Feb
23
2023
hands on table using smartphones

What Are P2P Transfers & How to Use Them

By | Budgeting & Goals, money | No Comments

P2P payments, aka peer-to-peer transfers, are a great way to use digital technology to send money to other people or receive funds from them. With a money transfer app or perhaps one from your financial institution, you can send a friend your half of the dinner bill, gas money, or other payments, quickly and easily from your mobile device. Chances are, you can also buy items (say, on Instagram or a website) using one of these apps.

To move money via P2P, all you need to do is to download one of the transfer apps, like Venmo or PayPal, and connect your bank account, debit card, or credit card to it. Or your financial institution may offer their own app that you could enable. Either way, once you are set up, you are just a few clicks away from being able to send money.

Here’s a closer look at exactly how these apps work, including:

•   What is a P2P money transfer?

•   How does a P2P payment work?

•   How long does a P2P transfer take?

•   Are P2P payments safe?

•   What are some alternatives to P2P payments?

What Is a P2P Payment?

With a P2P payment, you can send money to a friend with just a few clicks on your mobile device. This replaces the need to get cash at an ATM or write out a personal check, options that aren’t always quick or convenient.

For traditional P2P apps, both parties need to have an account with the transfer service in order to make the transaction. For example, if you want to use Venmo to repay a friend for the salad they bought you at lunchtime, that person would also need to have a Venmo account to receive that payment.

Typically, a P2P account is attached to your bank account online. Some P2P platforms, however, allow customers to link their P2P accounts to a debit card or even a credit card, though it may involve additional fees.

Recommended: How to Transfer Money From One Bank to Another

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Understanding How P2P Transfers Work

How does a P2P payment work? Here’s a closer look at what goes on when you use a P2P payment app.

Overview of the P2P Transfer Process

Say that you want to send money P2P to your sister for your mother’s birthday present. Depending on the type of P2P service you use, you’ll follow some variation of these basic steps.

•   Creating a P2P Account. You will need to download a P2P app and then sign up for an account. In order to send money to your sister, you’ll both need to have an account with the same money transfer service.

•   Linking your bank account to your P2P account. Some P2P services have the ability to hold funds, but they generally must be linked to a primary bank account, credit card, or debit card in order to be fully operational. This is how the account will pull any funds needed to make a payment.

To link your checking account, you may need your checking and routing number (which appear at the bottom of a check). Some P2P transfer services may only need your bank log-in information. Others may allow you to set up extra verification measures.

•   Searching for a user to transfer funds to. To send money to your sister, you’ll need to find her on the P2P platform. You can typically search by username, email address, or a phone number. In most cases you will be able to add her account as a contact or “friend” in your account.

•   Initiating a transfer. The next step in how a P2P payment works is getting the money moving. Your sister can request a payment from you, or you can initiate the payment yourself. This requires choosing the option to send funds, entering a dollar amount, and then clicking submit. If you’ve enabled additional security measures on your account, you may need to enter a PIN that gets texted to you as well.

You may be prompted to choose whether you are making a purchase or sending money to a friend or family member. This can impact whether fees get assessed and what kind of protection you receive for the transaction.

You may have the option to add a description or “memo” to your transaction. Some P2P services may require this information so that they can charge a fee for business-related transactions. Others offer the option to act as a personal ledger should you need it in the future.

•   Waiting for the transfer to complete. Now the funds are in motion via a P2P bank transfer. When money is sent from one customer to another, it moves in the form of an electronic package safeguarded with multiple layers of data encryption. This makes it hard for hackers to access the data (like your bank account number) within the transfer while it is in motion. Similarly, data encryption keeps your money and account information safe. Once the data set reaches its destination, it is decoded and deposited as currency.

•   Transferring the funds into the payee’s bank account. When a P2P transfer is completed, the funds may be deposited directly into your sister’s bank account. Or they may go into an account created for her by the P2P service. Funds received into P2P user accounts can then be transferred into traditional bank accounts at little to no cost. (You are likely to pay a fee if you want the funds transferred ASAP versus in a couple of days.)

Your sister will likely receive some combination of email, text, and/or in-app notifications that the funds have arrived. If she decides to leave the money in her P2P account, she can use that account balance the next time she needs to pay someone or purchase something from a business that accepts P2P transactions.

How Long Do P2P Transfers Take?

The general rule of thumb for P2P transfer services is to allow one to three business days for a transfer to complete (although some seem instantaneous; timing varies). That’s because standard bank transfers use the ACH (or Automated Clearing House) system, which can take a day or two to complete.

