Oct
28
2024

What Is a National Bank?

By | money, Money & Life | Comments Off on What Is a National Bank?

A national bank is a large commercial bank that is supervised by the Office of the Comptroller of the Currency (OCC), which is an independent bureau of the U.S. Treasury. National banks, which include some of the best-known banks, can operate in any state, making them distinct from state-chartered banks. They play a pivotal role in the U.S. economy by offering a wide range of services — including savings and checking accounts, credit cards, and loans — on a national scale. Here’s a closer look at what national banks are and how they work.

Key Points

•   National banks are chartered and regulated by the Office of the Comptroller of the Currency (OCC), an independent bureau of the U.S. Treasury.

•   Today’s national banking system was largely shaped by the National Banking Acts of 1863 and 1864.

•   Unlike state-chartered banks, national banks can operate in any state.

•   National banks offer financial services like savings and checking accounts, credit cards, and loans, and investment products.

•   National banks are crucial for the U.S. economy, facilitating interstate commerce and promoting economic growth.

Understanding National Banks

To understand national banks, it helps to know how they are officially defined, how our current system of banking came to be, and how national banks are regulated today.

Definition of a National Bank

In the U.S., a national bank is defined as a financial institution chartered and regulated by the federal government. National banks operate under a charter granted by the Office of the Comptroller of the Currency (OCC), an agency within the U.S. Department of the Treasury. They can legally operate in any state.

National banks are members of the Federal Reserve System and authorized to provide a wide spectrum of banking services, including lending, taking deposits, and managing financial transactions. National banks typically serve a national clientele, offering services across multiple states, making them key players in interstate commerce.

National banks include both online banks and traditional banks (the latter also being known as brick-and-mortar banks), and typically have “National” in their names or “N.A.” (for National Association) listed after their names.

The OOC maintains a current list of all active national banks in the U.S. If you don’t see your bank on the list, it is likely a state-chartered bank vs. a national one.

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History and Origins

Now that you know the national bank definition, consider how it came to be. The national banking system as it’s recognized today was shaped by the National Banking Acts of 1863 and 1864, which were enacted to create a system of national banks, establish a national currency, and offer greater financial stability during the Civil War. Here is some detail on how this unfolded:

•   In the decades prior to the Civil War, regulation of banks was in the hands of the individual states, and each bank issued its own currency. Banks were required to get a charter from their state government. But increasing demand for banks led to corruption, with petitioners often bribing state legislators to obtain a charter.

•   To reduce corruption and to make the process of opening a bank easier, many states enacted free banking laws. This meant that virtually anyone could open a bank, provided they met certain basic criteria, like having a certain minimum amount of capital and depositing bonds (or another type of security) with the state government to back the notes issued by the bank.

•   To create a more organized system, Congress passed the National Banking Act in 1863 (originally known as the National Currency Act). Under this system, banks could only issue a new kind of paper money —- national currency —- backed by government bonds. The Act also established the OCC to regulate national banks.

While the National Bank Act has evolved over the years, it continues to provide the basic governing framework for the operation and regulation of national banks in the U.S. today.

Regulatory Framework

Here are some important points about how national banks are regulated:

•   National banks in the U.S. are regulated by the OCC, which oversees their operations and ensures compliance with federal banking laws. As of 2024, the OCC oversees 1,040 national banks.

•   National banks are also members of the Federal Reserve System, which enables them to borrow from the central banking system to meet reserve requirements or to address a temporary funding problem.

•   In addition, national banks must belong to (and pay premiums to) the Federal Deposit Insurance Corporation (FDIC). This FDIC offers protection to account holders by insuring bank accounts up to $250,000 per depositor, per account category, per insured financial institution. (Co-owners of joint accounts at the same bank are each insured up to $250,000.)

This regulatory framework ensures that national banks remain financially sound, protect consumer interests, and follow guidelines for safe and effective banking practices.

Advantages of National Banks

National banks provide a number of benefits that make them attractive to customers. These include:

•   Stability. National banks must meet stringent regulatory requirements, including maintaining sufficient capital reserves, which reduces the risk of bank failure.

•   Oversight: Because they are supervised by the OCC and are members of the Federal Reserve System, national banks are held to high operational and ethical standards. This oversight reduces the risk of fraud and mismanagement.

•   Broad accessibility. If you have an account at a national bank, you can likely find branches and/or in-network ATMs throughout the U.S. and, in some cases, overseas.

•   Wide range of services. National banks often offer multiple checking and savings accounts as well as a variety of loan products. Some also offer investment services. A national bank can be a good fit for those who prefer to do all of their banking in one place.

These are the key features that set national banks apart from others.

National Banks vs State-Chartered Banks

The key difference between national banks and state-chartered banks is whether their charter was granted by the state government or the federal government. The OCC charters national banks; the state banking departments charter state banks.

