SoFi

To be creditworthy means you are considered suitable to access credit, whether that means you’re getting a loan or a line of credit (such as a credit card). You have proven that you have managed debt responsibly in the past and are likely to do so again in the future.

In other words, lenders see you as not a risky borrower who might be late with payments or default on your debt. You appear to be someone who will make payments on time and pay off what you owe.

Here, you’ll learn important intel about how creditworthiness is determined (it’s more than your credit score) and why it’s important.

What Is Creditworthiness and Why Does It Matter?

In short, a consumer’s creditworthiness is what lenders assess to hedge their bets that the borrower won’t default on — fail to repay — a loan.

You can think of creditworthiness a bit like a report card for borrowers. Like a report card, your overall creditworthiness is composed of a variety of factors, each of which is weighted differently. The factors are calculated into an overall credit score, which is a bit like a grade point average (GPA).

Like a report card, your creditworthiness gives lenders a snapshot of your historical behavior — and although your past doesn’t always predict the future, it’s the main information creditors have to go on about how much of a risk you might be.

It’s possible to build creditworthiness, but doing so takes dedicated effort.

Why Does Creditworthiness Matter?

Creditworthiness is important in an array of ways. It’s not just about credit cards. Your creditworthiness will be assessed if you ever take out an auto loan or mortgage, or if you’re just signing a lease on a rental property. Your credit report might even be pulled as part of the job application process as an indication of your level of personal responsibility.

What’s more, higher creditworthiness tends to correlate with better loan terms, including higher limits and lower interest rates. Lower creditworthiness can mean you’re stuck with higher interest rates or extra fees, which, of course, make it more difficult to make on-time payments, get out of debt, and otherwise positively impact your creditworthiness for the future. A low enough level of creditworthiness may preclude you from qualifying for the loan (or lease, or job) altogether.

In short: Creditworthiness is really important for just about everyone, and it’s worth building and maintaining.

Recommended: Understanding Purchase Interest Charges on Credit Cards

How Is Creditworthiness Calculated?

So what specifically goes into the definition of creditworthiness?

That depends on whom you ask. Which factors will be most heavily weighted to determine your creditworthiness change based on what kind of credit or loan you’re applying for.

A credit card issuer, for example, may look specifically into your experience with revolving debt, while a mortgage lender may be more concerned with how you’ve handled fixed payments like installment loans.

While each lender will have its own specific criteria and look into different things, one of the most common measures of creditworthiness is a FICO® Score — the three-digit credit score based on information reported by the three main America credit bureaus, Experian®, Equifax®, and TransUnion®.

It’s important to understand that lenders will see more than just a three-digit FICO Score, which ranges from 300 to 850. The credit report they pull may also include specific information about your open and closed accounts, revolving credit balances, and repayment history, as well as red flags such as past-due amounts, defaults, bankruptcies, and collections.

Lenders may also take your income and the length of time you’ve worked at your current job into consideration, as well as assets (like investments and properties) you own.

You may already know that credit scores range from poor (300 to 579) to exceptional (800 to 850). But those scores are underpinned by a specific algorithm that takes a variety of different historical credit behavior into account.

Specifically, your FICO Score is calculated using the following data points, each of which is weighted differently:

•   Payment history, 35%: The single most important factor determining your credit score is whether or not you’ve consistently paid on your loans and credit lines on time.
•   Amounts owed, 30%: This factor refers to how much of your available credit you’re currently using. Having higher balances (also known as your credit utilization) can indicate more risk to a lender, since it may be more difficult for someone with a lot of debt to keep up with paying a new account.
•   Length of credit history, 15%: Having a longer credit history gives lenders more context for your past behavior, so this factor is given some weight in determining your credit score.
•   Credit mix: 10%: This factor refers to how many different kinds of credit you have, such as installment loans, credit cards, and mortgages. It’s not necessary to have each, but having a healthy mix can help build your score.
•   New credit, 10%: Applying for a lot of new credit recently can look like a red flag to lenders, so having too many hard inquiries can ding your score.

Recommended: What Is a FICO Score and Why Does it Matter?

Building Creditworthiness

If you have a low credit score or a number of negative factors on your report, you may feel overwhelmed at the prospect of changing your creditworthiness for the better. But the good news is, it is possible to positively impact your credit score and build your overall credit profile. It just takes time, dedication, and persistence.

