Money & Life Archives | Page 5 of 38

Nov

2024

What Is a Check Hold?

By Jamie Cattanach | money, Money & Life, Terminology | Comments Off

A check hold is the period of time that your bank or credit union hangs on to your check before the funds are released and available in your account. Check holds allow both the sending and receiving financial institutions time to validate a check.

It might seem annoying to have to wait for your money, but the process can help avoid check fraud and bounced checks, which can sometimes result in fees to the account holder. Fortunately, check holds are governed by laws that limit most such holds to two business days (though there are some exceptions, explained below).

Here’s what you need to know.

How Does a Check Hold Work?

When your bank receives a check — be it through the mobile deposit feature on its app or at the physical bank branch — it doesn’t necessarily receive the full credit for the dollar amount on the check. Instead, many checks must first go through the Federal Reserve’s central clearinghouse. This can contribute to a situation in which a check is on hold.

Only after this process is complete does the recipient bank have full access to the funds.

Although some checks may clear immediately, others may not, which means the account holder cannot yet dip into those funds. In some cases, you may have access to a portion of the money you deposited to your checking account, but not the entire check amount, until the hold ends.

In terms of timing, most “local” checks (i.e., those deposited into a United States financial institution, from a United States financial institution) must clear within two business days. There are, however, some exceptions.

Reasons for Check Holds

Banking processes may require holding a check for a variety of reasons, including mitigating the risk of check fraud. Here’s the scoop.

Risk Mitigation

While check fraud is no longer as common as credit card fraud (likely because checks themselves are used less often), it can happen. Forged signatures, “paper hanging” or “kiting a check” (purposefully writing a check without sufficient funds), and plain old counterfeiting are all ways checks can be risky for both banks and their customers. Having a check on hold means there’s more time to review and verify it. This, in turn, mitigates the risk of attempts at bank fraud.

Regulatory Compliance

As mentioned above, some check holds are actually related to the Federal Reserve’s clearing process, as opposed to a policy written by the bank itself. In those cases, the check clearing process may be, quite literally, out of the bank’s hands.

Bank Policies

Individual banks may have their own policies on the books as far as how long to hold different types of checks internally. Of course, such policies are subject to the laws that limit check holds, described below.

Check Hold Time Frames

Thanks to the Expedited Funds Availability Act of 1987 (also known as the EFAA), most checks written in the United States must be cleared within two business days. However, in some cases, the time frame may be extended to six business days, including instances where the check is “non-local” (i.e. is being deposited from a foreign financial institution).

The same law requires banks to disclose their funds availability policies to account holders, so if you ever have a question about when your check should clear, you should be able to contact your bank and get an answer. This can help you understand why a bank might hold checks for a few days.

Recommended: What Is a High-Yield Checking Account?

Typical Hold Periods

The longest you should have to wait for a check hold to clear is about a week.

As mentioned, most “local” checks must clear within two business days, and some may clear more quickly than that. For instance, direct deposit checks often clear by the next business day, as do cashier’s checks and checks that were written from a different account at the same financial institution.

On the other end of the spectrum, if your account is newer, the check is in a large amount, or is being issued from a non-local bank, the hold may extend up to six business days.

Recommended: 50/30/20 Budget Calculator

Factors Affecting Check Hold Duration

While most check holds clear within a business day or two, there are certain factors that may extend the time it takes for your funds to hit your account. These include:

• Account history. Those with newer accounts may be subject to longer hold times during the first 30 days of account ownership as the bank works to verify both your identity and the validity and availability of incoming funds.

• The check amount. Larger checks (defined as totaling more than $5,525 in a day) may be subject to longer holds on the amount over the $5,525 mark, though federal regulations require banks to make at least part of the funds available to you within the normal hold time.

Generally speaking, the first $225 of most checks must be available the next business day, even if the remainder is still subject to a hold.

• The source of the check. Checks from foreign banks may be subject to holds of up to six business days.

• Your bank’s policies. As noted, your financial institution — whether a traditional vs. an online bank — is typically required by federal law to list their funds availability protocols in a prominent place — and a bank representative should be able to answer any questions you have about when a check might clear.

These factors can play a key role in how long a check is on hold for.

The Takeaway

While check holds may feel like an inconvenience, they’re a safety measure that can benefit both you and your bank. They allow banks to verify deposits. In most cases, the funds will be available in just one or two business days. In some cases, a hold of up to six business days is possible.

Looking for a bank account that makes managing your money easy? See what SoFi offers.

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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 is the maximum hold period for a check?

