If you have an old or expired credit card, you might shred or otherwise dispose of it. Most credit cards come with an expiration date printed on the face of the card alongside the credit card account numbers. If you keep your account open, you’ll usually get a new card in the mail before your previous card expires.
When you get your new credit card or if you’ve decided to close your account, you’ll want to be careful about what to do with your expired credit card. There are a few things to keep in mind to make sure you keep your financial information safe.
Things to Do With an Old or Expired Credit Card
If you have a credit card that’s closed or has passed its credit card expiration date, here are some options to consider as you decide what to do with the card.
Shredding Your Credit Cards
The simplest thing you can do after closing a credit card is to shred it. Most modern shredders have the ability to shred plastic credit cards in addition to paper. If you don’t have a shredder, you can cut your card into multiple pieces with scissors.
You might consider putting each piece of your card in a different trash can or trash bag. This will minimize the chance that someone might be able to reconstruct your full account number.
Disposing of Metal Credit Cards
It gets a little more complicated if you’re disposing of a metal credit card. Most retail shredders will not be able to handle shredding a metal credit card. If you have an expired metal credit card, you can try the following:
• Cutting it up with metal snips
• Turning it in at a physical bank branch
• Sending it back via certified mail to your credit card issuer
Contacting Expired Credit Card Hobbyists
Believe it or not, there are people who collect old credit cards as a hobby. They may do so because they are fascinated by the history of credit cards. While you might not feel comfortable having your credit card and account information in the hands of someone else, if you are, there may be someone who would want to have it.
Just keep in mind that while there are some old or historical cards that have actual value as collectibles, most current credit cards won’t be worth anything to a collector.
Deactivating Magnetic Strips and Chips
As part of the process of destroying a credit card that’s past its credit card expiration date, it’s not just the account number that you’ll need to take care of. Most credit cards have either a magnetic strip or an EMV chip (or both) that contain account information that you’ll need to make sure is destroyed.
If you have a contactless credit card, remember that it also contains potentially sensitive information.
Keeping Your Card Out Of The Recycling Bin
Above all else, don’t just throw your card in the recycling bin. While most credit cards are plastic, that doesn’t mean they can be recycled as-is. Check with your local trash or recycling authority to see if credit cards can be recycled. Even if your card can be recycled, it’s not a great idea to toss it in the recycling bin whole due to security risks.
Things to Do Before You Close Your Credit Card Account
It can be difficult to know when to cancel a credit card due to the implications it can have for your credit score. Especially if the account you’re thinking about closing is one of your older ones, it can impact the length of your credit history. As this is a factor that goes into determining your credit score, canceling a long-standing card could cause your score to drop.
So before closing your credit card account, consider the following options first.
Downgrade Your Card
Instead of closing your credit card account, you might consider downgrading your account to a different type of credit card. Most credit card issuers have a variety of different cards, so you might find one that’s a better fit for you. Plus, keeping your account open can help maintain your average age of accounts.
A secured credit card can make sense if you have a limited credit history or are working on rebuilding your credit history. But once you have an established history of adhering to credit card rules like making on-time payments, you may be able to qualify for an unsecured card.
Keep Your Card for Small Purchases
It may make sense for you to keep your credit card and use it to make small purchases here and there, especially if it doesn’t have an annual fee. Keeping a credit card open can help you maintain your average age of accounts, especially if the card is one of your older ones.
Just keep in mind that if you do decide to keep it open, you may want to make occasional small purchases on it. Otherwise, your credit card issuer may close it for inactivity.
If you have an old or expired credit card, it’s important to take the necessary steps to keep your financial information safe. In most cases, it’s a good idea to shred your expired card so that nobody can access your information. You might also just keep your credit card account open to avoid lowering your average age of credit accounts.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Can an expired credit card be charged?
In most cases, if you try to make a purchase after your credit card’s expiration date, it will be declined. Keep in mind, though, that merchants may continue to attempt to charge a card after its expiration date if you have it set up for recurring charges. Check with any merchants where you have recurring charges to see how this might affect you.
Can I cancel a credit card online?