National banks typically operate across state lines, providing a broader range of services on a national level. State-chartered banks, on the other hand, often serve local or regional markets, focusing on the needs of their specific communities.

Regardless of whether a bank is national or state-chartered, the way banking regulations work is quite similar. In addition, both national and state-chartered banks offer FDIC-insured deposits.

Becoming a National Bank

Becoming a national bank requires a financial institution to meet specific criteria and undergo a rigorous approval process. Here’s a look at the steps involved.

1.    Application for a federal charter: Institutions that want to operate as national banks must apply for a charter from the OCC. The application process involves submitting detailed information about the bank’s business plan, management structure, and financial health.

2.    Meeting capital requirements: National banks must meet minimum capital requirements, which ensure they have enough reserves to provide a safety net for their operations.

3.    Applying for FDIC insurance: Final approval for an application to establish a national bank is not issued until the OCC receives written confirmation by the FDIC that the accounts of the bank will be insured by the FDIC.

These steps are necessary to make sure that a bank is qualified as a national entity.

The Role of National Banks

National banks play three critical roles in the U.S. economy:

•   Providing financial services. National banks provide a wide range of essential financial services to individuals and businesses, including checking and savings accounts, loans, mortgages, and credit cards, investment products, and wealth management services.

•   Facilitating interstate commerce. With their federal charters, national banks provide banking services to businesses and consumers throughout the U.S., facilitating transactions that drive economic activity on a national scale.

•   Promoting economic growth. Without access to credit, many businesses would not be able to launch and grow. In addition, individuals would be unable to finance their education, cars, and homes. As a result, national banks play a crucial role in providing the credit necessary for economic growth.

In these ways, national banks play a crucial role in the U.S. economy and daily life.

Recommended: Guide to Commercial Banking

The Takeaway

Chartered under federal law, national banks play a vital role in the national economy. They offer a range of financial services to their customers, provide capital to support economic growth, and facilitate commerce across state lines.

National banks generally have more resources and a wider reach than state-chartered banks, which tend to offer more personalized, community-focused services. Which type of bank is the right fit for you will depend on your needs and personal preferences.

If you think a national bank would suit your needs, see what SoFi offers.

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

Are national banks safer than state-chartered banks?

Whether a bank is national or state-chartered, it must adhere to strict regulations. National banks are chartered, regulated, and supervised by the OCC to ensure they conform to national laws. State banks are chartered and regulated under state laws and are supervised by a state agency. Both types of banks are insured by the Federal Deposit Insurance Corporation (FDIC), which protects deposits up to $250,000 per depositor, per account category, per insured institution.

What are the major national banks in the United States?

The four largest banks in the U.S — each with over $1 trillion in assets — are:

•   JPMorganChase

•   Bank of America

•   Wells Fargo

•   Citibank

As national banks, these institutions are able to operate across state lines and offer a wide range of services, including checking and savings accounts, credit cards, mortgages, and investment options. National banks are chartered and regulated by the federal government, which allows them to provide banking services on a national scale.

How are national banks regulated differently than state banks?

National banks must adhere to a uniform set of federal regulations, including membership in the Federal Reserve System. State banks, on the other hand, follow state-specific regulations, which can vary by jurisdiction. Both types of banks are insured by the Federal Deposit Insurance Corporation (FDIC).

Photo credit: iStock/georgeclerk

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.

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.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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Oct
28
2024

What Is an Authorized Signer on a Bank Account?

By | Family Finances, money, Money & Life | Comments Off on What Is an Authorized Signer on a Bank Account?

An authorized signer is a person who has access to a bank account but doesn’t actually own the funds in the account. Their limited rights to the account differentiate an authorized signer from, say, a joint owner.

It could make sense to add an authorized signer to personal or business bank accounts if you’d like someone else to have access either for convenience or in case you’re unable to manage the account yourself. Here’s a closer look at what it means to be an authorized signer on a bank account and how to add one.

Key Points

•   An authorized signer can conduct transactions within a bank account but does not own the funds within it.

•   Account owners are legally responsible for activities conducted by authorized signers on their accounts.

•   Authorized signers can write checks, pay bills, and make deposits, but their authority ends upon the account owner’s death.

•   The account owner can limit the authorized signer’s access, such as restricting check-writing privileges.

•   Adding or removing an authorized signer requires completing a form with the bank and possibly an in-person visit to add the signer, and the account owner can revoke the signer’s status at any time.

Definition of an Authorized Signer


An authorized signer on a bank account is someone who has the right to make transactions from the account, at the discretion of the account owner. However, an authorized signer does not own the funds in the account. The account owner can choose to whom to grant authorized signer status, and they can revoke that designation at any time.

