Mar
15
2023
Guide to Store and Retail Credit Cards

Guide to Store and Retail Credit Cards

By | Credit, credit card | Comments Off on Guide to Store and Retail Credit Cards

A retail credit card is a type of credit card that is a partnership between a bank or major credit card issuer and a retailer. Also known as a store credit card, retail credit cards usually come with discounts, rewards, and other perks that are specific to that retailer.

You might have received an offer for a retail credit card when you’re at the checkout at a brick-and-mortar store. Or, you may have gotten an offer in the mail or while shopping online. When it comes to determining whether store credit cards are worth it, you’ll want to weigh their pros and cons.

What Is a Store Credit Card?

As mentioned, a store credit card is the same as a retail credit card. A store card is a credit card from a retailer, franchise, or group of stores. It might come with a sign-up offer, such as a one-time discount on your purchase. Other perks include a credit card points rewards program, special promotions, offers, and discounts on your purchases. Some might offer 0% financing on big-ticket purchases.

Store credit cards are not to be confused with retailer loyalty cards. Loyalty cards are a way to gain access to deals and promotions, and to earn points to swap for a discount on future purchases. However, they do not allow you to borrow money.

Recommended: Defining Credit Cards

How Do Store Credit Cards Differ From Other Credit Cards?

There are two main types of store credit cards: private label store cards and co-branded store cards. Private label credit cards differ more from other credit cards, as they are closed-loop cards, meaning you can only use the card at a specific retailer or group of retailers.

Closed-loop cards are more common than co-branded store cards. Co-branded credit cards are open-loop cards that partner with a major credit card network — think Visa, Mastercard, American Express, or Discover. As such, you can use this type of store card at the featured store or group of stores, as well as anywhere that particular credit card issuer is accepted.

Unlike private label cards, open-loop cards also may give you a chance to rack up points or scoop up rewards beyond spending in that specific store. Private label cards generally reserve rewards earnings for that particular store.

Benefits and Drawbacks of Store Credit Cards

There are both pros and cons to retail credit cards. Advantages include:

•   Easy to obtain: Retail credit cards are usually easier to qualify for than other types of credit cards. They typically require just a fair credit score. And because they report to the major credit bureaus each month, they still can help you build your credit when you’re starting out.

•   Often no annual fee: Many store credit cards don’t have an annual fee, which can save you money. This especially rings true if you don’t anticipate using the card that often.

•   Instant discounts: When you first sign up for a retail credit card, you might get a one-time discount on your first purchase.

•   Discounts, promos, and offers: As a store cardholder, you might be privy to exclusive, ongoing discounts, or special promotions and offers. The types of discounts and offers vary widely depending on the retailer and time of year. For instance, a retailer might offer a flat 5% discount on every purchase. Card holders also might have access to special coupons and offers.

•   Rewards and cash back programs: Similar to other types of credit cards, you can earn points to use for store purchases or cash back.

•   Other perks: If you’re a cardholder for a particular retailer, you might receive other benefits, such as free or expedited shipping, financing on certain types of products, or more time to return items.

Here are some potential downsides of a store credit card:

•   High interest rates: Whereas the average credit card annual percentage rate (APR) is 20.40%, interest rates for store credit cards average around from 26.72% APR. If you carry a credit card balance, it could take you longer to pay off your debt. Plus, you’ll owe more in interest.

•   Inflexibility in use: If you have a private label store card, or a closed-loop card, then you can only use the card to make purchases at that particular store or group of stores. Unless you shop frequently at that particular retailer, it might prove difficult to use often enough to make sense.

•   Lower credit limits: Store credit cards usually have lower credit limits than other types of credit cards. In turn, it could be harder to keep your credit usage down. A high credit usage, or credit utilization ratio, could hurt your credit score.

•   Deferred interest: A retail card might offer 0% financing for a period of time. Here’s the potential catch: If you don’t pay off your purchase before the promotional period ends, you might be on the hook for all of the interest owed from the purchase date onward.

To recap, here are the major pros and cons to keep in mind when considering if you should get a store credit card:

Store Credit Card Pros and Cons
Pros

 Cons
Easy to qualify for High interest rates
Often no annual fee Low credit limits
Rewards and cash back programs Deferred interest
Other perks Inflexibility in use

Recommended: Difference Between Credit Card Issuer and Credit Card Network

Are Store and Retail Credit Cards Worth It?

A store credit card could be beneficial if you are building credit from scratch or are new to credit. As they typically are easier to qualify for and often don’t have an annual fee, you can use it at your leisure to build credit.

It can also be worth it if you are a loyal devotee and shop frequently at a particular retailer. That way, you’ll make the most of ongoing discounts, exclusive sales, promotions, offers, and additional perks.

When to Consider Getting a Store Credit Card

As mentioned, if you’re building credit from scratch and don’t want to worry about annual fees, a store credit card could be a good choice for you. It could also be a solid option if you shop at that retailer enough to make use of the card’s perks.

