Jan
05
2025
Short Position vs Long Position, Explained

Short Position vs Long Position: What’s the Difference?

By | Growing Wealth, invest, Investing | Comments Off on Short Position vs Long Position: What’s the Difference?

When you own shares of a security, that’s a long position. When you borrow shares in order to sell them, that’s a short position (since you’re literally “short” of the shares).

Going long is considered a bullish strategy, whereas selling short is a bearish strategy because you’re banking on the share price declining. But there are exceptions to these conventions, and ultimately your strategy can depend on the securities being traded.

Key Points

•   Long positions in stocks involve buying shares with the expectation of potential price increases, that may come with unlimited upside and limited downside risk.

•   Short positions in stocks involve borrowing shares to sell, hoping for price drops, with unlimited risk and interest costs.

•   Long options positions can be bullish or bearish, influenced by time decay and volatility.

•   Short options positions involve selling contracts, aiming for price drops, with strategies based on market projections.

•   Long positions are typically used when bullish, while short positions are typically used for bearish outlooks or hedging.

Investors can buy call and put options on SoFi Active Invest, but they are not able to sell options on the platform at this time.

Long vs. Short Position in Stocks

An investor in a short position aims to benefit from a decline in the price of the asset. When you go short, your goal is to borrow shares at one price, sell them on the open market and then — assuming the price drops — return them to the broker at a lower price so you can keep the profit. Executing a short stock strategy is more complicated than putting on a long trade, and is for experienced traders.

When you go long on an asset, you are bullish on its price. Your potential downside is limited to the total purchase price, and your upside is unlimited. That’s a key difference in a long vs short position, since short positions can feature an unlimited risk of loss (if the price rises instead of dropping), with a capped upside potential (because the price can only drop to zero).

Long Positions and Stocks

To take a long position on shares, you execute a buy order through your brokerage account. This involves purchasing the stock with the expectation that its price will increase over time, allowing you to sell it later at a profit. In essence, a long position represents traditional stock ownership — buying low and selling high.

Short Selling a Stock

Short selling a stock is done by borrowing shares from your stock broker, typically using a margin account, then selling them on the open market. This is known as “sell to open” because you’re opening a short position by selling the shares first.

By using a margin account (a.k.a. leverage), you would owe interest on the amount borrowed, and you face potentially unlimited losses since the stock price could hypothetically rise to infinity. Investors must meet specific criteria in order to trade using margin, given its potential for significant losses as well as gains.

You must close your short position in the future by repurchasing the shares in the market (hopefully at a lower price than that at which you sold them), and then return the shares to the broker, keeping the profit. Remember: you’re paying interest on the money borrowed to open the position, which may influence when you decide to close.

A short squeeze is a danger short sellers face since intense short-covering — a rush to buy stock to cover short positions — leads to a rapidly appreciating share price (when traders rush to buy back stock, causing prices to increase quickly). It can also create opportunities for market participants who anticipate the squeeze, however.

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options tradingcan be risky, and best done by those who are not entirely new to investing.

Long vs. Short Position in Options

Long and short positions also exist in the world of options trading.

Long Position in Options

In options trading, going long means entering a buy-to-open order on either calls or puts. A long options position can be bullish or bearish depending on the type of option traded.

•   For example, in a long call position, you hope that the underlying asset price will appreciate so that your call value increases. The maximum potential gain for buying a long call is unlimited, while the maximum loss is limited to the premium paid.

•   In a long put position, you want to see the underlying asset price drop below the strike price, since buying a put offers the holder the right, but not the obligation, to sell a security at a specified price within a specified time frame. The maximum potential gain for buying a long put is the difference between the strike price and the asset price, minus the premium paid, while the maximum loss is the premium paid.

Investors may employ options strategies designed to seek returns from volatility, though these also tend to be higher risk. These strategies for options trading rely on the expectation that a stock price may become more erratic, thus making the options potentially more valuable.

A long straddle strategy, for example, is one of several strategies that bets on higher volatility by taking bullish and bearish positions of different financial values, anticipating upside or downside while still hedging against one or the other. These strategies may under perform if volatility decreases or remains stable. In that case, the maximum potential loss is limited to the total premiums paid for both options.

Short Selling Options

You can sell short options by writing (a.k.a. selling) contracts. The goal is the same as when selling shares short: you are expecting the option price to drop. Unlike shorting shares, which always reflects a bearish expectation, shorting options can involve either a bearish or bullish outlook, depending on whether you short calls or puts. An options seller enters a sell-to-open order to initiate a short sale.

You can take a bearish or bullish strategy depending on the options used. Whether you short call vs put options makes a difference: If you short call options, you are bearish on the underlying security. Shorting puts is considered a bullish strategy.

With options, you can short implied volatility and benefit from the passage of time. Entering a short position on calls and puts is done in the hope of seeing the option premium decline in value — that can come from changes in the underlying asset’s price, but it can also come from a decline in implied volatility and as expiration approaches.These are plays on two of the options Greeks: vega and theta.

Examples of Long Positions

Long positions come in different forms: going long on a stock – where you purchase shares outright, and going long on calls and puts – where you anticipate fluctuation on the price an investor pays to purchase the stock.

Going Long on a Stock

When you go long on shares of stock, you actually own shares in the company. Typically, you would go long on shares if you believe the price will rise, and would look to eventually sell them to potentially realize a gain. Here, you have unlimited upside potential (if the price continues to rise), and the downside is limited to what you paid for the shares ($1,000).

Going long on options, however, works a bit differently.

Going Long on Calls and Puts

Consider this example of going long on a call option. Say, for example, that you believe stock XYZ is poised to increase in value. You can purchase a call option on XYZ with an expiration date of three months, and wait to see if the stock increases within the contract window. If it does, you can exercise the option and purchase the stock at the agreed-upon strike price, with the likelihood of making a profit. If the price doesn’t move or declines, your option expires worthless, and you would lose the premium per share that you paid for the option.

Let’s say on the other hand that you believe stock XYZ’s will decline in a few months. You may then wish to go long on a put option. You would buy a put option for XYZ with an expiration date of three months. If the stock price falls below the strike price before the expiration date, you can exercise the option to sell the stock at its lower price, likely generating a profit (minus the premium). If you believe the stock price will stay flat or rise, your option would expire and be rendered useless – and you would only be out the premium you paid.