Yes, in most cases you do have the ability to cancel a credit card online. You could do so through your online account or possibly by using a chat feature on the card issuer’s website. If you’re not able to cancel your credit card online, you may have to call the customer service number on the back of your card to cancel your card.
What should I do before canceling a credit card?
Knowing when to cancel a credit card is a matter of balancing a variety of different factors. Before canceling a credit card, make sure that it won’t drastically affect your credit score. You’ll also want to contact any merchants where you have recurring charges to update your account information. That will ensure that you don’t have any interruption in service.
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Structured products are investment vehicles that are structured to seek specific objectives or goals. Most often, structured products are designed with the aim of generating returns based on the performance of an underlying security or basket of securities.
Structured products may offer investors built-in downside protection, with the potential for higher returns. However, investing in structured products does have risks, which investors should be aware of.
Key Points
• Structured products are investment vehicles designed to seek specific objectives, often linked to the performance of underlying securities.
• Structured products offer the potential for higher returns and downside protection but also come with higher risks.
• Structured products are suitable for experienced investors comfortable with derivatives and higher risk, not ideal for beginners.
• Structured products are generally complex, less liquid, and taxed at ordinary income rates, which can be a disadvantage for some.
• They can enhance portfolio diversification by providing indirect exposure to alternative investments.
Understanding Structured Products
Structured products are a type of alternative investment that can act as a counterbalance to more traditional investments, like stocks or bonds. Alternative investments, in general, may be structured to seek higher returns for investors compared to other investment types, though they typically entail a higher degree of risk.
They also require that investors hold onto them until they mature, meaning that they’re suited to buy-and-hold strategies, which can be important to note for investors who may have a different overall investment strategy.
Definition and Basic Concepts
In simple terms, a structured product is an investment that derives its value from other investments. Structured products are designed to offer maximum upside, based on market conditions.
There are different categories of structured products you might invest in:
• Participation products: These track an underlying asset, which may be an individual security or an index. Risk/reward profiles align with the underlying asset.
• Yield enhancement products: These pay a set coupon or interest rate and offer downside risk protection, so long as the underlying asset’s value remains at or above a certain level.
• Capital protection structured products: These offer guaranteed recovery of your initial investment, with the potential to benefit from increases in the value of the underlying asset.
Market-linked certificates of deposit (CDs) are one example of structured products. These are bank CDs that tie potential returns to an underlying asset, such as individual stocks or a stock index.
For example, you might invest $10,000 into a market-linked CD that bases returns on the performance of the S&P 500. The CD has a 12-month term. During that period, you get the benefit of returns that parallel the performance of the 500 largest publicly traded companies in the U.S., with the reassurance of FDIC insurance protection.
Individuals and institutional investors can invest in structured products. The difference between institutional vs. individual investors lies in who they represent. Institutional investors trade on behalf of other investors; a bank is one example. Individual investors trade for themselves.
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How Structured Products Differ from Traditional Investments
Structured products are distinct from traditional products in terms of how they work and what they’re designed to do for investors.
Stocks, bonds, mutual funds, and exchange-traded funds (ETFs) may be good for diversifying your portfolio, but there are limits to the needs they can meet for certain investors. Structured products may help fill gaps in a portfolio.
In terms of what a structured product looks like, they can be issued as:
• Publicly offered or privately placed debt securities
• Closed-end funds or trusts
• CDs
Each option has a different risk/reward profile, allowing investors to select structured products that align with their goals and risk tolerance. Structured products can be traded on exchanges just like stocks and some also trade on the secondary market, though that’s rare.
Compared to stocks or other traditional investments, structured products tend to be more complex in both how they work and how they’re taxed. In the past, structured products required a substantial minimum investment. Today, more financial institutions offer structured products such as market-linked CDs with low minimum buy-ins, reducing barriers to entry for a broader range of investors.
Benefits and Risks of Structured Products
Structured products can be attractive to investors for a variety of reasons. Some of the chief benefits of investing in structured products may include:
• Potential for higher returns, based on the performance of the underlying asset
• Indirect exposure to alternative investments
• Certain types may have built-in downside protections
It’s important to understand that structured product returns follow an “if/then” model. If the underlying asset delivers ABC return, then you reap XYZ rate of return.