A store credit card can also be a good idea if you don’t need a card with a high credit limit. Ideally, you’ll be able to pay off the balance in full each month.

When Not to Consider a Store Credit Card

If you don’t anticipate using a card very often, or prefer a card that you can use more widely, then it might be best to forgo opening a store credit card.

A store credit card also is probably not the best choice for you if you tend to carry a balance. That’s because the higher-than-average interest rates can gobble up any savings you’ve earned on rewards and discounts.

Alternatives to a Store Credit Card

Not sure a store credit card is worth it for you? Here are some alternatives to look into:

•   Cash-back credit card: A cash-back card is a type of rewards credit card that offers rewards in the form of cash back, which can offset your spending on the card. For instance, with a card that offers 1% cash back, you’d get $1 back for every $100 you spend. The SoFi credit card is an example of a cash-back card, offering unlimited cash-back rewards on all eligible purchases.

•   Airline credit card: Airline credit cards are co-branded with major credit card networks. Similar to a store or retail credit card, you’ll receive perks with a specific airline company if you make purchases on the card. Airline credit cards typically are open-loop cards, which means you can use the card anywhere that type of card is accepted.

•   Hotel credit card: Hotel credit cards are offered through partnerships between a hotel and a credit card network. With a hotel credit card, you get points toward that particular hotel’s rewards program. The card might also come with other benefits.

Recommended: Instant-Use Credit Cards

The Takeaway

A store credit card could be a good idea if you are building credit from scratch, or if there’s a card offered by a retailer you love and shop at often. Otherwise, it might make more sense to look at other options with greater flexibility in use and lower interest rates.

If you prefer a cash-back rewards credit card, consider the SoFi Credit Card. This credit card offers cash-back rewards on all eligible purchases that you can then use to invest, save, or pay down eligible SoFi debt.

FAQ

Are store credit cards good for credit?

Store credit cards can help you build credit from scratch. They tend to be easier to qualify for than other types of credit cards. And if you practice good credit card habits, such as keeping a low credit usage and paying on-time, they can help your score.

Will a store credit card improve my credit limit?

Adding another credit card, no matter the type of credit card, can help increase your credit limit. When you open a credit card, you receive a credit limit on top of those of your existing cards. For instance, let’s say you open a store credit card with a $2,000 limit, and your credit is capped at $10,000 among your other cards. By opening a store card, your credit limit will have increased to $12,000.

Should I cancel an unused store credit card?

You might consider closing an unused store credit card, but doing so could negatively impact your credit. That’s because it will lower your credit limit, which in turn increases your credit usage. Plus, it can impact your length of credit, which also plays into your score.

Will closing a store credit card hurt my credit?

Closing a store credit card could hurt your credit in two ways. First, it can lower your credit utilization ratio because your overall credit limit will decrease. Second, it could shorten your the length of your credit history, which also impacts your credit score.

Photo credit: iStock/Prostock-Studio


1See Rewards Details at SoFi.com/card/rewards.

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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Mar
15
2023
Guide to Credit Reports

Guide to Credit Reports

By | Credit, credit card | Comments Off on Guide to Credit Reports

If you’ve ever had a credit card, student loans, or other type of debt, you likely have a credit report. Credit reports serve as a record of how you have handled the repayment of any loan or debt that you’ve taken out. The items that are contained in your credit report primarily come from information collected by the three major credit bureaus.

Many lenders might look at your credit report when they are considering whether or not to extend you additional credit. Your credit score is also calculated in part from information that’s included on your credit report. These are two good reasons to regularly look at your credit report and make sure the information in it is accurate.

What Is a Credit Report?

At its simplest, a credit report is a compilation of information regarding past debts, loans, or credit card accounts that you’ve managed. Your credit report will contain basic information about you, as well as information on the various accounts you’ve had in the past. This might include the name of the creditor, the dates the account was open, the monthly payment amount, if applicable, and any current or outstanding balance.

Recommended: When Are Credit Card Payments Due?

How Does a Credit Report Work?

The issuers of most credit cards, loans, or other forms of debt report information about that debt to the most popular credit bureaus — Experian, Equifax, and TransUnion. Each credit bureau compiles its own information, though there is usually a lot of overlap between the information that appears on credit reports from different credit bureaus. Lenders typically send updated information to the credit bureaus each month, or if any information about your debt changes.

Recommended: Tips for Using a Credit Card Responsibly

Credit Report Information and Your Credit Score

It’s important to understand the relationship between the information on your credit report and your credit score. While these two things are related, they are not the same thing. As information on your credit report changes, your credit score updates as well. This means that it’s possible for your credit score to change every month (or even more often).

Further, while the information on your credit report influences your credit score, you won’t find your credit report listed on your credit report. Rather, you’ll have to go to lenders or credit monitoring websites for that information, both of which can allow you to check your credit score without paying.

Information Provided By a Credit Report

In addition to information about your accounts, your credit report may include other information about you. As one example, a credit report from Experian consists of four sections:

•   Personal information: This includes details such as your name, address, employment information, and any past names you’ve used.

