Dec
18
2024
Can You Use Your Debit Card in Another Country?

Can You Use Your Debit Card in Another Country?

By | Budgeting & Goals, Financial Independence, money | Comments Off on Can You Use Your Debit Card in Another Country?

You can typically use a debit card when traveling in another country as long as the merchant accepts transactions from the card issuer. Debit cards are especially useful when withdrawing cash from ATMs internationally, but cash and credit cards may make more sense for other purchases abroad.

Key Points

•   Using a debit card internationally is generally possible, but you may incur foreign transaction fees and should carry multiple payment methods for convenience and security.

•   Informing the bank about travel plans is crucial to prevent card freezes due to suspected fraudulent activity while abroad, ensuring uninterrupted access to funds.

•   Exchanging currency before traveling can help avoid high airport exchange rates, and using ATMs in the bank’s network can minimize ATM fees while withdrawing cash.

•   Prioritizing safety when using a debit card includes wearing a money belt, practicing ATM security, and memorizing PINs to protect against theft and fraud.

•   In the event of a debit card malfunction abroad, contacting the bank, using alternative payment methods, or seeking assistance from a U.S. embassy can help resolve issues.

Can You Use a Debit Card Internationally?

Yes, you can typically use your debit card internationally. This means you can spend money directly from your checking account, rather than run up a balance on your credit card.

Debit cards are usually linked to a processing network, such as Visa or Mastercard, which allows them to be used anywhere cards in that network are accepted. Visa and Mastercard are almost universally accepted anywhere you can pay with plastic. However, some networks are not accepted internationally, so it’s a good idea to carry cards from more than one issuer, as well as cash, when traveling abroad. Just be sure you have details like the customer service phone numbers in case you were to lose your cards or be the unfortunate victim of a pickpocket (see more safety tips below).

Recommended: How to Deposit Cash at an ATM

Will I Face Fees If I Use My Debit Card Internationally?

While you can typically use a debit card in another country, you may have to pay a foreign transaction fee. Though these fees vary by bank and card issuer, they are usually around 1-3% of any transaction abroad.

In addition, you may be given the option by a merchant to pay in local or U.S. currency. If you opt for the latter, it is known as dynamic currency conversion (DCC), and you will likely face an upcharge, possibly a steep one. It’s usually wiser to pay in local currency.

If you want to avoid foreign transaction fees, you may need to open an international credit card designed for travelers or find a bank account offering a debit card without these fees.

While you can use a debit card for purchases abroad, experts often recommend paying with cash or a credit card as it can offer better protection if a thief gets their hands on your plastic.

Instead, debit cards are ideal for taking cash out of an ATM. If your bank offers in-network ATMs in foreign countries, you can avoid ATM fees by withdrawing money from those specific ATMs — though you may still contend with foreign transaction fees.

What to Do Before You Travel to Another Country

Traveling to another country is exciting, but there’s a lot to do before you hop on that plane. You may have to find a pet sitter, book hotels, or renew your passport, but there are also a lot of important financial moves to make before traveling internationally:

•   Informing your bank: Banks and credit unions offer a wealth of services to prevent fraud. Unexpected transactions in foreign countries can be a red flag to your financial institution; in attempting to protect you from fraud, they may decline the transaction or freeze your card. It’s a good idea to let your bank and/or credit card issuer know where and when you’ll be traveling so there aren’t any interruptions to your banking service.

   It can also be wise to note customer service numbers for your bank and credit cards in a safe place but not in your wallet in case you were to lose your wallet or be robbed while traveling. You can then spring into action quickly to report losses.

•   Exchanging your money: You’ll want cash in the local currency for your trip, but it’s a good idea to exchange your money before setting out on your travels. Airport kiosks, hotels, and train stations have notoriously high exchange rates; you’ll likely get a better rate if you exchange in advance with a bank or credit union near you.

   That said, you don’t want to carry too much cash on you when traveling in another country, meaning you’ll need to exchange money as you go. You can avoid high exchange rates abroad by getting cash from an in-network ATM using your debit card. Just keep your ATM withdrawal limits in mind.

•   Getting travel insurance: If you’re paying for your travel with a rewards credit card, you may already carry special credit card travel insurance. But if cash and debit cards are your primary resources, you may want to find travel insurance through a third party. Travel insurance can help with the challenges and costs of trip cancellations, lost luggage, rental car issues, and even medical care in foreign countries.

•   Getting an international phone plan: Even the best laid plans can go wrong. If you get lost, want to use a translator, or need to call your bank to troubleshoot an issue with your debit card, it helps to have an international call, text, and data plan. It’s a good idea to ask your provider in advance about their international plans and see if you can work it into your travel budget.

Recommended: How to Wire Money in 5 Steps

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Tips for Safely Using Your Debit Card Internationally

Taking your debit card with you abroad can be convenient, but it’s important to prioritize safety when spending money in another country. Here are a few tips for safely using your debit card internationally:

•   Wear a money belt: Pickpockets can ruin a vacation in a matter of seconds. Keep your valuables (wallet, passport, smartphone, etc.) safe by keeping them out of your pockets. It’s also a good idea to avoid lugging around a purse on your shoulder. Instead, consider wearing a money belt — a pouch on a belt that keeps your money securely attached to your person. You can store your debit cards, credit cards, cash, and more in the pouch.

•   Tell your bank you’re traveling: Avoid becoming stranded in another country without access to your funds by alerting your financial institution of your travels. This should prevent them from freezing your card because of unusual activity.

•   Bring multiple forms of payment: Because something can go wrong — lost or stolen funds, payment type not accepted, etc. — it’s wise to have multiple forms of payment with you when traveling internationally. Ideally, your money belt may have a credit card, a debit card (from a different issuer), and cash in the foreign currency.

•   Practice ATM safety: When using your debit card to withdraw funds at an ATM, there are a few things you can do to protect yourself and your money.