Given the importance of payment history, making on-time payments is usually the most important thing you can do to build your credit score.

Because the amount of revolving debt you have is an important metric, reducing your overall debt can help, too — and will free up more money in your budget to put toward other financial goals.

If you’re working to pay off certain credit cards, it may not be best to close them once you’ve stopped using them. Keeping them open will help increase the overall length of your credit history. However, you may need to charge (and then pay off) a nominal amount each month to keep the card issuer from closing the account due to inactivity.

You may want to use that credit card for one low monthly bill, such as your Netflix subscription, and pay it off in full each statement cycle.

It’s also a good idea to check your credit report at least once a year. The Fair Credit Reporting Act requires that the three big credit bureaus provide you with a free copy of your credit report once every 12 months; you may find them available weekly as well. The free credit report source authorized by federal law is AnnualCreditReport.com.

These reports don’t include your credit scores, but you’ll still get the opportunity to assess your report for fraudulent items and dispute them. You may also be able to get your credit score for no charge as a perk from your financial institution or your credit card issuer. See what’s available.

Recommended: Breaking Down the Different Types of Credit Cards

The Takeaway

Creditworthiness is the measure by which a potential lender assesses how much of a risk it’s taking by offering you a loan or line of credit. Building your creditworthiness and maintaining it is important for ensuring you have access to loans, credit cards, and even employment opportunities. Being creditworthy can help you snag lower rates and more favorable terms, whether you are shopping for a home loan or new credit card.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Why is creditworthiness important?

Creditworthiness measures how likely you are to repay debts and do so on time. It lets lenders know you handle debt responsibly, and it may encourage them to offer you better terms when extending you credit.

What is creditworthiness most affected by?

Your payment history is the single biggest contributor to your credit score at 35%. This reflects how well you have paid debt on time in the past.

What are 3 reasons credit is important?

Creditworthiness is important because it shows you have good financial management habits, it shows potential lenders that you are a good candidate for loans and revolving lines of credit, and it can encourage them to offer you favorable rates and terms.

---

SoFi Credit Cards are 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.

*See Pricing, Terms & Conditions at SoFi.com/card/terms.
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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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 .

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.
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®

SOCC-Q225-017

Read more

If you drive a car, you need car insurance — and not just because it’s the law in nearly every state.

Fortunately, these days, getting car insurance is usually a simple process. You can buy car insurance online, over the phone, or even in person — but the easiest way to do so is with a few mouse clicks.

5 Steps to Getting Car Insurance

Knowing how to get car insurance that suits the type of vehicle you have and your driving habits is easier when you know your way around the car insurance market. Here’s our step-by-step guide to buying automobile insurance.

1. Figure Out What Type Of Coverage You Need.

The first step in learning how to get insurance on a car? Understanding what car insurance is in the first place and how much coverage you really need.

There’s a veritable dictionary of different auto insurance terms to understand, but one of the most important distinctions is between liability insurance and full insurance coverage.

•   Liability insurance is coverage that pays out to another driver if you’re found to be at fault in an accident. Liability insurance is further split into property damage and bodily injury coverage, coverage for vehicular damages and medical expenses, respectively.

•   Uninsured/underinsured motorist coverage is another type of liability insurance that pays out in the event of an accident involving another driver who doesn’t have insurance (or much of it).

•   Full coverage includes liability insurance but also pays out for damage to your own vehicle, even if you’re at fault. This may include collision coverage, which pays out in the event of an accident involving another vehicle, and comprehensive coverage, which pays out in the event of non-collision damages, such as fire, falling objects, or glass damage.

•   You may also be able to purchase medical payments coverage, which can offset the cost of your medical bills in the event of an accident, or personal injury protection insurance, which can help with lost wages and other expenses. These types of coverage kick in regardless of who’s at fault.

Most state laws only require liability insurance. However, this varies, as do the minimum policy limits in each state, so be sure to get familiar with your state laws before you go shopping.

Requirements aside, full coverage might be worth considering. Even in a minor accident, you could face thousands of dollars in repair costs, not to mention random damages like a windshield crack due to a rock kicked up on the highway.

