Financial Topics Archives | Page 13 of 788

Oct

2024

How Long Do Collections Stay on Your Credit Report?

By Kim Franke-Folstad | Credit, Debt Payoff, Financial Topics, relay | Comments Off

If you neglect to pay a bill for a significant period of time, your creditor may send your debt to a collection agency, which then seeks repayment from you. This can have serious — and lasting — repercussions for your credit score. Understanding how long collections stay on your credit report and how to manage them is essential for maintaining good financial health. Here’s a closer look at how debts end up in collections and how they impact on your credit.

Key Points

• If you miss multiple payments on a loan, credit card, or other bill, your account may be sold to a collection agency.

• A collection account can remain on your credit report for up to seven years.

• Paying off a collection account won’t remove it from your report but can prevent further damage.

• The negative impact of a collection on your credit score decreases over time.

• Unpaid medical debt is treated differently from other types of debt.

What Are Collections?

Having a debt in collections typically means that the original creditor or lender has written your debt off as a loss and has sent it to a debt collector. The collector may be an internal team within the same company that goes after delinquent debts or a third party debt collection agency.

Most of your monthly bills (including credit cards, mortgage, auto loan, student loans, and utilities) can go to collections if you neglect to pay them for long enough. This means that bills that might not typically appear on your credit report (electric, phone, or cable, for example) could show up on your credit report as debts in collections.

There’s no set time frame as to when a lender or company will place a past-due account into collections. Generally speaking, however, creditors will wait until after 90 to 180 days of nonpayment before they will send your debt to collections.

What Happens if a Bill Goes to Collections?

Some creditors have in-house collection departments, but many will “charge off” your debt. This means the original creditor closes your account and sells your debt to a third-party collection agency. When your account is sent to collections, the balance on your original unpaid account goes to $0, and a new collections account will be added to your credit reports. Having a collection account on your credit report is one of the many things that can affect your credit score.

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How Long Will Collections Stay on Your Credit Report?

Like other negative information, a collection account can remain on your credit reports for up to seven years from the date you first miss a payment to the original lender or creditor. Even if you eventually pay what you owe or settle with the company that owns your debt, the collection will typically remain on your credit reports (though it will say “Paid Collection” in the account information).

Recommended: How Long Does It Take to Build Credit?

Medical Debt on Your Credit Report

Medical debt is not included in your credit reports, provided it stays with your health-care provider. If you have a medical bill that is several months overdue, the provider may sell it to a collections agency. But even if that happens, it won’t show up on your credit reports right away.

That’s because the three major credit bureaus (Equifax®, Experian®, and TransUnion®) give consumers a one-year grace period to clear up any medical debt that’s gone to collections before listing the account in your credit reports. This waiting period allows time for bills to make their way through the insurance approval and payment process. It also gives consumers a chance to report any billing errors to their insurance company and/or health care provider, perhaps negotiate a smaller bill amount, or get on a payment plan.

More good news: Medical debts under $500 will not appear on your credit reports. In addition, medical debts in collections that have been paid off are removed from your credit reports — they won’t stick around for seven years.

Managing and Preventing Collections Accounts

One of the best ways to protect your credit reports (and credit scores) is to avoid having a debt ever go to collections. Here are some tips that can help.

• Stay organized: Keep track of payment due dates by setting reminders on your phone or switching to autopay. A budgeting and spending app can help ensure you aren’t short on cash when it comes time to make your payments.

• Communicate with creditors: If you’re having trouble paying some of your bills on time, it’s a good idea to contact your creditors or service providers. They may be to offer a more manageable payment plan or offer temporary relief.

• Monitor your credit report: It’s wise to regularly check your credit reports for any inaccuracies or any accounts labeled “delinquent” (a sign they may be headed to collections).

• Establish an emergency fun: Having savings to cover unexpected expenses, like medical bills, can help prevent debt from going to collections.

If you already have an account in collections, you’ll want to make sure the debt and collection agency are legitimate and, if so, create a plan to resolve the unpaid balance. Generally, it’s a good idea to pay off the debt in collections, either as a lump sum or payment plan, so your debt can be marked “paid” and the collection agency stops contacting you.

How Collections Impact Your Credit Report and Credit Score

Collections fall under payment history, which is the biggest factor in your FICO® Score calculation (representing about 35% of your score). People with collections on their credit reports tend to have lower credit scores than those who have no collections.

How much damage a collection account will do to your credit will depend on the size of the debt, how recent the collection is, and the overall strength of your credit profile. A collection account tells future lenders that you’ve had trouble managing debt in the past, making them less likely to offer favorable loan terms or approve you for new credit.

In general, the more recent a collection, the bigger the impact. However, over time, the damage to your credit score diminishes, especially if you maintain good credit habits, like making on-time payments and keeping credit card balances low. Also keep in mind that paid collection accounts may not affect your credit scores in the same way that unpaid collection accounts can.

How to Find Out if You Have Accounts in Collections

There are a few different ways you may find out that you have an account in collections.

• A debt collector must contact you about your debt before it sends information about the debt to a credit reporting company. If you receive a “validation notice” about a debt from a debt collector, it means they have satisfied their requirement to contact you and can begin to report the debt to credit reporting companies.

• If you aren’t sure about the status of an unpaid bill, you may want to check your credit reports. You’re entitled to a free credit report from each of the three major credit bureaus once a week through AnnualCreditReport.com. On your report, collections accounts will appear as a separate section, listing the original creditor, the collection agency, and the outstanding balance.

• You also can contact the original creditor to learn the status of your account. Just remember that if your debt has been sold, the original creditor is no longer able to collect your debt. You’ll have to deal with the debt buyer.

• Some credit monitoring services will automatically alert you if a new collection account is added to your report, allowing you to address the issue as soon as possible.

How Do You Remove Collections From Your Credit Report?

