Jan
31
2023
Promotional Certificate of Deposit (CD): How It Works

Understanding Promotional Certificate of Deposit (CD) Rates

By | Growing Wealth, Investing, money | Comments Off on Understanding Promotional Certificate of Deposit (CD) Rates

There’s a good chance that you’re familiar with certificates of deposit, or CDs, a financial product that typically pays a fixed interest rate if you keep your funds on deposit for a specific period of time. Sometimes, though, you may encounter an offer for a promotional CD, or bonus CD. This is a type of savings account offered by a bank or credit union for a short time, usually with a higher interest rate, to entice new deposits.

As with standard certificates of deposit, interest is earned on the funds that the account holder agrees to invest. This interest accrues until the CD matures, or reaches its maturity date, which is usually in several months or a few years. Because CDs are insured up to $250,000, they can offer a secure way to grow one’s money.

Promotional CDs can sweeten the deal by offering a higher-than-normal interest rate. That said, they may also require a higher initial deposit or a longer term in order to snag that loftier return.

Is a promotional or bonus CD right for you? Read on to learn:

•   What is a promotional certificate of deposit?

•   What are the pros and cons of a promotional CD?

•   When do promotional CDs make sense?

•   Are bonus CDs worth it?

What Is a Promotional CD?

A promotional CD is a timed deposit account, similar to a regular CD, but offered with more advantageous terms, such a higher rate. However, there’s usually a requirement or condition to nab that rate, such as making a larger deposit, keeping the funds on deposit longer, or already being a client of the bank.

Banks and credit unions offer these accounts to attract new investors and build capital, which they can then invest at a higher rate elsewhere. Just like regular CDs, promotional CDs usually earn interest on the deposited amount at a set rate until maturity. Most CD accounts are insured by the FDIC or NCUA (Federal Deposit Insurance Corporation or the National Credit Union Administration), depending on whether the money is on deposit at a bank or credit union.

Because there are a wide variety of CDs — including jumbo CDs and brokered CDs, and more — it’s wise to explore the exact terms of the CD you’re interested in, including interest rates, fees, and other stipulations.

How Does a Promotional CD Rate Work?

As noted above, CD promotional rates can be used to attract new investors and to build capital that they can then invest elsewhere at a higher interest rate. Promotional CDs will probably have better rates than a regular savings or CD account, but they may also require a higher initial deposit (perhaps closer to that of a jumbo CD) or longer term.

Like any CD these are low-risk investments, so generally the returns will be lower than other investments, like stocks. While bonds are also generally lower-risk vehicles, and bonds can seem similar to CDs in that they pay a fixed rate, the typical rate on a CD is often lower than a bond.

At maturity, promotional CDs are often rolled over into another CD that pays a lower interest rate, or they can be cashed out. Some banks might offer a higher rollover rate to retain the investment. The financial institution will generally charge a fee if an account holder withdraws the funds before the maturity date (there are no-penalty CDs, but they tend to pay a lower interest rate).

Recommended: What Is a Variable Rate CD?

Example of a Promotional CD Rate

Let’s say an investor wants to set up a certificate of deposit investment plan. They invest $5,000 in a CD for five years. A bank that offers a five-year promotional CD with a competitive 4% annual percentage yield (APY) would provide earnings of around $1,083. A regular savings account with a lower rate of 3.5% would earn about $938 with the same $5,000 deposit, or almost $150 less.

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🛈 While SoFi does not offer Certificates of Deposit (CDs), we do offer alternative savings vehicles such as high-yield savings accounts.

When to Consider Opening a Promotional CD?

A promotional CD makes sense when a bank or credit union is offering a better interest rate than a regular CD or savings account, you have the required amount to invest, and you don’t need the funds for the length of the CD term. While it’s impossible to say for sure which investments are the safest, if you’re worried about the higher risk associated with investing in assets like stocks or bonds, a promotional CD is a reasonably safe investment.

For example, CDs are sometimes used as college savings accounts or when parents are thinking about how to create an investment plan for a child.

How to Get a Promotional (Bonus) Rate CD

If you’re in the market for a promotional or bonus rate CD, follow these steps:

•   Do a bit of research to see what may be offered. Often, the best or only deal is what your bank may offer you.

•   Read the fine print. Make sure you qualify for the account and fully understand the term, the rate, and penalties for early withdrawal, among other features.

•   Apply for the CD when you are ready to invest, and set up funding to transfer money into your new CD account.

When a Promotional CD Does Not Make Sense

Now that you know how certificate of deposit promotions work, consider whether it’s really the right move for you. A promotional CD does not make sense if you may need the funds before the maturity date of the CD. The bank or credit union will likely charge a fee if you withdraw your funds early. In some cases, you might want to consider a no-penalty certificate of deposit.

Also, CDs do not keep up with inflation, so once taxes are paid on the interest earned, there may not be much of a return on the investment. If you want to explore other ways to earn interest, you might consider high-yield savings or fixed-income investment.

The Pros of Promotional CD Rates

The main advantages of promotional CDs are that they are safe and predictable.

•   Promotional CDs, like regular CDs, are likely a safe investment with a guaranteed rate of return.

•   Funds are typically insured by the FDIC up to $250,000.

•   The interest rate is usually fixed for the life of the CD, which helps to predict income.

The Cons of Promotional CD Rates

The main disadvantages of promotional CDs are that they do not offer high returns because they are low-risk.

•   The promotional rate is generally only offered for shorter maturity terms, and the rollover option is often to a standard CD at a lower rate (not the promotional rate).

•   Promotional CDs often require a larger initial deposit.

•   Promotional CDs may demand a longer term.

•   These financial products may only be available to current clients of a specific financial institution.

Promotional CD Rates vs Regular CD Rates

Promotional CD rates pay depositors a premium for parking their funds into a particular financial institution. The exact APY offered will depend on the bank, the length of the term, and the amount deposited. Most promotional CDs are shorter-term: e.g. about a year or less. Rates as of January 27, 2023 might be as high as 5.5% (the higher rates are likely to be offered by an online bank vs. a traditional bank or at a credit union).