And keep in mind, too, that even full coverage doesn’t mean everything is covered or coverages are unlimited. How much coverage you decide you want is up to you. It’s worth factoring in the age and value of your vehicle, other coverages you may have that can help, and how high a deductible you could afford to pay out of pocket in the event of an accident. Higher deductibles generally mean lower monthly car premiums — but, of course, you’re on the hook for a larger portion of the expenses if you do need to file a claim.

Recommended: What Does Car Insurance Cover?

2. Gather Your Information.

Once you have an idea of the kind of coverage you need, it’s time to get serious about shopping for auto insurance. You’ll need certain information in order to buy an auto insurance policy, so in order to make the transaction go smoothly, it’s a good idea to gather the following ahead of time:

•   The name and birth date of every driver to be put on the policy

•   The driver’s license number and issuing state of every driver to be put on the policy

•   The driving history (both at-fault and no-fault accidents) of every driver to be put on the policy

•   The car’s make, model, and vehicle identification number

•   The car’s current mileage

•   The estimated mileage the car is driven each year, as well as its primary purpose (business or leisure)

•   Any car safety features, like car alarms

•   The address the car is kept at most of the time

•   The name and policy number of your current insurance plan, if you have one

Other information may also be required, but gathering the basic details ahead of time should help save you some time.

💡 Recommended: How Much Is Sports Car Insurance

3. Choose Your Shopping Method.

There are three main ways to purchase car insurance: directly from an insurance company, through a captive agent, or through an independent broker.

•   Buying auto insurance directly (either online or over the phone) from an insurance company means you can do the research yourself. However, getting individual quotes from a variety of different companies can take time.

•   Buying auto insurance through a captive agent means you’re working with a representative from a single insurance company, which can be useful if you want a single point of contact who can help walk you through every step of the process. This might also be a good idea if you have more than one insurance policy through the same company because you may qualify for multi-policy discounts.

•   Buying auto insurance through an independent broker can create a bespoke insurance-buying experience where the broker does the footwork of shopping around for the best deal to suit your needs. However, your premiums may include a broker’s fee.

Each approach has its own drawbacks and benefits, and the best one when deciding how to get auto insurance for you will depend on your preferences.

4. Compare Quotes.

Car insurance is one of those areas of life where you can save a lot of money by shopping around. Of course, getting multiple quotes can be time consuming, but given that car insurance premiums can cost more than $172 per month, it might just be worth your time.

Fortunately, these days, there are some great auto insurance comparison websites and apps that can help you see your potential savings by filling out just a single form. (Be aware that you may start getting phone calls, emails, and letters from insurers eager to acquire your business, however.)

Recommended: Car Insurance Guide for New Drivers and 3 Ways to Save

5. Drive Happy — But Check In Regularly.

We’ve all heard the commercials, but it really is true: You may stand to save money by switching your car insurance to a different carrier, so it’s worth checking in at least once a year to make sure you’re happy with your coverage and its cost.

That said, many carriers also offer loyalty discounts to longtime customers, and if you get a lower offer elsewhere, your insurer may be able to match it. Your car insurance premium may get lower over time if you improve your driving record or your credit history, and you may also be able to score discounts by bundling different types of insurance from the same provider (like renters insurance, homeowners insurance, etc).

Of course, it’s not just monthly costs that are worth considering. You may decide you want more or less coverage over time or as your life situation changes, which is another good reason to check in from time to time. Additionally, if you do decide to switch carriers, make sure you’re purchasing a policy of equivalent coverage. Otherwise, you’re not saving money on an equivalent product — you’re just buying something cheaper from elsewhere.

Recommended: Electric Vehicle Insurance: Everything EV Drivers Need to Know

The Takeaway

Knowing how to buy car insurance might not be exciting, but car insurance is an important financial product that could relieve a financial burden in the case of an accident. As you start exploring your options, you’ll want to decide the type and amount of coverage you’ll need based on the age and value of your vehicle, your budget, and other coverage that you may have. Taking the opportunity to compare car insurance companies before committing to a policy can be a smart move that might save you money on your insurance rate.

When you’re ready to shop for auto insurance, SoFi can help. Our online auto insurance comparison tool lets you see quotes from a network of top insurance providers within minutes, saving you time and hassle.

SoFi brings you real rates, with no bait and switch.

---

Photo credit: iStock/LumiNola

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

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.