You generally can’t remove a collection account from your credit report unless the account is listed in error or as a result of fraud.

If you see an error on your credit report, such as an account you don’t recognize or a paid account that shows as unpaid, you can file a dispute using the credit bureau’s online process by phone or by mail. The credit bureau is required to respond within 30 days.

If you think the error is on the part of the debt collector, you can contact the collection agency using the phone number listed on your credit report. They can confirm if the debt belongs to you and provide other relevant information about the account.

If the entry is legitimate, one way you might be able to get it removed from your credit reports is to write a “goodwill letter” to the creditor that explains your situation and why you would like the debt removed. It may not work, but there’s no downside in trying.

When Will Credit Bureaus Remove Medical Collections?

In 2022, the three major credit bureaus agreed to remove medical collections from consumers’ credit reports once they were paid. They also decided to exclude unpaid medical collections under $500, and to extend the time before medical bills in collections can appear on credit reports from 180 days to one year. These changes provide some relief for consumers facing medical debt, giving more time to settle the bills before they affect credit.

Medical collections that meet these criteria should have automatically come off your reports, but if they are still listed on any of your credit reports, you can file a dispute with the credit bureau.

Will Making Payments Change the Timeline?

Making payments on a collection account does not restart the seven-year timeline for when the collection falls off your credit report. The original delinquency date remains the same, even if you make partial payments. However, paying off or settling a collection account can have positive effects. While it won’t immediately remove the collection from your credit report, a paid collection may be viewed more favorably by lenders than an unpaid one. It also stops the collection agency from continuing to pursue you for the debt.

But there is another timeline to keep in mind — the statute of limitations on the debt. The statute limits how long a creditor or debt collector can take legal action against you in pursuit of repayment. The time frame depends on the type of debt and where you live but is typically three to six years. Once the statute of limitations expires, the debt becomes “time-barred,” meaning that debt is no longer legally enforceable.

If you make a payment on a time-barred debt, it can restart the statute of limitations. This means the creditor can take you to court and, potentially, sue you for the full amount owed plus interest and fees.

The Takeaway

Collections can have a significant impact on your credit score, but they don’t last forever. Typically, collections remain on your credit report for seven years from the date of delinquency, but recent changes have provided some relief for medical debt.

The best way to protect your credit is to manage your accounts carefully and be sure to pay all of your bills in full and on time. If you do have accounts in collections, taking steps to resolve them — whether through payment, negotiation, or disputing inaccuracies — can help improve your financial health over time.

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FAQ

Should I pay off a three-year old collection?

Paying off a three-year-old collection can be beneficial, especially if you’re looking to build your credit or apply for new credit. While paying it off won’t remove it from your credit report, it can stop further damage and prevent additional actions like lawsuits or wage garnishments. Paid collections also tend to be viewed more favorably by lenders than unpaid ones. In fact, some credit scoring models don’t include paid collection accounts when calculating credit scores.

Can you have a 700 credit score with collections?

Yes, but it’s not common. Factors such as the size of the debt in collection, how old it is, and the overall makeup of your credit profile play significant roles in determining your score. If the collection is small, paid off, or several years old, and the rest of your credit history is strong, you may be able to achieve a 700 score. Larger or recent collections, on the other hand, typically have a more negative impact on your credit.

What happens if you never pay collections?

If you never pay collections, the debt will remain on your credit report as an unpaid collection account for up to seven years, significantly harming your credit score. Unpaid collections can also lead to lawsuits, judgments, and wage garnishments. On a positive note, many states have statute of limitations in place to prevent creditors and debt collectors from suing you to collect on an older debt.

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SORL-Q324-022

Oct

2024

ETFs vs Index Funds: What’s the Difference?

By Kim Franke-Folstad | invest, Investing, Terminology | No Comments

The main difference between exchange-traded funds (ETFs) vs. index funds stems from a difference in how each type of fund is structured.

Index funds, like many mutual funds, are open-end funds with a portfolio based on a basket of securities (e.g. stocks and bonds). Fund shares are priced once at the end of the trading day, based on the fund’s net asset value (NAV).

An ETF is a type of investment fund that also includes a basket of securities, but shares of the fund are designed to be traded throughout the day on an exchange, similar to stocks.

Although index funds and most ETFs track a benchmark index and are passively managed, ETFs rely on a special creation and redemption mechanism that help make ETF shares more liquid, and the fund potentially more tax efficient.

In order to understand the differences between ETFs vs. index funds, it helps to know how each type of fund works.

Key Points

• ETFs and index funds both offer investors exposure to a basket of securities, which may provide portfolio diversification.

• ETFs can be traded throughout the day, while index funds are traded at the end of the day.

• ETFs typically disclose their holdings daily, whereas index funds disclose quarterly.

• ETFs tend to have higher expense ratios than index funds, but can offer more trading flexibility.

• ETFs are generally more tax efficient than index funds.

What Are Index Funds?

Index funds are a type of mutual fund. Like other mutual funds, an index fund portfolio is a collection of stocks, bonds, or other securities that are bundled together into a pooled investment fund.

Index Funds Are Passive

Unlike most other types of mutual funds, which are actively managed by a portfolio manager, index funds are designed to mirror the holdings and the performance of an index like the S&P 500 index of U.S. large-cap stocks, or the Russell 2000 index of small-cap stocks.

Because index funds are passively managed, they tend to be lower cost than other types of mutual funds.

Not as Liquid

Investors buy shares of the fund, which gives them exposure to the basket of securities within the fund. As noted above, index mutual fund trades can only be executed once per day, which makes them less liquid than ETFs.

In addition, index funds (and mutual funds in general) have to reveal their holdings every quarter, so they tend to be less transparent than ETFs, which typically reveal their holdings once a day.

There are thousands of indexes to choose from, and it’s possible to create an investing portfolio from index funds alone.