Rates ranged from about 4.25% at CapitalOne, 0.02% at Chase, and 0.03% at Bank of America for CDs of a year or two in length with a deposit of less than $10,000.

Are Promotional CD Rates Worth It?

Do your research and think seriously about financial security as you consider a certificate of deposit promotion. A couple of points to recognize:

•   When interest rates are down, investing in the stock market using an IRA or 401(k) may make more sense than a CD in terms of helping your money grow, though investing carries risk.

•   Promotional CDs are often offered by banks with low interest rates overall, and what one bank considers a competitive rate might be much lower than other banks’ standard rates. In other words, if a financial institution is offering an additional 0.05% for opening a new CD, but their base APY is very low, it’s likely not the best deal for you.

The Takeaway

For risk-averse investors who want to invest a sum of money safely and know exactly what return they can expect, a promotional CD can be a good option. It’s a way to take advantage of temporary favorable interest rates offered by a bank or credit union that can yield a higher return than a simple savings account.

That said, there are also some savings accounts that offer higher rates and could be the right place to stash your cash. When you open an online bank account with SoFi, you can qualify for a competitive APY when you set up direct deposit. In addition, these innovative, all-in-one accounts offer all the convenience of spending and saving in one place with no minimum balance requirement or account fees.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

🛈 While SoFi does not offer Certificates of Deposit (CDs), we do offer alternative savings vehicles such as high-yield savings accounts.

FAQ

Can a certificate of deposit be discounted?

CDs are not sold at a discount, unlike other short-term money market instruments. CDs pay interest on the money deposited usually on an annual basis. For CDs with a maturity of less than one year, interest is paid at maturity, and taxes are due on the earnings each year. However, for investors who don’t need to receive interest payments each year, a zero-coupon CD provides a return by being sold for their face value at maturity, which is higher than the initial investment.

What is the typical interest rate for a certificate of deposit?

A typical interest rate for a CD could range from 0.03% to 5+% for CDs with a one-to-five-year term and deposit of less than $10,000. It depends on the bank and the terms. CD rate promotions typically add to these rates.

What is the typical minimum balance for a certificate of deposit?

A typical minimum balance for a CD ranges from $500 to $5,000 or more, depending on the CD and the bank. Jumbo CDs typically require a $50,000 or higher deposit. Some banks offer CDs with no minimum balance requirement.

Photo credit: iStock/Ridofranz

SoFi members with direct deposit activity can earn 4.20% 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 4.20% 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 4.20% 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 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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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.

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

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Jan
30
2023
Is Mining Cryptocurrency Worth It in 2021?

Is Crypto Mining Still Profitable in 2023?

By | Growing Wealth, Investing | Comments Off on Is Crypto Mining Still Profitable in 2023?

Crypto mining is still profitable, but it’s potentially not as profitable as it was in years past. That’s true for a number of reasons, including the fact that for most of 2022 and into early 2023, crypto values were down way off their peaks.

Cryptocurrencies generally still have value, but calculating miner profitability can be a bit trickier than before, given the expense of computer hardware and software, as well as the energy it takes to keep that mining equipment running.

As the oldest and largest crypto, Bitcoin uses a proof-of-work consensus mechanism, and as such it is one of the main sources of crypto mining. Before deciding whether Bitcoin mining is worth it, and crypto mining in general, it’s important to know how it works and what the pros and cons are.

Why Bitcoin Mining Exists

Mining Bitcoin isn’t just the creation of Bitcoin (BTC). It’s also the decentralized global system by which miners validate and secure all Bitcoin transactions — and earn Bitcoin themselves.

It goes back to the blockchain technology that Bitcoin and other cryptocurrencies are built on. To run these networks, miners rely on powerful computer systems — or in some cases cloud-based technology — to solve complex mathematical puzzles and validate blocks of digital transactions.

This system is known as proof-of-work (PoW). With Bitcoin and other PoW systems, every transaction gets recorded in a transparent, immutable, public ledger known as the blockchain. The miner/s who solved it get rewarded with new Bitcoin.

What Is Bitcoin Halving?

It takes about 10 minutes for miners to confirm a 1MB block of transactions and earn new Bitcoin. But remember mining is intensely competitive, especially because the reward is halved every 210,000 blocks and now stands at 6.25 BTC.

As more Bitcoins are mined and the supply of new Bitcoins drops, the amount of Bitcoins released with every new block diminishes over time. This is known as Bitcoin halving, and generally, the value of Bitcoin increases after periodic Bitcoin halving.

So, to sum it all up, mining serves the purpose of validating a crypto network, and generating rewards for network participants, sometimes called validators or miners.

How Much Does a Miner Earn?

As of January 2023, a Bitcoin miner that successfully validates a new block on Bitcoin’s blockchain will earn 6.25 BTC. That reward will be reduced, however, during the next halvening.

And remember, Bitcoin is a deflationary cryptocurrency — so fewer BTC are produced every year, until the total amount of 21 million BTC is mined. If miners are working in teams or in pools, however, that reward is split up between them, too.

Hurdles to Mining BTC

While Bitcoin mining may seem lucrative, there are some caveats. For instance, to mine crypto effectively and efficiently, specialized machines built and tuned specifically to mine cryptocurrencies are often required. It also requires space — and a great deal of energy — to house and cool these powerful machines that operate around the clock.

There’s also competition to consider: The mining market is dominated by large companies who secure large warehouse facilities to house their army of ASIC mining rigs. Some of these companies might run mining pools that smaller miners can contribute to in order to get a piece of some block rewards in exchange for a small fee.

This is all to say that today, mining Bitcoin as an individual is rarely profitable unless someone has access to extra low-cost electricity and affordable equipment.

Bitcoin Mining Advantages and Disadvantages

Here are some positive and negative aspects of mining crypto.