That’s what makes structured products both enticing — and risky. You’re essentially banking on the underlying asset meeting or exceeding performance expectations. But structured products allow for flexibility, so you can choose investments that are most aligned with the outcomes you seek.
That can enhance diversification. And if you’re unsure why portfolio diversification matters, it’s simple. A diversified portfolio helps you to balance risk.
On the risk side, it’s important to know that structured products are not liquid investments, as they require you to hold the investment until maturity. That is, investors can’t sell early if they hope to receive the specified returns and protections they signed up for. They’re less widely traded than traditional stocks or bonds and if you need to exist before maturity, you may have to do so at a loss.
Structured products are often highly customized, which adds another wrinkle if you plan to sell. Cost structures can sometimes be difficult to decipher and high fees can detract from your overall rate of return. Gains are taxed at ordinary income tax rates, versus the more favorable long-term capital gains rate.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
Who Should Consider Structured Products?
Structured products are more appropriate for some investors than others. If you’re a complete beginner to trading, you may want to familiarize yourself with more traditional investments before looking into structured products.
These investments may be most suitable for investors who:
• Have experience with derivatives
• Are comfortable accepting a higher degree of risk to seek potentially better returns
• Want to diversify with alternative investments, without buying them directly
• Understand the liquidity implications of allocating part of their portfolio to structured products
Note that some structured product finance investments may require you to be an accredited investor. The Securities and Exchange Commission (SEC) defines an accredited investor as someone who:
• Has a net worth >$1 million, excluding their primary residence AND
• Has income over $200,000 (or $300,000 with a spouse or partner) in each of the prior two years, with a reasonable expectation for the same income in the current year
Financial professionals who hold a Series 7, Series 65, or Series 82 securities license may also qualify.
Evaluating and Purchasing Structured Products
If you’re interested in adding structured products to your portfolio, it’s important to do your research. The due diligence process can involve:
• Checking the minimum investment requirements and accredited investor requirements, if applicable
• Researching the product’s underlying assets/investments to understand how it generates returns and what type of performance you might expect.
• Reviewing the fees associated with the structured product
• Understanding the product’s risk profile and how it corresponds to your personal risk tolerance
• Planning your eventual exit from the investment and what consequences may apply if you need or want to exit early
Working with a financial advisor can be helpful if you have questions about how a particular structured product works or where it might fit into your portfolio. A financial professional can look at your entire asset allocation, risk tolerance, and goals to determine how well structured products might work for you.
The Takeaway
While alternative investments may enable you to seek potentially higher returns in your portfolio, it’s important to weigh the benefits against the risks. Structured products can offer exposure to alternatives, with some downside protection added. While SoFi doesn’t offer structured product investments at this time, it does allow you to invest in stocks, ETFs, and more.
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).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
Are structured products suitable for beginner investors?
Structured products are often complex, which could make them a less suitable choice for beginner investors. You may want to learn the basics of stocks and bonds first before exploring the possibilities of structured products and other alternative investments.
How are structured products taxed?
Gains from structured products are typically taxed at ordinary income rates vs. the long-term capital gains tax rate. That could be a disadvantage if you’re in a higher tax bracket year to year, as the long-term capital gains rate maxes out at 20%.
Can I sell a structured product before maturity?
It’s possible to sell structured products before maturity if you can find a buyer on the secondary market. If you’re unable to find a buyer you may have to sell to the original issuer at a reduced price. You may also be charged fees or penalties to sell before maturity, which can reduce returns.
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A drawee in banking is the entity that has been asked to pay a sum of money to a person who presents a check or a similar financial instrument. If your employer (the drawer) were to write a check to you (the payee), the bank would be the drawee.
Knowing the definition of drawee can help you understand banking and legal terminology, which can help build your financial literacy. Read on to learn more about what a drawee in banking is.
Key Points
• A drawee is the entity, often a bank, that provides a sum of money to a payee presenting a check or similar financial instrument.
• The drawee relationship involves three parties: the drawer (payor), the drawee, and the payee.
• The drawee plays a crucial role in facilitating financial transactions, especially check cashing or depositing.
• The drawee helps manage risk by holding funds before releasing them, ensuring the check clears.