In addition, it’s worth noting that the account holder may be able to limit the authorized signer’s access. For instance, some financial institutions may allow the account owner to cap check-writing privileges at $500 or $1,000 for the authorized signer. Any amount above that could require two signatures on the check.

Online banks and traditional banks often allow customers to add authorized signers; some may allow you to add more than one. A bank account authorized signer may be a:

•   Spouse

•   Adult child or grandchild

•   Parent

•   Sibling

•   Another relative

•   Friend

•   Business partner (if you’re adding someone to business bank accounts)

Some points to note:

•   Authorized signers are often added to business accounts so that the authorized signer can make deposits or write checks as needed.

•   Authorized signer status applies while the account owner is still living. You can’t be an authorized signer on, for example, a savings account after death of the account owner, as your authority ends with their passing.

•   As briefly noted above, an authorized signer is different from a joint owner of an account. With a joint account, the parties each have access to, as well as ownership of, the money in the account.

Also, adding an authorized signer is not the same as opening a bank account for someone else. For example, a parent might open a bank account for a minor child. The parent is the primary account owner, while the child is a joint owner, or it might be a custodial account. (This will depend on the financial product chosen.)

Roles and Responsibilities of an Authorized Signer


An authorized signer on a bank account typically has the right to:

•   Check account balances

•   Sign checks drawn on the account

•   Pay bills

•   Schedule transfers to other accounts

•   Use a debit card to make purchases or withdraw cash from the account

•   Deposit funds to the account

•   Stop payments

You may be able to add an authorized signer to a business account, checking account, or savings account. If state laws allow, an authorized user may also be able to close the account.

You may wonder why someone would add an authorized signer to a bank account. It could make sense in certain situations.

•   Seniors may choose to add their children as authorized signers to help them manage their money.

•   A business owner may add one of their employees to the account and delegate certain tasks, such as paying invoices or making deposits.

•   Someone who’s undergoing medical treatment for a serious condition may add a family member or friend to make sure their bills are paid so they can focus on their health.

An authorized signer has no right to any assets in the account after the account owner passes away unless they’re also listed as a beneficiary. If you’d like your authorized signer to be able to inherit your account, you’d need to fill out a beneficiary form with your bank.

Recommended: How Do Savings Accounts Work?

Differences Between an Authorized Signer and Account Holder


The main difference between an authorized signer and an account holder is simple: The account holder owns the account; an authorized signer doesn’t.

An authorized signer can’t make any changes to the account’s ownership. They don’t have any automatic right to the money once the account holder passes away. The account owner can revoke their authorized signer status at any time. Account holders are also legally responsible for anything authorized signers do with the funds in the account.

To recap:

•   Account owners (including joint account owners) own the funds in the account and have discretion over how the account is managed, including when to add or withdraw an authorized signer.

•   Authorized signers have the right to conduct certain transactions in the account, but they don’t own it and their authority ends when the account holder dies. (In other words, there’s no access or rights for an authorized signer on a bank account after the death of the owner.)

•   Beneficiaries inherit funds in the account once the account passes away, but have no rights to it during the account owner’s lifetime.

Another angle on this matter: The difference between an authorized signer vs. joint owner bank account is that joint owners have equal ownership, control, and access with one another. They also share equal legal responsibility for account transactions.

A joint bank account owner may or may not automatically inherit a bank account when the other account owner passes away. If the account is held with rights of survivorship, the account becomes theirs. If it’s held as tenants in common, the share of the account belonging to the deceased owner passes to their heirs.

How to Add or Remove an Authorized Signer


Adding or removing an authorized signer typically requires you to fill out a form with your bank. You may add an authorized signer when you open a new bank account or after the account is established.

You’ll need to give the bank some information about the person you want to add, including their:

•   Name

•   Date of birth

•   Social Security number

•   Address and phone number

The bank may allow you to specify the level of access you’d like your authorized signer to have. This is similar to how credit cards may allow you to set spending controls for an authorized user. Your bank may also request an in-person meeting with your authorized signer to confirm their identity and create a signature card.

If you want to remove an authorized signer, you’ll need to let the bank know and complete any paperwork that’s required. You may be able to complete the process on your bank’s website or in their app. Once an authorized signer is removed, they no longer have any rights to transact in the account.

Legal Implications and Considerations


As the account holder or owner, you’re responsible for anything that an authorized signer does. That could lead to tricky legal situations if they engage in irresponsible or even criminal behavior, such as check fraud. At the very least, you could put yourself at risk for overdraft charges or other fees if the authorized signer mismanages funds in the account.

Before you add someone as an authorized signer, it’s important to consider how trustworthy they are and how comfortable you feel giving someone else access to your bank account. If your bank allows you to set controls on what an authorized signer can or can’t do, you may want to weigh the benefits of doing so. That way, you could likely minimize worries about an authorized signer overspending from your account.