What Are ETFs?

Unlike index funds, ETF shares can be traded on exchanges throughout the day, just like stocks, so ETFs require a different wrapper or structure than traditional mutual funds.

How ETF Shares Are Created and Redeemed

Because an ETF itself can hold hundreds or even thousands of securities, these funds utilize a special creation and redemption mechanism that allows for intraday trading of shares. This helps to reconcile the number of ETF shares that are traded with the price of the underlying securities in the fund, thus keeping share price as close to the value of the underlying securities as possible.

As a result, ETF shares are not only more liquid than index funds from a cash standpoint, they are also more fluid from a trading standpoint. An investor can place a trade while markets are open, and get real-time pricing information with relative ease by checking financial websites or calling a broker. That’s a plus for investors and financial professionals who prefer to make trades based on market conditions.

ETF Costs

When trading ETFs, bear in mind that the average expense ratio of ETFs is 0.15%, according to the Investment Company Institute, which is historically low — but still higher than most index mutual funds, which have an average expense ratio of 0.05%.

Depending on the brokerage involved, investors may also pay commissions and a bid-ask spread, which is the difference between the ask price and the bid price of an ETF share, although this has less of an impact for buy-and-hold investors.

ETFs and Tax Efficiency

Owing to the way ETF shares are created and redeemed, ETFs may be more tax efficient than index funds. When investors sell shares of an index fund, the underlying securities in the fund must be sold, and if there is a capital gain it’s passed onto all the fund shareholders.

When an investor sells shares of an ETF, the fund doesn’t incur capital gains, owing to the mechanism for redeeming shares. But if the investor sees a profit from the sale, this would result in capital gains (which is also true when selling index fund shares), which has specific tax implications.

Of course, investors who hold ETFs or index funds within an IRA or other retirement account would not be subject to capital gains tax events.

When picking ETFs, however, bear in mind that the majority of ETFs are passively managed: i.e. they are index ETFs. Only about 2% of ETFs are actively managed, owing to the complexity of their structure and industry rules about transparency for these funds.

ETFs vs. Index Funds at a Glance

When comparing ETFs vs. index funds, there are a few similarities:

• Both types of funds include a basket of securities that can include stocks, bonds, and other securities.

• ETFs and index funds may provide some portfolio diversification.

• Index funds and most ETFs are considered passive investments because they typically mirror the constituents of a benchmark index. (By comparison, actively managed mutual funds and active ETFs have a live portfolio manager who oversees the fund, and makes trades with the goal of outperformance.)

This chart helps to summarize the similarities and differences between ETFs vs index funds.

ETFs	Index Funds
Similarities:
Portfolio consists of many securities	Portfolio consists of many securities
Provides diversification via exposure to different asset classes	Provides diversification via exposure to different asset classes
ETF expense ratios are generally low	Index fund expense ratios are generally low
Most ETFs are passively managed	Index funds are passively managed
Differences:
A special creation-redemption mechanism enables intraday share trading	Shares bought and sold/redeemed via the fund itself
Shares trade during market hours on an exchange	Trades executed at end of day
Fund holdings disclosed daily	Fund holdings disclosed quarterly
Shares are more liquid	Shares are less liquid
Investors may also pay a commission on trades or other fees	Investors may pay a sales load or other fees
ETFs tend to be more tax efficient	Index funds may be less tax efficient

Recommended: Learn what actively managed ETFs are and how they work.

ETF vs. Index Fund: Which Is Right for You?

There’s no cut-and-dried answer to whether ETFs are better than index funds, but there are a number of pros and cons to consider for each type of fund.

Transparency

By law, mutual funds are required to disclose their holdings every quarter. This is a stark contrast with ETFs, which typically disclose their holdings each day.

Transparency may matter less when it comes to index funds, however, because index funds track an index, so the holdings are not in dispute. That said, many investors prefer the transparency of ETFs, whose holdings can be verified day to day.

Fund Pricing

Because a mutual fund’s net asset value (NAV) isn’t determined until markets close, it can be hard to know exactly how much shares of an index fund cost until the end of the trading day. That’s partly why mutual funds, including index funds, allow straight dollar amounts to be invested. If you buy an index fund at noon, you can buy $100 worth, for example, regardless of the price per share.

ETF shares, which trade throughout the day like stocks, are priced by the share like stocks as well. Knowing stock market basics can help you invest in ETFs, as well. If you have $100 and the ETF is $50 per share when you place the trade, you can buy two shares.

This ETF pricing structure also allows investors to use stop orders or limit orders to set the price at which they’re willing to buy or sell.

These types of orders, which are different than standard market orders, can also be executed through an online investing platform or by calling a broker.

Taxes

ETFs are generally considered more tax efficient than mutual funds, including index funds.

The way mutual funds are structured, there can be more tax implications as investors buy in and out of an index fund, and the cost of taxes is shared among different investors.

ETF shares are redeemed differently, so if there are capital gains, you would only owe them based on your ETF shares.

The Takeaway

Choosing between ETFs vs. index funds typically comes down to cost and flexibility, as well as understanding the tax implications of the two fund types. While both ETFs and index funds are low-cost, passively managed funds — two factors which can provide an upside when it comes to long-term performance — ETFs can have the upper hand when it comes to taxes.

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FAQ

Is it better to choose an ETF or an index fund?

ETFs and index funds each have their pros and cons. ETFs tend to be more tax efficient, and you can trade ETFs like stocks throughout the day. If you’re interested in a buy-and-hold strategy, an index fund may make more sense.

Are ETFs or index funds better for taxes?

In general, ETFs tend to be more tax efficient.

What are the differences between an ETF and an index fund?

While both types of funds can provide some portfolio diversification, ETFs are generally more transparent, and more tax efficient compared with index funds.

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

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.
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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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.