• Drawees often assume primary liability for errors or mistakes on checks they accept for payment.
Understanding Drawees
While the term drawee is not one that is often used by people, it plays a crucial role in the finance industry. Understanding what a drawee is can help you if you ever receive or write checks.
Definition of a Drawee
The definition of a drawee is a person or company (often a bank or other financial institution) that has been directed to pay someone presenting a financial instrument — often a check. The person presenting the check is usually referred to as the payee, and the payor (or drawer on a check) is the person who issued the check.
Role in Banking Transactions
While the term drawee may be relatively obscure, it plays a key role in banking transactions. Without a drawee as an intermediary, it would be much more difficult, or perhaps even impossible in some cases, to cash or deposit a check. When you deposit or cash a check, the drawee is the one that contacts the payor (or their bank) to withdraw the funds to give to you.
Without a drawee, you would have to contact the payor’s bank directly to receive your funds. This might or might not be successful.
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Drawee in the Context of Checks
While the concept of a drawee does exist in other areas besides checks (most notably in coupons presented to a retail store), it is most commonly used in banking when someone writes a check.
If you receive a check and try to cash it or deposit the check into an account such as a high-yield checking account, the bank or check-cashing service where you present the check will serve as the drawee. They will manage the transaction, contacting the individual or company that wrote the check (or their bank) to help facilitate the transfer of funds.
Importance of the Drawee
A drawee can be very important in helping to ensure the easy and quick transfer of funds between people or companies with accounts at different banks.
Facilitating Financial Transactions
One of the most important roles of a drawee is in helping to facilitate financial transactions, such as sending money between accounts. Whether using online or traditional banking, one of the most common bank transactions is moving money to someone else at a different account (such as by writing checks). A drawee plays a crucial role as an intermediary in this process.
Risk Management
A drawee can also help with risk management. Since it usually serves as an intermediary, it can help to lower the overall risk of the check writing process. It’s common for a drawee to be a bank, and these financial institutions usually will hold onto funds for a couple days before releasing them. This process (you may know it as waiting for a check to clear) helps to lower the overall default risk of the transaction.
Legal Implications
With a drawee as an intermediary in the process of writing and depositing a check, you as the payee are generally not liable for errors or mistakes on the check. When a drawee accepts a check for payment, they are often considered primarily liable for any errors, omissions, or mistakes on the check.
Rights and Obligations of the Drawee
When a drawee accepts a check for payment, they take upon themselves the obligation to honor any valid checks that are presented. They also do have the right to return what are known as dishonored items (such as if the payor’s account has non-sufficient funds). The drawee also assumes primary liability for any errors, omissions or mistakes on the check when it is presented. This is why banks or other financial institutions will generally make sure to review a check before they accept it and pay out any funds.
There are three main actors in the drawee relationship — the drawee and the drawer of a check (sometimes referred to as the payor), along with the payee.
Relationship With the Drawer
The person who writes a check or other financial instrument for payment is commonly referred to as the drawer (sometimes also called the payor). The drawer includes their routing and account number on the check before giving it to their customer as payment for an item or service. These routing and account numbers help the drawee to facilitate the transfer of money from one account to another.
Relationship With the Payee
The person who presents a check to a drawee for payment is usually referred to as the payee. It is common (though not required) that the payee have a checking account or other relationship with the bank that is serving as the drawee. This can help to mitigate the risk for the drawee, since they have a contact they can reach out to in case there are any errors with the check as it was presented.
It’s also worth noting that you can often cash a check at the bank it was drawn on, without having an account there but by providing appropriate ID (and the bank verifying that the funds are available).
Intermediaries Involved
If the drawer of a check has an account at a different bank than the one that is serving as the drawee, there may be other intermediaries involved in the process. One of the most common networks of financial institutions is the Automated Clearing House (ACH), but there are other similar networks as well. These intermediaries help the drawee to facilitate the process of cashing or depositing a check.
A drawee is one of three important actors in certain types of financial transactions, most commonly when a check is written and deposited or cashed. The drawee is usually a bank that accepts a check or other financial instrument and pays out the money. The payee is the person who presents the check for payment, and the payor or drawer is the person or entity that wrote the check. While the term drawee is fairly uncommon in everyday speech, drawees play a crucial role in the process of transferring money between people with accounts at different banks.
