worth of around $3.8 million or more. Being in this percentile means you have a significantly higher net worth than most people, often including substantial assets like real estate, investments, and savings.

What qualifies you as a 1 percenter?

To qualify as a 1 percenter, you typically need to be in the top 1% of wealth or income in your country. In the U.S., being in the top 1% requires a net worth of $11.6 million to $13.7 million or an annual income of $787,712 or more. This elite status signifies significant financial resources, including assets like real estate, investments, and savings. Being a 1 percenter also often comes with unique financial opportunities and challenges.

What salary is top 5%?

The income threshold to join the top 5% earners in the U.S. is $290,185. This income is about one-third of the income needed to be a one-percenter but represents a high level of income compared to the general population. Top 5% earners often include professionals in fields like finance, technology, and medicine, as well as successful business owners and executives.

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

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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.

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.

SOBNK-Q225-078

Dividend yield concerns how much an investor realizes from their investments over the course of a year as a result of dividends. Dividends, which are payouts to investors as a share of a company’s overall profit, can help investors generate bigger returns, and some investors even formulate entire strategies around maximizing dividends.

But it’s important to have a good understanding of dividends, dividend yields, and other related concepts before going too far into the weeds.

What Is Dividend Yield?

A stock’s dividend yield is how much the company annually pays out in dividends to shareholders, relative to its stock price. The dividend yield is a financial ratio (dividend/price) expressed as a percentage, and is distinct from the dividend itself.

Dividend payments are expressed as a dollar amount, and supplement the return a stock produces over the course of a year. For an investor interested in total return, learning how to calculate dividend yield for different companies can help to decide which company may be a better investment.

But bear in mind that a stock’s dividend yield will tend to fluctuate because it’s based on the stock’s price, which rises and falls. That’s why a higher dividend yield may not be a sign of better value.

How Does Dividend Yield Differ From Dividends?

It’s important to really drive home the difference between dividend yield and dividends in general.

Dividends are a portion of a company’s earnings paid to investors and expressed as a dollar amount. Dividends are typically paid out each quarter (although semi-annual and monthly payouts are common). Not all companies pay dividends.

Dividend yield, on the other hand, refers to a stock’s annual dividend payments divided by the stock’s current price, and expressed as a percentage. Dividend yield is one way of assessing a company’s earning potential.

How to Calculate Dividend Yield

Calculating the dividend yield of an investment is useful for investors who want to compare companies and the dividends they pay. For investors looking for investments to help supplement their cash flow, or even to possibly live off dividend income, a higher dividend yield on a stock would be more attractive than a lower one.

What Is the Dividend Yield Formula?

The dividend yield formula is more of a basic calculation than a formula: Dividend yield is calculated by taking the annual dividend paid per share, and dividing it by the stock’s current price:

Annual dividend / stock price = Dividend yield (%)

How to Calculate Annual Dividends

Investors can calculate the annual dividend of a given company by looking at its annual report, or its quarterly report, finding the dividend payout per quarter, and multiplying that number by four. For a stock with fluctuating dividend payments, it may make sense to take the four most recent quarterly dividends to arrive at the trailing annual dividend.

It’s important to consider how often dividends are paid out. If dividends are paid monthly vs. quarterly, you want to add up the last 12 months of dividends.

This is especially important because some companies pay uneven dividends, with the higher payouts toward the end of the year, for example. So you wouldn’t want to simply add up the last few dividend payments without checking to make sure the total represents an accurate annual dividend amount.

Example of Dividend Yield

If Company A’s stock trades at $70 today, and the company’s annual dividend is $2 per share, the dividend yield is 2.85% ($2 / $70 = 0.0285).

Compare that to Company B, which is trading at $40, also with an annual dividend of $2 per share. The dividend yield of Company B would be 5% ($2 / $40 = 0.05).

In theory, the higher yield of Company B may look more appealing. But investors can’t determine a stock’s worth by yield alone.

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Dividend Yield: Pros and Cons

For investors, there are some advantages and disadvantages to using dividend yield as a metric that helps inform investment choices.

Pros

•   From a valuation perspective, dividend yield can be a useful point of comparison. If a company’s dividend yield is substantially different from its industry peers, or from the company’s own typical levels, that can be an indicator of whether the company is trading at the right valuation.