Examples of Short Positions

Like long positions, short positions come in various forms as well. Shorting a stock is when you borrow shares in order to sell them and (hopefully) repurchase them at a lower price, while shorting an option is when you sell an option contract with the expectation that the underlying stock will rise to a certain price.

Shorting a Stock

If you wanted to short shares of XYZ, currently selling at $10 per share, this is a bearish strategy as you’re essentially betting on a price decline.

Let’s say you want to short stock XYZ. You would borrow shares from a stock broker and sell them on the open market. If the price falls, you buy back the shares at a lower price and return them to the broker, thus pocketing the difference as profit. Bear in mind that if the stock price rises, instead of falling, your losses are theoretically unlimited. This makes shorting stocks potentially riskier.

Going Short on an Option

If you think that stock XYZ is overvalued, and that its price will remain flat or decline, you might sell a call option with an expiration date of three months. Should the stock price stay below the strike price by the contract’s expiration, the option will expire worthless, and you’ll keep the premium paid by the buyer. If the stock price rises above the strike price, however, the buyer may exercise their right to purchase the stock at the strike price. This would leave you responsible for delivering the shares, which could result in losses.

If you believe stock XYZ is undervalued and its price will rise, you might sell a put option with the same three-month expiration. Should the stock price stay above the strike price, the option will expire worthless and you keep the premium. But if the price falls below the strike price, the buyer may exercise their right to sell the stock to you, and you’d be obligated to buy it, potentially incurring losses if the market price of the stock drops.

Comparing Long Positions vs Short Positions

Although long and short positions have different aims, these strategies do share some similarities.

Similarities

Both exposures require a market outlook or a prediction of which direction a single asset price will go.
If you’re bullish on a stock, you could consider going long by buying shares directly or buying call options. Both may profit from a rising stock price. Alternatively, if you’re bearish, you may opt to short the stock or sell call options. Both depend on a view of a share, or of the markets in general.

Differences

Short vs. long positions have several differences, and the ease with which you execute the trade is among them. For example, when taking a short position you’ll typically be required to pay interest to a broker. With a long position, you do not usually pay interest.

Additionally, long positions have unlimited gains and capped losses, whereas short positions have unlimited losses and capped gains.

Similarities in a Long Position vs. Short Position

Differences in a Long Position vs. Short Position

You can go long or short on an underlying stock via calls and puts. Taking a long position on shares is bullish, while going short is bearish.
Both long and short positions offer exposure to the market or individual assets. Short positions can have potential losses that are unlimited with capped upside — that is the opposite of some long positions.
Both rely on predicting price movements within a specific timeframe. Long positions require paying the upfront cost in full; short positions often require having a margin account.

💡 Quick Tip: If you’re an experienced investor and bullish about a stock, buying call options (rather than the stock itself) can allow you to take the same position, with less cash outlay. It is possible to lose money trading options, if the price moves against you.

Pros and Cons of Short Positions

When considering a short position, it can be helpful to look at both the pros and cons.

Pros of Short Positions

Cons of Short Positions

You benefit when the share price drops. You owe interest on the amount borrowed.
You can short shares and options. There’s unlimited risk in selling shares short.
Shorting can be a bearish or bullish play. There are limited gains since the stock can only drop to zero, and a risk of complete loss if the share price continues to rise.

Pros and Cons of Long Positions

Likewise, when considering a long position, assessing the benefits and drawbacks can be helpful.

Pros of Long Positions

Cons of Long Positions

You can own shares and potentially benefit when the stock rises and may also profit from puts when the underlying asset drops in value. You face potential losses on a long stock position and on call options when the share price drops.
You can take a long position on calls or puts. You must fully pay for the asset upfront, or finance through a margin account.
There’s unlimited potential upside with calls and shares of stock. A long options position may be hurt from time decay (loss of value near expiration date).

The Takeaway

Buying shares and selling short are two different strategies to potentially profit from changes in an asset’s price. By going long, you can purchase a security with the goal of seeing it rise in value. Selling short is a bearish strategy in which you borrow an asset, sell it to other traders, then buy it back — hopefully at a lower price — so you can return it profitably to the broker.

Shorting options can also be a bullish strategy, depending on whether you’re shorting call or put options. Shorting calls is considered bearish, while shorting puts reflects a more bullish sentiment since you profit if the asset’s price rises or remains stable.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.


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

FAQ

Are short positions riskier than long positions?

Yes, short positions can be riskier than long positions. That goes for selling shares of a stock short and when you write options. Speculators often face more risk with their short positions while hedgers might have another position that offsets potential losses from the short sale.

What makes short positions risky?

You face unlimited potential losses when you are in a short position with stocks and call options. Selling shares short involves borrowing stock, selling it out to the market, then buying it back. There’s a chance that the price at which you buy it back will be much higher than what you initially sold it at.

How long can you hold a short position?

You can hold a short position indefinitely. The major variable to consider is how long the broker allows you to short the stock. The broker must be able to lend shares in order for you to short a stock. There are times when shares cannot be borrowed and when borrowing interest rates turn very high. As the trader, you must also continue to meet margin requirements when selling short.

Photo credit: iStock/Charday Penn

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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.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Jan
04
2025
woman calculator budgeting finances mobile

Guide To Budgeting Living Expenses

By | Budgeting & Goals, money | Comments Off on Guide To Budgeting Living Expenses

You’re undoubtedly used to those bills coming in every month, such as your housing costs, food, and car insurance, but you may sometimes wonder if there’s a way to better manage them. Budgeting for your recurring living expenses can help you take control of your cash and spend and save smarter.

While there are various techniques you could use, a good starting point can be to first get a handle on your needs vs. wants and next determine which budget technique will work best for you.

Key Points

•   Living expenses include costs that are vital to daily life, such as housing, food, clothing, transportation, and healthcare.

•   It’s wise to differentiate between needs and wants when budgeting for living expenses.

•   Budgeting methods like proportional budgets, line-item budgets, and envelope budgets can help manage living expenses.

•   Average living expenses vary across the US, depending on factors like location, cost of living, and household size.