SOIN-Q324-040

Oct

2024

How High-Yield Savings Accounts Work

By Janet Siroto | Growing Wealth, invest, Investing, money | No Comments

Table of Contents

What is a High-Yield Savings Account?
How Do High-Yield Savings Accounts Work?
Benefits & Disadvantages of a High-Yield Savings Account
Practical Uses for a High-Yield Savings Account
What to Look For in a High-Yield Savings Account
How to Open a High-Yield Savings Account
High-Yield Savings Accounts vs CDs?
FAQ

High-yield savings accounts (HYSAs) typically offer significantly higher returns than traditional savings accounts. As of August 2024, the national average interest rate for savings accounts was 0.46% according to the FDIC¹, while some HYSAs provided annual percentage yields (APYs) of 3.00% or more.

Whether held at a traditional bank, online bank, or credit union, these accounts can keep your money liquid (meaning it’s nice and accessible), plus they don’t expose you to the risk that may accompany investing. However, you may have to meet a high initial deposit requirement or maintain a significant balance to reap that enticingly high interest rate.

Key Points

• High-yield savings accounts (HYSA) offer significantly higher interest rates compared to traditional savings accounts, enhancing the growth of deposited funds.

• These accounts are available at various financial institutions, including online banks which often provide the highest rates.

• Funds in high-yield savings accounts are typically insured up to $250,000, providing security for depositors.

• Accessibility to funds is easy, though withdrawals may be limited to six per month, with potential fees for exceeding this number.

• High initial deposits and maintaining minimum balances might be required to obtain the higher interest rates offered.

What Is a High-Yield Savings Account?

A high-yield savings account is a savings vehicle that functions similarly to a traditional savings account. These accounts, however, typically pay considerably higher interest rates than traditional savings accounts and almost always offer better returns than traditional checking accounts.

You may wonder, is a high-yield savings account worth it? For many people, the answer will be a resounding yes. Even a difference of one or two percent can add up over time, thanks to compounding interest — that’s when the interest you earn also starts earning interest after it’s added to your account. In other words, you make money on both your money and the interest, helping your funds grow.

You may be able to open a high-yield savings account at a variety of financial institutions, but the highest rates are often available from online banks vs. traditional banks or credit unions.

Depending on the financial institution, a high-yield savings account will likely be insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to $250,000 per depositor².

Like other savings accounts, withdrawals from high-yield savings accounts may be limited to six times per month. Exceeding that withdrawal limit may trigger a fee. (Worth noting: While federal regulation had required all savings accounts to limit withdrawals to six per month, that rule was lifted due to the coronavirus pandemic. Institutions can now decide if they want to allow more than six transactions per month. Check with your institution to be sure.)

How Are High-Yield Savings Different Than Regular Savings Accounts?

As briefly mentioned above, the average savings account interest rate is currently 0.46% (that’s right, a mere fraction of a percentage point). What’s more, many of the nation’s biggest banks pay significantly less than that – only around 0.01%. Yes, it’s better than nothing, but not by much!

Here’s how the math works out: If you had $5,000 in a savings account earning 0.01% per year, you would only earn 50 cents for the entire year it sat in your savings account, assuming no compounding occurred.

Disappointing, to say the least! So if you’re looking to make more on your savings, one option to consider is a high-yield savings account (which may also be called a growth savings account).

These savings vehicles can be a good place to put money you’re saving for short-term financial goals, since they can help you get a higher-than-average return on your money but still allow relatively easy access to your cash.

How Do High-Yield Savings Accounts Work?

How a high-yield savings account works is very similar to how other savings accounts operate.

• You make an initial deposit to open the high-interest account, while also sharing identification and other personal information with the bank or credit union.

• You can then add to your account as you see fit.

• You can also take money out of the account (there may be a cap on how many times a month you can do this, however), either withdrawing it or transferring it to another account.

Your account may also have minimum balances and monthly fees. This will vary with the institution. While traditional banks and credit unions may offer these accounts, it is common to find them at online banks, which have a lower overhead and can pass the savings on to you. You may find accounts that have no fees, like a SoFi Savings Account.

In many cases, your funds will be protected by either FDIC or NCUA; check with your financial institution to know the coverage limits in place.

How much interest will I get on $1,000 a year in a savings account?

Your interest will depend on where you stash the $1,000. If you put it in an account that gets only 0.01% APY, your earnings after a year would be 10 cents. In a high-yield savings account that earns 3.75% APY, you’d earn $37.50, without any compounding. Use the APY interest calculator below to see how much interest you could earn using different APY percentages.

Those are the basics on how a high-yield savings account works. There’s one other angle to consider, however. It’s worth noting that the money you keep on deposit at a bank is used by the financial institution for other purposes, such as loans to their customers. That is why they pay you interest: They are compensating you for being able to do so.

Benefits of a High-Yield Savings Account

There are definitely some big pluses to opening a high-yield savings account. Here are some of the main ones:

• The interest rate, of course! It is typically many times that of a traditional savings account or a CD.

• It’s a secure place to deposit funds when you are savings towards a relatively short- or medium-term goal (say, building an emergency fund, or saving for a down payment, a wedding, or another purpose)

• These accounts often come with no fees, zero! Typically, this is the case with online banks rather than bricks-and-mortar ones or credit unions.

Disadvantages of a High-Yield Savings Account

You know the saying, “Nobody’s perfect”? It holds true for high-yield savings accounts, too. These accounts may not suit your needs for a couple of key reasons.

• While the interest is higher than your standard savings account, it may not be able to compete with other financial products (such as stocks) for long-term savings, like retirement. In fact, it may not even keep pace with inflation. So if you are able to take some time and take on a degree of risk, you may be better off with stocks or mutual funds to reach some financial goals.

• More restrictions and/or requirements may be part of the package. For instance, you may need to deposit or keep a certain amount of money in the account, especially for those high-yield accounts offered by traditional banks. Or might need to set up direct deposit or automate bill payment.