Advantages

•   Proven track-record. Proof-of-work (PoW) consensus algorithms, which are the basis for crypto mining, have been around for many years. During that time, the Bitcoin network hasn’t seen a significant security problem.

   Many in the industry believe this is a result of Bitcoin’s significant hash rate, which refers to the amount of computing and process power being contributed to the network through mining.

   In the past, hackers have been able to destabilize smaller PoW networks, although the same can be said for smaller proof-of-stake (PoS) networks.

•   Cryptographic security. When trusting a network with large sums of money, PoW might be the best bet. It’s difficult to attack a PoW blockchain, so much so that would-be hackers are often content to become honest miners instead.

Disadvantages

•   Energy usage. Bitcoin mining uses a lot of electricity. Critics point to this as the main flaw of PoW. It’s possible that the Bitcoin network uses as much energy as an entire small country. Although Bitcoin’s overall energy usage is decreasing and much of it now comes from sustainable sources, this is still a primary concern.

•   Barriers to entry. PoW mining becomes more difficult with time, making it harder for the average person to get involved. A major principle of a decentralized PoW network is to distribute tasks as well as profits among many users. But as mining becomes more complex and difficult, a handful of large companies — which can afford to build warehouses full of mining machines — dominate the mining sphere.

Crypto Mining Advantages

 Crypto Mining Disadvantages
Proven track record High energy usage
Cryptographic security Greater barrier to entry
Difficult to attack Gets more difficult over time

The Risks of Crypto Mining

While crypto mining can be profitable in some instances, it does have its risks and downsides. Here’s a brief rundown.

Environmental Risks:

As mentioned, crypto mining is resource-intensive. Running mining rigs eats up a lot of electricity, which, in turn, generates environmental pollution.

Security Risks:

Malware and other security risks exist in the mining sphere, too. For instance, it’s possible that bad actors could use techniques (like phishing) to access someone’s computer, and then load mining codes and programs onto it without them knowing. As such, the victim could be sharing their computing resources and electricity mining with a hacker without even realizing it.

Regulatory Risks:

Regulation has yet to make it to the crypto space, but the federal government is working on it, and anyone involved in crypto can probably expect new rules and regulations to be announced within a few years. Those new rules and regulations will likely affect miners, too, so that’s another thing to keep in mind.

Investment Risk:

Crypto mining requires some upfront investment. You’ll need to buy a “rig,” first and foremost, and stocking up on computer power isn’t always cheap. But, as with any investment, there are risks in doing so. Mining may not be as profitable in the future, meaning your investment may not earn you the types of returns you were hoping for.

Or, if new regulations make mining illegal (though there’s no indication that will happen), investing in mining equipment may have all been a sunk cost.

Bitcoin Mining Pools

Due to the high cost and rising difficulty of mining Bitcoin, most miners today use something called a mining pool, as mentioned previously. Participating in mining pools is considered by many to be the only way for smaller miners to make any profit today, and even then it can be difficult to recoup the costs of equipment and electricity.

Within a mining pool, individual miners pool their resources together with other miners, improving their chances of mining a block and earning the Bitcoin rewards. When a block gets mined, the rewards are then split up among the different miners in proportion to the amount of computing power (known as hashing power) they contributed.

Mining pool owners typically charge mining fees for maintaining and participating in the pool. There are several different pools to choose from, each with their own structure.

Further, there are also Bitcoin cloud mining opportunities out there, which effectively allow miners to use computing resources over the internet. Miners using this strategy are renting others’ equipment, which incurs more costs.

Factors to Consider When Choosing a Mining Pool

After securing the Bitcoin mining equipment and electricity required for mining, a small miner will need to find a suitable mining pool. There are a few important factors to consider:

•   Fees: Most, but not all, Bitcoin mining pools charge fees. The fees are taken from the reward payout and can be as high as 4%.

•   Pool size: The larger the pool, the more frequent the potential payout, as more hashing power equals more blocks being found. However, this also means that the payouts are smaller, since rewards are shared between more people. On the flip side, smaller pools pay out less frequently, but in larger amounts.

•   Security and reliability: Miners might want to find a mining pool that they can trust won’t steal users’ funds or get hacked. Joining established pools with long histories may help to reduce these risks.

•   Required equipment investment: You’ll need to bring some power to the pool, too. And it’s becoming increasingly expensive to mine. When Bitcoin was first created, the computer power required for Bitcoin mining was enough for the computer-processing unit (CPU) of an average laptop computer to handle. But over time, the calculations have become more complex. Today, mining can mostly only be accomplished with advanced Application Specific Integrated Circuit (ASIC) machines, created specifically for mining Bitcoin.

And yet the hardware needs of Bitcoin mining is constantly evolving, as older machines become obsolete. An ASIC that was powerful enough to be profitable six months ago might not be able to produce enough coins to match the cost of electricity needed to run that same ASIC today. When this happens, miners must acquire new, more advanced hardware.

If you plan to try Bitcoin mining on your own, here are some things to consider when purchasing equipment:

•   Equipment cost

•   Electricity cost

•   The time it will take to recoup equipment costs

•   How BTC price fluctuations might impact profitability

•   The frequency with which you will need to buy newer, more powerful machines and sell old ones

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How Long Does it Take to Mine 1 Bitcoin in 2023?

There’s no correct answer here: The amount of time it takes to mine one whole bitcoin varies, and depends largely on the amount of hashing power a miner contributes.

In general, the more hashing power, the faster a block will be solved, resulting in the miner reaping the block reward in the form of newly minted bitcoins. Mining difficulty is another important variable. The lower the difficulty, the greater the odds of finding a new block.

When prices rise, more people are generally motivated to mine crypto. Then, as the Bitcoin hash rate increases due to more miners coming online, the difficulty adjustment (which happens every two weeks) tends to increase.

When prices fall, the opposite tends to happen, as the costs of Bitcoin mining equipment and electricity rise in relation to the value of the coins being mined. As hashing power comes offline, the difficulty tends to adjust downward.