•   Accounts: You’ll see both open and recently closed accounts listed.

•   Inquiries: Both hard and soft credit checks will appear, though only hard pulls affect your credit score.

•   Public records: This is information about you gathered from public records, including bankruptcies.

How Is a Credit Report Made?

Each of the major credit bureaus has its own process for how it generates a credit report. It’s typical that the credit bureau will have an informational section with details about you, sourced from loan applications and/or public records.

Another section of most credit reports is a listing of your open and recently closed accounts. Lenders will often report to the credit bureaus information about the amount, payment history, and status of accounts you have with them.

Why Is a Credit Report Important?

Your credit report is important because it is one of the sources of information that’s used to calculate your credit score. And your credit score can help determine whether you are approved for other financial products, like a credit card. If your credit score is too low, you may not be able to be approved for a new credit card or loan, and if you are approved, you may have to pay a higher interest rate.

Additionally, your credit report matters because many lenders will often refer to it when determining whether to approve you and under what terms. Sometimes, they may look at what’s known as a tri-merge credit report, which combines the three credit reports from each of the major credit bureaus.

Recommended: How to Avoid Interest On a Credit Card

How to Get a Credit Report

One good way to get your credit report is through AnnualCreditReport.com . This is a website authorized by federal law and brought to you by the three major credit bureaus.

You are able to get a copy of your credit report from each of the credit bureaus every year. Note that you can only get your own credit report to review — checking someone else’s credit report isn’t an option.

When to Get a Credit Report

It is a good financial habit to regularly review your credit report. As mentioned, you can get a free copy of your credit report each year from each of the major credit bureaus.

By reading a credit report regularly, you can make sure that there’s no inaccurate information on your credit report. If you have incorrect information, it could have a negative impact on your credit score.

What to Look For in a Credit Report

As you regularly review your credit report, there are a few common credit report errors you’ll want to look out for. These include:

•   Typos or incorrect information

•   Information belonging to someone with a similar name

•   Closed accounts that are still marked as open

•   False late payment

•   Duplicate debts or accounts

Monitoring Your Credit Report

If there is any incorrect or erroneous information on your credit report, you’ll want to dispute that with the credit bureau. Disputing a credit report is a relatively straightforward process, and it’s an important one.

Generally, most credit report disputes must be submitted in writing, and it’s a good idea to send the letter via certified mail. That way, you have proof that the credit bureau received your letter.

The Takeaway

If you’ve been using credit cards, loans, or other financial products, it’s likely that you have a credit report with each of the three major credit bureaus. Your credit report contains identifying information about you as well as information about your open and recently closed credit accounts. Regularly monitoring your credit report and correcting any incorrect information is a good financial habit to have.

That’s because information from your credit report is used in the calculation of your credit score. Your credit score is used by potential lenders to decide whether they will approve you for new loans or credit cards. Having a good credit score makes it more likely that you’ll be approved for a new credit card, for example.

If you’re in the market for a new credit card, you might look at a rewards credit card like the SoFi Credit Card. With the SoFi Credit Card, you can earn cash-back rewards, which you can then use to invest, save, or pay down eligible SoFi debt.

FAQ

Can negative information remain on my credit report for long?

Yes, negative information can remain on your credit report, even after you have closed your account. Most negative information will stay on your credit report for seven years, though some information (like bankruptcies) can stay on your credit report even longer.

How do I get my credit report?

You can get your credit report through AnnualCreditReport.com. You’re able to get a free copy of your credit report from each of the credit bureaus every year.

Who is eligible to view my credit report?

You can view your own credit report, but in most cases, you will not be able to check someone else’s credit report. The only time someone else can view your credit report is if they have a legitimate reason. This might include a potential lender that’s viewing your credit report to determine whether they want to extend you additional credit.

What errors might be present in my credit report?

While the major credit bureaus make every attempt to ensure that all credit reports are completely accurate, errors have been known to happen. Possible errors might include typos, accounts from someone with a similar name, duplicate accounts, or false late payments, among other errors. This is why it’s a good idea to regularly review your credit report and dispute any incorrect information.

What is the most important thing on a credit report?

Arguably all of the information contained in your credit report is important and worth taking the time to review. Perhaps most important is information on your accounts, as the details reported there have the potential to impact your credit score, and thus your borrowing opportunities.

Photo credit: iStock/Deepak Sethi


1See Rewards Details at SoFi.com/card/rewards.


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

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Mar
15
2023
Guide to Writing Call Options: What You Should Know

Guide to Writing Call Options: What You Should Know

By | Growing Wealth, invest, Investing | Comments Off on Guide to Writing Call Options: What You Should Know

Selling a call option is referred to as writing a call option. When writing a call option you will be initiating the option contract for sale, and will collect a premium from the buyer when the contract is initially sold.

There are two ways to write a call option — sell covered calls or sell naked calls.

•   When you write a covered call, you are selling an option on an underlying stock that you own.

•   Writing a naked call means you are selling an option on a stock you do not currently own.