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FAQ
What is the difference between a drawer and drawee in banking?
In a financial transaction, the drawer is the party (such as an employer) that directs the drawee to transfer funds to a payee. The drawee is the entity (such as a financial institution) that actually distributes a specified sum to the recipient. So if you did a freelance gig and were paid by the Acme Company, that business is the drawer, and the bank that cashes the check they gave you is the drawee.
What is the role of the drawee?
Usually, the drawee is the entity that facilitates a transfer between a drawer (or payor) and payee. In many situations, the drawee is the bank or check-cashing service involved in cashing or depositing a check that a drawer provides to a payee.
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.
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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.
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It’s possible to overdraft your account with a debit card if you have signed up for your bank’s overdraft coverage, which can enable a transaction to go through even when the account is short of the funds needed to cover it. However, you may wind up paying expensive overdraft fees on your purchase or withdrawal.
Overdraft fees have been around for so long now, many consumers may simply accept them as a cost of doing business with their bank or credit union. But you may not want to do so. Read on for a closer look at what opting into your bank’s overdraft service could mean specifically for debit card transactions.
Key Points
• Overdrafting occurs when an account owner’s spending exceeds their account balance but the bank still covers it, leading to potential overdraft fees.
• With standard overdraft coverage, a bank may (at its discretion) cover a transaction even if it overdraws an account, though it would typically charge an overdraft fee.
• With debit cards and ATMs, a bank customer must opt-in to overdraft coverage, consenting to the related overdraft fees.
• Overdraft protection programs allow account holders to link to a backup account, from which the bank can pull funds when the primary account is overdrawn.
• Account holders may be able to reduce or avoid overdraft fees by linking accounts, using credit cards or other payment methods, or choosing low- or no-fee banks.
What Does It Mean to Overdraft With Your Debit Card?
Overdrafting with a debit card means that you may spend more money than you actually have in the account.
If you don’t have enough money in your bank account to cover a debit card transaction, you can expect one of two things to happen.
• Your bank may decline your request, leaving you empty-handed at the cash register or ATM.
• Your bank could allow the transaction to go through. Technically, you will have overdrawn your account, because your account balance will fall below zero. But you’ll get what you wanted — some cash, a latte, movie tickets, etc. And you’ll be saved from potential embarrassment in front of co-workers or friends.
The second outcome may seem more satisfying, at least for the short-term. But there’s a catch: Your bank may only let the transaction go through if you participate in its overdraft coverage or protection program, and you can be charged a fee for this service.
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What Is Overdraft Coverage vs. Overdraft Protection?
Many financial institutions offer overdraft programs that will let your transactions go through, at least temporarily, if you don’t have enough money in your account. But the rules — and fees — for this service can vary significantly from one bank and bank account to the next, so it’s important to understand what you’re signing up for.
Standard Overdraft Coverage
Many banks offer some type of standard overdraft coverage for their consumer checking accounts. Generally, if you overdraw your account with a check, automatic bill payments, or recurring debit card transactions, the bank may process the transaction anyway (at its discretion and usually up to a certain limit). But it will typically cost you: Your bank may charge an overdraft fee. And you’ll still have to get your account back in the black ASAP to avoid multiple fees. So while you can overdraft a debit card with no money in your account, it can get pricey.
Overdraft Protection
Overdraft protection services work a little bit differently. With this type of program, you can designate a backup account (a savings account, credit card, or line of credit, for example) to cover any shortfalls. The bank will automatically transfer money to your overdrawn checking account.
You’ll likely still be charged for this service, but this “transfer fee” may be lower than the bank’s overdraft fee. Before opting into any overdraft program, it’s important to understand the specific terms and fees.
How Are Debit Card Overdrafts Different?
You may not have a choice when it comes to paying fees when you overdraw your account with a check or automated clearing house (ACH) payments. If the bank approves the transaction, you can expect to pay an overdraft fee. If it declines the transaction, you’ll likely face a non-sufficient funds (NSF) fee. This charge means that even though the transaction wasn’t completed, you still will pay for the inconvenience the bank experienced due to the situation.