How Many Bitcoins Will Be Mined in 2023?

There are about 900 new Bitcoins being mined every day. Assuming that rate held up during the entirety of 2022, then about 328,500 Bitcoin would’ve been mined in total. That should hold true during 2023, too. Roughly speaking, the amount of Bitcoin remaining to be mined totals around 2 million.

The interesting thing to note is that more people mining Bitcoin does not lead to an increase in the number of coins being mined. The block reward is currently set at 6.25 (this will remain true until the next Bitcoin halving), and one block gets mined roughly every 10 minutes. Increased competition for blocks leads to a higher hash rate, but the number of new coins being minted remains the same.

Alternatives to Mining Bitcoin

For those who choose to undertake the cumbersome task of mining crypto, the best cryptocurrency to mine might be the one with the lowest difficulty and highest price. But it’s critical to remember that these dynamics are in a constant state of flux, so the best cryptocurrency to mine today might not be the best one to mine tomorrow.

Historically, the only time altcoin miners have made significant profits has been when they were mining lesser-known, cheaper coins in the weeks and months before a large increase in prices, or an “alt season.” This has happened twice so far — once in 2017 and again in late 2020/early 2021.

Is It Worth Mining Ethereum In 2023?

Ethereum is the crypto market’s second-largest player. But unfortunately for miners, mining is no longer possible on the Ethereum network.

That’s because the “Ethereum 2.0” upgrade has gone into effect, which changed the consensus mechanism for Ethereum from proof-of-work to proof-of-stake. As such, the network no longer utilizes mining.

Only those who hold large quantities of ETH will be able to stake their tokens and become “validators.” Validators will have a chance at winning the next block rewards, with the highest odds going to those with the greatest amount of ETH staked. You can do more research about crypto mining vs. staking to learn more.

The Takeaway

Crypto mining is still profitable in 2023, however, it’s not as profitable as it once was, given that crypto prices have fallen from their peaks, and that mining operations have become more expensive to run and maintain. That’s not to say that prospective miners won’t make a profit, but there are more things to consider than in years past.

With that in mind, mining is a complex operation that carries considerable costs and risks. Most people interested in crypto mining may find it more worthwhile to join a mining pool than to try and go it alone.

FAQ

Is Bitcon mining profitable?

Bitcoin mining can be profitable, but there are many things prospective miners need to take into consideration. Given lower crypto prices and increased costs for equipment and resources, it may not be profitable for everyone.

What is the average profit margin for mining crypto?

It’s difficult, if not impossible to say what the average profit margin for mining crypto is without knowing a miner’s costs for electricity, mining equipment, and more. Those taking part in a mining pool, too, would have different costs to consider as well.

What risks are associated with mining crypto?

Some of the main risks associated with crypto mining include environmental concerns, security risks, investment risks, and regulatory risks. These are all things that any and all miners should take into consideration.

Photo credit: iStock/Chris Tamas

SoFi Invest®

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

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

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
First Trade Amount Bonus Payout
Low High
$50 $99.99 $10
$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100

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Jan
30
2023
Man on laptop

What Happens to My Stock in a Merger?

By | Growing Wealth, invest, Investing | Comments Off on What Happens to My Stock in a Merger?

It’s hard to know what to expect as an investor when mergers take place and you own stocks that are in the mix. Acquisitions often lead to a loss in value for the acquiring company’s shares, while the target company often sees a lift.

But that’s not always the case, and there are certainly no guarantees.

What Are Mergers and Acquisitions (M&A)?

Mergers and acquisitions (M&A) are corporate transactions that involve two companies combining, or one buying a majority stake in another. This can involve private companies or public companies.

A CEO typically embarks on an M&A transaction with the objective of finding “synergies,” which is Wall Street lingo for creating value through consolidation. Synergies are typically found by reducing costs or finding new avenues for growth by combining two companies.

Stock-for-stock mergers — when the target’s shares are converted into the buyer’s shares — are the most common type of M&A transaction. That’s why there’s often a burst of M&A activity after a prolonged bull market: Companies with high stock prices can use their shares to make pricey purchases.

For instance, in early 2020, M&A activity experienced a slowdown as the repercussions of COVID-19 took hold of the global economy. Dealmaking during the pandemic eventually came back as share prices soared and executives sought opportunities to adjust to the new business environment.

Meanwhile, in an all-cash merger, the buyer either has to spend the cash they have on hand, or raise new capital to fund the purchase of the target.

What Is a Merger of Equals?

A true merger of equals (MOEs) is rare, so most mergers are actually acquisitions. But MOEs could signal to investors that two similar, roughly equal-sized companies are uniting because there are significant tax or cost savings to be had. Investors may find that with MOEs, the premiums paid aren’t as significant.

What Is Private Equity?

Private equity (PE) firms, alternative investment funds that buy and restructure companies, also participate in M&A. They seek deals when there’s “dry powder,” or funds that have been committed by investors but aren’t yet spent.

How Do Stocks Move During Mergers?

After an M&A announcement, the most common reaction on Wall Street is for the shares of the acquiring company to fall and those of the target company to rally. That’s because the buyer typically offers a premium for the takeover in order to win over shareholders, and big company moves or decisions are a key driver of price fluctuations and how stocks work.

The rally in the target’s stock can come as a surprise, often leaving investors with the dilemma of selling then or after the deal is complete. The target’s shares usually trade for less than the acquisition price until the transaction closes. This is because the market is pricing in the risk of the deal falling apart.

Why Do M&A Deals Fall Through?

Deals can and do fall apart for a number of reasons. For example, deals can get scrapped because of a key regulatory disapproval, stock volatility, or simply because the CEOs changed their minds.

That would mean the money spent on investment bankers, lawyers, and consultants to put together the M&A terms would have been effectively wasted, not to mention the specter of a costly break-up fee.