SOPRO-Q225-027

Read more

A statement credit is money that gets credited to your credit card account, reducing the amount you owe. It can be earned through various means, including returns, price adjustments, reward redemptions, or sign-up bonuses. Put simply, it’s the opposite of a charge to your account. It lowers your balance instead of increasing it.

Knowing how you earned that reduction in your debt can help you take advantage of your credit card’s rewards system in the future.

What Is a Statement Credit?

Credit card companies use a statement credit to issue a credit to your accounts, such as cash back or other rewards you have earned. Essentially, you receive money from your card issuer for a specific reason.

Finding documentation of your statement credit varies among credit card companies. Generally, though, you will see it on your monthly statement under transactions or account activity.

If you check your statements online, you’ll probably see the credit appear in green text and contribute to the statement balance.

Regardless of the format, a statement credit has a minus sign in front of the cash amount, thus decreasing your revolving balance.

How to Receive Statement Credits

There are a few ways a statement credit might apply to your account. A common reason is through a return.

If you have ever returned an item you bought using your credit card, the retailer will probably refund the money borrowed from your card issuer. You’ll receive a statement credit that matches the price of the returned item.

Other than returns, ways you may receive a statement credit include:

•   Shopping benefits. Some card providers offer discounts or statement credits for shopping with specific merchants.

•   Travel credits. Card providers may offer annual statement credits to pay for eligible travel expenses like a luggage fee or plane tickets.

•   Rewards. Among the different types of credit cards are rewards options. Card providers that offer cash back, points, or miles may let you redeem them in the form of a statement credit.

Statement Credits vs. Cash Back

Your credit card company gives you options when you sign up for a rewards credit card. One choice may be cash back or statement credits.

Cash back sounds simple enough, but it doesn’t always mean you’ll get direct money. Instead, your issuer may offer a cash reward in the form of a credit put on your account. Occasionally, they may send you a physical check or deposit the money in your checking account.

You earn cash back as a reward for using the credit card. It is a percentage of the money spent on purchases using the card.

In comparison, a statement credit reduces your credit card balance. Carrying a high balance between periods could lead to a high credit utilization ratio, which shows the amount of available credit a person has. That can result in a lower credit score over time.

Are Statement Credits Taxable?

The type of credit or reward you receive determines whether it’s taxable. If the credit card holder spent money to earn the reward, they usually don’t have to pay taxes on it. If they receive the credit without any spending, the reward may be taxable.

For example, an individual receives money back on her account after returning a chair she purchased online. That credited amount would not be taxable.

Cashback earners who engage in programs for points, like travel rewards, also generally avoid taxation.

The primary instance where cardholders face a taxable reward is with sign-up bonuses.

If they did not have to purchase anything to earn the bonus, it’s probably taxable. The taxation may apply regardless of how the credit card company issues the bonus, whether it’s in cash or airline miles.

Using Your Rewards Wisely

Credit cards have their perks, but it’s smart to use the credit card responsibly and the rewards wisely.

Consider using statement credits put on your account to lessen your balance (but keep in mind that statement credits aren’t usually considered the same as making a payment to your account, even though both lower the amount owed). Or look into the various rewards your card issuer offers.

When shopping for a new card, you may want to look closely at the points, cash back, or miles involved. For instance, how are the rewards offered, how are they redeemed, is it better for you to get a card with consistent points across all purchases or increased rewards in certain areas?

Think through which rewards best fit your lifestyle and interests. If you want to see the world, you may want to get a card that optimizes travel benefits. Trying to pay down your debt? Cash back applied to your balance could be the way to go.

Recommended: Understanding Purchase Interest Charges on Credit Cards

The Takeaway

A statement credit is a reduction in a credit card balance. It could result from an item you returned or from the redemption of travel points, cash back, or other rewards. It’s important to note that some kinds of statement credits, such as a sign-up bonus, could be taxable.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How do credit card statement credits work?

Statement credits are a way that you get money credited back to your account. They can lower your balance and may reflect an item that was returned, cash back or other credit card rewards, or the application of a sign-up bonus.

What does an offer for a $400 statement credit mean?

Typically, once you spend the amount required to qualify for a statement credit, the amount is tallied against your balance. So if your balance was was $1,000 and you had a $400 credit, that means you’d now have a balance of $600. Note, though, that this usually doesn’t count as a payment to your account. You should still go ahead and pay at least the minimum owed.