•   If income doesn’t cover living costs, options include reducing expenses or increasing income through side hustles or career changes.

What Are Living Expenses?

Basic living expenses, as the name implies, are ones necessary for daily living, with main categories including housing, food, clothing, transportation, healthcare, and relevant miscellaneous costs.

Although not everyone would define basic living expenses in the exact same way, here is a breakdown of expenses to consider.

Housing

For homeowners, this can include their mortgage payment, property tax, and insurance payments, along with monthly utilities and basic maintenance costs.

If living in a condo, this includes condominium fees. For renters, it can include the monthly rent payment, utilities, renters insurance, and any other housing-related costs they’re responsible for paying.

Food and Beverage

Basic expenses would include buying groceries for the family, but not restaurant food or other optional food or drink expenses. So while, yes, dinner at a sushi restaurant is technically food, dining out doesn’t count as a basic living expense. You could do without it.

Recommended: Ways to Save Money on Food

Clothing

This includes clothes for work and school for the family, plus footwear, underwear, outerwear, casual clothing, pajamas, and so forth. Designer clothing and other pricier items are typically not categorized in basic living expenses. The same holds true for buying a cool sweater that’s on sale but you don’t truly need it.

Healthcare

Expenses in this category can range from monthly payments for healthcare insurance, to co-pays and additional bills from doctors, dentists, specialists, and so forth. It also includes co-pays for prescription medications and over-the-counter meds.

Transportation

Transportation expenses can include car payments and insurance, gas, and maintenance. It can also include Uber and taxi expenses, public transportation tickets, parking fees, and so forth.

Other Expenses

Cleaning supplies for the home or apartment, personal care items, cell phone and internet bills, and similar items can also be included in a list of basic living expenses.

Minimum Debt Payments

Not to be overlooked are making sure you stay current on such things as student, car, and personal loan payments, as well as at least the minimum due on credit cards.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

Average Living Expenses in the USA

The average living expenses can vary greatly depending on where you live and your household size. Here is a snapshot of a few locations across the country and how much monthly living expenses are, using data from the Economic Policy Institute.

Location

Household size

Housing

Food

Transportation

Healthcare

Rapid City, SD1$577$278$803$662
Rapid City, SD2 (couple)$664$510$980$1,324
Rapid City, SD4 (2 parents, 2 children)$875$805$1,152$2,014
Seattle, WA1$1,523$326$854$344
Seattle, WA2 (couple)$1,599$597$1,057$688
Seattle, WA4 (2 parents, 2 children)$1,906$941$1,274$1.032
Tallahassee, FL1$778$294$816$439
Tallahassee, FL2 (couple)$843$539$1,042$879
Tallahassee, FL4 (2 parents, 2 children)$1,024$850$1,170$1,327
Washington, DC1$1,387$374$472$411
Washington, DC2 (couple)$1,419$686$601$822
Washington, DC4 (2 parents, 2 children)$1,618$1,082$747$1,378

Wants Versus Needs

The challenge, in many of these categories, can be to successfully determine which of these expenses are truly needed and which are extras that would be more appropriately categorized as “wants.” In and of itself, there’s nothing wrong with paying for “wants” that fit within the budget but, for the purposes of making a basic living expense budget, it’s important to tease them apart.

Paying a cell phone bill, for example, could be considered important for safety and to facilitate communicating with work and family. Getting the latest and greatest cell phone for its bells and whistles, meanwhile, is crossing over into a want, not a need.

In the 1970s, something called the Growth-Share Matrix was developed, and it may help people who are wondering how to categorize living expenses and then prioritize them. The process includes listing all expenses, and then putting wants in one column and needs in another. Each column can then be divided into high or low priority. So, when budgeting living expenses, there would be four categories:

•   High-priority needs

•   High-priority wants

•   Low-priority needs

•   Low-priority wants

Another way to name these categories is:

•   Must have

•   Should have

•   Could have

•   Won’t have

This makes it easier to see what must be paid and what is optional. When budgeting, it can make it easier to choose where to put any discretionary funds. In other words, these methods may be able to help people answer these questions: “What are living expenses that must be paid? Which ones are more optional?”

When making a budget, it’s important to also account for any credit card payments, personal loan payments, student loan payments, and other debts that must be paid. After documenting all these expenses, figuring out how to calculate living expenses is as easy as some quick math. Figuring out how to budget for these expenses is the next item on the agenda.

💡 Quick Tip: Bank fees eat away at your hard-earned money. To protect your cash, open a checking account with no account fees online — and earn up to 0.50% APY, too.

Allocating Your Income

Although no two financial situations or budgets are exactly the same, there’s been a long-standing rule of thumb when making a budget that says people shouldn’t spend more than 30% of their after-tax income on housing.

According to the U.S. Bureau of Labor Statistics’ most recent analysis of how people spend their income, the percentages stack up as follows:

•   Housing: 33.8%

•   Transportation: 16.4%

•   Food: 12.4%

•   Personal insurance/pensions: 11.8%

•   Healthcare: 8.1%

•   Apparel and services: 2.6%

This accounts for nearly 85% of what people, on average, have been spending. It shows that, on average, people are slightly above the recommended percentage for housing expenses.

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3 Types of Living Expense Budgeting Methods

There are numerous ways to craft a budget; in fact, we’ve created a guide to cover the different types of budgeting methods. One of the keys to effective budgeting is picking a strategy that allows for consistency. The following methods can help an individual create a budget.

1. Proportional Budget

For people who have divided up their expenses into needs and wants, proportional budgets may make sense. This is a budgetary strategy where monthly income is divided into three categories:

•   Needs

•   Wants

•   Savings

In one type of proportional budget — the 50/30/20 rule featured in the book “All Your Worth” by Senator Elizabeth Warren and Amelia Warren Tyagi — 50% of income would go towards needs; 30% towards wants; and 20% towards savings. It typically makes sense to do this calculation with after-tax income, which is take-home pay.

Advantages of a proportional budget include that it’s a simple formula, which may make it easier to stick to. Plus, it keeps a focus on the big picture, clearly distinguishing between needs and wants. It can also be a useful method for people who want to save money in a straightforward way.