As a result, there can be investor skepticism towards M&A. However, most M&A deals do make it past the finish line, despite investor reservations.

Different Stock Reactions to M&A

The stock market is a key way to gauge how shareholders and other investors feel about a deal. Here are some different scenarios of how the market could react and influence share prices:

Buyer (acquiring company) rises alongside target (company being acquired): This is typically the best case scenario for companies and investors. It occurs when the stock market believes the deal is a smart acquisition for the buyer and that the deal’s been made at a good price.

Buyer falls significantly: The buyer’s shares may plummet if investors believe executives are overpaying for a target or if they think the target isn’t a good purchase.

Target moves little: The target’s shares may see little change if rumors of a potential deal already sent share prices higher, causing the premium to be baked in. Alternatively, the premium being paid may be low, causing a muted market reaction.

Buyer rises, target falls: In rarer cases, a deal gets called off and the buyer’s shares rise while the target falls. This could be because investors have soured on the merger and believe that the acquiring company is getting out of a bad deal.

Target falls: If a target company needs money, a private equity firm could buy a stake at a discount. In such cases, the target company’s shares could slump.

Merger vs Acquisition Impacts on Stocks

Mergers and acquisitions are similar, and when it comes to the effect of each on stocks, the impact is generally felt in the same way, too. That is, for shareholders, there likely isn’t all that much of a difference in how a merger or an acquisition would affect the value of their shares.

The key difference mostly concerns the variance in values or sizes between the two companies. Mergers generally involve two roughly equal-sized or valued companies, meaning that the effect on share values may be rather muted.

Acquisitions tend to involve companies of different sizes or values, so you’re more likely to see a swing in share values, as discussed.

M&A Stock Impact Example

To see the effect of a merger or acquisition on a stock’s price, let’s look at a textbook example: The merger between Kraft and Heinz in 2015, which created one of the largest food companies in the world.

The two companies had multiple similarities, including their size and the industries in which they operated. And when the merger was originally announced, stock values soared. Kraft shares shot up more than 35% in March 2015 after the news hit the market.

The new company, the Kraft Heinz Company, became a single stock: Kraft Heinz Co., trading under the KHC ticker. While the stock did originally shoot way up in price, the following months saw its value taper off before rallying again and reaching a peak of nearly $100 per share in early 2017.

Since then, however, its value has fallen, bottoming-out at less than $23 per share at the onset of the COVID-19 pandemic in early 2020. As of Jan. 26, 2023, shares were trading at around $40.

How Is Employee Stock Impacted By a Merger?

Depending on the specifics, employee stock can be significantly affected by a merger. One of the most profound ways this can occur is that the new company might cancel or modify employee stock options.

But generally, if you are an employee in a company that is merging with another or being acquired, it’s likely that you will see your shares either cashed out, or exchanged for shares in the new company.

Do Mergers Create Value?

There’s long been a debate among investors and academics whether M&A actually creates value for stakeholders and shareholders. Recent research has shown that frequent acquirers do tend to add value, while bigger deals are riskier. A lot of mergers fail, costing billions.

The stock market is famously fickle, and it can take time before the market gives credit to the combined company for any cost or revenue synergies. In general, cost-saving synergies are much easier to pledge, while revenue synergies could be tougher to deliver.

Investors should also pay attention to executive changes that result from the merger. Leadership turnover can make a difference when it comes to making sure a merger adds value and two companies integrating well.

Buying a Stock Before vs After a Merger

For investors, timing the market can be tricky when it comes to deciding to buy a stock before or after a merger. The fact of the matter is that there’s no real way to know for sure what will happen when news of a merger reaches the stock markets, or what will happen after the merger goes through.

But as mentioned, some stocks do rally on the news of a merger, while others might fall. It’ll often come down to the specific companies involved, their relative sizes or values, and the overall economic environment.

Calculating Stock Price After a Merger

If you own shares in a company that’s involved in a merger, you’ll likely wonder what your shares will be worth after it’s all said and done. Unfortunately, no one can predict the future — which means there’s really no way to calculate a stock’s price after a merger goes through. If there were, you can be sure that traders would be lined up to either buy the stock before a merger in anticipation of its value going up, or short-selling the stock in order to bet against it.

What Is Merger Arbitrage?

Merger arbitrage — also known as merger arb or risk arbitrage — is a hedge-fund or private equity strategy that involves buying shares of the target company and shorting shares of the acquiring company. Returns are usually amplified through the use of leverage.

The so-called “spreads” between the takeover company and the offer value are a way to calculate the odds the market is placing on the deal successfully closing. When it comes to retail vs. institutional investors, some of the former may want to try merger arbitrage. However, there are key points to keep in mind.

First and foremost, it’s typical that most of the arbitrage opportunities will have been taken immediately after the deal gets announced. That said, mergers fall apart for all sorts of reasons. Usually, the biggest hurdle is getting regulatory approval, as regulators often reject a deal for being anticompetitive. A crash in the stock market could also make buyers back out.

What Is a Cash-Out Merger

A cash-out merger, which is often called a “freeze-out or squeeze-out” merger, effectively freezing out certain shareholders. This is done when two entities merge, and shareholders of the target company don’t want to be a part of the acquiring company. As such, stipulations of the deal may require that shareholders of the target company sell their shares before the merger.

Essentially, they’re cashing out their shares before the merger goes through.

Pros and Cons of Mergers

Like anything, there are pros and cons to mergers. Here’s a rundown of some of the upsides and downsides of M&A activity:

Pros of Mergers

The biggest advantages of mergers, for acquiring companies, are that they potentially allow those companies to grow faster, enter new markets, and acquire new talent and resources. Merging with a new company means bringing on a big new addition, and all that comes with it.

For target companies, shareholders or owners can see a big payday as a result of a merger, and they may benefit from access to a bigger pool of resources owned by the acquiring company.