Is a statement balance what you owe?

Your credit card statement balance shows what you owe at the end of a given billing cycle, which is typically between 28 and 31 days long. The balance reflects purchases, fees, interest, and any unpaid balances, with payments or credits deducted, too.

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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 .

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.

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

SOCC-Q225-016

Read more

As a teenager, you may think you don’t have enough money to worry about coming up with or sticking to any kind of budget. But, in truth, you don’t need a lot of money to benefit from budgeting. In fact, coming up with a plan for how to spend your money (which is what budgeting is) can be particularly helpful for teens who don’t have much in the way of income or savings.

While creating a teen budget might sound intimidating or complicated, it simply involves looking at what you have coming in and going out, setting aside some money for future goals (say, getting a new phone), while also allocating funds for having fun right now.

Whether all you have is allowance and odd jobs or you earn steady income from a part-time job, here’s how to do more with the money you have.

How to Build a Budget for Teens

Learning how to budget as a teen helps set the foundation for financial success later in life. It includes tracking income and expenses, setting savings goals, and making wise spending decisions. Below we break it all down.

1. Determine How Much You Earn

The first step in creating a budget is figuring out your income. As a teenager, your income might come from various sources, such as a part-time job, an allowance from your parents, or occasional gigs like babysitting or mowing lawns. If you have a checking account, all of your deposits represent your income.

List all of your regular income sources and calculate the total amount you receive each month. If your income fluctuates, you can estimate a monthly average. Alternatively, you might find it easier to break up your budget on a weekly cycle. If you have a job where you’re paid every two weeks, just divide that amount in half.

This step will give you a clear picture of how much money you have to work with.

2. Figure Out How Much You Usually Spend

So where does all your money go? To find out, come up with a list of spending categories and roughly how much you spend weekly or monthly on each.

If you typically make purchases using a debit card or payment app, you can see your spending by looking at your transactions for the past month. If you normally spend cash, however, you may need to track your spending for a few weeks or a month. You can do this by keeping every receipt and jotting down your spending at the end of each day.

Next, you’ll want to categorize your spending into different areas, such as food, clothing, transportation, entertainment, etc. This exercise will help you understand your spending habits and identify where you might be overspending.

3. Divide Spending Into “Needs” and “Wants”

Once you have a clear idea of your spending, it’s time to differentiate your spending categories into “needs” vs. “wants.”

Needs are required or necessary spending like your cell phone bill, car insurance, gas money, and any other expenses that your parents have asked you to be responsible for. Wants are nonessential items like eating out, video games, and trendy clothes.

By dividing your expenses into these two categories, you can prioritize your spending. This can help ensure that your needs are met before you start spending money on your wants.

4. Set Some Money Goals

Saving money is a crucial part of budgeting. Whether you want to save for a new pair of sneakers, a car, or college, having a goal in mind can motivate you to save consistently.

It’s helpful to set specific, achievable savings goals. For example, if you want to save $300 to make a purchase in six months, you’ll need to save $50 each month. Having clear goals helps you stay focused and disciplined. When you make your monthly or weekly budget, you can make sure to set aside money for your short-term and long-term goals, whatever they may be.

If you don’t have a savings account, now may be a good time to open one. Even if you open an account with a very small amount, your balance will grow as you add funds over time and earn compound interest (which is when the interest you earn on your balance also earns interest). Many banks and credit unions offer teen savings accounts that are designed to help young people earn a competitive yield on their money, while avoiding maintenance fees and minimum balance requirements.

5. Make Your Teen Budget

Now that you have a clear understanding of your income, expenses, and savings goals, you can create your budget. You can do this using a budgeting app, pen and paper, or simply the “notes” app on your phone.

Start by putting your income at the top. Next, you’ll want to list your fixed expenses (needs), variable expenses (wants), and savings goals and what you will spend on each.

Once you have a list of all your spending categories, it’s time to figure out how much money to use for each one. You’ll want to make sure that your total expenses and savings do not exceed your income. If they do, you’ll need to adjust your spending habits by cutting down on spending in the “wants” categories or finding ways to increase your income.