In compliance with federal regulations, holding a check usually cannot last longer than six business days. However, if the bank has reason to suspect fraud or your checking account is brand new, longer check hold times may be deemed “reasonable.”

Can a bank hold a check indefinitely?

No. Banks are subject to federal regulations that limit most check holds to two business days, though in some cases the hold period may extend to six business days. While longer holds are possible under certain circumstances (such as a new account or suspected fraud), the bank still must clear your funds once verification is complete.

How can I avoid check holds?

Directly deposited funds generally clear on the next business day, so signing up for direct deposit with your employer is a good way to avoid check holds on your regular paycheck. For other checks, if the amount is larger, you might ask for a certified or cashier’s check, each of which tends to clear more quickly.

Photo credit: iStock/FG Trade

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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.

*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.

SOBNK-Q324-116

Nov

2024

Average Car Loan Interest Rate by Credit Score

By Alene Laney | Credit, Money & Life, relay | Comments Off

As of the second quarter of 2024, the average car loan interest rate for a new car is 6.84%. The average interest rate for a used car is 12.01%. This is across all credit scores and loan terms.

However, the averages change quite a bit when broken down by credit score, loan term, and new vs. used car loans. Here’s what auto loan interest rates you can expect, why they vary, and what you can do to get a better interest rate for your next car loan.

Key Points

• Car loan interest rates vary significantly based on credit score. Higher credit scores typically receive lower rates, while lower scores often face higher rates.

• Borrowers with scores above 700 (prime) can secure lower rates, sometimes below 5.00%, while subprime borrowers (scores below 600) may see rates over 10.00%.

• Higher interest rates increase monthly payments and total loan cost, making a good credit score valuable for affordable car financing.

• Interest rates on loans for used cars are generally higher than for new cars, as lenders see more risk in financing older vehicles.

• Improving your credit score, shopping around for rates, and considering a cosigner with good credit can help you secure a lower car loan rate.

Average Used Car Interest Rates by Credit Score

The average auto loan interest rates based on credit score, collected by Experian in the Q2 2024 “State of the Automotive Finance Market,” are as follows:

Credit score	New car interest rate	Used car interest rate
Super prime (781 to 850)	5.25%	7.13%
Prime (661 to 780)	6.87%	9.36%
Near prime (601 to 660)	9.83%	13.92%
Subprime (501 to 600)	13.18%	18.86%
Deep subprime (300 to 500)	15.77%	21.55%

Recommended: What Is the Starting Credit Score?

Factors That Affect Auto Loan Interest Rates

It helps to understand what factors affect auto loan interest rates. If you understand these, you may be able to make choices that can secure a lower APR on your next car.

Credit Score

Your credit score is a key factor in what interest rate you’ll qualify for on an auto loan. The better your score, the better interest rate you can get.

Lender

Lenders play a big role in auto loans, largely due to the financing incentives offered on new car loans. If you’re able to take advantage of zero or low-interest financing, that might be the way to go. Just be sure to negotiate the price of the car before you talk payments with the dealer.

Amount Borrowed

A larger down payment means you’ll borrow less and possibly qualify for a more favorable interest rate.

Length of the Loan

Shorter loans have lower interest rates for new vehicles, but that doesn’t always hold true for used car interest rates. According to Experian data for 2024, here’s the average car loan interest rate based on the length of the loan:

Term	New car interest rate	Used car interest rate
Up to 48 months	3.87%	12.05%
49 to 60 months	5.04%	10.93%
61 to 72 months	6.86%	12.80%
73 to 84 months	9.07%	11.53%
85+ months	9.22%	9.81%

Economic and Market Conditions

Economic and market conditions affect what interest rates are available. When the Federal Reserve Board raises interest rates, those costs are usually passed on to the consumer (you). You’ll see higher interest rates when this happens.

If there’s a high demand for cars, such as in the years following the COVID-19 pandemic, you may see higher rates and fewer incentives, as well.

Track your credit score with SoFi

Check your credit score for free. Sign up and get $10.*

How to Get a Better Auto Loan Interest Rate

If you’re looking for a better auto loan interest rate, there are a few strategies you’ll want to try:

• Work on your credit score. If you have time, make some moves to build your credit score. Pay down debt, get your payments on autopay, ask for a credit line increase, dispute inaccuracies, and start regularly checking your credit.

• Look for an incentive. If you have excellent credit, you may find a dealership that offers 0% APR financing for certain models they sell. Just be careful that you’re getting a good deal on the car, too.

• Opt for a shorter loan term. You might see lower interest rates on shorter loan terms, such as those that are 48 months or shorter.