◦   Don’t use the ATM alone, if possible.

◦   Don’t use the ATM at night.

◦   Memorize your PIN (and make sure it’s unique); don’t write it down anywhere.

◦   Watch someone else use the ATM first; if they can successfully retrieve their card and their money, that’s a good sign that criminals haven’t tampered with the machine.

◦   Learn to check ATMs for card skimmers. If a machine looks like it’s been tampered with or has an extra bit of plastic around the card slot, don’t insert your card and find another source of cash.

Can You Withdraw Money at an International ATM?

If you’re wondering if you can use your debit card internationally, you may well be thinking about withdrawing money from an ATM while abroad. That is a top reason to bring your debit card with you when traveling overseas. Before traveling, you can research which ATMs are in your bank’s network in the country you’re visiting — and even make a list of their locations so you know where to go during your trip.

While using an in-network ATM may help you avoid ATM fees, some banks and card issuers may still charge foreign transaction fees. If you regularly travel abroad, it may be worth opening a checking account with a debit card that has no or very low foreign transaction fees.

Pro Tip: If you are worried about ATM fees abroad, you may be able to use your debit card at a store and request cash back at the register. However, foreign transaction fees may apply.

What to Do If Your Debit Card Does Not Work?

If you’re in a foreign country and your debit card isn’t working, don’t panic. There are a few things you can do to ensure you can safely spend your money abroad, like:

•   Calling your financial institution. Making an international call might be expensive, but talking to someone at your bank can usually rectify any issue with your debit card. Also, some financial institutions have numbers to use when traveling internationally. It can be wise to note that information down in advance so it’s handy.

•   Using another form of payment. If you’re in the midst of a transaction, it might make sense (at least temporarily) to pay with a credit card or cash until you’re in a calmer place. Then, when you’re back at your hotel or another quiet place, you can resolve your debit card issues.

•   Finding a U.S. embassy. As a last resort, if you have no way of getting money and are stranded abroad, find a U.S. Embassy or Consulate. In emergencies, they may offer temporary loans to travelers.

Recommended: Credit Cards vs. Debit Cards

The Takeaway

You can typically use your debit card overseas to make purchases and/or withdraw cash at an ATM. Just keep in mind that not all U.S. debit cards are accepted internationally, and your bank may charge a foreign transaction fee. If you use an ATM that is not in your bank’s network, you may also get hit with an ATM fee.
If you’re looking for a new banking partner, it’s a good idea to consider not only interest rates but also any fees you may encounter both at home and abroad.

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.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Is it better to use cash instead of a debit card internationally?

When traveling internationally, it’s a good idea to have a mix of payment methods: cash, credit cards, and debit cards. Some experts advise using credit cards and cash for purchases and relying on your debit card exclusively for ATM transactions.

Can I use my debit card in all countries?

In most cases, you can use your debit card in other countries, as long as the merchant takes credit cards and accepts cards with your logo. Visa and Mastercard are the most universally accepted, with Discover and American Express following closely behind. When you use your debit card abroad, you may have to pay foreign transaction fees and ATM fees.

Is it better to use a credit card or debit card internationally?

When traveling abroad, you may want to prioritize payment methods that do not charge foreign transaction fees, whether that’s a credit card or a debit card. However, it’s a good idea to carry both kinds of cards (plus cash). Experts generally recommend using a credit card for cash for purchases and utilizing a debit card to withdraw more money at ATMs as needed.

Photo credit: iStock/Anchiy

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, 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 Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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Dec
18
2024
11 Ways to Make Money While Driving

11 Ways to Make Money While You Drive

By | Financial Independence, Life & Career, money | Comments Off on 11 Ways to Make Money While You Drive

If you enjoy driving and have access to a reliable vehicle, you may be able to use that everyday skill to make money. There are numerous ways to earn money while driving, whether through ridesharing, delivering food, or being a tour guide.

Not only is this an easy way to bring in some cash, it can be a very flexible gig. You can set your own hours or get behind the wheel when your schedule allows.

Want to learn more about all the ways you can get paid for driving? Then read on, and get ready to start your engine. Here are 11 tips on how to make money while driving.

Key Points

•   Before you jump into making money by driving, consider the costs and wear and tear on your car.

•   Ridesharing involves using apps like Uber or Lyft to pick up passengers.

•   Food delivery through apps like Uber Eats or Grubhub is another way to make money while driving.

•   Grocery delivery can be done via apps such as Instacart.

•   Other options include delivering goods via services like Shipt or Amazon Flex and helping people move large items through platforms like Taskrabbit or Dolly.

What to Consider Before Using Your Car to Make Money

Before you set out on your new road to earning extra income, it’s wise to make sure that driving to make money is right for you. There are risks and complications when using your personal vehicle that may outweigh the potential side hustle benefits you would reap.

Consider the following before embarking on using your car to make money:

•   Wear and tear on your car. Using your car to earn money while you drive can rack up a lot of miles. An uptick in use will put stress on your vehicle, leading to its overall depreciation and potentially more trips to the mechanic.

•   Age of your vehicle. The age of your car may impact your ability to earn money. For example, some rideshare companies require newer cars.

•   Car insurance. You will need proper insurance to cover yourself and possibly a passenger. There are usually specific insurance requirements to be eligible for ridesharing and other driving gigs, so scrutinize your policy to see how car insurance works for you in this situation.

•   Taxes. If you earn more than $400 while driving your car to make money, the IRS considers you an independent contractor. Along with a Form 1040, you’ll have to fill out a Schedule C form. You’ll also be subject to the self-employment tax.

•   Cost of doing business. This isn’t necessarily a low-cost side hustle, since you’ll be responsible for gas, vehicle maintenance, and repairs. But as a self-employed worker, you’ll be able to write off those expenses and others, such as mileage, on your tax return.