6. Start Using Your Budget

Creating a budget is only the first step; sticking to it is where the real challenge lies. It helps if you start tracking your spending. You can do this by collecting receipts and writing down what you spend at the end of each day. Or, if you use a debit card or payment app, you can just look at your bank account or app transaction history to see how much you’re spending in a given day or week.

Recording your expenses daily or weekly can help you stay within your budget and prevent you from overspending. If you’re not able to meet your savings goals, you may need to make some adjustments in your spending.

7. Revisit Your Budget

Your financial situation and priorities can change, so it’s important to reevaluate your budget regularly. You may want to review your income and expenses at least once every few months to ensure your budget still aligns with your goals.

If you find there are certain areas where you are consistently overspending or underspending, you can adjust your budget accordingly. If you no longer ride the bus or you have a new source of income, for example, you may be able to spend more on “wants” or put more toward saving (aka, future “wants”).

Regularly updating your budget helps you stay in control of your finances and ensures that you’re always working toward your goals.

Recommended: 50/30/20 Budget Rule: What It Is and Tips on Using It

Why Getting Started Young Is Important

Budgeting is a key financial literacy skill, and starting to budget as a teenager sets you up for lifelong financial success. Here are some reasons why it’s crucial to develop good money habits early on.

•   Builds discipline: Learning to manage money requires discipline and a sense of responsibility. These traits are beneficial not just for financial management but for all aspects of life.

•   Prepares for future financial independence: The skills you develop now will help you manage larger sums of money in the future. Whether it’s paying for college, buying a car, or renting an apartment, budgeting will always be essential.

•   Helps achieve long-term goals: Starting early allows you to develop a habit of saving, which can help you achieve long-term financial goals like buying a house or starting a business.

•   Builds an appreciation for money: When you budget, you become more aware of the value of money and the effort it takes to earn it. This awareness can lead to more mindful spending and better financial decisions.

The Takeaway

Budgeting for teens might sound intimidating or even pointless if you don’t have much money to work with. But doing the simple steps listed above can help you take control of your finances and build better money habits.

By determining your income, tracking your expenses, setting savings goals, and regularly reevaluating your budget, you’ll be able to make your money go farther and be well on your way to financial success.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

What should I spend money on at 15?

At 15, you’ll want to focus on spending money wisely, balancing things you need to spend money on, things you want to spend money on, and saving up for things you want to buy or do in the future. Common teens expenses include:

•   Transportation (bus / train fare, gas)

•   School supplies

•   Extracurricular / sports supplies or equipment

•   Clothing

•   Takeout

•   Entertainment

•   Saving for a car

•   Saving for college

What is a good budget for kids?

A good budget for kids is simple and easy to manage, ensuring a balance between spending, saving, and sharing/giving. Here’s one framework to consider:

•   Income: Allowance, gifts, and earnings from small jobs.

•   Expenses: Essentials (school supplies, clothing), savings, and fun spending.

•   Breakdown: 50% for essentials, 20% for savings, 20% for fun, and 10% for giving/charity.

This budget helps teach kids to manage money wisely, save for future needs, and understand the importance of generosity.

What is the savings rule for kids?

You can apply the general guideline for adults — which is to save around 20% of your income/paycheck — to kids. Whether a child/teen earns money through an allowance, doing chores, or a part-time job, they can start putting 20% of their weeking income toward saving. This gives them money for the unexpected, as well as things they want to buy or do in the future. It also builds a great habit that can serve them well throughout their lives.

---

About the author

---

Photo credit: iStock/SDI Productions

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. 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.
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.

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.

SOBK-Q224-1920513-V1

Read more

If you’re no longer being well-served by your current savings or checking account, it may be time to make a switch. Maybe you’re moving and need a bank with closer branches or ATMs. Or, perhaps you’re annoyed by your current bank’s fees or poor customer service. A common reason for closing a bank account is finding a new account that pays a higher annual percentage yield (APY).

Whatever the reason, closing a bank account isn’t complicated. However, you’ll want to make sure you follow certain steps, in a certain order, to prevent hassles and fees. Here’s what you need to know about closing a bank account.

6 Steps to Closing a Bank Account

While closing a savings account (or checking account) is generally a simple process, it requires more than just contacting your bank. There are a series of steps you’ll want to follow to ensure a smooth transition. Here’s how to close a bank account.