• Less access may be an issue. It may take more steps and/or more time (perhaps a couple of days) to transfer funds when you have a high-yield savings account.

Practical Uses for a High-Yield Savings Account

A high-yield savings account can be used for a variety of purposes, just as other types of savings accounts can be.

Building an Emergency Fund

It may be a good place to build an emergency fund that is your safety net in case you have an unexpected car or household repair needed. You typically want to have a three to six months’ worth of living expenses available, but you can certainly start one of these accounts with less and add to it.

Saving for a High Value Purchase

Perhaps you are saving for a car, a cruise, or other big-ticket item. Or maybe you are getting close to having enough money for a down payment on a house. A high-yield savings account can be a secure, interest-bearing place to park those funds until you are ready to use them.

Saving Surplus Money

A high-yield account can also be a great place for any extra cash for which you may be figuring out next steps. Perhaps you received a tax refund or a spot bonus, or you are selling your stuff that’s no longer needed on eBay. That extra cash can go into a high-yield savings account rather than sit in your checking account, potentially earning zero interest.

Separating Your Money

Sometimes, setting up an additional savings account (or two) can help you organize your money. Perhaps you want to have multiple savings accounts to help you achieve different goals, such as an account for future educational expenses and one for paying estimated taxes on your side hustle. As you save money towards each of those aims, you might as well accrue some interest. A high-yield savings account will help you do that, and let you check on how your cash is growing towards each goal.

What to Look For in a High-Yield Savings Account

Ready to explore high-yield savings accounts a bit further? Here are a few things to look for (and to look out for) when considering a high-yield account.

Annual Percentage Yield (APY)

One of the most important factors to look for in a savings account, the APY is how much you’ll earn in returns in one year. Some accounts will specify that the currently advertised rate is only available for an initial period of time, so that can be something to keep in mind.

Required Initial Deposit

Many high-yield savings accounts require a minimum opening deposit. If that’s the case, you’ll want to make sure you are comfortable depositing that much at the outset.

Minimum Balance

Some banks require you to maintain a minimum balance to keep your high-yield savings account open. You’ll want to feel comfortable with always meeting the minimum threshold because falling below it can trigger fees or mean you won’t get the interest rate you’re expecting.

Ways to Withdraw or Deposit Funds

Banks all have their own options and rules for withdrawing and transferring funds. Options might include ATM access with an ATM card, online transfers, wire transfers, or mobile check deposits. Withdrawals may be limited to six per month.

Balance Caps

A balance cap puts a limit on the amount of money you can earn interest at the high-yield account rate. So, for example, if an institution offers 3% interest on your savings account, but sets a balance cap at $2,000, you would only grow that interest on the first $2,000 and not on any additional funds you may deposit.

Bank Account Fees

It’s a good idea to understand what, if any, bank fees may be charged — and how you can avoid them, such as by keeping your balance above the minimum threshold or minimizing withdrawals per month.

Links to Other Banks and/or Brokerage Accounts

Make sure you know whether you can link your high-yield savings account and other accounts you may hold. There could be restrictions on connecting your account with other financial institutions or there might be a waiting period.

Withdrawing Your Money

You’ve just read that it may be a bit more complicated or time-consuming to get your funds transferred. You should also check to see how withdrawals can be made. For instance, would it be possible to pull some funds out of your high-yield savings at an ATM? Your financial institution can answer that question.

Compounding Method

It’s up to the bank whether they compound interest daily, monthly, quarterly, or annually — or at some other cadence. Compounding interest more frequently can boost your yield if you look at the APY versus the annual interest rate (the latter takes into account the compounding factor btw).

Recommended: 52 Week Savings Challenge

How to Open a High-Yield Savings Account

Now that you’ve learned about high-yield savings accounts, you may be ready to say, “Sign me up!” If so, a good first step is to take a look at your current bank and see if they have a high-yield savings account available — that could be the quickest, easiest path forward.

If not, look for an account and interest rate that speaks to you, and move ahead. Most high-yield savings accounts can be easily opened online with such basic information on hand, such as your driver’s license, your Social Security number, and other bank account details.

How Do High-Yield Savings Accounts Compare to CDs?

Another option you can use to grow your savings is a certificate of deposit or CD.

A CD is a type of deposit account that can pay a higher interest rate than a standard savings account in exchange for restricting access to your funds during the CD term — often between three months and five years.

Interest rates offered by CDs are typically tied to the length of time you agree to keep your money in the account. Generally, the longer the term, the better interest rate.

When you put your cash in a CD, it isn’t liquid in the way it would be in a savings account. If you want to withdraw money from a CD before it comes due, you will typically have to pay a penalty (ouch). This could mean giving up a portion of the interest you earned, depending on the policy of the bank.

Another key difference between CDs and high-interest savings accounts is that with CDs, the interest rate is guaranteed. With savings accounts, interest rates are not guaranteed and can fluctuate at any point.

A CD can be a good savings option if you’re certain you won’t need to access your cash for several months or years and you can find a CD with a higher rate than what high-yield savings accounts offer.

Make the Most of Your Money With SoFi

If you’re ready to amp up your money, a SoFi Checking and Savings account can help. We make it easy to open an online bank account and — if you sign up for direct deposit — you’ll earn a competitive APY on a qualifying account. Need more incentive? How about this: SoFi has zero account fees and offers Vaults and Roundups to further grow your cash. Plus, you’ll spend and save in one convenient place.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.30% APY on SoFi Checking and Savings.

FAQ

Can you lose money in a high-yield savings account?

In most cases, you likely won’t lose money with a high-yield savings account. If your account is held at a financial institution insured by FDIC or NCUA, you are covered in the rare event of a bank failure for up to $250,000 per account category, per depositor, per insured institution. That said, you might lose money vs. inflation if the rate of inflation exceeds that of the APY on your high-yield savings account.