This budget method may not work well for people who are still working on separating needs from wants. And, if a person’s needs currently take up more than 50% of income earned, then the 50/30/20 percentage breakdown may work as a goal vs. something that can be fully implemented right away.

Recommended: Check out the 50/30/20 calculator to see the breakdown of your money.

2. Line-Item Budget

A line-item budget is a granular method where you track expenditures, line by line, in relevant categories. This can be helpful for people who want to keep their focus on spending money on basic living expenses because they can easily see how much of their money is going into what category.

This is also an easy method to create and use. However, it doesn’t necessarily have a focus on savings, and it is more time intensive to manage.

3. Envelope Budget

The envelope system is another way to create a household budget, and it may be the most hands-on way to manage money. People using this method withdraw enough money from the bank each month to cover each budget category. Then, they put the appropriate amount for each category in a separate envelope: housing expenses in one, grocery expenses in another, and so on.

Once a particular envelope is empty, then no more money can be spent in that category for that month, unless cash is taken from another envelope, which reduces the amount that can be spent on that envelope’s category. This method can work well for people who appreciate a tactile way of handling money. The need to get cash from the bank each month does add a step to the process and, like the line-item method, it doesn’t address savings.

This method can be adapted for those who don’t use cash. Instead, you can use your debit card and keep track (by hand or via an app) on how your category spending is going.

Recommended: Tips for Aggressively Saving Money

Budgeting Tips

Here’s some advice as you create and live on a budget:

•   When creating a budget, look for expenses that can be eliminated or at least reduced. For example, you might cut a streaming service or two or drop all that you subscribe to and find free entertainment through your public library’s resources.

•   It also generally makes sense to incorporate savings into a budget. First build an emergency savings account and then save for other personal goals, including for retirement.

Although the proportional budget described above has savings as an integral part, the line-item budget and envelope budget don’t. But, a line can be added for savings towards retirement or other goals — and an envelope can be added to the monthly pile.

•   Consistency also counts, big time. When budgeting is a part of daily life, it can make it much easier to reach financial goals than when it’s a sporadic activity. If budgeting fades from focus for a month, don’t quit. Get right back on track.

•   Finally, when help is needed, ask for it, whether from trusted friends and/or relatives or a qualified financial advisor.

What If Your Income Doesn’t Cover Your Living Costs?

If your income doesn’t cover your living expenses, you have two options (or you could do a combination of both):

•   Reduce your expenses. You might take a roommate, move in with a family member for a while, start shopping at warehouse clubs, or decide not to eat out much less.

•   Increase your income. This might mean looking for a new job, training up for a different career, or starting a side hustle.

These methods can help you cover your living costs. Worth noting: If part of the issue is considerable debt that is negatively impacting your spending power, you might meet with a non-profit credit counselor for advice on eliminating that drain on your funds.

Budgeting and Saving With SoFi

Budgeting for daily living expenses can help you better understand your financial situation and then meet your money goals. Your financial institution may offer tools to help you track your money and budget successfully too.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


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

FAQ

What are considered living expenses?

Living expenses are the minimum expenditures needed to survive, so typically they include housing and utilities, food, clothing, healthcare, insurance, and minimum debt payments.

What is the average living cost in the U.S.A.?

The current average cost of living in the United States is $61,334. That’s how much the average household spends on expenses, with almost 35% going to housing and housing-related costs.

What salary is needed to live comfortably in the U.S.A.?

The salary needed to live comfortably in the U.S. will depend on many factors, such as cost of living, location, and household size and configuration. One recent study found that, when looking at America’s 25 most expensive cities, a salary of at least $68,499 would be required for an individual to live comfortably. For larger households, the number will rise.

About the author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is a full-time freelance writer who specializes in SEO-optimized blog and website copy: both B2B and B2C for companies ranging from one-person shops to Fortune 500 companies. Read full bio.

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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.

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.

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04
2025
What Is a Returned Item Fee (NSF Fee)?

Returned Item Fees: What They Are & How to Avoid Them

By | Budgeting & Goals, Financial Independence, money | Comments Off on Returned Item Fees: What They Are & How to Avoid Them

Returned item charges are bank fees that are assessed when you don’t have enough money in your account to cover a check (or online payment) and the bank doesn’t cover that payment. Instead, they return the check or deny the electronic payment, and hit you with a penalty fee. Returned item fees are also called non-sufficient funds (NSF) fees. While these fees used to be ubiquitous, some banks have chosen to eliminate them.

Read on to learn exactly what NSF/returned item fees are and how you can avoid paying them.

Key Points

•   Returned item fees, also known as non-sufficient funds (NSF) fees, are charged when an account lacks enough funds to cover a check or electronic payment.

•   These fees can be avoided by closely monitoring account balances and setting up bank alerts for low balances.

•   Linking a savings account to a checking account can provide a backup to cover shortfalls, potentially avoiding NSF fees.

•   Using a debit card strategically can prevent large holds that might lead to NSF fees for other transactions.

•   Choosing a bank that offers no-fee overdraft protection can also help avoid these fees.

What Is a Non-Sufficient Funds (NSF) Fee?

A non-sufficient fund or NSF fee is the same thing as a returned item fee. These are fees banks charge when someone does not have enough money in their checking account to cover a paper check, e-check, or electronic payment. They are assessed because the bank has to put forth additional work to deal with this situation. They also serve as a way for banks to make money. The average NSF fee is $19.94.

In addition to being hit with an NSF fee from the bank, having bounced checks and rejected electronic payments can cause you to receive returned check fees, late fees, or interest charges from the service provider or company you were attempting to pay.

💡 Quick Tip: Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.

How Do Non-Sufficient Fund Fees Work?

Here’s a basic example. Let’s say that someone has $500 in the bank. They withdraw $100 from an ATM and forget to record that transaction. Then, they write a check for $425, believing that those funds are available:

•   Original balance: $500

•   ATM withdrawal: $100

•   New actual balance: $400

•   Check amount: $425

•   Problem: The check is for $25 more than what is currently available.

The financial institution could refuse to honor this check (in other words, the check would “bounce” or be considered a “bad check”) and charge an NSF fee to the account holder. This is not the same thing as an overdraft fee.