• Put down a larger down payment. If you’re able to put down a larger down payment, you might see a lower interest rate.

• Shop around for a lender. Compare auto loan interest rates for your credit score at banks, credit unions, and online lenders to see which is best for your situation.

How Often Do Auto Loan Rates Change?

Auto loans rates change with fluctuating market conditions. If the prime rate jumps, you’ll see auto loan interest rates jump for new and used car loans.

Incentives for auto loan rates can change with little notice at the dealership, so if you see a 0% interest rate, consider snagging it before the promotion expires.

How to Use Average Car Interest Rates

Average car interest rates can help show you what to expect when you get a car loan of your own. If you don’t see a rate close to the average, you may want to continue shopping around.

Average car interest rates do change based on your credit score, loan term, car make and model, dealer incentives, and whether or not you’re buying a new or used car.

Where Are Auto Loan Rates Heading?

Auto rates are tied to the federal funds rate. When the Federal Reserve Board votes to cut rates, you may see lower interest rates on auto loans. But there are other factors lenders consider — such as delinquencies — before lowering their rates.

Car valuation company Kelley Blue Book expects to see lower APRs on auto loans by the end of 2024. They report a 1% decrease in your auto loan APR results in a 3% decrease in your monthly payment.

Ways to Get a Better Car Loan Rate

The best way to get a better car loan rate is to learn how to build credit. There’s a stark difference between borrowers with poor credit scores and those with optimal credit scores. Here’s a comparison of the average car loan interest rate by credit score for the very lowest scores to the very highest:

	New car loan APR	Used car loan APR
Super prime (781 to 850)	5.25%	7.13%
Deep subprime (300 to 500)	15.77%	21.55%

With poor credit, you’ll most likely pay the highest interest rate available. Even worse, you may not be able to get a loan. Only 0.38% of new car loans are issued to borrowers with a deep subprime credit score. Start monitoring your credit score if you’re worried about getting approved for an auto loan.

The Takeaway

You can use the average car loan interest rate to your advantage. Knowing what it is and what your credit score is can arm you with the knowledge to negotiate for the best rate based on your credit score.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance with a money tracker.

FAQ

What APR will I get with a 700 credit score for a car?

A 700 credit score is considered prime and will receive some of the best APR offers. The average interest rate for someone buying a new car with a credit score in the 700 range is 6.87%, according to Experian’s “State of the Automotive Finance Market.” For a used car, the average interest rate is 9.36%.

What car loan interest rate can I get with an 800 credit score?

An 800 credit score is considered super prime and qualifies for the best APR offers. The average interest rate for someone buying a new car with a credit score in the 800 range is 5.25%. For a used car, the average APR is 7.13%.

What is a good APR for a 72 month car loan?

The average APR for a 72 month car loan is 6.86% for a new car and 12.80% for used. If you’re able to get a better APR than the average, you may consider that good.

Is 7% APR good for a car loan?

A 7.00% APR may be a good APR for a car loan, but it depends on your credit, loan term, and whether you’re buying a used or new car. If you have excellent credit and are seeking a new car loan, 7.00% is higher than the average 5.25% APR you could get. But if you’re buying a used car, 7.00% is a great rate.

What APR is too high for a car?

An APR is too high when it’s over the average APR for your credit score. The APR for people with poor credit averages 15.77% for new cars and 21.55% for used cars, so anything over those amounts would be considered high.

Can you negotiate APR on a car?

Yes, you can negotiate the APR (annual percentage rate) on a car loan. Start by researching current rates based on your credit score and prequalifying with different lenders. Dealers may match or beat offers to close the sale, so leverage competing rates to negotiate a better APR.

Photo credit: iStock/PixelsEffect

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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

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

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

SORL-Q424-018

Nov

2024

What Is the Average Credit Score for a 25 Year Old?

By Sarah Li Cain | Credit, Money & Life, relay | Comments Off

Having good credit can help you reach financial goals such as buying a car or home, or renting an apartment. If you’re in your 20s, it makes sense that your credit score may be lower than that of older friends. That’s because you have a shorter credit history, an important factor in calculating your score.

Still, you can use averages to gauge where you stand credit-wise. Credit bureaus don’t use your age to calculate your score, though there are patterns based on it. Let’s take a look at the average credit score for a 25 year old and see what it could mean for your financial life.

Key Points

• The average credit score for a 25 year old is 680, which falls in the low end of the “good” range.

• Many 25 year olds carry student loans, which can influence their score positively with on-time payments or negatively if payments are missed.

• A shorter credit history contributes to a lower average score, as credit bureaus weigh the length of credit history heavily.