Cons of Mergers

Potential drawbacks of a merger are that they can easily fall apart (due to regulatory issues, or other problems), they can eat up massive amounts of time and resources, and that they can be risky. Remember, there’s no guarantee that a merger will create more value than it destroys, so it’s something of a roll of the dice depending on the specifics.

Mergers need to jump through a lot of hoops, too, to get approved by regulators — much like a company going through the IPO process. So, investors would do well to temper their excitement about a merger until it becomes a little more clear as to whether the process will result in a successful marriage.

Or, at the very least, have a high risk tolerance when investing in stocks involved in a merger or acquisition.

The Takeaway

When a merger is announced, the typical reaction is for the acquiring company’s stock price to fall, while the target company’s stock price gains. But different scenarios in the market can give clues on how investors are feeling towards an M&A deal.

Mergers are risky, too, and many of them fail. For investors, the important thing to know is that M&A announcements can go either way, but they often can and do result in the creation of shareholder value for those holding stocks.

If investors following various deals want to delve into stock-trading, opening an Active Invest account with SoFi Invest is one option. The SoFi trading app is streamlined and secure, and you can view all your holdings from a single dashboard. SoFi members can trade stocks, ETFs, fractional shares, and more.

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

FAQ

How do stocks work with mergers?

Depending on the specifics of the merger, investors may have their shares cashed-out, or exchanged for shares of the new company. Prices of stocks may increase or decrease, often depending on if they’re shares of the target or acquiring company.

How do you calculate a stock price after a merger?

After a merger, two companies’ stocks become one. There’s no easy way or calculation to determine a stock’s price post-merger, as no one can predict the future. But there are historical trends that can be researched involving post-merger price fluctuations that may be helpful to some investors.

Is it good to buy stock before or after a merger?

Any and every stock purchase has its risks, and buying a stock before or after a merger may be more risky than your average purchase. Nobody knows which way a price will go in the future, but if you do want some advice about buying a stock before or after a merger, it may be best to speak with a financial professional for guidance.

SoFi Invest®

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

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

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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Jan
30
2023
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Guide to Starting an Investment Club

By | Growing Wealth, invest, Investing | Comments Off on Guide to Starting an Investment Club

An investment club is a group of individuals who discuss the financial markets and make investments. They typically meet regularly to discuss and decide on investment strategies and opportunities. People start and join investment clubs to learn about investing and potentially achieve higher returns than they would by investing on their own.

Maybe you and your coworkers spend breaks discussing the market, or you’re constantly texting friends about financial moves. Or perhaps you want to raise capital for specific stock. Whatever the reason, you may be thinking about starting an investment club to learn more about the financial markets, socialize, and potentially make a profit. Below we lay out some of the steps to start an investment club.

What Is an Investment Club?

An investment club is a novel way for people to come together and help one another reach their shared financial investment goals by discussing them and working together to make them come to fruition. Talking through what-ifs, gathering advice, and learning from other people can be one way to broaden an investor’s knowledge base and alert them to popular investment trends, like investing in cryptocurrency or impact investing.

Typically, an investment club can take on one of two forms, depending on the interest and goals of club members. Some investment clubs pool their money, and the group invests as one unit. Other investment clubs, sometimes called self-directed investment clubs, meet to discuss strategy or invite speakers to share on various topics, but each investment club member makes stock investments independently.

For investors who decide to pool resources and invest as a group, it’s important to understand any regulations and guidelines. Depending on the structure of the investment club, it may be necessary to register with the Securities and Exchange Commission (SEC) as an investment company. Additionally, setting up the investment club as a legal partnership or limited liability company may be necessary.

How Many Members are Usually in an Investment Club?

The number of members in an investment club can vary, but they typically have between 10 and 20 members. Some clubs may have more or fewer members depending on their specific goals and the amount of capital they have to invest.

The size of the club can also be influenced by regulatory restrictions and compliance requirements, as well as the availability of potential members and the size of their financial resources.

How to Start an Investment Club: 4 Steps

The following are some of the initial steps you should take if you’re interested in starting an investment club:

Step 1: Decide On The “Why”

The first step in starting an investment club is figuring out the purpose of the club. Understanding and agreeing on the motivation behind the investment club can help like-minded members craft a mission statement and bylaws.

There are many reasons for starting an investment club. Some people want to invest with friends to pool resources and enjoy the camaraderie that comes with a mutual goal. Others want to explore specific areas, such as impact investing, or invest in alternative investments, such as startups or mineral rights. There are several reasons to start an investment club.

A frank discussion can help narrow focus and weed out members who might be happier in a club with different goals. These discussions can also be a good time to discuss the financial commitment of the investing club. Some clubs may have annual membership fees for club expenses such as speakers, meeting space, and supplies and a monthly expected contribution to earmark for investing.

Step 2: Observe Existing Investment Clubs in Action

Once you’ve decided on the “why” of your club, seeing a few investment clubs in action can be helpful. Browsing stock market forums or performing an online search may help you find clubs in your area. There also may be “model clubs” that are open for observation.

Pay attention to how these club meetings are run, including the format and structure. For example, you may notice whether clubs have guest lecturers or if they operate casually or formally. This will give you and your club members a sense of how you’d like your meetings to go.

Step 3: Kick Things Off with Informative Sessions

Before getting deep into group investing, it may be helpful to have several investment club meetings without pooling funds. These club meetings can include a speaker’s series or an open forum opportunity to discuss approaches to the market, and can be a good way to assess whether or not taking the next step and forming an investment club makes sense.

Step 4: Create a Legal Framework

Many investing clubs operate as a business entity, either as a Limited Liability Company (LLC) or Limited Liability Partnership (LLP). It can be helpful to create a legal framework for your investment club that clarifies and addresses specific financial questions, including:

•   Will returns be reinvested or distributed to members?

•   What happens if someone decides to leave the club?

•   How will investment decisions be made?

The answer to this last question may also change whether your investment club must register with the SEC. For example, if you have one club member making investing decisions, or one member providing investment advice to the rest of the club, that person may need to register as a financial advisor with the SEC. There may also be state-specific securities requirements that a club may need to comply with.