Recommended: Savings Account Calculator

The Takeaway


Adding an authorized signer to a bank account may be something to consider if you’d like to have a backup person who could access your account if needed or someone to whom you could delegate some personal finance tasks.

If you’re interested in opening a new checking account or savings account, and are exploring joint accounts, see what SoFi offers.

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 an authorized signer withdraw money from the account?

Authorized signers can typically write checks on the account, use a debit card to make purchases, withdraw cash at ATMs, or make withdrawals in person at bank branches. If your bank gives you the option, you may be able to limit the types of withdrawals an authorized signer can make. For instance, you could possibly put a cap on ATM withdrawals, or make it necessary to have two signatures on checks for more than $1,000.

Does an authorized signer have access to online banking?

An authorized signer can have access to online and mobile banking if the bank offers that feature. They would need to create a unique user ID and password to log in and access any accounts they have access to.

Can an authorized signer be held liable for account activities?

Account owners, not authorized signers, are legally responsible for any activity that occurs in the account. That’s an important legal point to consider if you’re thinking of adding an authorized signer to bank accounts you own. It’s wise to be sure you feel they are a trustworthy individual.

Photo credit: iStock/miniseries

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.

SOBNK-Q324-032

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Oct
22
2024

How Do Low-Income Home Loans Work?

By | Home Ownership, Money & Life, mortgage | Comments Off on How Do Low-Income Home Loans Work?

A low-income home loan is designed to make it possible for borrowers with lower income levels to meet their goals of homeownership. Typically, low-income mortgage programs help borrowers overcome a variety of barriers. Alongside those with a low income, these programs can help if someone has a poor credit score, large amount of debt, or a small down payment.

This guide takes a closer look at such details as:

•   How home loans for low-income borrowers work

•   Examples of these programs

•   How to buy a home when someone has a low income.

What Is a Low-Income Home Loan?

When it comes to home loans with low income requirements, these programs tend to have more relaxed income, credit, and down payment requirements than conventional loans. Other advantages of these programs can include lower interest rates, discounted mortgage insurance, and reduced closing costs.

Many low-income loan programs actually have income limits that prohibit those with higher incomes from qualifying. These programs can make it much easier to qualify for a mortgage when someone has a lower income, but they do still need to be able to afford the cost of their monthly payments.

Some of these programs are specifically designed to help first-time homebuyers, and there can be grants, tax credits, and other types of assistance available to new homeowners.

An April 2024 SoFi survey of 500 would-be homeowners suggests that there is significant need for programs for low-income buyers, yet not enough people are aware of them: Respondents named home availability in their price range as their top concern, and one in five people (19%) said they were not at all optimistic that they would find a home in their budget within the next six months. Yet when asked about their awareness of financing options for buyers with lower incomes, there was widespread lack of knowledge, with one in eight buyers not aware of any of the programs.


💡 Quick Tip: SoFi Home Loans are available with flexible term options and down payments as low as 3%.*

Examples of Low-Income Home Loans

There are a few different types of home loans for low-income borrowers. Here are a few popular examples:

•   United States Department of Agriculture (USDA) loans. Even with a low income, it’s possible to qualify for a USDA loan if the borrower plans to buy a home in an eligible rural area. As a bonus, this program doesn’t require a down payment.

•   Federal Housing Administration (FHA) loans. These government-backed loans tend to come with lower credit score requirements than conventional loans and only require a 3.5% down payment, no matter what the buyer’s income level is.

•   Veterans Affairs (VA) loans. Active service members, veterans, and potentially surviving spouses can use a VA loan to buy a home without making a down payment.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

How Do Low-Income Home Loans Work?

How low-income home loans work depend entirely on the specific loan program the borrower is applying to. For example, with FHA low-income home loans, borrowers must make a 3.5% down payment, but income levels don’t make borrowers ineligible for a loan.

VA loans on the other hand don’t require a down payment at all. It’s best for mortgage seekers to do careful research on each loan program to confirm if they qualify for a mortgage or not.


💡 Quick Tip: A VA loan can make home buying simple for qualified borrowers. Because the VA guarantees a portion of the loan, you could skip a down payment. Plus, you could qualify for lower interest rates, enjoy lower closing costs, and even bypass mortgage insurance.†

Pros and Cons of Low-Income Home Loans

Home loans for low-income families come with some unique advantages and disadvantages worth keeping in mind.

Pros of Low-Income Home Loans

First, consider the upsides:

•   Low to no down payment requirements

•   Easier to qualify for than conventional loans

•   Less strict credit score requirements

•   May have more favorable interest rates.

Cons of Low-Income Home Loans

Next, review the downsides of these loan programs:

•   May only work for specific applicants (like VA loans)

•   May require ongoing mortgage insurance

•   Can be harder to find low-income loan programs.