The biggest difference between these two paths is the risk profile. Your risk with covered calls is that you may miss out on some of the upside gains if the stock’s price goes above the strike price of your call option.

When you sell a naked call, you have no risk protection and theoretically unlimited risk.

What Are Calls?

Remember the basics of put vs. call options: When you buy a call option at a specific strike price, you have the right (but not the obligation) to purchase the underlying stock at the strike price of the option over a given time period.

Buying put gives you the right, but not the obligation, to sell the underlying stock or asset before the expiration date.

If you are wanting to know how to trade options, it’s important to understand the differences between calls and puts, when you would buy or sell options, and how to arrange options trading strategies to minimize your risk. When you buy an option, your maximum risk is capped at the amount of premium that you initially paid for the option. But when you write a call option or put option, your risk is theoretically infinite.

Writing Call Options

Writing call options is similar to writing put options in that you are selling the option initially. When you write a call option, you are creating a new option contract that allows the buyer the right to buy the stock at the specified strike price at any time before the expiration date.

When you write a call option, you can be forced to buy the stock at the strike price at any time. In practice, this is unlikely to happen unless the stock is deep in-the-money before expiration or if it’s at or in-the-money at the date of expiration.

Recommended: Margin vs Options Trading: Similarities and Differences

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

Writing Call Option Strategies

There are several strategies when trading options, depending on whether you have a bullish or bearish outlook for a given stock. Here are two of the most common call writing option strategies:

Writing Covered Calls

One common options strategy is writing covered calls. A call is considered a “covered” call when you also own at least 100 shares of the underlying stock. Writing covered calls is a popular income strategy if you think that the stock you hold will move within a specific range. You then might write a covered call with a strike price a little above the expected price range.

When you write covered calls, since you are the seller of the option contract, you will collect an initial premium. Your best case scenario is that the underlying stock will close below the strike price of the call option at expiration. That means that the call will expire worthless, and you will keep the entire premium. If the stock closes above the strike price at expiration, you will be forced to sell your shares of stock at the strike price. This means that you may miss out on any additional gains for the stock.

Writing Naked Calls

If you are wondering what naked calls are, it is when you write a call when you don’t have a long position in the underlying stock. Unlike covered calls, writing naked calls comes with significant risk. Since a stock has no maximum price, you have unlimited exposure. The more a stock’s price rises above the strike price of the call option, the more money you will lose on the trade.

Because of this, writing naked calls is something that is recommended only for people with significant options experience and/or those who have a high tolerance for risk. You will want to make sure you understand your risk before writing naked calls, and have a plan for what you will do if the stock moves against you.

Writing Call Options Example

To understand the difference between writing covered calls and naked calls, here are two examples.

Covered Call Example

Say that you own 100 shares of stock XYZ with a cost basis of $65. You feel that the stock is trading in a range of $60-$70, so you write a covered call with a June expiration and a strike price of $70, collecting $1.25 in premium, or $125 ($1.25 x 100).

If the stock closes below $70 at June’s expiration, you keep your shares and the entire $125 premium. Because you still own shares in XYZ, you can write another covered call in July (and beyond) generating income as you collect the premiums.

If instead the stock rises to $75 by June, then you will be obligated to sell 100 shares of XYZ at the strike price of $70. Because you already own 100 shares of XYZ, your shares will be called away. Your broker will automatically sell your 100 shares at the price of $70/share. You will miss out on any additional gains above the $70 price.

Naked Call Example

Say that you are bearish about stock ABC, which currently is trading at $100/share. You sell the October $110 calls for a premium of $4.25. You collect $425 upfront ($4.25 * 100 shares per option contract). As long as stock ABC closes below $110/share, you will keep the entire $425.

However if stock ABC closes above $110 at October options expiration you will be forced to buy 100 shares of ABC at whatever the prevailing market price is for stock ABC.

When you wrote (sold) the call option, you gave your buyer the right to buy 100 shares of stock ABC at $110/share. If ABC has risen to $250/share, for example, you will have to pay $25,000 to buy 100 shares, and then sell those 100 shares for $11,000 ($110/share), taking a $14,000 loss on your trade offset slightly by the $425 premium you collected.

The Takeaway

Writing call options can be a viable and valuable options strategy with several different uses. Writing covered calls on a stock whose shares you also hold can be a way to earn additional income if the stock is not very volatile. You can also write naked calls, or calls on stocks that you don’t own. Writing or selling naked calls leaves you in a position where you have unlimited risk, so make sure that you have a risk mitigation plan in place.

If you’re ready to try your hand at options trading, SoFi can help. When you set up an Active Invest account and start investing online, you can trade options from the SoFi mobile app or through the web platform. SoFi doesn’t charge any commission, and also enables you to trade stocks, ETFs, and more. And if you have any questions, SoFi offers educational resources about options to learn more.

Trade options with low fees through SoFi.

FAQ

Is writing a call option the same thing as buying a put?