Step 1: Decide Where You Want to Keep Your Money

Before you end one banking relationship, it’s a good idea to have another place lined up to stash your money. You may be able to increase your returns and reduce the cost of banking if you take time to research your options. For example, the top high-yield savings accounts currently have APYs of up to 4% or more — that’s many times higher than the average national average rate of 0.42% APY as of December 16, 2024.

If you have multiple financial goals and needs, you may want to have more than one bank account. For example, you might open different savings accounts for different objectives, such as one earmarked for an upcoming vacation or large purchase and another for your emergency fund. Just keep an eye out for any fees.

Step 2: Update Any Automated Transactions

If you have any direct deposits or automatic payments set up, you’ll need to move them to the new account. Check with your employer regarding any forms you need to fill out for direct deposit so your paycheck can be rerouted to the new account.

It’s also a good idea to comb through your statements and create a list of monthly recurring payments, such as automatic payment for loans, insurance policies, credit cards, streaming services, and the like. If you have any annual subscriptions, go through the last 12 months of transactions. A failed automated payment or negative account balance could trigger penalties.

Step 3: Move Your Money

Once your automatic payments are updated and any pending transactions have cleared, you can move your money out of your old account. However, the timing on this is critical: If an automatic payment or outstanding check goes through after you empty the account, you could end up overdrafting the account, which can trigger a hefty fee.

Also, if your bank account has a minimum balance requirement, you may want to wait to transfer money out of the account until just before you officially close the account, so you don’t get hit with a monthly maintenance fee due to a low balance.

Recommended: How Much Money Do You Need to Open a Bank Account?

Step 4: Monitor Your Old Account

After you’ve funded your new bank account, you can begin using it. However, you may want to keep your old account open for a couple of months as you transition to the new account, as long as it’s not costly to do so. This allows you to catch any automatic transactions you forgot to change over.

Step 5: Download Your Transaction Records

Once your account is closed, you likely won’t have access to your transaction history and online statements. If you require any records of your banking activities under the old account (say, for tax purposes), you may want to download your documentation before you officially deactivate your account.

Step 6: Close Your Old Account

Once you’re set up and using your new savings account, you can close the old one.

The exact process for doing this will depend on your bank — some allow you to close an account online or via a phone agent, while others require you to fill out an account closure request form or submit a written request. Be sure to follow your bank’s guidance on the proper method for closing an account.

If you still have money left in your account, you should be able to request a transfer to your new account or receive a check by mail.

Because closed bank accounts can sometimes be reactivated in error and incur fees, it’s smart to get written confirmation of the account closure for your records. You’ll also want to carefully review your final bank account statement for any errors.

Recommended: How to Switch Banks in 3 Easy Steps

Common Reasons for Closing a Savings Account

Here’s a look at some reasons why you might want to close your current bank account and open a different one at the same or a different bank.

•  You’re moving and your current bank doesn’t have branches and ATMs near your new location.

•  Your bank’s hours don’t suit your lifestyle.

•  The bank has policies that don’t work for you, such as minimum balance and service fees.

•  You have multiple bank accounts and want to consolidate.

•  Another bank offers higher interest rates on savings accounts.

•  You want to change from a brick-and-mortar bank to an online bank.

•  You aren’t happy with your bank’s customer service.

•  You’re opening a joint account.

•  You’re switching from a child account to an adult account.

Why It’s Important to Close a Savings Account Properly

Once you’ve decided you no longer want or need a certain bank account, it’s a good idea to go through all of the steps involved in properly closing that account, rather than just let it sit around unused. Here’s a look at some reasons why this is important.

Dormancy Fees and Other Penalties

Some banks charge account holders a “dormancy fee” after a period of time without any deposits or withdrawals. These fees can add up over time. Also, if your old bank account charges a monthly maintenance fee when your balance goes below a certain level, you could end up triggering that fee. If you have funds left in your unused savings account, these penalties could deplete them.

Fraud

If you’re not closely monitoring your old bank account, it can be more difficult to spot suspicious activity. Even inactive accounts contain personal information that could be exploited by identity thieves. Closing a rarely or never-used account reduces the likelihood of your sensitive data falling into the wrong hands.