Are Low-Income Home Loans Worth It?

Low-income loan programs can be worth it if the math makes sense. It’s generally a good idea to shop around with different lenders to see which mortgage loan will be the most beneficial. It can be a good idea to compare different interest rates, mortgage insurance requirements, and fees to see which loan will cost the least.

Borrowers can research a variety of loan programs to see which may best suit their needs. For example, home loans for low-income single mothers, home loans for low-income seniors, or low-income home improvement loans are designed for different borrowers.

Steps for How to Buy a House With a Low Income

When a borrower has a low income, there are steps they can take to make buying a house easier.

•   Build one’s credit score. The higher someone’s credit score is, the easier it can be to qualify for a home loan. It’s a good idea for borrowers to check their credit score to see where they stand and if there are any mistakes on their credit report that might be harming their credit score. Consumers will want to consistently pay their bills on time if they want to help build their credit score before buying a home.

•   Pay off debt. Another technique that can help build a credit score is to pay off debt. This can be beneficial to one’s score, and the less debt someone has, the easier it can be to qualify for a home loan. Lenders take a borrower’s debt-to-income (DTI) ratio into account when deciding how much money to lend them and the lower this ratio is, the better.

•   Save for a larger down payment. The larger someone’s down payment is, the less money they need to borrow. When someone has a low income, it’s easier to qualify for smaller loans. Conventional wisdom may be that they will put down at least a 20% down payment, even if the low-income mortgage loan program doesn’t require that large of a down payment.

Recommended: What Is a HUD Home?

Low-Income Home Loan Tips

If someone is struggling to qualify for a low-income home loan, these are some steps they can take to make the process easier.

•   Find the right program. To start, finding a niche program designed to meet the applicant’s specific needs can help. For example, a single mother may want to look into low-income home loans for single mothers, as well as more general loan programs.

•   Use a cosigner. If someone’s credit score or income makes it challenging for them to qualify for a mortgage, they can apply with a cosigner who has the qualifications lenders are looking for. The cosigner needs to know they will be responsible for making payments if the main borrower defaults on the loan.

The Takeaway

While income is a major factor that mortgage loan lenders take into consideration, having a low income doesn’t need to disqualify someone from qualifying for a mortgage loan. There are low-income loan programs that can help consumers meet their goals of homeownership.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.


SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can I buy a house if I make $25k a year?

Whether or not someone can buy a house with only a $25,000 a year income depends on a few different factors. The overall cost of the house, their down payment amount, and the lender they choose to work with can all impact if their income will make it possible to qualify for a loan.

What’s the lowest score you can have to get a home loan?

Generally borrowers need to have a credit score of at least 620 to buy a home. All lenders and loan programs have different requirements though, so it’s worth researching the loan programs that work for each applicant’s credit score.

Is there an income limit for first-time homebuyers in California?

Some first-time homebuyer programs in California have income limits. These limits exist to stop buyers who have high-income from taking advantage of programs designed to support low-income buyers.

Photo credit: iStock/digitalskillet

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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.

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 .

†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

SOHL-Q324-107

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Oct
21
2024

What Is a Stale-Dated Check?

By | Money & Life | Comments Off on What Is a Stale-Dated Check?

A check that is not cashed within a certain timeframe (usually six months) is considered a stale-dated check. Banks and other financial institutions are not obligated to accept stale-dated checks (also just known as “stale checks”).

Many banks may, however, still honor stale-dated checks, but if the account the check is drawn against has been closed or has insufficient funds, you could wind up with a returned check, plus a fee. It’s a wise financial move to cash any checks that you receive in a timely fashion. Learn more about stale-dated checks here. 

Key Points

•   A stale-dated check is one not cashed within a certain time period — typically 180 days, but it may be considered stale sooner.

•   Banks are not obligated to honor stale-dated checks, though some may choose to do so.

•   Depositing a stale-dated check could lead to the check being returned and incurring a fee.

•   Contacting the issuer for a replacement or checking bank policies can help avoid issues with stale checks.

•   Stale checks may be subject to escheatment laws, where unclaimed funds are turned over to the state.

Defining Stale-Dated Checks

A stale check is one that has not been cashed after a certain period of time. While there is not a single, universal period of time that makes a check “stale,” six months is a common amount of time that a check is good for. The UCC (or U.S. Uniform Commercial Code) doesn’t require banks to cash a check older than that — though it doesn’t forbid them from cashing checks that are that old, either.

Stale-dated checks can cause baking issues. Your own bank might reject a stale check that you try to deposit to your bank account if they deem that too much time has passed since it was issued. Or, they might accept it and the issuing bank might not pay the check. For example, the account the check was drawn on could be closed or lack sufficient funds. 

Some stale checks may be handled under what are known as escheatment laws.