An overdraft fee comes into play when you sign up for overdraft protection. Overdraft protection is an agreement with the bank to cover overdrafts on a checking account. This service typically involves a fee (called an overdraft fee) and is generally limited to a preset maximum amount.

Are NSF Fees Legal?

Yes, NSF or returned item fees are legal on bounced checks and returned electronic bill payments. However, they should not be charged on debit card transactions or ATM withdrawals.

If you don’t opt in to overdraft coverage (i.e., agree to pay overdraft fees for certain transactions), then the financial institution cannot legally charge overdraft (or NSF) fees for debit card transactions or ATM withdrawals. Instead, the institution would simply decline the transaction when you try to make it.

No federal law states a maximum NSF fee. But The Truth in Lending Act does require banks to disclose their fees to customers when they open an account.

The Consumer Financial Protection Bureau has been pushing banks to eliminate NSF fees, and their efforts have paid off. Many banks have done away with NSF fees and others have lowered them.

Are NSF Fees Refundable?

You can always ask for a refund. If you’ve been with a financial institution for a while and this is your first NSF fee, you could contact the bank and ask for a refund. The financial institution may see you as a loyal customer that they don’t want to lose, so they may say “yes.” That said, it’s entirely up to them — and, even if they agree the first time, they will probably be less willing if it becomes a pattern. (Or, they may say “no” to the very first request.)

Recommended: Common Bank Fees and How to Avoid Them

Do NSF Fees Affect Your Credit?

Not directly, no. Banking history isn’t reported to the consumer credit bureaus. Indirectly, however, NSF fees could hurt your credit. If a check bounces — say, one to pay your mortgage, car payment, credit card bill, or personal loan — this may cause that payment to be late. If payments are at least 30 days late, loans and credit cards can be reported as delinquent, which can hurt your credit.

And if a payment bounces more than once, a company might send the bill to a collections agency. This information could appear on a credit report and damage your credit. If you don’t pay your NSF fees, the bank may send your debt to a collection agency, which could be reported to the credit bureaus.

Also, keep in mind that any bounced checks or overdrafts could be reported to ChexSystems, a banking reporting agency that works similarly to the credit bureaus. Too many bounced checks or overdrafts could make it hard to open a bank account in the future.

What Happens if You Don’t Pay Your NSF Fees?

If you don’t pay your NSF fees, the bank could suspend or close your account and report your negative banking history to ChexSystems. This could make it difficult for you to open a checking or savings account at another bank or credit union in the future. In addition, the bank may send your debt to a collection agency, which can be reported to the credit bureaus.

How Much Are NSF Fees?

NSF were once as high as $35 per incident but have come down in recent years. The average NSF is now $19.94, which is an historical low.

When Might I Get an NSF Fee?

NSF fees can be charged when there are insufficient funds in your account to cover a check or electronic payment as long as the bank’s policy includes those fees.

Recommended: Negative Bank Balance: What Happens to Your Account?

What’s the Difference Between an NSF and an Overdraft Fee?

An NSF fee can be charged if there aren’t enough funds in your account to cover a transaction and no overdraft protection exists. The check or transaction will not go through, and the fee may be charged.

Some financial institutions, though, do provide overdraft protection. If you opt in to overdraft protection and you have insufficient funds in your account to cover a payment, the bank would cover the amount (which means there is no bounced check or rejected payment), and then the financial institution may charge an overdraft fee. So with overdraft, the transaction you initiated does go through; with an NSF or returned item situation, the transaction does not go through and you need to redo it. Fees may be assessed, however, in both scenarios.

How to Avoid NSF Fees

There are ways to avoid overdraft fees or NSF fees. Here are some strategies to try.

Closely Watch Your Balances

If you know your bank balance, including what’s outstanding in checks, withdrawals, and transfers, then a NSF situation shouldn’t arise. Using your bank’s mobile app or other online access to your accounts can streamline the process of checking your account. Try to get in the habit of looking every few days or at least once a week.

Keep a Cushion Amount

With this strategy, you always keep a certain dollar amount in your account that’s above and beyond what you spend. If it’s significant enough, a minor slip up still shouldn’t trigger an NSF scenario.

💡 Quick Tip: If your checking account doesn’t offer decent rates, why not apply for an online checking account with SoFi to earn 0.50% APY. That’s 7x the national checking account average.

Set Up Automatic Alerts

Many financial institutions allow you to sign up for customized banking alerts, either online or via your banking app. It’s a good idea to set up an alert for whenever your balance dips below a certain threshold. That way, you can transfer funds into the account to prevent getting hit with an NSF fee.

Link to a Backup Account

Your financial institution may allow you to link your savings account to your checking account. If so, should the checking balance go below zero, they’d transfer funds from your savings account to cover the difference.

Use Debit Cards Strategically

If you use your debit card to rent a car or check into a hotel, they may place a hold on a certain dollar amount to ensure payment. It may even be bigger than your actual bill. Depending upon your account balance, this could cause something else to bounce. So be careful in how you use your debit cards.

Look for No-Fee Overdraft Coverage

You can avoid NSF fees by shopping around for a bank that offers no-fee overdraft coverage.

The Takeaway

Returned item fees (also known as NSF fees) can be charged when there are insufficient funds in your account to cover your checks and electronic payments. When you get hit with an NSF fee, you’re essentially getting charged money for not having enough money in your account — a double bummer. To avoid these annoying fees, keep an eye on your balance, know when automatic bill payments go through, and try to find a bank that does not charge NSF fees.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

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

FAQ

What happens when you get an NSF?

If you get charged an non-sufficient funds (or NSF) fee, it means that a financial transaction has bounced because of insufficient funds in your account. You will owe the fee that’s listed in your bank’s policy.

Is an NSF bad?

If a financial transaction doesn’t go through because of insufficient funds, then this can trigger returned item charges (NSF fees). This means you’re paying a fee for not having enough money in your account to cover your payments, a scenario you generally want to avoid.

Does an NSF affect your credit?

An NSF fee does not directly affect your credit, since banking information isn’t reported to the consumer credit agencies. However, if a bounced check or rejected electronic payment leads to a late payment, the company you paid could report the late payment to the credit bureaus, which could impact your credit.