But your bank can’t charge you fees for overdrafts on most debit card transactions unless you have specifically opted in to those charges.
Opt-In vs. Opt-Out Policies
Deciding whether you want or don’t want to pay overdraft fees on debit card transactions can be a pretty complicated decision. Policymakers at the Federal Reserve decided in 2010 to change the previous process that involved having to opt out of overdraft coverage (that is, customers could be automatically enrolled in the service). Since then, bank customers have to opt in by signing paperwork that says they understand the fees and they want their bank to process their debit card transactions even when they’re short of funds.
• If you opt in to debit card and ATM overdraft coverage, you can expect withdrawals and purchases to go through even if you don’t have enough funds in the bank at the time of the transaction. But you will likely be charged a fee in exchange for this service. (See below for pricing specifics.)
• If you don’t opt in to debit card and ATM overdraft coverage, you may experience one-time ATM withdrawals and debit purchases being declined if you don’t have enough money in your account at the time of the transaction. You can avoid paying an overdraft fee for those transactions, but it will be up to you whether you want to use a credit card or some other method to complete the transaction.
• Keep in mind, though, that even if you don’t opt in to overdraft coverage for your debit card, you could still face fees. If you’re short of funds when the bank processes an automatic payment through your debit card — for a gym membership or subscription service, for example — you might face an overdraft fee if the bank chooses to complete the transaction. And if the payment is declined, you may be charged an NSF fee.
Federal regulators have proposed lowering overdraft fees to as little as $3, but currently they average around $26 to $27. And though some banks don’t charge overdraft fees on checking accounts, 94% of accounts at financial institutions still have them, according to a recent survey. And they can run as high as $38 or so.
Some banks also may charge what are known as “continuous” overdraft fees, or daily overdraft fees. These are charges assessed every day the account remains overdrawn, and the fees can add up quickly.
Your bank may waive the fee on a smaller purchase. Also, if it’s the first time you’ve overdrawn your account — or it’s been a while since you did so — the bank might remove the fee if you call and ask.
Should You Overdraft With a Debit Card?
If you’ve opted in to debit card overdraft coverage, it may seem worth the risk of overdrafting if you need some quick cash or to fill your gas tank in a pinch when you’re low on funds. But if you have other resources (whether it’s a credit card or a piggy bank), you might want to tap those first. Keep potential fees in mind — not to mention the stress of knowing your checking account will have a negative balance — as you ponder this strategy.
Understanding how opt-in overdraft coverage works is one way to avoid triggering unnecessary bank fees. But there are other proactive steps you may want to consider, as well, including the following:
Choose a Bank That Doesn’t Charge Overdraft Fees
Some banks don’t charge overdraft fees; often, they cover you up to a specific overdraft limit, such as $50. Others may offer one or two fee-free account options. (If bank fees overall are an issue for you, keep in mind that online banks often have lower costs than traditional brick-and-mortar institutions.)
Use Credit Cards for Emergency Expenses
If you have a relatively low-interest credit card or you’re able to pay off your credit card balance every month to avoid accruing interest, it may make sense to use your credit card for emergency expenses. Thinking about which card you’re going to use before an emergency comes up could help you make the best decision.
Link Accounts for Overdraft Protection
Linking your checking and savings accounts can allow your bank to quickly move funds to cover negative balances. Though you might pay a transfer fee, it’s usually less than an overdraft fee.
Build an Emergency Fund
Having an emergency fund that can cover three to six months’ worth of expenses is a good goal, but even a smaller amount of savings may allow you to deal with the kinds of unexpected expenses that can trigger debit card overdrafts. A high-yield savings account can help you grow your money while also keeping it accessible.
Steps to Help You Better Manage Your Debit Card
If the convenience of using a debit card has made it your go-to tool for accessing cash and making purchases throughout the day, there are steps you can take to prevent overdrafts.
If your bank offers account alerts, consider setting up a notification so you know when your checking account balance is getting low.