U.S. Escheatment Laws

Escheatment is the process by which banks and other financial institutions turn over unclaimed property to the government. All states have created programs that handle this unclaimed property and attempt to return it to its rightful owners. 

At a certain point, stale checks can reach the time period set by the state (the one where the issuing bank is) and are then handled under escheatment laws. 

So, say you were issued a refund check from your health insurance provider, reimbursing you for some medical services you received. If you misplace that check for a couple of years and then find it when moving, you may have trouble depositing it. The check may no longer be able to be cashed, and the funds may have been turned over to the state. You might have to find the unclaimed money by searching online.

Recommended: What Happens If a Direct Deposit Goes to a Closed Account?

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How to Approach a Stale-Dated Check

If you have a stale-dated check in your possession, there are a few steps you’ll likely want to take:

How to Identify a Stale-Dated Check

The first step is identifying and confirming that you have a stale-dated check. Most checks reflect the date the check was written in the upper righthand corner. A good rule of thumb is that checks become stale six months after the check is written. (That can be true even if the check is printed with “void after 90 days” on it.)

Types of Checks That Can Go Stale

Most types of checks can go stale — personal checks, business checks, and government checks are examples of checks that can go stale. 

Here are a couple of exceptions to the six-month “good for” policy:

•   A check from the U.S. Treasury (such as a tax refund you might have received) are typically good for one year vs. six months.

•   Certified checks do not go stale or expire, although they may be subject to escheatment laws.

•   Traveler’s checks, while not so commonly used these days, usually don’t expire as long as the issuing bank is still in business.

Risks of Cashing a Stale-Dated Check

If you have a stale or outstanding check, there are a few risks to cashing it that you’ll want to be aware of. 

•   The first risk is that it is possible that your bank may not honor stale checks, especially those over six months old. 

•   The second risk is that the check may no longer be good. As noted above, the issuing bank may not cash the check. The account it’s issued against could be closed or may not have enough money in it to cash your check. This could lead to the check being returned and you possibly owing a bank fee. 

It’s worth noting that a valuable option can be to go back to the person or business who issued the check, explain the situation, and request a new replacement check. Yes, it can take a bit of effort, but it may yield what you are looking for: a fresh check that you can cash.

Can Stale-Dated Checks Be Deposited?

It’s possible that a stale-dated check can be deposited at your bank, but whether the funds will be able to be transferred from the issuing bank to your account can depend on a number of different factors. Remember:

•   Your bank has the option to refuse a stale check, so it’s wise to check with your financial institution first to find out its policy before you try to, say, mobile-deposit the check.

•   The issuing bank may not be able to transfer the funds, as noted above. The account could have been closed in the interim, or it might have insufficient funds. You could wind up with a fee for the check being returned. Again, you might contact the bank (this time, the issuing one) to inquire whether the check can be deposited. 

These steps can save you time, fees, and frustration when dealing with a stale check. 

Recommended: Where to Cash a Check Without Paying a Fee

How Business Owners Are Affected by Checks Going Stale

If you are a business owner who has written a check that has never been cashed, it doesn’t mean that the money reverts back to you. Instead, it is possible that the money now belongs to the state per escheatment laws. 

Rather than just reversing the charge in your accounting software and keeping the money, you will need to work through your state’s unclaimed funds laws. Failure to do so may open you up to fines and/or legal trouble.

As a business owner, it can be a wise move to try to reach out to the recipient of an uncashed check before six months pass after the date issued. This could remind them to cash the check. (If you do this after six months have passed and they reply, you might work on a replacement check for them.) Following through in this way could save all involved from a challenging and time-consuming process to get the money to the intended recipient. 

How to Avoid Stale-Dated Checks

The best way to avoid stale-dated checks is to cash your checks as soon as you receive them. Thankfully, mobile deposit and other technological advances have helped make depositing checks a quick and simple process. 

If you do find an old check that was issued many months or years ago, it’s probably best to not just deposit it. Instead, contact the issuer to see if they might stop payment on the check you have in hand and issue a new check. Or you might reach out to your own bank and the bank that issued the check to hear their policies on stale checks. That can help you avoid having the check returned and your account debited a fee.

Recommended: Emergency Fund Calculator

The Takeaway

A stale-dated check (also known as a stale check) is one that is not cashed within a certain time frame after the check was written, typically six months. Banks, credit unions, and other financial institutions are not required to honor stale checks. 

If you have a stale check, it’s best to contact the person or business that issued it, if possible, to see if they can provide a replacement. Failing that, check with your bank and the issuing bank to see what their policies are for stale checks. Otherwise, the check might be returned after you deposit it and a fee assessed.

Looking for a bank that partners with you on checking and savings accounts? See what SoFi offers. 

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

How do you fix a stale-dated check?