It is important to understand put vs. call options and how they are different. While writing a call option and buying a put option are both bearish options strategies, they are very different in terms of their risk/reward profile. When you write a call option, you collect the option premium upfront but have unlimited risk. Buying a put option has a defined risk of the initial premium that you paid to purchase the put option, which gives you the right but not the obligation to sell the underlying shares.

Does a writer of a call option make an unlimited profit?

No, the writer of a call option does not and cannot make an unlimited profit. When you write a call option, your maximum profit is defined by the initial premium that you collect when you first write the option. As a call option writer, you are hoping that the stock closes below the strike price of your option at expiration. In that scenario, it will expire worthless and you will receive your maximum profit.

How are call options written?

Writing a call option is another way to say that you are selling a call option. When you write a call option, you are giving the buyer the right (but not the obligation) to buy 100 shares of the underlying stock at a given strike price at any time before the options expiration. When you write a call option, you collect an initial premium from the buyer of the option.

Photo credit: iStock/PeopleImages

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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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Mar
15
2023

FDIC Insurance: What It Is And How It Works

By | Budgeting & Goals, money, Terminology | Comments Off on FDIC Insurance: What It Is And How It Works

With the Federal Deposit Insurance Corporation (FDIC) recently in the news, many people are wondering what the FDIC is, exactly, and what it does.

The Federal Deposit Insurance Corporation, or FDIC, is an independent agency of the U.S. government. In the unlikely event of a bank failure, it protects you and reimburses your deposits, typically up to $250,000 per depositor, per insured bank, per account ownership category.

People often take the FDIC guarantee for granted now, but it was created from a very real need and has kept many people and their money safe.

Here, you’ll learn more about this important aspect of banking, including:

•   What the FDIC is

•   What the FDIC does

•   How does the FDIC work

•   Which accounts are and are not eligible for FDIC protection

What Is the FDIC?

The FDIC is the shorthand way of referring to the Federal Deposit Insurance Corporation. It is an independent agency created by Congress in 1933, after the Great Depression, when thousands of banks failed. The goal was to shore up confidence in the U.S. financial system and protect Americans from losing their cash if their bank failed.

In January 1934, the FDIC began insuring deposits, covering them up to $2,500. That number has increased through the years, of course, most recently with the Emergency Economic Stabilization Act of 2008. President George W. Bush signed the act to temporarily raise FDIC insurance coverage from $100,000 to $250,000 per depositor during the financial crisis. President Barack Obama made the coverage hike permanent in 2010 with the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

It’s important to note how this insurance works: The standard coverage is $250,000 per depositor, per insured bank, for each account ownership category. Joint accounts may be covered up to $500,000.

Related: The Government Takes Decisive Action on Bank Closures

What Does the FDIC Do?

Since its creation, no depositor has lost any money from an FDIC-insured deposit. This means that, unlike your great-grandparents, you can put your money into an eligible financial institution, whether a savings vs. checking account or other qualifying account, and know it’s more secure than stuffing it under your mattress. (Yes, that used to be a thing for many savers.)

Also of note: Though it’s the customers’ money that’s covered by the FDIC, the agency is funded by premiums paid by the banks and from earnings on investments in U.S. Treasury securities. Customers do not pay for this insurance; they are automatically covered when they open an FDIC-insured account.

There are rules and limits you should know about, however, if you want to make the most of the FDIC’s coverage.

Types of Accounts Insured by the FDIC

The FDIC insures all deposit accounts at insured banks and savings associations up to the FDIC’s limits, including:

•   Checking accounts

•   Savings accounts

•   Money market accounts

•   Certificates of deposit (CDs)

•   Prepaid cards when the underlying funds are deposited in an insured bank (these funds are only insured in the instance of bank failure, not loss or theft)

•   Certain retirement savings accounts, but only when placed in certain types of investments and in accordance with all FDIC requirements.

   Deposit accounts, such as checking and savings accounts, money market deposit accounts, and certificates of deposit, can all be held in traditional IRAs and Roth IRAs and are eligible for FDIC insurance.

Recommended: Tips for Overcoming Bad Financial Decisions

How to Tell if Your Money Is FDIC-Insured

How can you tell for sure if your account is covered? While the FDIC insures deposits in most banks and savings associations, not all of them are protected. Every FDIC-insured depository institution must display an official sign at each teller window or teller station, so that’s an easy way to check if you bank at a brick-and-mortar location.

If you’re using an online bank or a mobile-first financial product, the company’s website should contain information about its coverage.

Or you can find out if your deposits are insured by using the FDIC BankFind tool .

Recommended: Comparing the Different Types of Deposit Accounts

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No account or overdraft fees. No minimum balance.

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Types of Accounts Not Insured by the FDIC

Now, here are the kinds of funds not covered by FDIC insurance. Money held in these ways, even if purchased from an insured financial institution, is not protected:

•   Stocks

•   Bonds

•   Annuities

•   Mutual funds

•   Municipal securities

•   Life insurance policies

•   The contents of a safety deposit box

This is an important point to note as you think about your financial security.