• Younger adults may rely more on credit, increasing utilization rates, which can temporarily lower scores.

• By making consistent payments and maintaining low balances, young adults can steadily increase their credit scores over time.

Average Credit Score for a 25 Year Old

While data doesn’t explicitly show the average credit score breakdowns by age, it does by age ranges. Those who are 25 fall under what are considered Gen Z, and this generation’s average FICO® credit score was 680 in 2023.

Recommended: What Is the Starting Credit Score?

Track your credit score with SoFi

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What Is a Credit Score?

A credit score is a three-digit number, typically ranging from 300 to 850, that predicts your credit behavior. It shows lenders how likely you are to pay back loans on time.

Credit scoring companies like FICO and VantageScore calculate your credit score based on information from your credit history, using factors like payment history, how long you’ve had credit or accounts open, and new credit applications. The higher your score, the less of a risk you are to lenders, as it demonstrates you pay back loans on time.

Recommended: How to Check Your Credit Score for Free

What Is the Average Credit Score?

As of October 2023, the average FICO credit score for all ages was 717. The average VantageScore for all ages was 702 as of March 2024.

Average Credit Score by Age

The average credit score tends to go up the older someone is, which could be attributed to a longer credit history and opportunities to open different types of accounts. The table below shows average FICO credit scores according to Experian data from October 2023.

Age	Average Credit Score
16 to 26	680
27 to 42	690
43 to 58	709
59 to 77	745
78+	761

What’s a Good Credit Score for Your Age?

Even if your credit score is at or above the average for your age range, it doesn’t mean that it’s good or that it’ll help you reach your financial goals. A better way to gauge your credit is by using credit score ranges from FICO and VantageScore. That way, you can understand the likelihood of qualifying for credit cards and other types of loans.

FICO

Rating	Credit Score Range
Poor	Lower than 580
Fair	580 to 669
Good	670 to 739
Very Good	740 to 799
Exceptional	800 and higher

VantageScore

Rating	Credit Score Range
Subprime	300 to 600
Near Prime	601 to 660
Prime	661 to 780
Superprime	780 to 850

How Are Credit Scores Used?

Lenders use credit scores as a factor in determining whether to approve you for a loan. Your credit score provides a snapshot of your risk as a borrower and how you use credit. In many cases, the higher your credit score, the more likely you’ll be approved for loans at more competitive rates and terms. Or, you may have access to more loan products, like luxury rewards credit cards.

Factors Influencing the Average Credit Score

There are five factors that affect credit scores:

• Payment history: This aspect of your credit score looks at whether you pay your loans on time, including accounts that may have gone to collections.

• Length of credit history: Having a longer credit history can offer more insights into your credit behavior.

• Credit utilization: Credit utilization is the percentage of available credit you use on revolving accounts. The more you use, the more it could seem you’re overextended on your accounts.

• Credit mix: Scoring models look at the varieties of credit you have like mortgages, credit cards, and car loans.

• New credit: Opening or applying for new credit accounts within a short span of time could affect your credit score.

How to Strengthen Your Credit Score

Credit scores can fluctuate over time due to a number of reasons. If your credit score is lower than you’d like, consider these best practices to build credit:

• Set up automatic payments or reminders to help you pay loans on or before the due date

• Keep your accounts current by paying off past due balances

• Check your credit history reports to see what may have led to a drop in your score

• Fix any errors on your credit reports

• Increase your credit card limits

• Avoid applying for new credit unless necessary

• Keep accounts as long as possible, even if they’re not currently being used

• Watch your credit card balances to make sure they don’t get too high

How Does My Age Affect My Credit Score?

Your age doesn’t directly affect your credit score. Instead, it’s based on factors like your payment history and the length of time you’ve had credit. The earlier you start building your credit, the more opportunities you’ll have to get a good credit score.

Recommended: How Long Does It Take to Build Credit?

At What Age Does Credit Score Improve the Most?

There’s no set age when your credit score will improve the most because it’ll depend on factors such as when you start building credit and whether you pay loans consistently on time. Older generations may have higher credit scores because they have more chances to build their credit. It’s important to focus on where you are at now and what you can do to keep building your credit.

Credit Score Tips

Aside from paying your bills on time, consider other ways you can build credit. While it may be hard to open a new loan or credit card if you have a limited credit history, you can consider products like a secured credit card. A secured credit card has a refundable security deposit that acts as your credit line. Another option is a credit builder loan, where the lender sets aside your loan funds in a separate savings account and you can access the cash once you’ve paid off the loan.