Know When Your Bills Are Due
Putting together a budget can help you pay your bills on time and organize your payment dates. Then, you might also see if you can move some payment dates. For instance, you could ask your credit card issuer to shift your date. That way, your checking account won’t be drained due to having so many payments in the same pay week or pay period.
The Takeaway
You may be able to overdraft your debit card transactions if you have overdraft coverage. This means your bank will cover the transaction, but you will likely be charged a fee for this privilege. If you choose not to opt into your bank’s standard overdraft coverage, there’s a good chance that a debit card transaction that would take your account into a negative balance would be denied.
The rules and fees for overdrawing your account with a check, automatic payment, or debit card can vary significantly depending on where you bank, so it’s a good idea to read all the paperwork you receive when you sign up for an account.
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FAQ
What happens if I overdraw with my debit card without overdraft coverage?
Here’s what happens if you overdraft with a debit card: If you don’t have overdraft coverage and you don’t have enough money in your bank account to cover the transaction you’re trying to make, your bank will likely decline the purchase or withdrawal. You won’t overdraft your account and you won’t have to worry about paying an overdraft fee, but you will have to find another way to finance your transaction or skip it.
How much does overdraft coverage typically cost?
Overdraft fees can vary depending on the bank and other factors, including whether you have a backup account or credit card linked to your checking account. One recent survey found an average fee of around $26 or $27. That said, there is a movement afoot to lower these fees considerably which may or may not impact future charges.
Can I overdraft using my debit card at an ATM?
If you’ve opted in to your bank’s overdraft coverage, your ATM withdrawal may go through, even if you withdraw more than you actually have in your account. You can expect to be charged an overdraft fee for this service. If you don’t opt in to overdraft coverage, the transaction will likely be declined, and you won’t be charged an overdraft fee, but you won’t be able to access the funds you’re seeking.
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Hedge funds are pooled investment vehicles that use complex investment strategies to try and generate above-average returns. Investing in hedge funds can be risky, but rewarding if the fund meets or exceeds performance expectations.
Compared to traditional mutual funds or exchange-traded funds, hedge funds typically have more barriers to entry for investors. If you’re interested in how to invest in a hedge fund, it’s helpful to understand who these funds are designed for, and the minimum requirements.
Key Points
• Hedge funds are private investment vehicles using complex strategies to seek high returns, but they carry significant risks.
• Access is limited to accredited investors, typically requiring a net worth of more than $1 million, or a relatively high income.
• Hedge funds invest in diverse assets like stocks, derivatives, and real estate, using strategies like equity long, equity short, or equity neutral.
• Investing involves understanding fund strategies, performance, and costs, and that fees are often higher than mutual funds.
• Regulatory oversight by the SEC helps ensure legal compliance, with trends showing slower growth and evolving strategies.
What Exactly Is a Hedge Fund?
A hedge fund is a private investment vehicle that accepts funds from multiple investors. The hedge fund manager directs the investment strategy to attempt to generate the best possible returns for investors.
Hedge funds can hold a variety of investments, including alternative investments. Depending on the fund’s strategy and investment objectives, a hedge fund may offer exposure to:
• Stocks
• Derivatives
• Foreign currencies
• Real estate
• Commodities
• Fixed income investments
Fund managers may utilize a range of strategies to manage fund assets. Examples of hedge fund strategies include equity long, equity short, and market neutral (basically, strategies that take different time frames into consideration, as well as prevailing market conditions), which may be chosen in anticipation of or to hedge against anticipated market movements. The strategy or strategies employed can influence the fund’s risk/reward profile. Greater risk can bring greater rewards, but it also raises the possibility of losing money.
Alternative investments, now for the rest of us.
Start trading funds that include commodities, private credit, real estate, venture capital, and more.
Getting Started in Hedge Fund Investments
Getting started in hedge fund investing isn’t exactly straightforward — it’s not the same as firing up an investment account and buying stocks online.
Hedge funds are generally viewed as high-risk investments and as a result, the Securities and Exchange Commission (SEC) regulates who can directly invest in them. Access to hedge investment funds is limited to institutional investors, pension funds, and accredited investors. However, it’s possible for unaccredited investors to gain exposure to hedge funds in their portfolio through certain mutual funds or ETFs.