Is a high-yield savings account a good idea?

A high-yield savings account can be a good idea. It provides significantly higher interest than a standard savings account, but offers the same security and easy access/liquidity.

Can I withdraw all my money from a high-yield savings account?

You can withdraw all your money from a high-yield savings account. One of the benefits of this kind of account is its liquidity. If you are ready to close the account, check with your financial institution about their exact process for doing so.

Are there any downsides to a high-yield savings account?

There are some potential downsides of a high-yield savings account. While these accounts earn more interest than a standard savings account, they may not keep pace with inflation nor how much you might earn from investments. There may be restrictions at some financial institutions, such as a minimum balance requirement and withdrawal limits. While the funds are liquid, access may require some maneuvering. Transfers may take longer, and if you keep your funds at an online bank, you cannot walk into a branch to take out cash.

Article Sources

You may also be interested in:

Pros and Cons of High-Yield Savings Accounts

What’s the Average Interest Rate for Savings Accounts?

How to Calculate Savings Account Interest

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 4.30% 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 4.30% 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 4.30% 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 10/8/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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.

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.

SOBK0223049

Oct

2024

Different Types of Banking Accounts, Explained

Understanding the Different Types of Bank Accounts

By Emma Diehl | Budgeting & Goals, money | Comments Off

If you’re in the market for a bank account, you likely see a lot of different terms, such as checking, savings, checking and savings, money market, and more.

Having a bank account (or two or a few) typically provides the foundation of your daily financial life, so it’s important to choose wisely. Bank accounts can allow you to safely store your money; track your earnings, spending, and saving; and potentially earn some interest as well. In these ways, bank accounts can help you meet your goals, from socking away the down payment for a house to retiring early.

For instance, in SoFi’s April 2024 Banking Survey of 500 U.S. adults, 88% of people said they have a checking account and 71% have a savings account.

Different accounts can serve different purposes and have their own pros and cons. This guide will help you understand which account or mix of accounts can be best for your unique financial situation and aspirations.

Key Points

• Different types of bank accounts can help you meet different goals, from saving in the shorter-term for a vacation to saving over the years for retirement.

• Checking accounts are designed for daily transactions and short-term financial needs, while savings accounts can be better for longer-term savings goals, given their higher interest rates.

• Money market accounts and CDs typically offer higher interest rates, but come with certain restrictions — money market accounts may limit transactions, for example, while CDs typically require funds to remain in the account for a period of time.

• Retirement accounts like IRAs and 401(k)s are tax-advantaged and designed to help individuals grow their savings, but come with restrictions, such as penalties for early withdrawals.

• Brokerage accounts allow people to trade securities: While these come with higher risk and potential fees, they have the potential to provide higher returns.

7 Types of Bank Accounts Explained

Here’s a rundown of the different types of banking accounts, how they’re different, and how they could make achieving financial goals simpler.

1. Checking Account

Checking accounts can be the hub of your financial life, as money flows in and out as you earn and spend (or deposit and withdraw funds). Some points to consider:

• It doesn’t take much time to open a checking account (often less than a half hour), and they are available through traditional banks, credit unions, and online financial institutions.

• Accounts are typically insured by the Federal Deposit Insurance Corporate (FDIC) or National Credit Union Administration (NCUA) for $250,000 per account holder, per ownership category, per insured institution.

• Some checking accounts may charge fees, while others allow opening checking accounts for free but may have some restrictions. It may be possible to have fees waived on a checking account by meeting certain minimum account balances or setting up direct deposits from your employer.

• Checking accounts got their name from one of their prominent features — writing checks. While writing checks may be less common these days, a debit card typically enables you to tap and swipe as you spend.

• Many checking accounts offer no interest, though some do pay an interest rate, usually well under the rate of inflation. This means that if a person chooses to park all their money in this account, their money wouldn’t keep pace with inflation and would end up losing value year over year. That’s why, while many Americans have a checking account, it’s typically not their only bank account.

2. Savings Account

Another type of deposit account is a savings account. Checking and savings accounts often form the foundation of a person’s banking life.

• Savings accounts generally earn more interest than a checking account, and you are likely to find some of the best rates at online banks. You may see the terms “high-yield” or “high-interest” used to describe these. According to SoFi’s survey, 23% of respondents have a high-yield savings account.

• In general, it’s not recommended to use a savings account for day-to-day spending. Instead, it’s better suited for short-term savings goals, so that you can earn interest as you save.

How People Use Their Savings Accounts

To save for emergencies	77%
To save for a specific goal such as a vacation	52%
To earn interest	48%

Source: SoFi’s April 2024 Banking Survey of 500 U.S. adults

• As with checking, the usual age to open a bank account on your own is 18.

• Unlike a checking account, the cash stored in savings accounts is typically less accessible — that’s why they call it a saving not a spending account. A savings account may not have an ATM or debit card and it is most likely not possible to write a check from it either.

• Some savings accounts may require a minimum balance. If an account holder goes below the minimum required balance, some banks will charge a fee.

• Savings accounts may also have limits on how many withdrawals can be made from the account each month. Regulation D may limit the number of withdrawals from your savings account that can be made each month. In the past, Regulation D limited the number of withdrawals from savings accounts to six per month. This limitation was suspended indefinitely in 2022, though financial institutions may still assess fees for more than a certain number of outgoing transactions.

• Additionally, some banks may charge maintenance fees for keeping a savings account open. Fees and policies will vary bank to bank, so it can be beneficial to account holders to shop around to different banks instead of settling with the first one they find.

3. Checking and Savings Account

Another bank account type to consider: a checking and savings account, which is a hybrid that allows account holders to save and spend from one account. Often offered by online banks, these accounts may pay competitive interest rates, be more convenient, and have tech tools that can make tracking spending and saving very simple.