The Takeaway

While looking at the average credit score for a 25 year old may be useful to see where you stand, it’s more effective to look at your credit history to see what you can do to build your score. By regularly monitoring your score, you can see whether the actions you’re taking are helpful.

See exactly how your money comes and goes at a glance.

FAQ

Can I buy a house with a 633 credit score?

Yes, it’s possible to qualify for a mortgage with a 633 credit score. You may be able to qualify for an FHA loan or a conventional mortgage, but potentially at a higher interest rate.

Can I buy a house with a 613 credit score?

Yes, it’s possible to buy a house with a 613 credit score, though it may limit your loan options and result in higher interest rates. FHA loans, designed for those with lower credit scores, are often a good option, but lenders may require a larger down payment.

What credit score is needed to buy a $300K house?

The credit score you need to buy a $300K house will depend on the type of mortgage you want and other factors, such as your income, available assets, and down payment.

Is 650 a good credit score?

A 650 credit score is considered fair and is slightly below the average credit score.

Is a 750 credit score good at 25?

Yes, a 750 credit score at 25 is considered excellent and indicates strong credit habits for someone in this age group. This high score can help secure favorable interest rates and better loan terms, giving an advantage in achieving financial goals.

How rare is an 800 credit score?

Less than a quarter of U.S. consumers (22%) have a credit score of at least 800. This exceptional score reflects consistent financial responsibility, including on-time payments, low credit utilization, and a long credit history.

Photo credit: iStock/Anchiy

SORL-Q424-027

Nov

2024

What Is a Drawee in Banking?

By Dan Miller | Money & Life, Terminology | Comments Off

A drawee in banking is the entity that has been asked to pay a sum of money to a person who presents a check or a similar financial instrument. If your employer (the drawer) were to write a check to you (the payee), the bank would be the drawee.

Knowing the definition of drawee can help you understand banking and legal terminology, which can help build your financial literacy. Read on to learn more about what a drawee in banking is.

Key Points

• A drawee is the entity, often a bank, that provides a sum of money to a payee presenting a check or similar financial instrument.

• The drawee relationship involves three parties: the drawer (payor), the drawee, and the payee.

• The drawee plays a crucial role in facilitating financial transactions, especially check cashing or depositing.

• The drawee helps manage risk by holding funds before releasing them, ensuring the check clears.

• Drawees often assume primary liability for errors or mistakes on checks they accept for payment.

Understanding Drawees

While the term drawee is not one that is often used by people, it plays a crucial role in the finance industry. Understanding what a drawee is can help you if you ever receive or write checks.

Definition of a Drawee

The definition of a drawee is a person or company (often a bank or other financial institution) that has been directed to pay someone presenting a financial instrument — often a check. The person presenting the check is usually referred to as the payee, and the payor (or drawer on a check) is the person who issued the check.

Role in Banking Transactions

While the term drawee may be relatively obscure, it plays a key role in banking transactions. Without a drawee as an intermediary, it would be much more difficult, or perhaps even impossible in some cases, to cash or deposit a check. When you deposit or cash a check, the drawee is the one that contacts the payor (or their bank) to withdraw the funds to give to you.

Without a drawee, you would have to contact the payor’s bank directly to receive your funds. This might or might not be successful.

Drawee in the Context of Checks

While the concept of a drawee does exist in other areas besides checks (most notably in coupons presented to a retail store), it is most commonly used in banking when someone writes a check.

If you receive a check and try to cash it or deposit the check into an account such as a high-yield checking account, the bank or check-cashing service where you present the check will serve as the drawee. They will manage the transaction, contacting the individual or company that wrote the check (or their bank) to help facilitate the transfer of funds.

Importance of the Drawee

A drawee can be very important in helping to ensure the easy and quick transfer of funds between people or companies with accounts at different banks.

Facilitating Financial Transactions

One of the most important roles of a drawee is in helping to facilitate financial transactions, such as sending money between accounts. Whether using online or traditional banking, one of the most common bank transactions is moving money to someone else at a different account (such as by writing checks). A drawee plays a crucial role as an intermediary in this process.

Risk Management

A drawee can also help with risk management. Since it usually serves as an intermediary, it can help to lower the overall risk of the check writing process. It’s common for a drawee to be a bank, and these financial institutions usually will hold onto funds for a couple days before releasing them. This process (you may know it as waiting for a check to clear) helps to lower the overall default risk of the transaction.

Legal Implications

With a drawee as an intermediary in the process of writing and depositing a check, you as the payee are generally not liable for errors or mistakes on the check. When a drawee accepts a check for payment, they are often considered primarily liable for any errors, omissions, or mistakes on the check.