Bottom line: Make sure you know what you and your car are getting into. You don’t want a scenario where you end up wasting money and your valuable time instead of earning more income.

💡 Quick Tip: Tired of paying pointless bank fees? When you open a bank account online you often avoid excess charges.

11 Ways to Earn Money by Driving

How can I make money driving my own car?

How can I make money driving my own car? The answer depends on where you live, the kind of car you own, other skills you may have, and your personal preferences. But whether you own your car or lease it, the opportunities are out there if you’re willing to grab them.

Here are 11 suggestions on how to make money by driving:

1. Ridesharing

If you’ve ever hopped in an Uber, then you likely understand what ridesharing is all about. A driver uses their car to pick up passengers on demand. This has become a popular way to earn money while driving in recent years. You can drive as suits your schedule, and rideshare companies such as Uber and Lyft strive to make the driver sign-up process as streamlined as possible.

If you have a good driving record, a flexible schedule, and newer four-door vehicle, working for a rideshare app can potentially be a great source of extra income, especially if you’re willing to give up your Friday and Saturday nights to earn prime-hour cash. Your specific earnings will depend on how often you drive, when, and for how long, as well as where you are located. Uber drivers can earn anywhere from $7.70 to $38.65 per hour, with the average coming in at $20.29, according to Indeed.

Recommended: How to Make Money From Home

2. Food Delivery Service

Another way you can be driving to make money: by delivering anything from a smoothie to Pad Thai and back again. When you sign up with food delivery apps such as Uber Eats, Seamless, and Grubhub, you’ll get notifications to pick up food from participating restaurants and drive them to hungry patrons. For every delivery, you’ll get paid.

Drivers for Door Dash can earn anywhere from $7.25 to $40.00 per hour, but the national average hourly pay is $17.14, according to Indeed.

3. Delivering Groceries

If you want to earn money driving without the smell of takeout in your car, consider delivering groceries instead of prepared meals. Apps such as Instacart rely on independent drivers to shop and deliver groceries to people’s homes.

Grocery deliverers can make between $14 and $43 an hour, depending on how busy the local area where you live is. Be sure and check for any requirements. For example, to work for Instacart, you need to be age 18 or older, have a bank account, and be able to lift at least 40 pounds.

4. Delivering Goods to Others

Food isn’t the only thing you can deliver to earn money while driving. There’s a whole world of goods out there that people want delivered. Apps such as Shipt work with drug stores (like CVS) and large retailers (like Target and Lowe’s) to get people what they need.

Looking for another idea? Amazon Flex allows independent drivers to deliver packages on their own schedules for an hourly wage. They do require you to have a mid-size, four-door sedan or larger.

5. Moving Large Items for Others

If you own a van, SUV, or truck and can do some heavy lifting, you could use your vehicle and your strength to make big bucks by helping move items.

Maybe a recent grad can finally afford to move out from their parents’ place, or someone is moving to a new, nearby neighborhood. People like these often need help moving oversized items such as furniture or multiple heavy boxes a short distance.

You can check out websites like Taskrabbit or Craigslist to see if someone needs moving assistance, or register with an online service such as Dolly or GoShare that will connect you with clients.

6. Shuttling Children

With the proper qualifications, you can drive to make money by transporting children. Many working parents need help getting their kids to and from school or to their after-school activities. You can search Care.com or other childcare employment sites for part-time gigs, driving children where they need to be.

Companies such as HopSkipDrive work with school districts and independent drivers to solve child transportation issues. Most of these types of jobs require around five years of experience working with kids, in-person interviews, and background checks.

Recommended: 8 Great Flexible Part-time Jobs for Gen Z and Millennials

7. Transporting Elderly People

Some seniors need help getting around town but prefer not to use rideshare services. Check with elder-care services in your community. They may need drivers to help get their clients to a store, an activity, or a doctor’s appointment.

You will likely need similar vetting to that mentioned for chauffeuring children.

8. Driving Tours

If you have the gift of gab and knowledge of your area, being a tour guide could be a fun way to make money while driving. You could register with online companies such as ToursByLocals and create a private driver profile to promote your insider savvy. This could involve showing tourists local highlights so they can take some photos for social media, or sharing hidden treasures that they might not otherwise learn about. It’s a win-win when you use your hometown smarts to boost your financial security.

9. Putting Advertising on Your Car

Here’s a passive income idea that works, though it’s not for everyone: Consider turning your car into a mobile billboard. Companies such as Wrapify and Carvertise will match you with a local advertising campaign and supply you with temporary “wraps” for your car that promote a product. Depending on where you drive and the size of your car, you could make between $264 and $452 a month.

Typically, these businesses want to wrap cars that are on the road and visible for much of the time. If you are doing deliveries by car, this might be a way to bring in more cash.

10. Renting Out Your Car

You can make money off your car without even driving it. Companies such as Turo and Getaround allow you to rent out your vehicle à la Airbnb. They will vet borrowers, cover insurance, and provide you with a device that allows renters to unlock your car without a key.

If you don’t want to do ridesharing, let others do it for you. Companies like HyreCar arrange to lend your car to other vetted drivers who want to earn money for Lyft or Uber. But to really make some dough, you would have to be willing to part with your vehicle often.

11. Being a Safe Driver

Here’s another way that driving can bring in some cash: If you are a safe driver, you may be eligible for a bit of money. For example, Allstate will reward you with a Safe Driving Bonus every six months if you don’t get in a fender-bender.

The State Farm insurance app will track your car to determine if you are driving safely — it monitors things like staying within the speed limit and coming to a complete stop versus a rolling one. You could get up to a 30% discount on your auto insurance.