Lost Deposits

If you’ve signed up for direct deposit you don’t receive regularly — your yearly tax refund, for instance — you may forget you’ve done so. And if they one day make a deposit to a savings account you’re no longer using, you may not notice you received that payment.

While there are drawbacks to keeping an unused account open, you may also be wondering: Is it bad to close a savings account? The good news is, closing your account usually comes at no cost. Not only do most banks not charge a fee to close a basic savings account, but doing so will not affect your credit score.

If, however, your account has a negative balance, you will need to repay that at the time of closing the account.

Recommended: What Happens to a Direct Deposit If It Goes to a Closed Account?

Closing a Joint Account

If you’re looking to close a joint checking or savings account, you’ll want to check with your bank about the correct procedure. Some banks allow only one account holder’s authorization to close a joint account, while others require both parties to sign an account closure request or to request an account closure online.

Closing a Child’s Account

A childs’ bank account is designed for kids under age 18. Typically, both the child and a parent or guardian act as joint account holders.

In some cases, a bank will automatically convert a child’s account into a regular account when the child turns 18. In that case, the child/now adult can likely close the account on their own. If a parent or guardian is still the co-owner of the account, however, both parties will usually need to request the closure of the account.

Closing an Inactive Account

An account can become “inactive” or “dormant” if its owner does not initiate any activity for a specific period of time, often two years. If your account has been marked inactive or dormant, you’ll need to reactivate it before it can be closed by the bank. Contact your bank’s customer service to reactivate your bank account. There might also be an option to do this through your online or mobile banking.

Closing the Account of Someone Deceased

Closing the bank account of a loved one who has passed away is generally more complicated than closing your own bank account. The first step is let the bank know of the account owner’s death. To do this, you may need to supply an original or certified copy of the death certificate and, possibly, other documents. The bank can then freeze the account, and stop any standing orders or direct debits.

When you’ve notified the bank about the death, they can let you know what the next steps will be and what other documentation they need to officially close the account.

Recommended: What Happens to a Bank Account When Someone Dies?

How Long Does It Take to Close a Bank Account?

If your bank account has a zero or positive balance and there are no pending transactions, closing a bank account is a quick process. Typically, the bank can close the account as soon as you make the request. If there are still pending transactions or unpaid fees, however, the process can take longer. You will likely need to wait for deposits or payments to fully clear and/or bring the balance into positive territory before you can close the account.

Can You Reopen a Closed Bank Account?

Generally, once a bank account is closed, it can’t be reopened. However, it may be possible to reopen a closed account if it was closed due to inactivity. Also, some banks reserve the right to reopen an account if another payment or deposit comes through.

When closing your account, it’s a good idea to ask the bank about their policy on transactions after an account is closed. If you find out that an old account was reopened due to a new transaction, you’ll want to withdraw or add funds and then close the account again. Be sure to update the person who billed or paid you with your new bank account information.

Does Closing a Bank Account Hurt Your Credit Score?

No, closing a bank account will not have any impact on your credit. Bank accounts are different from credit card accounts and aren’t part of your consumer credit reports. Banks report account closures to the consumer reporting agency ChexSystems. Opting to close a bank account, however, won’t have a negative impact on your ChexSystems report.

Finding an Account That Meets Your Needs

Even if you’ve been with the same bank forever, it’s worth taking a pulse check from time to time to ensure that your current savings and checking accounts meet your financial needs and are helping you get closer to achieving your goals.

If you find an account that offers a higher APY on your deposits and/or charges lower or no fees, it can be well worth making the switch. Closing a bank account is a simple process and there are typically no fees involved.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

Does it cost money to close a savings account?

Typically, no. The one exception is if you close your account soon after opening it. Some banks charge something called an “early account closure” fee (ranging from $5 to $50) if a customer closes their account within 90 to 180 days of opening it. However, many banks and credit unions don’t charge early account closure fees. Check the institution’s policy before opening an account.

Can you close a savings account at any time?

Yes, you can request to close a savings (or checking) account anytime. Just keep in mind that some banks charge what’s known as an early closure fee if an account holder closes their account within 90 to 180 days of opening it.

What happens when you close a savings account with money in it?

If you close a bank account but still have money in the account, you should receive a check from the bank for the remaining funds.

---

About the author

---

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. 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.
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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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.

SOBK0323007

Read more