Also, you may wonder about the FDIC vs. NCUA in terms of protecting your finances. The National Credit Union Administration (NCUA), created by Congress in 1970, covers federally insured credit unions in much the same way as the FDIC covers banks, including deposits up to $250,000. If your funds are held at a credit union, you may want to make sure it has NCUA coverage. The FDIC will not be protecting you, but it’s likely the NCUA is.

How FDIC Insurance Works

Here’s more important intel if you’re wondering, How does the FDIC work?

The FDIC covers your holdings in certain accounts, as listed above. What amount of money is insured in a bank account? Usually, the limit is $250,000. It is calculated to cover both principal and interest earned by the depositor. If you have an account that has $200,000 in it and has accrued $20,000 in interest, you will be covered in the amount of $220,000.

As mentioned above, there is a standard $250,000 cap on FDIC insurance. If you have high net worth, this coverage may not be enough. As a result, you may want to keep in mind that by having money in excess of that amount in one bank or one account, you may be putting yourself at risk.

Because the $250,000 applies to each bank where you have an account, one way you may be able to increase the FDIC insurance coverage available to you is by using multiple banks.

Another option is to structure your accounts properly within a single bank. If you have any concerns about your coverage, it can be a good idea to discuss them with a representative at your bank.

Quick Money Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

What Happens if a Bank Fails?

If a bank were to fail, the FDIC would intervene in two ways:

•   The FDIC would pay depositors up to the insurance limit to cover their losses. So, if you had $10,500 in an insured account and the bank failed, you would be reimbursed for that amount. Typically, this happens within a few days after a bank closes.

•   The FDIC also takes responsibility for collecting the assets of the failed bank and settling its debts. As assets are sold, depositors who had more than the $250,000 limit in an insured account may receive payments on their claim.

How to Recover Your Money if a Bank Fails

Because of the FDIC safety net, you won’t likely see fearful customers lining up to get their money the way they did before deposit insurance was established.

Still, when a bank closes, it can cause depositors to worry and wonder how to get their money. Typically, there are one of two scenarios when a bank fails:

•   Most commonly, you would become a depositor at a healthy, FDIC-insured bank. You would have access to your insured funds at this new bank and could likely choose to keep your accounts there if you like.

•   If there is not a healthy, FDIC-insured bank that can step in quickly, the FDIC will likely pay the insured depositor by check within as little as a few days after the bank closes.

As for immediate next steps if you learn your bank is closing, the FDIC aims to post information as promptly as possible, or you can contact the agency at 877-ASK-FDIC or visit the FDIC Support Center website .

The Takeaway

Though it’s quite a rare occurrence, a bank can fail when it takes on too much risk or, as was the case recently, was exposed to interest rate risk. If your bank is covered by FDIC insurance you can receive reimbursement up to $250,000, meaning your funds aren’t lost for good. FDIC insurance covers checking, savings, money market accounts, CDs, and other deposit accounts.

The FDIC does not cover some of the other financial products or services offered by banks, including stocks, bonds, mutual funds, annuities, and securities.

Putting your money in a brick-and-mortar financial institution isn’t the only way to make sure it’s protected. SoFi Checking and Savings is a mobile-first online bank account that keeps your hard-earned dollars safe; all accounts receive FDIC insurance of up to $250,000 per member.

What’s more, we offer an array of great features that can make managing your money easier, such as spending and saving in one convenient place and using savings tools such as Vaults and Roundups. Plus, you’ll earn a competitive annual percentage yield (APY) and pay no account fees, both of which can help your money grow faster.

Want security, convenience, and no account fees? Bank smarter with SoFi.
 

FAQ

How often does a bank fail?

Currently, banks fail very rarely. In the past two years, no banks failed in the United States. However, the FDIC was created in response to thousands of bank failures around the time of the Great Depression.

How does the FDIC differ from the NCUA?

FDIC insurance applies to qualifying accounts at banks. NCUA insurance covers qualifying accounts at credit unions.

How many banks are FDIC insured?

As of September 2022, the FDIC insured a total of 4,746 institutions. Of these, 4,157 were commercial banks, and 589 were savings institutions.

Are credit unions FDIC-insured?

Credit unions don’t qualify for FDIC insurance. Instead, they may be covered by the National Credit Union Administration, or NCUA, insurance.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

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

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

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

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

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

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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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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2023
What Is an ESG Index? 5 ESG Indexes to Know

What Is an ESG Index? 5 ESG Indexes to Know

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is an ESG Index? 5 ESG Indexes to Know

An index is a group of companies that reflect the performance of a certain sector. Thus an ESG index includes companies that meet certain criteria for environmental, social, and governance standards and reflect that sector.

Just as a large-cap equity index like the S&P 500 can be used as a performance benchmark for the performance of large-cap U.S. stocks, different ESG indexes can be used as benchmarks for sectors focused on sustainable or socially responsible investing (sometimes called SRI) practices.

Some indexes may also include or exclude companies as a form of risk mitigation.