About the author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is a full-time freelance writer who specializes in SEO-optimized blog and website copy: both B2B and B2C for companies ranging from one-person shops to Fortune 500 companies. Read full bio.

Photo credit: iStock/MicroStockHub

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.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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.

Checking Your Rates: 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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04
2025
percentage sign

APY vs Interest Rate

By | Budgeting & Goals, money, Terminology | Comments Off on APY vs Interest Rate

Interest rates and APY, or annual percentage yield, are likely words that you’ll hear throughout your financial life. If you are opening an interest-earning bank account, you’ll likely want to earn the highest return on your money that you can find. Conversely, if you are borrowing money (say, taking out a home loan), you’ll probably want to snag the lowest rate on your mortgage.

While you may see the terms interest and APY used interchangeably, they are not identical. APY expresses how much you will earn on your cash over the course of a year. Interest rate, however, is the interest percentage that you’ll earn or that a lender will change you.

Ready to learn more about APY vs. interest rate and how each impacts your finances

Key Points

•   APY (Annual Percentage Yield) and interest rate are two different concepts that are often used interchangeably but have distinct meanings.

•   APY represents the amount of money you will earn on your deposits over the course of a year, taking into account compound interest.

•   Interest rate, on the other hand, is the percentage at which your money will accrue interest, without considering compounding.

•   APY is higher than the interest rate because it includes the effect of compounding, which allows your money to grow faster.

•   Understanding the difference between APY and interest rate is important when opening a bank account or taking out a loan.

APY and Interest Rate Defined

If you deposit money into an interest-bearing account, you will earn an annual percentage yield (APY) on that money. The APY is a useful number because it tells you how much you’ll earn on your deposits over the course of a year, expressed as a percentage. The APY calculation takes into account the interest rate being offered, then factors in whether or not the financial institution offers compounded interest.

Compound interest is the interest you earn on the interest you’ve already earned. Depending on the bank or credit union, interest may compound daily, monthly, quarterly, or annually. The more frequently interest compounds, the faster your money grows.

💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 4.00% APY, with no minimum balance required.

What Is APY?

APY expresses how much money your cash will earn over the course of a year when it’s in an interest-bearing account.

APY is often confused with APR, which stands for annual percentage rate and comes into play when you take out a loan. A loan’s APR factors in the loan’s interest rate, as well as any additional fees and costs. It tells you how much you will pay for the loan over one year.

What Is an Interest Rate?

An interest rate is typically either the money you earn for keeping your cash at a financial institution or the cost that lenders charge you when they extend credit.

For example, if you put your money in a high-interest savings account, you might earn 4.50% for keeping your funds there. But if you take out a mortgage, you might be charged 7.00% interest for the privilege of borrowing that money to buy a house and paying it back over time.

Incidentally, the difference between the interest rates that banks pay depositors and charge borrowers is one of the ways these financial institutions earn money.

Earn up to 4.00% APY with a high-yield savings account from SoFi.

No account or monthly fees. No minimum balance.

9x the national average savings account rate.

Up to $2M of additional FDIC insurance.

Sort savings into Vaults, auto save with Roundups.


APY vs. Interest Rate Explained

So what is the difference between APY and interest rate? And why does interest rate vs. APY matter anyway? When you are opening a bank account, it can make a difference as one can give you a better picture of how your money will grow while on deposit.

The interest rate tells you the basic rate at which your money will accrue interest. The APY, however, gives you great insight to what you will have earned at the end of a year because it factors in the boost that compound interest can deliver.

Recommended: Different Ways to Earn Interest

The APY Formula

For those who want to delve in a bit deeper, the actual formula for APY calculation is as follows: (1 + r/n)ⁿ – 1.

•   The “r” stands for the interest rate being paid.

•   The “n” represents the number of compounding periods within a year.

If, for example, the interest rate is 3.50%, then that’s what you’d use for the “r.” If interest is compounded quarterly, then “n” would equal four.

Compounding frequency can cause two different savings accounts with the same interest rates to have different APYs. For example, if two different banks offer a certificate of deposit (CD) with the same interest rate and one of them compounds annually, that institution would have a lower APY than the institution that compounds quarterly or daily.

Fortunately, if you want to compare savings rates from one bank or credit union to another, you don’t need to perform these in-depth calculations.

Financial institutions are required to provide information on APY as part of the Truth in Savings Act. And, here’s the heart of it all: The higher the APY, then the more quickly the money you deposit can grow.

Recommended: Use the APY calculator below to see how much interest you can earn on your investments.


Calculating APR

The APR vs. interest rate of a loan tells you how much the loan will cost you over one year, including both the loan’s interest rate and fees, and is expressed as a percentage. A loan’s APR gives you a better sense of the true cost of the loan than the loan’s interest rate, since it includes fees. The higher the APR, the more you’ll pay over the life of the loan.

Thanks to the federal Truth in Lending Act, lenders must provide the APR of a loan. This allows you to compare loans apples to apples. A loan with a low interest rate but high fees may not be a good deal. In fact, you may be better off with a loan that charges a higher interest rate but no or lower fees. APR allows you to be a savvy consumer.

APR can be calculated with this formula: APR = ((Interest + Fees / Principal or Loan amount) / N or Number of days in loan term)) x 365 x 100. Lender’s will tell you the APR of a loan and you won’t need to perform any complicated calculations.

How Simple and Compound Interest Differ

Another dimension of interest rate vs. APY is seen when you consider how simple and compound interest differ. With simple interest, no compounding is involved. If you were to deposit $10,000 in an account earning 4.00% simple interest, at the end of three years, your money would earn $1,200 for a total of $11,200.

If, however, the interest were compounded daily, you would earn $408 the first year. The second year, interest would accrue on the principal and the interest ($10,408), and you would earn $425 the next year (for $10,833), and then $442 the year after that, for a total of $11,275.

While the dollar amount may not seem earth-shattering in this example of a few years, when you are talking about your decades-long financial life, it can really add up. Your money will grow faster with compound interest, helping you reach your financial goals.

Types of High-Interest Accounts for Savings

If you’re looking to earn a competitive rate on your savings, you’ll want to compare accounts by looking at APYs, as well as account fees and minimums. Generally, you can find competitive rates by looking at high-yield savings accounts, money market accounts, and CDs.