You should also ensure you clearly understand the tax implications of investments and profits.

Creating membership bylaws, even if your club is an informal group of friends and acquaintances, can help ensure everyone is on the same page and there is a clear understanding of the investment club’s finances, commitments, and purpose.

Do Investment Clubs Pay Taxes?

Investment clubs or their members have to pay taxes on any income they earn from investments. The specific tax rules that apply to an investment club will depend on how the club is organized.

If an investment club is organized as a partnership, the club itself does not pay taxes on its income. Instead, the income is passed through to the individual members, who must report their share of the club’s income on their personal tax returns. If the investment club is organized as an LLC, the club will be taxed as a corporation.

In any case, investment clubs must file an annual tax return, and members must report their share of the club’s income on their individual tax returns. They must also report any capital gains or losses from the sale of investments on their tax returns.

Pros and Cons of Starting an Investment Club

Pros

 Cons
Pooled resources increases investment capital Potential for fraud
Provides a learning opportunity Conflicts with other members
Can be a fun social activity Complex tax situation

Pros of Investment Clubs

Investment clubs have many advantages, especially when compared to an individual investing alone without outside help. The following are some of the benefits of an investment club:

•   Pooled resources: Investment clubs allow members to pool their resources together, giving them access to a larger pool of capital to invest with. This can increase the potential for higher stock market returns and diversification of investments.

•   Learning opportunity: Investment clubs provide an excellent opportunity for members to learn about different investment strategies and opportunities. Members can learn from each other’s experiences and expertise and discuss different investment options and ideas.

•   Social interaction: Investment clubs can also provide a social element, as members meet regularly and discuss investments and strategies. This can be a fun and engaging way to learn about investing.

Cons of Investment Clubs

Investment clubs also have risks, including the following drawbacks:

•   Risk of fraud: Investment clubs are generally not regulated by the SEC, and members should be aware that there is a risk of fraud or mismanagement of funds. Before investing, members must perform due diligence and research the background of the club’s organizer and members.

•   Potential for conflicts: Investment clubs can also be prone to disputes among members, particularly when making investment decisions or dividing profits if club rules are not formally adopted.

•   Complex tax situation: Investment clubs can have a complicated tax situation, and members may be responsible for reporting their share of the club’s income on their individual tax returns. This can be confusing and time-consuming, and members should consult with a tax professional to understand the tax implications of being a member of an investment club.

Investment Club Alternatives

There are several alternatives to an investment club for individuals who want to invest and learn about investing. Some of them are:

•   Individual investing: Investing on your own through a brokerage account is always an alternative to pooling resources in an investment club. Investing on your own allows you to purchase individual stocks, bonds, or mutual funds without compromising with members you disagree with.

•   Robo-advisors: Robo-advisors are digital platforms that provide automated investment advice and management. They can be a good option for individuals who want to invest on their own but want the help of technology to make investment decisions.

•   Financial Advisor: Hiring a professional investment manager or financial advisor to manage your investments.

The Takeaway

Starting an investment club has the potential to be rewarding in many ways. For instance, developing and discovering investing strategies with peers can be beneficial and enjoyable. In some cases, pooling resources to invest together can bring members closer to their individual financial goals.

There are other options for investors who don’t have the bandwidth to start up a self-directed investment club. Talking stock tips at the water cooler is one classic strategy, but another option is to join platforms that allow you to “watch” your peers’ investment moves in real-time.

For example, an online brokerage account with SoFi Invest® allows you to follow people’s investment moves. This feature hides actual dollar amounts, but allows you to view watchlists of other participants, view people’s SoFi Invest activity, and see your own investments play out on a dynamic leaderboard. This can be a way to actively participate in the market together while keeping your finances separate.

Take a step toward reaching your financial goals with SoFi Invest.

FAQ

Do investment clubs make money?

Investment clubs can make money if the investments they make are profitable. However, like any other investment, they can also lose money if the investments do not perform well. It’s important to do research and perform due diligence before investing in an investment club, as there are no guarantees of profitability.

Do investment clubs pay tax?

Investment clubs are generally required to pay taxes on their income. The exact type and amount of taxes owed will depend on the type of investment club and the income it generates. Generally, investment clubs are treated as partnerships or corporations for tax purposes and must pay taxes on their income.

How do I start an investment club for fun and profit?

To start an investment club, you’ll need to recruit a group of like-minded individuals interested in investing and pooling their resources together. You’ll also need to decide on a legal structure for the club, such as a partnership or limited liability company, and establish rules and guidelines for making investment decisions and managing the club’s finances. Additionally, you should research and consult a financial professional and attorney to ensure you follow all the legal and regulatory requirements.

SoFi Invest®

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

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

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Jan
27
2023
Does Paying for Your Car Insurance Build Credit?

Does Paying for Your Car Insurance Build Credit?

By | credit card, Insurance | Comments Off on Does Paying for Your Car Insurance Build Credit?

You might think that paying for your car insurance each month affects your credit in the same way that paying other recurring bills does. In most cases, paying for car insurance does not help build credit. This is mostly because car insurance is not an installment loan, so it isn’t reported to the major credit bureaus.

However, if your insurance account goes delinquent and is sent to collections, that could have a negative impact on your credit score. In this way, car insurance does have the potential to affect your credit score.

How Does Paying Car Insurance Work?

Like most types of insurance, car insurance works by making monthly (or annual) premium payments to the insurance company. Then, if you are in an accident that is covered by your policy, the insurance company may pay to repair or replace your vehicle, subject to the deductible listed on your policy.

Every car insurance policy is different, so work with your agent to make sure you understand how your particular policy works.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

Paying Car Insurance With a Credit Card

Many insurance companies do allow you to pay for your car insurance with a credit card. However, it’s possible that your company may only allow payment by cash, check, or bank transfer.