•   For many investors, the primary reason to invest in dividend stocks is for income. In that respect, dividend yield can be an important metric. But dividend yield can change as the underlying stock price changes. So when using dividend yield as a way to evaluate income, it’s important to be aware of company fundamentals that provide assurance as to company stability and consistency of the dividend payout.

Cons

•   Sometimes a higher dividend yield can indicate slower growth. Companies with higher dividends are often larger, more established businesses. But that could also mean that dividend-generous companies are not growing very quickly because they’re not reinvesting their earnings.

Smaller companies with aggressive growth targets are less likely to offer dividends, but rather spend their excess capital on expansion. Thus, investors focused solely on dividend income could miss out on some faster-growing opportunities.

•   A high dividend yield could indicate a troubled company. Because of how dividend yield is calculated, the yield is higher as the stock price falls, so it’s important to evaluate whether there has been a downward price trend. Often, when a company is in trouble, one of the first things it is likely to reduce or eliminate is that dividend.

•   Investors need to look beyond yield to the type of dividend they might get. An investor might be getting high dividend payouts, but if they’re ordinary dividends vs. qualified dividends they’ll be taxed at a higher rate. Ordinary dividends are taxed as income; qualified dividends are taxed at the lower capital gains rate, which typically ranges from 0% to 20%. If you have tax questions about your investments, be sure to consult with a tax professional.

The Difference Between Dividend Yield and Dividend Rate

As noted earlier, a dividend is a way for a company to distribute some of its earnings among shareholders. Dividends can be paid monthly, quarterly, semi-annually, or even annually (although quarterly payouts tend to be common in the U.S.). Dividends are expressed as dollar amounts. The dividend rate is the annual amount of the company’s dividend per share.

A company that pays $1 per share, quarterly, has an annual dividend rate of $4 per share.

The difference between this straight-up dollar amount and a company’s dividend yield is that the latter is a ratio. The dividend yield is the company’s annual dividend divided by the current stock price, and expressed as a percentage.

What Is a Good Dividend Yield?

Two companies with the same high yields are not created equally. While dividend yield is an important number for investors to know when determining the annual cash flow they can expect from their investments, there are deeper indicators that investors may want to investigate to see if a dividend-paying stock will continue to pay in the future.

A History of Dividend Growth

When researching dividend stocks, one place to start is by asking if the stock has a history of dividend growth. A regularly increasing dividend is an indication of earnings growth and typically a good indicator of a company’s overall financial health.

The Dividend Aristocracy

There is a group of S&P 500 stocks called Dividend Aristocrats, which have increased the dividends they pay for at least 25 consecutive years. Every year the list changes, as companies raise and lower their dividends.

Currently, there are 65 companies that meet the basic criteria of increasing their dividend for a quarter century straight. They include big names in energy, industrial production, real estate, defense contractors, and more. For investors looking for steady dividends, this list may be a good place to start.

Dividend Payout Ratio (DPR)

Investors can calculate the dividend payout ratio by dividing the total dividends paid in a year by the company’s net income. By looking at this ratio over a period of years, investors can learn to differentiate among the dividend stocks in their portfolios.

A company with a relatively low DPR is paying dividends, while still investing heavily in the growth of its business. If a company’s DPR is rising, that’s a sign the company’s leadership likely sees more value in rewarding shareholders than in expanding. If its DPR is shrinking, it’s a sign that management sees an abundance of new opportunities abounding. In extreme cases, where a company’s DPR is 100% or higher, it’s unlikely that the company will be around for much longer.

Other Indicators of Company Health

Other factors to consider include the company’s debt load, credit rating, and the cash it keeps on hand to manage unexpected shocks. And as with every equity investment, it’s important to look at the company’s competitive position in its sector, the growth prospects of that sector as a whole, and how it fits into an investor’s overall plan. Those factors will ultimately determine the company’s ability to continue paying its dividend.

The Takeaway

Dividend yield is a simple calculation: You divide the annual dividend paid per share by the stock’s current price. Dividend yield is expressed as a percentage, versus the dividend (or dividend rate) which is given as a dollar amount. The dividend yield formula can be a valuable tool for investors, and not just ones who are seeking cash flow from their investments.

Dividend yield can help assess a company’s valuation relative to its peers, but there are other factors to consider when researching stocks that pay out dividends. A history of dividend growth and a good dividend payout ratio (DPR), as well as the company’s debt load, cash on hand, and credit rating can help form an overall picture of a company’s health and probability of paying out higher dividends in the future.

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