•   High-yield savings accounts, typically offered by credit unions and online banks, are accounts that typically pay a substantially higher APY than the national average of traditional savings accounts. They generally also have low or no fees.

•   Money market accounts are savings accounts that offer some of the features of a checking account, such as checks or a debit card. They often come with a higher APY than a traditional savings account, but typically require a higher balance, such as $1,000 or more, to avoid monthly fees.

•   Certificates of deposits (CDs) also tend to pay a higher APY than a regular savings account but require you to leave your money untouched for a certain period of time, called a term. If you take money out before then, you’ll likely pay an early withdrawal penalty. CD terms typically range from three months to five years. Generally, the longer the term, the higher the APY.

Recommended: How Does a High-Yield Savings Account Work?

High-Interest Checking Accounts

Checking accounts work well for everyday spending but typically offer no interest or very little. A high-yield checking account is a special type of account offered by some financial institutions (such as traditional and online banks, and credit unions) that offers a higher-than-average APY. These are accounts designed to give you the flexibility of a traditional checking account (with checks and/or a debit card) but with higher-interest returns.

A few points to note:

•   Often, to qualify for the highest rate the checking account has to offer, you need to meet certain criteria. This might be making a certain number of debit card transactions in a month, having at least one direct deposit or automated clearing house (ACH) payment each month, or choosing to receive paperless statements.

•   Some high-interest checking accounts will offer different APY tiers, with higher account balances earning a higher APY than lower account balances.

Creating a SoFi Savings Account

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


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

FAQ

Why is APY higher than the interest rate?

There is a difference between APY and interest rate: The APY is higher than the interest rate because it reflects the effect of compounding, in which your money earns interest on its interest.

What does it mean to earn 5.00% APY?

If an account says it earns 5.00% APY, that means at the end of the year, your money on deposit will earn 5.00% (say, $500 on $10,000 on deposit). The interest rate may be lower, because the APY reflects the impact of compounding interest.

Why do banks use APY instead of APR?

When a bank tells you its APY, or annual percentage yield, it’s sharing how much your money can grow when on deposit for a year. On the other hand, APR stands for annual percentage rate, which is the amount charged if you borrow money. If you are interested in taking out a loan from the bank, you would be told the APR.

About the author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is a full-time freelance writer who specializes in SEO-optimized blog and website copy: both B2B and B2C for companies ranging from one-person shops to Fortune 500 companies. Read full bio.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

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

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

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

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

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

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
04
2025
Guide to Reopening a Closed Bank Account

Guide to Reopening a Closed Bank Account

By | Budgeting & Goals, Financial Independence, money | Comments Off on Guide to Reopening a Closed Bank Account

You can sometimes reopen a closed bank account depending on the bank’s policies and the reasons for the closure. Accounts that you closed or that were closed due to inactive status tend to be easier to reopen than those that were terminated due to problems like frequent overdrafts. This guide will help you navigate having a closed bank account that you’d like to reopen.

Key Points

•   Bank accounts can be closed by the owner or the bank for various reasons, including dissatisfaction, relocation, or financial issues.

•   Closed accounts might be reopened depending on the bank’s policies and the reasons for closure.

•   Dormant accounts require reactivation, which can often be resolved by making a transaction.

•   Accounts closed due to excessive overdrafts may be reopened after settling outstanding balances.

•   Fraudulent activities leading to account closure generally prevent reopening with the same bank.

Why Might You Need to Close a Bank Account?

Account holders may decide to close a bank account for a variety of reasons, including the following:

•   No longer needing the account

•   Moving to a new location

•   Lack of convenience

•   Dissatisfaction with the account

•   Issues meeting minimum requirements

Here’s more about each.

No Longer Needing the Account

Sometimes, you simply might not need a bank account anymore. For example, if you’d set up a separate savings account to save enough money for a down payment on a house or for a vacation, after you’ve accomplished those goals, you might decide that you don’t need multiple bank accounts anymore.

Moving to a New Location

If you’re moving to a new community that doesn’t have a branch of your financial institution nearby, you may decide to close your bank account and open a new one that’s more readily accessible in your new town. Moving doesn’t create a problem when someone banks solely online, but it can lead someone to switch banks if they prefer in-person options.

Lack of Convenience

Another potential reason someone might switch banks is due to a lack of convenience, such as a bank’s hours being incompatible with their schedule or the bank not having a widespread enough network of ATMs so they wind up paying many ATM fees. When banking becomes inconvenient through a certain financial institution, that could spur someone to seek a more practical solution.

Dissatisfaction With the Account

Whether it’s poor customer service, a lack of desired services, or fees that are too high, customers sometimes close their accounts and go elsewhere because they aren’t satisfied with their current financial institution. If, for instance, you see an offer for a savings account that earns more interest and charges lower fees, you might decide to make a switch.

Issues Meeting Minimum Requirements

If a bank requires you to maintain a certain balance to keep the account open or to avoid hefty fees, an account holder may opt to close the account if they’re struggling to meet those requirements. By closing a savings account with a minimum balance that’s just out of reach, for instance, someone could avoid incurring fees each month when they don’t make the minimum balance requirement.

Is It Bad When a Bank Closes Your Account?

Whether it’s bad when a bank closes your account depends on why the bank closed it — and situations can vary. According to the governmental agency, the Office of the Comptroller of the Currency , banks typically can close accounts for nearly any reason without providing notice.

That being said, common reasons why a bank may close an account can include:

•   Low or no activity: Banks may place an account in a dormant status after a certain period elapses with no transactions. With a dormant account, it’s not technically closed, but the account owner is no longer able to make transactions. How long it might take for an account to go dormant depends on both state laws and a particular bank’s policies.

   After an account has been dormant for a period of time, a traditional or online bank may close the account and, if you can’t be reached, forward the funds to the proper state government, labeling them as “unclaimed property.” At this point, you’d need to submit a claim to your state’s treasury office to obtain that money.

   Recommended: How to Find a Lost Bank Account

•   Suspicious activity: A bank will close an account if it has proven the account to be involved in fraudulent activity. When the bank initially suspects fraudulent behavior (whether the account holder was the perpetrator or the victim), the bank will likely freeze the account to investigate. Red flags can include large transactions, frequent account activity (especially if that activity is new or different), and transfers to overseas accounts.