The challenge is that the criteria for what constitutes sustainable investing, in any form, is inconsistent throughout the industry.

Nonetheless, recent industry research suggests that ESG investing strategies perform similarly to, and sometimes better than conventional strategies. By knowing some of the top ESG indexes, then, it’s possible to invest in funds that capture the performance of that index, and put your money toward companies whose aim is to focus on positive environmental, social, and corporate governance outcomes.

What Are ESG Indexes?

There are a number of ESG indexes maintained by major data providers which track the performance of firms that embrace ESG or SRI criteria. Why are environmental, social, and governance factors considered important enough to be the foundation of dozens of industry indexes?

Some investors believe in investing their money in the stocks of companies (or other securities) that reflect certain proactive values regarding the planet, society, and fair and ethical corporate structures. At the same time, adherence to ESG factors is increasingly considered by many stakeholders as a form of risk management. For example, investors might choose to assess a company’s ESG scores or ratings to gauge its risk exposure (as well as possible future financial performance). Consumers might want to know about a company’s environmental and social practices to inform their purchasing decisions.

While you cannot invest in an index, investors can gain exposure to ESG companies in an index by purchasing an index mutual fund or exchange-traded fund (ETF) that seeks to replicate the performance of that index (aka passive investing).

Just as there are many different flavors of equity indexes — from large cap to small cap, domestic to international, and so on — there are numerous ESG indexes. These exist in many forms, depending on the underlying metrics used to construct them, and there are hundreds of ESG index funds and ETFs that investors can access.

Recommended: How to Invest in ESG Stocks

New Growth in the ESG Sector

According to Deloitte, some 149 ESG-related funds were launched in 2021 alone, making up 22% of all funds launched by managers in that year.

The number of ESG-related funds on the market continues to grow, roughly a third of them passively managed index funds or ETFs. In 2021, socially responsible U.S. mutual funds saw record inflows of some $70 billion — a 36% increase over 2020. However, ESG funds saw substantial outflows through 2021 and most of 2022. But sustainable funds still managed to outperform non-sustainable funds through Q3 of 2022, despite challenging market conditions, according to Morningstar research as of September 30, 2022.

ESG vs Socially Responsible Investing: What’s the Difference?

There are various terms for investing according to a certain set of values — including impact investing and socially responsible investing (SRI) — and not all of them refer to green investing strategies. Some terms may be used interchangeably, but there are some key differences to understand.

•   Impact investing is a broad term that encompasses investors who seek measurable outcomes. Impact investing may or may not have anything to do with environmental or social factors.

•   Socially responsible investing is also a broader label, typically used to reflect progressive values of protecting the planet and natural resources, treating people equitably, and emphasizing corporate responsibility.

•   Securities that embrace ESG principles, though, may be required to adhere to specific standards for protecting aspects of the environment (e.g. clean energy, water, and air); supporting social good (e.g. human rights, safe working conditions, equal opportunities); and corporate accountability (e.g. fighting corruption, balancing executive pay, and so on).

ESG Investing Standards

That said, there isn’t one universally observed set of criteria that define an ESG investment or an ESG index. Rather, each ESG index and corresponding index fund is typically based on proprietary metrics of qualitative and quantitative factors relating to environmental, social, and governance factors.

These metrics may be formulated internally by investment managers/research teams, based on metrics established by popularly accepted ESG frameworks, or a combination of both.

While it’s clear where the money’s been trending with regards to ESG investments, prudent investors should still remain selective when it comes to picking an ESG fund, as how these indexes are constructed can sometimes be based on opaque methodologies.

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5 Commonly Used ESG Indexes

Following is an overview of five ESG indexes commonly used as benchmarks for some of the largest ESG funds, and the manner in which they’re constructed.

1. S&P 500 ESG Index

The S&P 500 ESG Index consists of 307 domestic investments across the broader market. All firms included in the index must meet specified ESG criteria established by S&P Dow Jones Indices.

ESG Criteria: According to S&P, the index uses an exclusionary methodology to filter out firms within the S&P 500 that partake in undesirable business activities, defined as follows:

•   Firms operating within the thermo coal, tobacco, and controversial weapons industries.

•   Companies that score within the bottom 5% of the United Nations Global Compact (UNGC).

•   Companies that score within the bottom 25% of ESG scores within each global GICs industry group.

2. Nasdaq-100 ESG Index

The Nasdaq-100 ESG Index consists of 96 separate securities that meet ESG criteria established by Nasdaq. The parent index includes 100 of the largest domestic and international non-financial firms that trade on the Nasdaq exchange.

ESG Criteria: Firms must meet the following requirements, at a minimum, to qualify under the index:

•   “An issuer must not be involved in certain specific business activities, such as alcohol, cannabis, controversial weapons, gambling, military weapons, nuclear power, oil & gas, and tobacco.”

•   “…an issuer must be deemed compliant with the United Nations Global Compact principles, meet business controversy level requirements.”

•   “…have an ESG Risk Rating Score that meets the requirements for inclusion in the Index.”