If you have a stale check (one made out to you over six months ago), one option would be to contact the check’s issuer. They may be able to stop payment on the original check and reissue the check. If you’re not able to contact the original issuer or they are not willing to reissue the check, ask your bank and the issuing bank if the check can still be deposited. Some banks will honor stale checks up to a point.

What are a bank’s obligations with respect to stale checks?

Generally speaking, a bank is not required to accept or cash a stale-dated check that it receives. While the time period for when a check becomes stale can vary, six months is customary. However, different banks may have different rules or policies with regards to stale checks — it can be wise to check with your bank and the issuing bank before you try to deposit a stale check.

Is depositing stale-dated checks illegal?

With a stale-dated check (meaning one that was issued more than six months ago), generally it is not illegal to deposit it, as long as you are not doing so with fraudulent intent. However, banks may not cash a check that is stale-dated. If you have a stale check, you might contact the issuer for a replacement, or ask your bank and the issuing bank for guidance. 

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.

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

SOBNK-Q324-076

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Oct
17
2024

How Long Do Closed Credit Accounts Stay on Your Credit Report?

By | Credit, Money & Life, relay | Comments Off on How Long Do Closed Credit Accounts Stay on Your Credit Report?

You might think that if you close a loan or credit card account it will no longer affect your credit report, but they can actually stay on your credit report for up to 10 years. During this time period, these accounts can help or hurt your credit score, depending on a number of factors.

Here’s what you should know about closing loan and credit card accounts from your credit report.

Key Points

•   Closed credit accounts can stay on your credit report for up to 10 years, impacting your score.

•   On-time payments on closed accounts positively affect your credit history.

•   Late payments on closed accounts can negatively impact your credit history for seven to 10 years.

•   Closing accounts can affect your credit utilization rate and credit mix, influencing your credit score.

•   Removing closed accounts with poor payment history or fraudulent activity can build your credit profile.

How Closed Accounts Affect Your Credit

Closed credit accounts and loans can have varying effects on your credit, some positive and some negative, due to the factors that make up your credit rating. Here’s a closer look at three of those that are significant in this situation: your credit history, your credit utilization rate, and your credit mix.

Your Credit History

A closed account on which you made on-time payments will help your credit score by building your credit history. The effect will be less than if it were an open account, but it would be a positive factor nonetheless, since it shows that you can manage credit responsibly.
However, if you made late payments on an account that is now closed, the negative impact may linger in your credit history for seven years and up to 10 years if you file for bankruptcy.

Longevity is a factor on your credit report. Credit scoring systems reward borrowers with a longer history of managing debt and repayment. That means that if you close an account and seven years pass, you’ll lose any benefit of having had that account. It won’t make a significant change, but it is another factor to be aware of.

Track your credit score with SoFi

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Your Credit Utilization Rate

Part of your credit rating is based on how much debt or credit you already have. Creditors look at your credit utilization ratio, which is how much credit you have available to you versus how much you actually use. The best case scenario is to not use more than 10% of your accessible credit; otherwise, no more than 30% is a good move.

Two examples:

•   Say you have a $10,000 credit limit on your credit card, you might want to limit your balance to $1,000. That’s 10%.

•   Otherwise, keeping your balance to no more than $3,000 would be 30%, the upper end of what’s considered a good credit utilization ratio.

If you close a loan or a credit card account, that might reduce the amount of credit available to you, which will increase your utilization rate. If you open a credit card or take out a loan, that will increase the amount of credit available to you, thereby decreasing your utilization rate.

Your Credit Mix

Credit scoring systems, such as the FICO® Score and VantageScore® look at the types of loans you have and how you manage them. These systems reward a mix of loan types, such as installment loans (auto loans and mortgages), and revolving accounts such as credit cards. Eliminating a credit card account or other type of loan (such as when it is closed and eventually drops off your report) could limit your credit mix, and that could negatively impact your credit score. Worth noting though: Credit mix counts for 10% of your score vs. 35% for your payment history (meaning, how successfully you make payments on time).

Why Do Closed Accounts Stay on Your Credit Report?

Both closed and open accounts can contribute to your credit rating as they stay on your credit report. That’s because the credit agencies can gain a fuller picture of your risk as a borrower the more information they have.

Monitoring and understanding your credit report (perhaps with a credit score monitoring app; your bank may offer this) is an important part of your financial wellness.

When to Remove a Closed Account from Your Credit Report

If possible, remove a closed account from your credit report if it has a poor payment history. Also, remove any accounts that are found to be fraudulent. If an account shows that you made regular, on-time payments, don’t remove it because it will be helping your score.

Recommended: Average Salary by State

How to Remove a Closed Account from Your Credit Report

A few factors affect your credit score; one of which is your credit history. As noted above, your credit history shows the loans and credit cards you have obtained in the past seven to 10 years, along with your repayment patterns. Even closed accounts are part of that narrative for the stated period of time.