Recommended: How to Deposit Cash at an ATM

The Takeaway

If you have a vehicle, you can make extra money. Signing up with the right apps and online services can get your car (and your new income stream) up and running. Whether it’s doing deliveries, transporting a sofa, or helping a person get to their destination, you can turn your vehicle (plus your driving skills) into a profit-mobile.

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.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

What are the pros of making money while driving?

By using your car to make money, you may be able to set your own hours and be your own boss. It’s also a pursuit that doesn’t require much specialized training. In many cases, you are using a skill you already have.

What are the cons of making money while driving?

Using your car to make money can place a lot of stress and miles on your vehicle. Gas and maintenance prices can really add up. Plus some pursuits, such as helping people move furniture, can be physically challenging.

Is making money with your car better as a side hustle?

Earnings from most car-driving gigs can be sporadic and unpredictable, unless you live in a major city with consistent high demand. For this reason, it may be best to have another form of steady income and drive for cash on the side.

How much can you potentially earn with your car?

How much you can make driving your car depends on the type of job and where you live. On average, Uber drivers earn $20.29 per hour, according to Indeed.

Photo credit: iStock/Hispanolistic

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, 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 Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found 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.

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Investing in Index Funds in a Roth IRA

By | Growing Wealth, invest, Investing | Comments Off on Investing in Index Funds in a Roth IRA

An index fund is a type of mutual fund or exchange-traded fund that aims to track the performance of a specific stock index. A Roth IRA is a type of tax-advantaged investment account. Index funds are one type of investment you could hold inside a retirement plan like a Roth IRA.

Here’s a closer look at investing in index funds through a Roth IRA.

Key Points

•   A Roth IRA is a tax-advantaged retirement account, while index funds are investments that can be held within such accounts.

•   Investing in index funds within a Roth IRA allows for tax-free growth and withdrawals.

•   Index funds provide diversification and offer the potential for long-term growth, which could make them an efficient choice for retirement savings.

•   When selecting an index fund, consider factors like risk tolerance, investment goals, expense ratios, and historical performance.

•   It’s important to regularly review your Roth IRA and the investments in it and make any necessary adjustments to meet your financial objectives and comply with contribution limits.

Understanding Your Investing Options in a Roth IRAs

A Roth IRA is an individual retirement account that allows you to set aside after-tax dollars for retirement. Because you’ve already paid taxes on the money you contribute to the Roth IRA, you can withdraw it tax-free in retirement, which is an attractive feature to some investors.

Roth IRAs can offer a number of different investment options, including:

•   Index funds

•   Target-date funds

•   Exchange-traded funds (ETFs)

•   Real estate investment trust (REIT) funds

•   Bonds

Index funds, target-date funds, and REITs can feature a mix of different investments. So, you might invest in a target-date fund that has a 70% allocation to stocks, and a 30% allocation to bonds, for instance. When comparing different funds it’s important to consider the expense ratio you might pay to own it and its past performance.

Some brokerage companies that offer IRAs may also offer other investments, such as individual stocks, commodities, or even cryptocurrency. Evaluating your personal risk tolerance, investment timeline, and goals can help you decide how to invest your money if you’re opening a retirement account online like a Roth IRA.

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1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

What Are Index Funds?

An index fund is a type of mutual fund or ETF that aims to track the performance of a specific stock index. A stock index measures a specific segment of the market. For example, the S&P 500 index tracks the 500 largest companies listed on public stock exchanges in the U.S.

Index funds typically work by investing in the same securities that are included in the index they’re trying to match. So, for example, if an index fund is using the S&P 500 as its benchmark, then its holdings would reflect the companies that are included in that index.

Index funds are a type of passively managed fund, since assets turn over less frequently. In terms of performance, index funds are not necessarily designed to beat the market but they can be more cost-friendly for investors as they often have lower expense ratios.

Long-term Benefits

Index funds offer the opportunity for long-term appreciation. Because they track the stock market, which historically has an annual return of about 7% (as measured by the S&P and adjusted for inflation), index funds may be able to get a similar rate of return over time, minus any fund fees.

Why Invest in Index Funds Through a Roth IRA?

As noted above, you can hold a range of investments in a Roth IRA, including index funds. Investing in index funds may help diversify your portfolio. Here are some of the other possible factors to consider.

Tax-free Growth and Withdrawals

Because you’ve already paid taxes on the money you contribute to a Roth IRA, you can withdraw it tax-free in retirement, as long as you are age 59 ½ and meet the five-year rule, which dictates that your account has to be open for at least five years before you start withdrawing funds. Tax free withdrawals in retirement might appeal to you if you expect to be in a higher tax bracket at that time.

Any earnings you have from index funds or other investments grow tax-free in a Roth IRA and they can be withdrawn tax-free in retirement.

Supporting Retirement Goals

Because they offer the potential for long-term growth, index funds can be part of a retirement savings strategy. An investor can choose the funds that best fit their risk tolerance and investment goals. The fees are also lower for index funds than some other types of investments, which means you can keep more of your earnings over the long term.

How to Invest in Index Funds in a Roth IRA

If you’ve decided to invest in index funds through your Roth IRA, the process for getting started is relatively simple:

1.    Decide which index fund or funds you’d like to invest in (see more on that below).

2.    Log into your Roth IRA account.

3.    Find the fund you’d like to purchase and select “Buy.” You may be able to specify a specific dollar amount you want to spend or choose the number of shares you want to buy.

4.    Review your order to make sure it is correct, then finalize it.

Tips on Choosing the Right Index Funds

While index funds operate with a similar goal of matching the performance of an underlying benchmark like the S&P 500, they don’t all work the same. There can be significant differences when it comes to things like the expense ratio, the fund’s underlying assets, its risk profile, and its overall performance.

When choosing an index fund to invest in, consider the following factors:

•   Risk tolerance. How much risk are you willing to take with your investments? Knowing if you’re a conservative, moderate, or aggressive investor is important to choosing index funds that make the most sense for you. Our risk tolerance quiz can help you figure out which category you fall into.