3. MSCI KLD 400 Social Index

Established in 1990, the MSCI KLD 400 Social Index is one of the first and oldest socially responsible investing (SRI) indexes, making it a popular standard for evaluating long-term ESG performance.

The KLD 400 Social index comprises 402 U.S. securities that meet the ESG standards set by the MSCI ESG Research team.

ESG Criteria: MSCI uses the following methodology to determine eligibility and inclusion within the index.

•   Companies involved in nuclear power, tobacco, alcohol, gambling, military weapons, civilian firearms, GMOs, and adult entertainment are excluded.

•   Must have an MSCI ESG rating above “BB.”

•   Must have an MSCI Controversies score above “2.”

4. MSCI USA Extended ESG Focus Index

The MSCI USA Extended ESG Focus Index includes securities across the U.S. equity markets, but selects constituents from the MSCI USA parent index using an optimization process that targets companies with high ESG ratings in each sector. Companies related to segments such as tobacco, controversial weapons, producers of or ties with civilian firearms, thermal coal and oil sands are excluded.

The MSCI USA Index has 628 constituents while the MSCI USA Extended ESG Focus Index has around 321, which means an exclusion close to 49%.

5. FTSE US All Cap Choice Index

The FTSE U.S. All Cap Choice Index is part of the FTSE Global Choice Index Series. It’s designed to help investors align their investment choices with their values, by selecting companies based on the impact of their products and conduct on society and the environment., but excludes companies involved in:

•   Vice-related industries (e.g. alcohol, tobacco, gambling, adult entertainment)

•   Non-renewable energy (e.g. fossil fuels, nuclear power)

•   Weapons (conventional military weapons, controversial military weapons, civilian firearms)

•   Companies are also excluded based on controversial conduct and diversity practices

Risks and Drawbacks of ESG Indexes

As with all investments, the risks of choosing ESG-linked investments is that they may not necessarily outperform over your target timeframe. There are also unique ESG-linked issues that come with evaluating these indexes.

Diversification Risk

The primary risk of using an ESG-based strategy is the risk of underperformance and the risk of reduced diversification relative to cheaper, broader-market index funds.

This isn’t a surprise, as many of the top ESG indexes are market capitalization (“cap”) weighted, which means that the largest firms in the index bear the greatest responsibility for changes in index values.

Given that some of most popular ESG investments also track the performance of the broader-market indexes, this makes these particular indexes less attractive as part of a diversifying strategy.

Higher Costs

Another issue of concern is that some ESG funds charge higher fees and expense ratios relative to conventional funds.

While these fees aren’t necessarily head and shoulders above broader-market index funds, they can get progressively more expensive depending on how nuanced the fund’s investing strategy is. This is because ESG is a factor-based investment strategy which entails more complexity than traditional broader-market indexing.

Typically, the longer the time frame for comparison, the greater the risk for underperformance becomes, net of fees.

Inconsistency of ESG Standards

Perhaps the biggest drawback of ESG-investing is the inconsistent reporting among industry firms, and the desire for more uniformity among which ESG frameworks are applied.

In other words, the ESG criteria established at one institution for their index or funds has little or no bearing on the ESG criteria employed by another firm.

Because sustainable investing has grown over the past decade, there has been an industry-wide movement towards greater consistency in ESG criteria and reporting. The Securities and Exchange Commission (SEC) has even recently undertaken efforts to codify aspects of financial reporting when it comes to ESG-related investments.

Nevertheless, these efforts remain in their early stages, and investors should continue to be discerning when it comes to picking ESG-linked investments.

Relevance of ESG Criteria

Existing ESG frameworks run the gamut when it comes to which metrics they choose to apply; whether these metrics are actually relevant to the underlying investments can be debated. For example, metrics related to carbon emissions may be relevant to heavy industry, but how relevant would those metrics be to the financial or technology sectors?

To address the issue of relevance, some ESG-linked funds have introduced an additional factor to correctly weight relevance of certain criteria. However, individual investors would do well to identify and assess when these solutions are applied.

Finally, expect to encounter data consistency issues when trying to quantify information that is naturally qualitative, particularly when management at each firm has wide discretion over how they choose to represent those metrics.

The Takeaway

There’s no doubt that enthusiasm for ESG investing has grown over the past decade, and continues to gain traction. Understanding ESG indexes and how they apply sustainability rules and criteria to the companies in the index can help investors understand the corresponding index mutual funds and ETFs they may want to invest in.

Due to the sheer number of ESG-centric investments available to date, it’s a good idea to be selective when reviewing the underlying strategy of each fund, and understanding the underlying methodology of how each index constructs its portfolio.

Exploring and incorporating sustainable strategies in your portfolio can be easy when you open an online brokerage account with SoFi Invest. The app allows you to buy and sell shares of stocks, ETFs, fractional shares, IPO shares, and more. Even better, SoFi members have complimentary access to advice from professionals, who can answer any questions you may have.

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.

Photo credit: iStock/StefaNikolic

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

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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