• Net worth >$1 million, excluding the value of your primary residence, and
• Annual income over $200,000 individually or $300,000 with a spouse or partner in each of the prior two years, with the same income expected for current and future years
Financial professionals with Series 7, Series 65, or Series 82 securities licenses also qualify as accredited investors.
Aside from those requirements, you must be able to meet the minimum investment requirements for a hedge fund. The amount you’ll need will vary by fund, but a typical investment minimum may range anywhere from $100,000 to $2 million.
Maximizing Potential for Returns and Managing Risks
The key to making money with hedge funds while minimizing risk generally lies in two things: Market trends and the fund manager. Like other investments, hedge funds are influenced by things like changing interest rates and volatility, and hedge fund managers need to do their best to contend with those risks to try and maximize returns for investors.
Managing risk, of course, starts with doing your research. Specifically, it’s important to understand what the fund invests in, the strategies the fund manager employs, and the fund’s track record. Helpful questions to ask include:
• How is fund performance determined?
• Does the fund use leverage or speculative strategies?
• Does the fund manager have any conflicts of interest?
• How are the fund’s assets valued?
• How are fund assets safeguarded?
It may also be wise to consider the costs, as hedge funds can charge higher fees than traditional mutual funds or ETFs. An investor might pay an asset management fee of 1%-2%, as well as a higher performance fee of 20%, which is intended to motivate the hedge fund manager to generate better returns.
Note that hedge funds are generally not liquid assets and you may be required to leave your capital in the fund for a certain period. There may be limits on when you can redeem your shares, so it’s important to consider how much money you’re comfortable putting into these investments.
Regulatory and Legal Aspects
Due to their complexity, hedge funds and hedge fund investments are subject to federal regulation. Some of the laws and regulations governing hedge funds include:
• Securities Act of 1933
• Securities Exchange Act of 1934
• Investment Company Act of 1940
• Dodd-Frank Wall Street Reform and Consumer Protection Act of 20106
The SEC regulates hedge funds to ensure that they act within the scope of the law concerning registration, investment offerings, and investor protections. Hedge funds that trade in commodities or futures may also be subject to regulation from the Commodity Futures Trading Commission (CFTC).
Hedge funds are required to file Form ADV with the SEC. This document includes relevant details about the fund’s assets, its investment strategies, and potential conflicts of interest. You have the right to review a hedge fund’s Form ADV before investing to learn more about it.
Evolving Trends in Hedge Funds
Hedge funds are not static, as new trends emerge and older ones fade away. Some of the most significant trends to watch right now, according to the CAIA Association, include:
• Slower growth as the hedge fund industry reaches maturity
• Increased focus on long/short equity strategies, private debt, and private credit
• Gradual reduction in hedge fund fees
Demand for hedge funds may slow, too, should the U.S. economy enter a recession. If you’re all interested in how to invest in hedge fund markets now, or in the future, it’s worth watching these and other trends to see how this investment space will develop.
The Takeaway
Hedge funds can help you build a diversified portfolio, with the potential to generate returns. If you’re interested in how to invest in hedge funds, you’ll first need to determine whether you’re an accredited investor. If not, consider other avenues for accessing these and other types of alternative investments, such as through investing in mutual funds or ETFs. You can quickly start investing online in funds that offer exposure to venture capital, real estate, and other alternatives.
Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.
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FAQ
What are the requirements to invest in hedge funds as an individual?
Individual investors must typically be accredited to invest in hedge funds. That means having a net worth greater than $1 million, excluding the value of your primary residence, and an annual income of $200,000 (or $300,000 for couples).
Is it possible to start investing in hedge funds with a small capital?
It’s possible to find hedge funds that have a lower minimum investment of $20,000 or $25,000. But that may still be out of reach for the average person who’s just getting started with investing. It may be easier to invest in diversified funds that hold alternatives such as hedge funds, real estate, or private equity through a brokerage.
What are the key benefits of investing in hedge funds?
The most attractive feature of hedge fund investing is that it’s possible to see returns that beat the market. It’s important to remember, however, that hedge funds don’t always outperform and in some cases, returns may lag significantly behind returns generated by the S&P 500.
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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.
An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
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