•   Your goals. What specifically, are you hoping to get out of your investment? Are you saving for the long term and aiming for it to grow over time? Are you putting away money for retirement? Determining exactly what you want to do with your investment will help you decide what type of index funds to invest in.

•   Broad vs. specialized fund. Broad funds attempt to mimic the performance of a stock market as a whole, while a specialized fund like a small cap index fund, for example, targets companies with a smaller market capitalization. A specialized fund can be riskier because you’re invested in one type of asset, while a broad fund can provide some diversification, although like any investment, there are still risks involved.

•   Performance history. A fund’s performance history can help you see how the fund has handled different market conditions. Look to see how it has consistently performed relative to the benchmark it tracks. You can also compare its performance to other index funds in the same category.

•   Expense ratios. These ratios represent the annual cost of managing an index fund. They’re expressed as a percentage of your total investment. Keep in mind that a small difference in expense ratios can add up over time. With a smaller expense ratio, less of your investment goes to management costs.

Managing Your Index Funds

Even though index funds are passively managed, it’s a good idea to review them from time to time.

First, check their performance to see if they are mirroring the index they follow, minus the expense ratio. If their performance is not keeping up, you may want to consider another fund.

Also, keep an eye on fees. If you see that the fees for your index funds are growing over time, you may want to change your investment.

Managing Your Roth IRA

Similarly, with a Roth IRA, it’s wise to review your account and the investments inside it at least once a year. Monitor how well your assets are performing and see if they are on track to help you reach your goals.

You may find that you need to do some portfolio rebalancing. Based on how your assets have performed, you might have a different asset allocation than you originally started out with, as some things may have performed better than others. For instance, maybe stocks outperformed bonds. Review your asset allocation carefully and make any adjustments needed to help stay true to your risk tolerance and investment goals.

Finally, contribute to your Roth IRA each year if you can, but be sure not to over-contribute. The IRS sets the maximum limit for annual Roth IRA contributions. For 2024, the maximum limit is $7,000, or $8,000 if you’re age 50 or older. You have until the tax filing deadline to make contributions for that tax year. For 2025, the maximum limits are the same: $7,000 or $8,000 if you’re 50 or older.

It’s important to note that the limits are cumulative. If you have more than one Roth IRA, or a Roth IRA and a traditional IRA, your total contributions to all accounts cannot be greater than the limit allowed by the IRS. Unlike traditional IRA contributions, Roth IRA contributions are not tax-deductible.

Also, be aware that you’ll need to have earned income for the year to contribute to a Roth IRA, but there are limits. The IRS sets a cap on who can make a full contribution, based on their filing status and modified adjusted gross income (MAGI).

Here are the income thresholds for the 2024 and 2025 tax years:

Filing Status

 You Can Make a Full Contribution for 2024 If Your MAGI is…

 You Can Make a Full Contribution for 2025 If Your MAGI is…
Single or Head of Household Less than $146,000 Less than $150,000
Married Filing Jointly Less than $230,000 Less than $236,000
Married Filing Separately and Did Not Live With Your Spouse During the Year Less than $146,000 Less than $150,000
Qualifying Widow(er) Less than $230,000 Less than $236,000

Contribution amounts are reduced as your income increases, eventually phasing out completely. The 2024 phaseout limits are $146,000 for single filers, heads of households, and qualifying widows or widowers. The limit for couples is $230,000.

If you’re married and file separate returns but lived with your spouse during the year, you’d only be able to make a reduced contribution for 2024 if your MAGI is less than $10,000.

The 2025 phaseout limits are $150,000 for single filers, heads of households, and qualifying widows or widowers. The limit for couples is $236,000. And if you’re married and filed separate returns and lived with your spouse during the year, you can make a reduced contribution only if your MAGI is less than $10,000.

Recommended: Roth IRA Calculator

The Takeaway

A Roth IRA is a tax-advantaged account that can help you save for retirement. There are a number of different investment options to choose from when you have a Roth IRA, including target-date funds and index funds.

If you decide to invest in index funds, research different funds to find the best ones for you, and be sure to look at their performance and expense ratio, among other factors. Also, consider your risk tolerance and goals when choosing index funds to make sure that they are aligned to help you reach your financial goals.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help build your nest egg with a SoFi IRA.

FAQ

Can I lose money investing in index funds?

It is possible to lose money investing in index funds. All investments involve risk and can lose money. However, broad index funds, such as those that use the S&P 500 as a benchmark, are diversified and hold many different types of stocks. Even if some of those stocks lose value, they may not all lose value at the same time.

Is it better to invest in index funds or individual stocks for a Roth IRA?

Which investment is best depends on an investor’s financial situation, goals, and risk tolerance. There is no one-size-fits-all answer. But in general, individual stocks can be more volatile with more potential for risk (they may also have more potential for higher returns). Broad index funds that provide significant diversification may help minimize risk and maximize returns over the long term.

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/Ridofranz

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

S&P 500 IndexThe S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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2024

A Comprehensive Guide to Treasury Bills (T-Bills)

By | Financial Topics, Growing Wealth, invest, Investing, Terminology | Comments Off on A Comprehensive Guide to Treasury Bills (T-Bills)

U.S. government-backed securities like Treasury bills (T-bills) provide a way to invest with minimal risk. These debt instruments are one of several different types of Treasury securities including Treasury notes (T-notes) and Treasury bonds (T-bonds).

Unlike other treasuries, however, T-bills don’t pay interest. Rather, investors buy T-bills at a discount to par (the face value).

Investors looking for a low-risk investment with a short time horizon and a modest return may find T-bills an attractive investment. T-bills have minimal default risk and maturities of a year or less. But Treasury bill rates are typically lower than those of some other investments.

Key Points

•   T-bills are short-term investments that offer a guaranteed rate of return.