Rights and Obligations of the Drawee

When a drawee accepts a check for payment, they take upon themselves the obligation to honor any valid checks that are presented. They also do have the right to return what are known as dishonored items (such as if the payor’s account has non-sufficient funds). The drawee also assumes primary liability for any errors, omissions or mistakes on the check when it is presented. This is why banks or other financial institutions will generally make sure to review a check before they accept it and pay out any funds.

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The Drawee Relationship

There are three main actors in the drawee relationship — the drawee and the drawer of a check (sometimes referred to as the payor), along with the payee.

Relationship With the Drawer

The person who writes a check or other financial instrument for payment is commonly referred to as the drawer (sometimes also called the payor). The drawer includes their routing and account number on the check before giving it to their customer as payment for an item or service. These routing and account numbers help the drawee to facilitate the transfer of money from one account to another.

Relationship With the Payee

The person who presents a check to a drawee for payment is usually referred to as the payee. It is common (though not required) that the payee have a checking account or other relationship with the bank that is serving as the drawee. This can help to mitigate the risk for the drawee, since they have a contact they can reach out to in case there are any errors with the check as it was presented.

It’s also worth noting that you can often cash a check at the bank it was drawn on, without having an account there but by providing appropriate ID (and the bank verifying that the funds are available).

Intermediaries Involved

If the drawer of a check has an account at a different bank than the one that is serving as the drawee, there may be other intermediaries involved in the process. One of the most common networks of financial institutions is the Automated Clearing House (ACH), but there are other similar networks as well. These intermediaries help the drawee to facilitate the process of cashing or depositing a check.

Recommended: 23 Ways to Make Quick Cash

The Takeaway

A drawee is one of three important actors in certain types of financial transactions, most commonly when a check is written and deposited or cashed. The drawee is usually a bank that accepts a check or other financial instrument and pays out the money. The payee is the person who presents the check for payment, and the payor or drawer is the person or entity that wrote the check. While the term drawee is fairly uncommon in everyday speech, drawees play a crucial role in the process of transferring money between people with accounts at different banks.

Looking for a bank account that helps you transfer money, quickly and easily? See what SoFi offers.

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 is the difference between a drawer and drawee in banking?

In a financial transaction, the drawer is the party (such as an employer) that directs the drawee to transfer funds to a payee. The drawee is the entity (such as a financial institution) that actually distributes a specified sum to the recipient. So if you did a freelance gig and were paid by the Acme Company, that business is the drawer, and the bank that cashes the check they gave you is the drawee.

What is the role of the drawee?

Usually, the drawee is the entity that facilitates a transfer between a drawer (or payor) and payee. In many situations, the drawee is the bank or check-cashing service involved in cashing or depositing a check that a drawer provides to a payee.

Photo credit: iStock/AndreyPopov

SOBNK-Q324-114

Nov

2024

Can You Overdraft With a Debit Card? Understanding Your Options and Risks

By Kim Franke-Folstad | Budgeting & Goals, money, Money & Life | Comments Off

It’s possible to overdraft your account with a debit card if you have signed up for your bank’s overdraft coverage, which can enable a transaction to go through even when the account is short of the funds needed to cover it. However, you may wind up paying expensive overdraft fees on your purchase or withdrawal.

Overdraft fees have been around for so long now, many consumers may simply accept them as a cost of doing business with their bank or credit union. But you may not want to do so. Read on for a closer look at what opting into your bank’s overdraft service could mean specifically for debit card transactions.

Key Points

• Overdrafting occurs when an account owner’s spending exceeds their account balance but the bank still covers it, leading to potential overdraft fees.

• With standard overdraft coverage, a bank may (at its discretion) cover a transaction even if it overdraws an account, though it would typically charge an overdraft fee.

• With debit cards and ATMs, a bank customer must opt-in to overdraft coverage, consenting to the related overdraft fees.

• Overdraft protection programs allow account holders to link to a backup account, from which the bank can pull funds when the primary account is overdrawn.

• Account holders may be able to reduce or avoid overdraft fees by linking accounts, using credit cards or other payment methods, or choosing low- or no-fee banks.

What Does It Mean to Overdraft With Your Debit Card?

Overdrafting with a debit card means that you may spend more money than you actually have in the account.

If you don’t have enough money in your bank account to cover a debit card transaction, you can expect one of two things to happen.

• Your bank may decline your request, leaving you empty-handed at the cash register or ATM.