Another way to go is to open both a checking and a savings account at a single financial institution or different banks. While there’s no one “perfect” bank account, people can mix and match, some people may find that opening a number of bank accounts can help them meet both their daily needs and may be suitable for some short to mid-term goals. In fact, 31% of respondents in SoFi’s survey said they had two checking or savings accounts, and 20% had three accounts or more. Thirty-seven percent had just one checking or savings account.

Some factors to consider are the annual percentage yield (APY) or other perks available from the account.

4. Certificate of Deposit

A CD, or certificate of deposit, is sort of like a savings account, but more hands-off. Both types of accounts are meant for saving, but while an account holder can withdraw money from a savings account within the limits set by Regulation D, outlined above, money deposited in a CD is considered untouchable for a predetermined amount of time.

• Length of CDs can range from a few months to several years or longer. The benefit of a longer CD term is generally a higher interest rate — that is, unless banks expect the federal funds rate to drop. In that case, a shorter-term CD may pay more than a longer-term CD. According to the FDIC , the national deposit rate cap for a three-month CD was 1.53% and for a 60-month CD is 1.43% as of mid-July 2024. You may find higher rates when shopping around.

• But with that boost in interest rates comes a few caveats. In addition to its “no touch” policy (no early withdrawal) some CDs also have a minimum deposit, typically starting at $500 and up.

• There is the option of no-penalty/early withdrawal CDs. However, be wary when signing up for these, as they often include specifics on how and when an account holder can withdraw early without fees and penalties.They may not earn more interest on your money either when compared with standard savings accounts.

• CDs are usually insured and considered a safe place to store funds.

• Another alternative is CD-laddering. That means buying CDs of varying intervals, so access to savings will be staggered as CDs expire.

5. Money Market Account

A money market account is another type of FDIC-insured account.

• Money market accounts generally have a higher interest rate than a traditional savings account, but may have more restrictions.

• These accounts are typically insured.

• Additionally, taking funds out of a money market account can be relatively easy — many come with checks or the ability to execute online electronic transfers.

• Money market accounts may also be restricted as under previous Regulation D guidelines and have monthly limits on transactions. That means withdrawals and transfers could be limited, making it not a good fit for day-to-day transactions.

• Like savings accounts, money market accounts may have balance minimums. In some cases, these minimums are higher than a savings account. If an account holder doesn’t maintain the balance minimum, it’s likely they’ll be charged a monthly fee.

• Money market accounts might be the right choice for people who want high-yield savings, but don’t need to access the capital too often and can meet the deposit minimums.

6. Brokerage Accounts

A brokerage account is a type of investment account that allows account holders to trade securities.

• It’s important to note that while the return on these accounts could be positive, there is risk involved. Your money is not insured, and the value of your account could dip.

• Depending on the service level of the brokerage, a brokerage account can come with fees. Typically, the more “full-service” firm, the more the firm does the work for the customer, the more fees. On the other hand, automated investing and DIY brokerages may have fewer fees associated with them.

• To open a brokerage account, a person needs cash and an idea of what they’d like to purchase. Some accounts do not have a minimum deposit amount but others require a minimum deposit which may range depending on the account type.

• In order to withdraw funds from a brokerage account, securities need to be sold first. After settlement, the money can be withdrawn from the account.

• Withdrawn investments may be taxable, and investing is often thought of as a long-term savings strategy. A brokerage account is less liquid than a savings, checking, or money market account.

7. Retirement Accounts

Retirement accounts, like IRAs, 401(k)s, and SEPs, are designed to help individuals save for retirement. Deciding what kind of retirement account to open will depend on a number of factors:

• Employer benefits. Some employers offer a 401(k) and may have a 401(k) matching program or other perks with their retirement plans. Taking advantage of those benefits can be worthwhile, especially up to the employer match.

• Target retirement date. Working backwards using a retirement calculator, people can determine just how much they need to save each month to retire on time. From there, certain retirement plans might make more sense than others.

Selecting a retirement plan is a personal decision that depends on factors like their personal goals, the target date for retirement, risk tolerance, and more.

For questions, it can be helpful to consult with a qualified financial professional. With retirement accounts, the money contributed is locked-in until retirement. Withdrawing early can result in fees and penalties that can cut into savings.

Finding Accounts That Work for You

Since different types of accounts have different purposes, benefits, and uses, it is likely that individuals will have a few kinds of accounts to meet their needs. You might keep all or most of your accounts at one institution, or you might open them at various banks and/or brokerage firms.

Each financial institution is likely to have its own policies in place so it can be helpful to review the options available with a few different institutions as you build your financial portfolio. If you have questions, consider consulting with a financial professional who can provide personalized financial advice.

Recommended: Requirements to Open a Bank Account

Looking for Something Different

When it comes to personal finance, different account types can serve different purposes. Checking accounts make it possible to easily withdraw and deposit money while accounts like 401(k) or IRAs are designed for longer-term goals, like investing toward retirement. People will generally have a mix of these accounts. A checking and savings account can offer account holders the ability to easily deposit and withdraw money into their account, while also earning a competitive interest rate.

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 4.30% APY on SoFi Checking and Savings.

FAQ

What are the most common types of bank accounts?

There are a variety of common bank account types, depending on your financial needs and goals. These include checking, savings, checking and savings, and certificate of deposit (CD) accounts, among others.

What are the two most common types of bank accounts?

For many people, the two most common types of bank accounts are checking and savings. Typically, a checking account is for daily use, meaning depositing money and spending it. A savings account is geared towards savings and typically pays interest.

What is the best kind of bank account to open?

Of the different types of bank accounts, the best kind to open will depend on your particular needs. Many people find a checking account to be the hub of their financial life, allowing them to deposit and then spend funds. A savings account can be a good place to stash money for a while and earn interest. (There are other types to consider as well.) You will find variations in interest, minimum deposit and balance, fees, and other features depending on the financial institution.