•   Investors don’t receive coupon, or interest, payments. The return is the discount rate.

•   T-bills have a near-zero risk of default.

•   Investors can buy T-bills directly from TreasuryDirect.gov, or on the secondary market using a brokerage account.

What Is a Treasury Bill (T-Bill)?

Treasury bills are debt instruments issued by the U.S. government. They are short-term securities and are issued with maturity dates ranging from 4 weeks to one year. It may be possible to buy T-bills on the secondary market with maturities as short as a few days.

How Treasury Bills Work

Essentially, when an individual buys a T-bill, they are lending money to the U.S. government. In general, T-bills are considered very low risk, since they are backed by the full faith and credit of the U.S. government, which has never defaulted on its debts.

T-bills are sold at a discount to their par, or face value. They are essentially zero-coupon bonds. They don’t pay interest, unlike other types of Treasuries (and coupon bonds); rather the difference between the discount price and the face value is like an interest payment.

T-Bill Purchase Example

While all securities have a face value, also known as the par value, typically investors purchase Treasury bills at a discount to par. Then, when the T-bill matures, investors receive the full face value amount. So, if they purchased a treasury bill for less than it was worth, they would receive a greater amount when it matures.

Example

Suppose an investor purchases a 52-week T-bill for $4,500 with a par value of $5,000, a 5% discount. Since the government promises to repay the full value of the T-bill when it expires, the investors will receive $5,000 at maturity, and realize a profit or yield of $500.

In the example above, the discount rate of the T-bill is 5% — and that is also the yield. But examples aside, the actual 52-week Treasury bill rate, as of Feb. 1, 2024, is 4.46%.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

T-Bill Maturities

Understanding the maturity date of a T-bill is important. This is the length of time you’ll hold the bill before you redeem it for the full face value. Maturity dates affect the discount rate, with longer maturities generally offering a higher discount/return, but interest rates will influence the discount.

The government issues T-bills at regular auctions, in four-, eight-, 13-, 17-, 26-, and 52-week terms, in increments ranging from $100 to $10 million. The minimum T-bill purchase from TreasuryDirect.gov is $100.

Some investors may create ladders (similar to bond ladders), which allow them to roll their T-bills at maturity into more T-bills. Although T-bill rates are fixed, and because their maturities are so short, they don’t have much sensitivity to interest rate fluctuations.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

How to Purchase T-Bills

You can purchase T-bills at regular government auctions on TreasuryDirect, or on the secondary market, from your brokerage account.

Buying From Treasury Direct

Noncompetitive bids: With a noncompetitive bill, the investor accepts the discount prices that were established at the Treasuries auction, which are an average of the bids submitted.

Since the investor will receive the full value of the T-bill when the term expires, some investors often favor this simple technique of investing in T-bills.

Competitive bid: With a competitive bid, all investors propose the discount rate they are prepared to pay for a given T-bill. The lowest discount rate offers are selected first. If investors don’t propose enough low bids to complete the entire order, the auction will move onto the next lowest bid and so on until the entire order is filled.

Buying and Selling on the Secondary Market

Another option is to purchase or sell T-bills on the secondary market, using a standard brokerage account.

Investors can also trade exchange-traded funds (ETFs) or mutual funds that may include T-bills that were released in the past.

Redemption and Interest Earnings on T-Bills

As noted above, although T-bills are debt instruments and an investor’s loan is repaid “with interest,” T-Bills don’t have a coupon payment the way some bonds do. Rather, investors buy T-bills at a discount, and the difference between the lower purchase price and the higher face value is effectively the interest payment when the T-bill matures.

When a T-bill matures, investors can redeem it for cash at Treasury.gov.

T-bill purchases and redemptions are now fully digital. Paper T-bills are no longer available.

Tax Implications for T-Bill Investors

Gains from all Treasuries, including T-bills, are taxed at the federal level; i.e. they are taxed as income on your federal income tax return.

Treasury gains are exempt from state and local income tax.

Comparing T-Bills to Treasury Notes and Bonds

The U.S. government offers a number of debt instruments, including Treasury Bills, Notes, and Bonds. The difference between them is their maturity dates, which can also affect interest rates and discount rates.

Treasury Notes

Investors can purchase Treasury notes (or T-notes) in quantities of $1,000 and with terms ranging from two to 10 years. Treasury notes pay interest, known as coupon payments, bi-annually.

Treasury Bonds

Out of all Treasury securities, Treasury bonds have the most extended maturity terms: up to 30 years. Like T-notes, Treasury bonds pay interest every six months. And when the bond matures the entire value of the bond is repaid.

Recommended: How to Buy Bonds: A Guide for Beginners

Considerations When Investing in T-Bills

Like any other investments, it’s important to understand how T-bills work, the pros and cons, and how they can fit into your portfolio.

What Influences T-Bill Prices in the Market?

Although any T-bill you buy offers a guaranteed yield at maturity, because T-bills are short-term debt the discount rates (and therefore the yield) can fluctuate depending on a number of factors, including market conditions, interest rates, and inflation.

The Role of Maturity Dates and Market Risk

Generally, the longer the maturity date of the bill, the higher the returns. But if interest rates are predicted to rise over time, that could make existing T-bills less desirable, which could affect their price on the secondary market. It’s possible, then, that an investor could sell a T-bill for lower than what they paid for it.

Federal Reserve Policies and Inflation Concerns

It’s also important to consider the role of the Federal Reserve Bank, which sets the federal funds target rate, for overnight lending between banks. When the fed funds rate is lower, banks have more money to lend, but when it’s higher there’s less money circulating.

Thus the fed funds rate has an impact on the cost of lending across the board, which impacts inflation, purchasing power — and T-bill rates and prices as well. As described, T-bill rates are fixed, so as interest rates rise, the price of T-bills drops because they become less desirable.