• Your bank could allow the transaction to go through. Technically, you will have overdrawn your account, because your account balance will fall below zero. But you’ll get what you wanted — some cash, a latte, movie tickets, etc. And you’ll be saved from potential embarrassment in front of co-workers or friends.

The second outcome may seem more satisfying, at least for the short-term. But there’s a catch: Your bank may only let the transaction go through if you participate in its overdraft coverage or protection program, and you can be charged a fee for this service.

What Is Overdraft Coverage vs. Overdraft Protection?

Many financial institutions offer overdraft programs that will let your transactions go through, at least temporarily, if you don’t have enough money in your account. But the rules — and fees — for this service can vary significantly from one bank and bank account to the next, so it’s important to understand what you’re signing up for.

Standard Overdraft Coverage

Many banks offer some type of standard overdraft coverage for their consumer checking accounts. Generally, if you overdraw your account with a check, automatic bill payments, or recurring debit card transactions, the bank may process the transaction anyway (at its discretion and usually up to a certain limit). But it will typically cost you: Your bank may charge an overdraft fee. And you’ll still have to get your account back in the black ASAP to avoid multiple fees. So while you can overdraft a debit card with no money in your account, it can get pricey.

Overdraft Protection

Overdraft protection services work a little bit differently. With this type of program, you can designate a backup account (a savings account, credit card, or line of credit, for example) to cover any shortfalls. The bank will automatically transfer money to your overdrawn checking account.

You’ll likely still be charged for this service, but this “transfer fee” may be lower than the bank’s overdraft fee. Before opting into any overdraft program, it’s important to understand the specific terms and fees.

How Are Debit Card Overdrafts Different?

You may not have a choice when it comes to paying fees when you overdraw your account with a check or automated clearing house (ACH) payments. If the bank approves the transaction, you can expect to pay an overdraft fee. If it declines the transaction, you’ll likely face a non-sufficient funds (NSF) fee. This charge means that even though the transaction wasn’t completed, you still will pay for the inconvenience the bank experienced due to the situation.

But your bank can’t charge you fees for overdrafts on most debit card transactions unless you have specifically opted in to those charges.

Opt-In vs. Opt-Out Policies

Deciding whether you want or don’t want to pay overdraft fees on debit card transactions can be a pretty complicated decision. Policymakers at the Federal Reserve decided in 2010 to change the previous process that involved having to opt out of overdraft coverage (that is, customers could be automatically enrolled in the service). Since then, bank customers have to opt in by signing paperwork that says they understand the fees and they want their bank to process their debit card transactions even when they’re short of funds.

• If you opt in to debit card and ATM overdraft coverage, you can expect withdrawals and purchases to go through even if you don’t have enough funds in the bank at the time of the transaction. But you will likely be charged a fee in exchange for this service. (See below for pricing specifics.)

• If you don’t opt in to debit card and ATM overdraft coverage, you may experience one-time ATM withdrawals and debit purchases being declined if you don’t have enough money in your account at the time of the transaction. You can avoid paying an overdraft fee for those transactions, but it will be up to you whether you want to use a credit card or some other method to complete the transaction.

• Keep in mind, though, that even if you don’t opt in to overdraft coverage for your debit card, you could still face fees. If you’re short of funds when the bank processes an automatic payment through your debit card — for a gym membership or subscription service, for example — you might face an overdraft fee if the bank chooses to complete the transaction. And if the payment is declined, you may be charged an NSF fee.

Recommended: How to Get a Debit Card

Costs and Fees Associated With Overdraft Services

Federal regulators have proposed lowering overdraft fees to as little as $3, but currently they average around $26 to $27. And though some banks don’t charge overdraft fees on checking accounts, 94% of accounts at financial institutions still have them, according to a recent survey. And they can run as high as $38 or so.

Some banks also may charge what are known as “continuous” overdraft fees, or daily overdraft fees. These are charges assessed every day the account remains overdrawn, and the fees can add up quickly.

Your bank may waive the fee on a smaller purchase. Also, if it’s the first time you’ve overdrawn your account — or it’s been a while since you did so — the bank might remove the fee if you call and ask.

Should You Overdraft With a Debit Card?

If you’ve opted in to debit card overdraft coverage, it may seem worth the risk of overdrafting if you need some quick cash or to fill your gas tank in a pinch when you’re low on funds. But if you have other resources (whether it’s a credit card or a piggy bank), you might want to tap those first. Keep potential fees in mind — not to mention the stress of knowing your checking account will have a negative balance — as you ponder this strategy.