•   Excessive overdrafts: If an account holder regularly spends more from an account than what’s available, this leads to negative balances and bounced checks. A bank can charge overdraft fees and require that the account holder bring in sufficient funds to return the account back to the minimum balance required. If that happens frequently or if funds are not restored, however, the bank may close the account.

Worth noting: If your bank account is closed due to a negative balance or suspicion of fraudulent activity, this may make it difficult for you to open a new bank account. Those issues will be on your record with ChexSystems, an industry reporting agency. You might need to explore what are known as second chance checking accounts in order to open a bank account again.

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No account or overdraft fees. No minimum balance.

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Do You Get Your Money If a Bank Closes Your Account?

By law, a bank must refund to you any money in a closed account after subtracting fees that are due. Typically, a check will be sent to the account holder. There is a possibility that the bank might move the money into a different type of account.

If the bank cannot reach you about this matter, your funds could be sent to the state as unclaimed money.

How Long Do Banks Keep Closed Accounts?

For deposit accounts of $100 or more, a bank must retain records for at least five years. However, this doesn’t necessarily mean that you can reopen the account within that time frame.

You’ll learn more about how you might reopen a closed account below.

Can You Reopen a Closed Bank Account?

There isn’t a simple yes/no answer to “Can a closed bank account be reopened?” You may be able to reopen a closed bank account in some situations. It will depend, however, on why the account was closed and your financial institution’s policies.

Usually, it’s a wise move to contact the bank, find out why your account has been closed, and see if it’s possible to use it again. You might be able to reactivate a dormant account simply by making a withdrawal or depositing funds (see below for more details). But if a bank account has been closed due to, say, suspicions of fraud, you may not be able to reinstate it.

Next, you’ll learn the steps involved if you do try to reopen a closed bank account.

How Do You Reopen a Closed Bank Account?

If you’ve closed your account (rather than a bank doing so), you can typically submit a request to reopen, say, your checking account. This can be done online, over the phone, or by visiting a branch in person, with the exact process varying depending on the specific financial institution.

Another option you have in this situation is to simply open a new bank account, whether at your previous financial institution or at another one of your choice. When choosing your account, it’s worth exploring the different types of savings accounts you might consider.

On the other hand, if your bank account gets closed by a bank, whether or not you can reopen it largely depends on the reason for the closure as well as your bank’s policies.

In general, the first step in reinstating a troubled account is to talk to your financial institution about why your account was frozen, put into dormant status, or closed. Ask what you need to do to address the issues. You can also review your account agreement. If you believe that a bank wrongfully closed your account, you can file a written complaint .

Here’s guidance on how to reopen a closed bank account in three scenarios.

Reopening a Dormant/Inactive Account

This is one of the simplest issues to address. If you receive a notification that your account is considered inactive or dormant, contact your bank to find out how to make it active again. The bank may allow you to make a deposit to the old account, or they may have you open a new bank account.

💡 Recommended: What Do You Need to Open a Bank Account?

Reopening an Account After Closure Due to Excessive Overdraft

Financial institutions need to monitor their levels of risk. If they close a bank account for excessive overdrafts, the account holder would likely need to talk to the bank to see if they are willing to reopen the old account or if they’d allow them to open a new one. Different banks will have different policies. You may be required to pay off your negative balance, sometimes within a specified timeframe, before you can reopen your account.

Reopening an Account Closed for Suspicious or Fraudulent Activities

If a bank believes that a customer is engaged in fraudulent behavior (rather than being a victim of it), then it may be difficult to reopen an account or to open a new one with the institution. Contact the financial institution, and be prepared to demonstrate how any activity in your account that appeared suspicious was, in fact, not fraudulent or not your fault.

How to Prevent Bank Account Closures

In order to avoid your bank account being closed, it’s a good idea to:

•   Use it regularly so it doesn’t go dormant.

•   Set up alerts for a low balance. That way, you can remedy a situation which could lead to closure due to your overdrafting.

•   Review communication from your bank. You might get a notice that your account has issues, but if you don’t read it, you can’t take steps to prevent closure.

Recommended: APY Calculator

The Takeaway

Whether or not you can reopen a closed bank account largely depends on why it was closed in the first place. Sometimes, an account holder in good standing decides to close a bank account and later changes their mind. In that case, the financial institution will almost certainly allow them to have an account there again. Other times, the bank closed the account, perhaps because of excessive overdrafts, suspicious activity, or lack of use. In those instances, talk to the financial institution to see what steps you need to take.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

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

FAQ

Can a bank close your account?

Yes, it can. According to a governmental agency that oversees financial transactions, banks can close accounts for virtually any reason without notice.

Is it bad when a bank closes your account?

Whether it’s bad depends upon the reason why the bank closes your account. Sometimes, a bank account is closed because of inactivity. Other times, it can be a more concerning situation, one that can make it harder to open an account in the future. For instance, the bank may have flagged the account for suspicious or fraudulent activity. Another reason why a bank may close an account is excessive overdrafts.

Can you reopen a closed account?

Whether you can reopen a closed account depends on who closed the account (you or the bank), the reasons why the account was closed, and the bank’s policies. Talk to your financial institution to find out what steps you would need to take in order to reopen your account.

How do I prevent my bank account from being closed?

To prevent your bank account from getting closed, use the account regularly and set up low balance alerts so you can avoid overdrafting. If your account is troubled, talk to your financial institution. Explore what solutions might exist to keep your account open and return it to good standing. It might also be beneficial to brush up on your financial habits and the basics, such as how savings accounts work.

Will a direct deposit reopen a closed account?

No. If an account is closed, the direct deposit funds will have nowhere to be deposited and so the transaction will not go through. To address this situation, talk to your bank about reopening the account and let the payer know that there is an issue with the account tied to your direct deposit.

About the author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is a full-time freelance writer who specializes in SEO-optimized blog and website copy: both B2B and B2C for companies ranging from one-person shops to Fortune 500 companies. Read full bio.

Photo credit: iStock/Delmaine Donson

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

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

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

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

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

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

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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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