By the same token, when the Fed lowers interest rates that tends to favor T-bills. Investors buy up the higher-yield bills, driving up prices on the secondary market.

How Can Investors Decide on Maturity Terms?

Bear in mind that because the maturity terms of T-bills are relatively short — they’re issued with six terms (four, six, 13, 17, 26 and 52 weeks) — it’s possible to redeem the T-bills you buy relatively quickly.

T-bill rates vary according to their maturity, so that will influence which term will work for you.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Advantages and Disadvantages of T-Bills

Advantages of T-Bills

•   They are a low-risk investment. Since they are backed in the full faith of the U.S. government, there is a slim to none chance of default.

•   They have a low barrier to entry. In other words, investors who don’t have a lot of money to invest can invest a small amount of money while earning a return, starting at $100.

•   They can help diversify a portfolio. Diversifying a portfolio helps investors minimize risk exposure by spreading funds across various investment opportunities of varying risks and potential returns.

Disadvantages of T-Bills

•   Low yield. T-bills provide a lower yield compared to other higher-yield bonds or investments such as stocks. So, for investors looking for higher yields, Treasury bills might not be the way to go.

•   Inflation risk exposure. T-bills are exposed to risks such as inflation. If the inflation rate is 4% and a T-bill has a discount rate of 2%, for example, it wouldn’t make sense to invest in T-bills—the inflation exceeds the return an investor would receive, and they would lose money on the investment.

Using Treasury Bills to Diversify

Investing all of one’s money into one asset class leaves an investor exposed to a higher rate of risk of loss. To mitigate risk, investors may turn to diversification as an investing strategy.

With diversification, investors place their money in an assortment of investments — from stocks and bonds to real estate and alternative investments — rather than placing all of their money in one investment. With more sophisticated diversification, investors can diversify within each asset class and sector to truly ensure all investments are spread out.

For example, to reduce the risk of economic uncertainty that tends to impact stocks, investors may choose to invest in the U.S. Treasury securities, such as mutual funds that carry T-bills, to offset these stocks’ potentially negative performance. Since the U.S. Treasuries tend to perform well in such environments, they may help minimize an investor’s loss from stocks not performing.

The Takeaway

Treasury bills are one investment opportunity in which an investor is basically lending money to the government for the short term. While the return on T-bills may be lower than the typical return on other investments, the risk is also much lower, as the US government backs these bills.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest with as little as $5 with a SoFi Active Investing account.

About the author

Rebecca Lake

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

Photo credit: iStock/Marco VDM


SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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17
2024
What is Revolving Debt_780x440

What Is Revolving Debt?

By | Credit, Debt Payoff, personal_loan, Terminology | No Comments

While revolving credit provides borrowers with flexibility, too much revolving debt can be crippling. Even with falling interest rates, the most vulnerable credit card holders can use some help.

Let’s look at ways of dealing with mounting revolving debt. But first, here’s a primer on what revolving debt is and how it differs from installment debt.

Key Points

•   Revolving credit allows borrowing up to a limit but can lead to high interest and debt if not managed well.

•   Installment debt involves fixed monthly payments until the loan is paid off, offering predictable payments and potential refinancing options.

•   Managing revolving debt involves strategies like budgeting, debt consolidation, and balance transfers to lower interest rates and monthly payments.

•   Credit utilization ratio and payment history significantly impact credit scores, with late payments damaging scores for up to seven years.

•   Debt settlement and credit counseling are options for managing debt, but they come with potential drawbacks like damaged credit scores and high costs.

A Closer Look at Revolving Debt

There are two main categories of debt: revolving and installment. Revolving credit lets you borrow money up to an approved limit, pay it back, and borrow again as needed. The two most common revolving accounts are credit cards and a home equity line of credit (HELOC).

HELOCs are offered to qualified homeowners who have sufficient equity in their homes. Most have a draw period of 10 years, followed by a repayment period. A less common type of revolving credit is a personal line of credit, usually obtained by an existing customer of a lending institution.

Then there are credit cards, which became part of the American fabric in the 1950s, starting with the cardboard Diners Club card. You can choose to make credit card minimum payments, pay off the entire balance each month, or pay some amount in between. If you don’t pay off the full balance when it’s due, your balance will accrue interest.

That’s one of the quiet dangers of revolving debt: If you haven’t reached your limit, you can continue to borrow while you owe money, which adds to your debt and to the amount of interest accruing on it.

Recommended: Credit Card Rules to Live By

Revolving Debt vs. Installment Debt

Now let’s take a look at installment debt. It differs from revolving debt in a few key ways — namely, how you borrow money, how you pay it back, and how interest is calculated.

Installment credit comes in the form of a loan that you pay back in installments every month until the loan is paid off. Think mortgages, auto loans, personal loans, and student loans.

Installment loans can be secured with collateral, or they can be unsecured. Some loans could have fees, and the interest rate may fluctuate, depending on whether you have a fixed or variable rate loan. The loan amount is determined when you’re approved.

There are benefits and drawbacks to both types of debt. Let’s take a look.

Revolving Debt Pros and Cons

Pros:

•   Borrow only what you need

•   Can access credit quickly

•   May qualify for high borrowing limit

Cons:

•   Will have a credit limit

•   Can have high interest rates

•   Can be easy to run up a big balance

Installment Debt Pros and Cons

Pros:

•   Can cover large or small expenses

•   Payments are predicable

•   Can refinance to a lower rate

Cons:

•   Interest applies to the entire loan amount

•   Can’t add to the loan amount once it’s finalized

•   Long repayment terms are possible

Secured and Unsecured Debt

Now is a good time to touch on secured vs. unsecured debt (and why credit card debt is especially pernicious). Mortgages, HELOCs, home equity loans, and auto loans are secured by collateral: the home or car. If you stop making payments, the lender can take the asset.