That said, there may be a way to remove a closed account from your credit report, which you might want to do if it is having a negative effect. Here are some options.

1. File a Dispute if There Is an Error on Your Credit Report

It might be that you notice a fraudulent account when you check your credit report. If that is the case, you can remove the record by submitting a dispute in writing with each of the three credit bureaus (Equifax®, Experian®, and TransUnion®). You must include supporting documents. The bureaus will investigate your complaint and update your credit score if there is fraudulent data.

2. Contact the Creditor and Pursue a Goodwill Deletion

Another way to remove a closed account from your credit report is to directly contact the creditor that’s involved and ask them to remove the account from your credit report. (This is sometimes known as a goodwill letter or goodwill request.) The creditor will have to contact the credit bureau(s) directly to do so. You will be more successful if you have a positive credit history and relationship with the creditor.

3. Wait It Out

In time, a closed account will no longer be reflected on your credit report, but it might take seven to 10 years. The good news is that the accounts that stay the longest are usually ones that you closed in good standing, and these will positively influence your credit score.

Recommended: Why Did My Credit Score Drop After a Dispute?

What Does “Account Closed” Mean on a Credit Report?

“Account closed” on your credit report indicates an account that is no longer active. There can be several reasons for an account being closed.

•   Perhaps it was an installment loan that you paid off.

•   You might have opened a credit card account and then decided to close it (maybe you weren’t using it much).

•   The creditor closed it, which could be positive (you paid off a loan) or negative (you weren’t paying your bills in a timely manner).

These are typical scenarios that lead to seeing “account closed” on your credit report.

How Long Will a Paid-off Account Take to Show up on Your Report?

Lenders usually update the credit report agencies with closed account information at the end of a billing cycle. Thus, it could take one or two months before a paid-off account is reflected on your credit report.

How Long Does a Closed Account Stay on My Credit Report?

As noted above, how long closed accounts stay on your credit report can vary.

•  Accounts closed in good standing (paid on time and in full) can remain on your credit report for up to 10 years.

•  Accounts closed due to nonpayment (these include collection accounts, some bankruptcies, and debt settlement) remain on your credit reports for seven years from the first missed payment or from being turned over to collections. The exception is Chapter 7 bankruptcy, which usually stays on your credit report for 10 years.

Practice Good Credit Habits Going Forward

Here’s advice that can help you manage existing credit card and loan accounts well.

•  First, it’s always wise to take control of your budget. Whether you do that with the 50/30/20 budget rule or a financial tracking app, keeping on top of your income, your spending, and your saving can be a money-smart move.

•  Check your credit score regularly to make sure there is no fraudulent activity. You might aim for an annual review.

•  Extend your credit history as much as you can with accounts that are and have been in good standing. This means it’s probably in your best interest to occasionally use a credit card account and keep it in good shape vs. closing it because you don’t use it often. This can reduce your available credit and possibly lower your debt utilization ratio.

  One good idea can be to use a credit card for predictable expenses, such as streaming services, and set up automatic payments. That way, you will be paying a set amount each month and building a positive credit history.

These moves can help you keep your financial profile in good shape.

The Takeaway

Closed credit accounts will stay with you for a long time, seven to 10 years usually. Keep accounts that you have owned for a long time open and in good standing whenever possible. If you have fraudulent accounts on your credit history or ones that were not managed well, you might take steps to have them removed and possibly build your credit profile.
Keeping tabs on your credit score and your budget can be easy with the right tools, like those SoFi offers.

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.

FAQ

Can I get closed accounts removed from my credit report?

You can remove a closed account from your credit report if you suspect it is fraudulent by filing a dispute with the three credit bureaus. You can also contact a creditor directly and ask them to remove a closed account. However, they are under no obligation to comply with this kind of request for a “goodwill” deletion. Alternatively, you can wait for seven to 10 years, after which closed accounts will fall off your credit history.

What is the 609 loophole?

The 609 loophole is a tactic that some people think will remove bad debt history from their credit reports. A section of the Fair Credit Reporting Act states that you can write a letter to gain documentation on what you may believe is an incorrect entry in your credit history. The 609 letter theory is that if a credit bureau cannot produce a piece of information, such as the original signed copy of your credit application, they have to remove the disputed item because it’s unverifiable. However, these steps are not the same as a dispute. Also, if you have legitimate debt, even without this documentation, the debt may remain. In other words, this process is unlikely to provide a shortcut to building your credit.

How long before a debt is uncollectible?

At which point a debt can no longer be collectible varies based on the type of debt and the state you live in. It is often between three and six years, but it could be as long as 20 years. After the statute of limitations that applies, a debt collector can no longer sue you for repayment, though some might still try to collect.

Photo Credit: iStock/dusanpetkovic
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.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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 .

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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