Recommended: 10 Personal Finance Basics

How to Avoid Overdraft Fees

Understanding how opt-in overdraft coverage works is one way to avoid triggering unnecessary bank fees. But there are other proactive steps you may want to consider, as well, including the following:

Choose a Bank That Doesn’t Charge Overdraft Fees

Some banks don’t charge overdraft fees; often, they cover you up to a specific overdraft limit, such as $50. Others may offer one or two fee-free account options. (If bank fees overall are an issue for you, keep in mind that online banks often have lower costs than traditional brick-and-mortar institutions.)

Use Credit Cards for Emergency Expenses

If you have a relatively low-interest credit card or you’re able to pay off your credit card balance every month to avoid accruing interest, it may make sense to use your credit card for emergency expenses. Thinking about which card you’re going to use before an emergency comes up could help you make the best decision.

Link Accounts for Overdraft Protection

Linking your checking and savings accounts can allow your bank to quickly move funds to cover negative balances. Though you might pay a transfer fee, it’s usually less than an overdraft fee.

Build an Emergency Fund

Having an emergency fund that can cover three to six months’ worth of expenses is a good goal, but even a smaller amount of savings may allow you to deal with the kinds of unexpected expenses that can trigger debit card overdrafts. A high-yield savings account can help you grow your money while also keeping it accessible.

Steps to Help You Better Manage Your Debit Card

If the convenience of using a debit card has made it your go-to tool for accessing cash and making purchases throughout the day, there are steps you can take to prevent overdrafts.

Monitor Your Accounts

Using a tracking tool to monitor your checking account and other account balances, can help you avoid an overdraft.

Set Up Low Balance and Other Alerts

If your bank offers account alerts, consider setting up a notification so you know when your checking account balance is getting low.

Know When Your Bills Are Due

Putting together a budget can help you pay your bills on time and organize your payment dates. Then, you might also see if you can move some payment dates. For instance, you could ask your credit card issuer to shift your date. That way, your checking account won’t be drained due to having so many payments in the same pay week or pay period.

The Takeaway

You may be able to overdraft your debit card transactions if you have overdraft coverage. This means your bank will cover the transaction, but you will likely be charged a fee for this privilege. If you choose not to opt into your bank’s standard overdraft coverage, there’s a good chance that a debit card transaction that would take your account into a negative balance would be denied.

The rules and fees for overdrawing your account with a check, automatic payment, or debit card can vary significantly depending on where you bank, so it’s a good idea to read all the paperwork you receive when you sign up for an account.

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 if I overdraw with my debit card without overdraft coverage?

Here’s what happens if you overdraft with a debit card: If you don’t have overdraft coverage and you don’t have enough money in your bank account to cover the transaction you’re trying to make, your bank will likely decline the purchase or withdrawal. You won’t overdraft your account and you won’t have to worry about paying an overdraft fee, but you will have to find another way to finance your transaction or skip it.

How much does overdraft coverage typically cost?

Overdraft fees can vary depending on the bank and other factors, including whether you have a backup account or credit card linked to your checking account. One recent survey found an average fee of around $26 or $27. That said, there is a movement afoot to lower these fees considerably which may or may not impact future charges.

Can I overdraft using my debit card at an ATM?

If you’ve opted in to your bank’s overdraft coverage, your ATM withdrawal may go through, even if you withdraw more than you actually have in your account. You can expect to be charged an overdraft fee for this service. If you don’t opt in to overdraft coverage, the transaction will likely be declined, and you won’t be charged an overdraft fee, but you won’t be able to access the funds you’re seeking.

Photo credit: iStock/megaflopp

SOBNK-Q324-080

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Reasons for Check Holds

Risk Mitigation

Regulatory Compliance

Bank Policies

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Check Hold Time Frames

Typical Hold Periods

Factors Affecting Check Hold Duration

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What is the maximum hold period for a check?

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Factors That Affect Auto Loan Interest Rates

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How to Get a Better Auto Loan Interest Rate

How Often Do Auto Loan Rates Change?

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The Takeaway

FAQ

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What Is the Average Credit Score for a 25 Year Old?

Average Credit Score for a 25 Year Old

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What Is a Credit Score?

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Average Credit Score by Age

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How Are Credit Scores Used?

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The Takeaway

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What Is a Drawee in Banking?

Understanding Drawees

Definition of a Drawee

Role in Banking Transactions

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Drawee in the Context of Checks

Importance of the Drawee

Facilitating Financial Transactions

Risk Management

Legal Implications

Rights and Obligations of the Drawee

The Drawee Relationship

Relationship With the Drawer

Relationship With the Payee

Intermediaries Involved

The Takeaway

FAQ

What is the difference between a drawer and drawee in banking?

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