An unsecured loan does not require the borrower to pledge any collateral. Most personal loans are unsecured. The vast majority of credit cards are unsecured. Student loans are unsecured, and personal lines of credit are usually unsecured.

That means lenders have no asset to seize if the borrower stops paying on unsecured debt. Because of the higher risk to lenders, unsecured credit typically has a higher interest rate than secured credit.

Which leads us to the common credit card trap: The average annual percentage rate (APR) for credit cards accruing interest was 22.63% in early 2024 … and rising. The APR on a credit card includes interest and fees.

Perhaps you can see how “revolvers” — borrowers who carry a balance month to month — can easily get caught in a trap. The average household of credit card revolvers owes $6,380 according to recent data from TransUnion. Some owe much more.

Recommended: Personal Loan vs Personal Line of Credit

Types of Revolving Credit

As we discussed earlier, common types of revolving credit accounts include HELOCs, credit cards, and personal lines of credit. Each type has features and benefits that are worth knowing.

A credit card, for instance, is convenient to use — especially for everyday purchases — and may come with extra benefits like rewards programs, airline miles, or cashback offers. Depending on the card, you might also have access to purchase protection, which reimburses you for damaged or stolen items.

With a HELOC, you leverage your home’s equity to get the funds you need, up to an approved limit, during a typical 10-year draw period. A HELOC can be a good option if you’re looking to pay for home improvements or ongoing expenses or to cover a financial emergency.

Have a less-than-predictable income or facing a major ongoing expense, like a home renovation? If you have good credit, a personal line of credit may be the right choice. It’s flexible, so you can withdraw money as you need it, though your lender may set a minimum draw amount.

How Revolving Debt Can Affect Your Credit Score

Both installment and revolving debt influence your score on the credit rating scale, which typically ranges from 300 to 850.

Your credit utilization ratio is a big factor. It’s the amount of revolving credit you’re using divided by the total amount of revolving credit you have available, expressed as a percentage.

Most lenders like to see a credit utilization rate of 30% or lower, which indicates that you live within your means and use credit cards responsibly.

The most important element of a FICO® Score is payment history. It accounts for 35% of your credit score, so even one late payment — a payment overdue by at least 30 days — will damage a credit score.

And unfortunately, late payments stay on a credit report for seven years.

Tips for Managing Revolving Debt

Ideally, we’d all avoid interest on credit cards by paying off the balance each month. But if you do carry a balance, you have plenty of company. Forty-six percent of Americans carry a balance on active credit card accounts, recent data from the American Bankers Association shows.

If your revolving credit card debt has become unwieldy, there are ways to try to get it under control.

Budget Strategies

The fastest ways to pay off debt call for creating a budget to plan how much you will spend and save each month.

With the avalanche method, for example, you pay off your accounts in the order of highest interest rate to lowest. The 50/30/20 budget works for some people: Those are the percentages of net pay allotted toward needs, wants, and savings.

Debt Consolidation

Do you have high-interest credit card balances? You may be able to transfer that debt to a credit card consolidation loan.

Consolidating high-interest credit card balances into a lower-rate personal loan will typically save you money. Most personal loans come with a fixed rate, which results in predictable payments, and just one a month.

Installment loans do not count toward credit utilization. So using a personal loan to pay off higher-interest revolving debt will lower your credit utilization ratio (a good thing) as long as you keep those credit card accounts open. (Yes, closing a credit card can hurt your credit score.)

Homeowners using a home equity loan or HELOC to consolidate high-interest credit card debt can substantially lower their monthly payments. However, their home will be on the line, and closing costs may come into play.

Another method, cash-out refinancing, is a good move only when a homeowner can get a better mortgage rate and plans to stay in the home beyond the break-even point on closing costs.

Balance Transfer

A balance transfer card is another way to deal with high-interest debt. Most balance transfer credit cards temporarily offer a lower or 0% interest rate. But they may charge a balance transfer fee of 3% to 5%, and they require vigilance.

Make one late payment on the new card, and you’ll usually forfeit the promotional APR and have to pay a sky-high penalty APR. You’ll need to keep track of the day when the promotional rate expires so any balance is not subject to the high rate.

Debt Settlement

A debt settlement company may be able to reduce a pile of unsecured debt. There are many drawbacks to this route, though.

You will usually stop paying creditors, so mounting interest and late fees will cause your balances to balloon. Instead, you’ll make payments to an escrow account held by the debt settlement company. Funding it could take up to four years.

What’s more, your credit scores will be damaged, there is no guarantee of a successful outcome, it can be very expensive, and if a portion of your debt is forgiven, it probably will be considered taxable income.

This and bankruptcy options are considered last resorts. If you do go with a debt settlement company, know that those affiliated with the American Fair Credit Council agree to abide by a code of conduct.

Credit Counseling

A credit counseling service might be able to help. The Federal Trade Commission advises looking for a nonprofit program, but it adds that “nonprofit” does not guarantee that services are free, affordable, or even legitimate.

Look into credit counseling organizations affiliated with the National Foundation for Credit Counseling, National Association of Certified Credit Counselors, or Financial Counseling Association of America.

The Department of Justice keeps a list of approved credit counseling agencies. Also check with state and local consumer agencies.

A credit card hardship program addresses temporary setbacks. However, not all card companies have one.

The Takeaway

Revolving credit offers flexibility, but if left unchecked can devolve into runaway revolving debt. Credit card debt is especially pernicious, thanks to high interest rates charged to revolving balances. Debt consolidation, one approach to tame mounting revolving debt and the stress that comes with it, aims to lower your monthly payments.

Another option to consider is a lower-interest loan. It will result in a smaller monthly payment amount and just one payment to keep track of each month. The personal loan tends to be funded fast, has a fixed rate, and usually comes with no fees required.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.


SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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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.

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 .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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