Photo credit: iStock/hemul75

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 4.30% 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 4.30% 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 4.30% 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 10/8/2024. 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.

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.

SOBK0723034

Oct

2024

Pros & Cons of Online and Mobile Banking

By Janet Siroto | Budgeting & Goals, Growing Wealth, money | Comments Off

Online and mobile banking are growing in popularity, thanks to how they can make transactions faster, easier, and more secure. Indeed, the number of Americans who are going all in on managing their finances this way continues to grow. Recent research shows that about 27% of Americans use online-only banks.

Not only that, those who use any type of online banking, whether through a traditional or online-only bank, tend to use it frequently. In SoFi’s April 2024 Banking Survey, which looked at the banking usage of 500 U.S. adults, 48% of respondents said they use online banking daily, and another 26% reported using it several times a week.

Whether you are among the online-only banking crowd or are using your traditional bank’s website or app, online and mobile banking have many advantages. And as with most financial services, there are also downsides to consider. Here, take a closer look at this important facet of your personal finances, so you can decide which banking style suits you best.

Key Points

• Online and mobile banking are becoming increasingly popular, with close to 30% of Americans primarily using online-only banks.

• Common online banking features used include checking balances, transferring funds, depositing checks via mobile device, and using automatic bill pay.

• Some online banks may offer higher interest rates and lower fees compared to traditional banks.

• Online banks provide the convenience of banking from just about anywhere, but lack in-person assistance and may have more limited services and ATM access in certain areas.

• Any traditional and online bank that is insured by the FDIC guarantees the same amount of protection in the highly unlikely case of a bank failing.

What Is Online Banking?

Online banking, most generally, refers to the ability to conduct transactions through a financial institution’s web page or app, making it unnecessary to go to a branch. Most banks today offer some form of online banking, and most members, in turn, are accustomed to having that option.

For instance, 63% of respondents in SoFi’s survey said they frequently use online banking to transfer funds between accounts, and 43% said they frequently do mobile check deposits.

Frequent Uses of Online Banking
Check account balances	77%
Transfer funds	63%
Mobile check deposit	43%
Automatic bill payment	40%
View or download account statements	38%
Chat online with customer service	17%

Source: SoFi’s April 2024 Banking Survey of 500 U.S. adults

Often, however, the term “online banking” is used to refer to online-only banking vs. traditional banking, meaning you manage your personal finances completely online.

Since online banks typically have no physical locations and therefore lower overhead, they can usually offer consumers a higher annual percentage yield (APY) on deposit accounts and other perks.

Pros of Online Banking

To better understand online-only banking, consider these upsides:

Higher Interest Rates and Lower Fees

As mentioned, online-only banks tend to offer a higher interest rate on savings accounts and possibly checking accounts, too. As of July 2024, the national interest rate on savings accounts is 0.45%. At some online-only banks, however, you can find an APY of 4.00% or higher.

In addition, these banks may offer lower or no fees. Stashing your cash in one of these banks can be a way to avoid bank fees, such as account maintenance charges and the like.

No Minimum Balance

Many traditional banks still require you to maintain a minimum balance or else be charged a monthly fee. In terms of how much money you need to open an account online and keep it in good standing, you may be in for a pleasant surprise. A number of digital financial institutions allow a balance of just a few dollars, and you still won’t be hit with charges on your statement.

Convenience

Online banks are open 24 hours a day, 7 days a week, which means you can take care of transactions after normal bank hours. You can manage your money whenever and wherever.

ATM Access

Most online banks are part of an online network of ATMs, such as MoneyPass or Allpoint. What’s more, there is generally no fee for using these ATMs. If the financial institution doesn’t partner with an ATM network, they will typically offer to refund ATM fees up to a certain number of withdrawals.

Enhanced Online Experience

As digital innovators, online-only banks may provide a better user experience when online or in the app. Expect to get the latest tools and access to a wealth of features such as round-up savings programs or a dashboard that helps you track your earnings, spending, and savings.

Cons of Online Banking

There are, however, some potential downsides to managing money this way. Consider these potential issues with online banking:

No In-Person Assistance

While most online banks provide a customer service line or chat function, they generally do not offer personal bankers. This means that there is no one available face-to-face to help you with your banking needs, such as setting up accounts, applying for loans, and getting a document notarized. If you are a person who wants and appreciates this kind of personal connection, you may not be well-suited to digital banking.

Limited Services

There may be some services that you aren’t able to enjoy with an online-only bank. It may or may not offer credit cards, car loans, and mortgages; you may not be able to deposit cash easily, as you can at a brick-and-mortar bank branch. Every online bank is different, so do your research to see what services they offer.

Limited ATM Access

Although many online banks will have a network of tens of thousands of ATMs that customers can access, others may offer less robust options vs. traditional retail banks. It’s worthwhile to see exactly where a digital bank has allied ATMs near your usual haunts, like your home and office, before signing up.

Is Online Banking Safe?

People may worry about whether online banking is safe. In the SoFi survey, 21% of respondents said they were very concerned about the security of their online bank accounts, and another 21% said they were somewhat concerned. The truth is, traditional banks are no more or less secure than online-only banks, and vice-versa. All are at a very minimal risk of a hack.

The Takeaway

Whether you call it online banking, mobile banking, or digital banking, keeping your funds with an online-only bank can offer many rewards. You’re likely to earn a higher interest rate and pay fewer fees, for instance. But those who like banking in person at a branch may choose to stick with a traditional bank. Think carefully about what suits your financial style and needs best.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.30% APY on SoFi Checking and Savings.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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SoFi members with direct deposit activity can earn 4.30% 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 4.30% 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 4.30% 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 10/8/2024. 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.

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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