If you do pay for your car insurance with a credit card, make sure that you are including that amount in your monthly budget. That way, you can make sure to have enough money in your bank account to pay your credit card statement in full.

How Your Credit Score Can Be Affected by Paying Car Insurance

While your regular and on-time car insurance payments likely will not have an effect on your credit score, that doesn’t mean your score can’t be impacted by paying car insurance. Specifically, your credit score can be affected by not paying your car insurance premiums. If your insurance agency sends your account to a debt collection agency, that could result in negative impacts to your credit score.

Does Paying Car Insurance Help Build Credit?

As we’ve mentioned before, paying your car insurance does not usually help with building credit. So if you’re hoping to do so, you’ll need to look at other avenues, like making regular on-time payments to your creditors. Additionally, paying off a debt affects your credit score by lowering your debt-to-income ratio and your overall credit utilization, so that could be another avenue to consider.

Factors to Consider When Paying Car Insurance With a Credit Card

The biggest factor to consider if you want to pay your car insurance with a credit card is whether or not your insurance company accepts credit card payments. While many insurance agencies do, some do not. If your agency does not take credit card payments, you’ll have to find an alternative way to pay your bill.

Additionally, you’ll want to make sure that you have the money budgeted to pay off your credit card balance in full when it comes due. That way, you’ll avoid accruing interest on your car insurance payment if you used your credit card to cover it.

Recommended: How to Avoid Interest On a Credit Card

Consequences of Missing a Car Insurance Payment

If you’re significantly late with a car insurance payment and your account is sent to collections, that can negatively impact your credit score. However, the biggest consequence of missing a car insurance payment is that you may not be covered if you get into an accident. Generally, car insurance covers you only if your premium payments are up-to-date.

Additionally, if you live in a state where car insurance is required and your insurance has lapsed, you may face civil or criminal charges.

Recommended: What is a Charge Card?

Do Car Insurance Payments Appear on Your Credit Report?

Generally, car insurance payments do not appear on your credit report. This is in contrast to other types of recurring payments like mortgages or loans. However, if you make significantly late payments, your insurance company may report those late payments to the credit bureaus.

Recommended: When Are Credit Card Payments Due?

Does Your Credit Score Impact Car Insurance Rates?

While paying your car insurance does not usually impact your credit score, the reverse is not true. Your credit score can (and often does) impact the rates that you are charged for car insurance.

A lower credit score can mean that your insurance premiums are higher. That is yet another reason to work on improving your credit score by following solid financial practices.

Factors That Determine Your Car Insurance Rate

Here are some of the major factors that can determine your car insurance rate:

•   Age

•   Gender

•   Make and model of your car

•   Location (ZIP code) where you typically park your car

•   Your driving habits, including how much you drive and your driving record

•   The type of coverage you choose, as well as the limits and deductibles

•   Your credit score

If you’re looking to lower your car insurance costs, making changes in some of the above areas can help. This could include improving your credit or driving record or reviewing your coverage needs.

Recommended: What is the Average Credit Card Limit?

Other Ways to Build Credit

Although paying your car insurance on time does not usually impact your credit, there are a few other ways you can build your credit.

Paying Your Bills On Time

One of the best ways to build your credit is by paying your bills on time, each and every month. Set up a budget and make sure that your monthly expenses are less than your monthly income. Work toward having an emergency fund to help cover you when you have unexpected expenses. Organize your bills and make sure that you pay them by their due dates.

Recommended: How Paying Off a Car Loan Affects Your Credit Score

Responsibly Using a Credit Card

Another way of establishing credit is by responsibly using a credit card. Most credit card payments and balances are reported to the major credit bureaus. Responsibly using a credit card and paying it off in full each month can help you build credit.

Additionally, some credit cards, like the SoFi Credit Card, offer rewards, such as cash-back rewards, with each purchase. Those rewards can serve as a bit of extra income each month to help you meet your financial goals.

Recommended: Tips for Using a Credit Card Responsibly

Taking Out a Personal Loan

When potential creditors look at your credit report, many of them are looking for evidence that you can be trusted to pay your debts. If you don’t have many items on your credit report, lenders may not be sure if you’ll be responsible with additional debt. Taking out a personal loan (and then responsibly paying it back in full) can be one way to build your credit.

The Takeaway

While having and paying for car insurance is important if you regularly drive a vehicle, it usually won’t have much of an impact on your credit score. However, if you don’t pay your insurance premiums when they’re due, your account might be sent to collections, which can negatively impact your credit score. If you’re looking for ways to build your credit, you might consider getting a personal loan or opening and responsibly using a credit card.

When you’re ready for a new credit card, you can consider a cash-back rewards credit card like SoFi’s credit card. With the SoFi credit card, you can earn unlimited cash-back rewards if you’re approved. Then, use those rewards as a statement credit, invest them in fractional shares, or put them toward other financial goals you might have, like paying down eligible SoFi debt.

Apply for a SoFi credit card today!

FAQ

Can unpaid car insurance affect my credit score?

Yes, unpaid car insurance can negatively affect your credit score. If you make significantly late payments, your insurance company might report the late payments to the credit bureaus. If your account becomes too delinquent, it may be sent to collections, further impacting your credit score.

How does my credit score impact my car insurance rate?

Many insurance companies do consider your credit score and credit history when determining the rates you pay for car insurance. As with many financial products, having a good credit score can help you to pay lower monthly premiums for car insurance.

Can I get car insurance with low credit?

Yes, it is possible to get car insurance with low credit, though your monthly premiums may be higher than those of a similar applicant with better credit. If you’re looking at lowering your car insurance, one option is to raise your credit score. You could accomplish this through paying down debt, examining your credit report for inaccuracies, or being more regular about making on-time payments to your creditors.

Photo credit: iStock/Believe_In_Me



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.


Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points toward active SoFi accounts, including but not limited to, your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, Student Loan Refinance, or toward SoFi Travel purchases, your rewards points will redeem at a rate of 1 cent per every point. For more details, please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, Member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

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

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