When it comes time to move funds from the app to, say, a checking account, some apps may charge a small fee, often around 1.75% of the overall transfer amount.

Are P2P Money Transfers Safe?

Many people wonder, Are mobile payment apps safe? Any time your bank account, credit, or debit card information is online, there is a chance that someone can get a hold of it, and P2Ps are no different. While all major money transfer companies encrypt your financial information, no P2P system can say it’s totally impervious to hacks and scams.

There are also additional measures you can take to make sure that your account remains secure. For example, you may be able to set up two-factor authentication, which might involve typing in a unique pin number that is texted to your phone for each transaction. Or you might elect to receive notifications each time there’s a transaction posted on your account, enabling you to spot financial fraud right away if it were to happen.

You may also want to take care when you type in a recipient’s email address, phone number, or name. A typo could lead to the money going to the wrong person.

How Do Peer-to-Peer Transfer Companies Make Money?

P2P transactions are largely offered for free to consumers, which may beg the question of how the companies that offer these services stay in business. Here are two major ways that P2P money transfer apps may generate income.

Account Fees

Typically, you can make P2P payments from a linked bank account or straight from the P2P account for free. If you want an instant transfer or you are transferring money using a credit card or from depositing checks into your P2P account, there may be a fee involved.

Business Fees

P2P platforms aren’t just for consumers — they are used by businesses as well. Compared to the free transactions that standard user profiles offer, business profiles are generally subject to a seller transaction fee for each customer purchase made with a P2P money transfer app. Venmo, for instance, charges a fee of 1.9%, plus 10 cents for each transaction.

What Are the Benefits of P2P Money Transfers?

There are three main benefits to using online money transfer services.

•   They’re fast. Depending on the service, P2P money transfers can happen very quickly. They can take anywhere from just a few seconds to a couple of business days.

•   They’re cheap. When exchanging money between friends and family, P2P money transfers are often free. There may be a small fee, however, if you want an instant bank transfer, are using a credit card instead of a bank account, are making a transfer above a certain dollar amount, are conducting a high volume of transfers, or are using the service for a business transaction.

•   They’re easy. P2P transfers eliminate the need to make trips to the ATM or a local bank branch to get cash. They also eliminate the need to get out your checkbook, write a check, and then mail it to someone. For a P2P transfer, all you likely need is a mobile device, the app, and cell service or WiFi.

Alternatives to P2P Money Transfers

What if a P2P money transfer isn’t available or doesn’t suit your needs? Try these options instead to move money.

Sending a Check

You can go old-school and write a paper check. You fill out the necessary details and hand or mail the check to the person you are paying. Typically, no fee is involved, although you may have to pay for a new checkbook when you run low and order more checks.

Money Orders

Money orders are in some ways similar to a check, but you don’t write them from a bank account. Instead, you purchase them (essentially pre-paying for the amount you are sending) at the post office, businesses like Western Union or Moneygram, or from certain retailers.

Typically, you will pay a small fee. For example, the United States Post Office will issue money orders up to and including $1,000. Those that are for amounts up to $500 will be assessed a $1.75 fee; for ones that are $500.01 to $1,000, $2.40 will be charged. Once you have a money order, you can either give it to the recipient in person or mail it. You can also typically track a money order to see when it’s cashed.

Using Online Bill Payment Services

Many financial institutions offer ways for their customers to pay bills electronically. A key feature of mobile banking, this service can be a simple way to send funds from your checking account, regardless of where you are or what time it is. You may be able to set up recurring payments as well for bills you receive regularly.

Wire Transfers

Wire transfers are another way to send funds electronically using a network of financial institutions and transfer agencies that operate globally. Typically, you will access a wire transfer via your bank, its website, or its app. You’ll need to have your payee’s banking details and will likely pay a fee to wire money.

For instance, domestic wire transfers can charge a fee of anywhere from $15 to $50, and they can be processed in a few hours or within a day. International wire transfers can cost more (with both the sender and recipient possibly paying fees) and can take longer, typically two days.

Recommended: What Is an E-Check (Electronic Check)?

The Takeaway

Peer-to-Peer (or P2P) payment apps facilitate mobile money transactions. You can use them in place of cash or writing a check when you want to give friends or family money, whether it’s to cover your portion of a dinner bill or split the cost of a vacation rental. Some businesses also accept this form of payment.

All you need to make a P2P transfer is a mobile device, an internet connection, and your P2P app, which you must link to your bank account or credit card.

Customers with a SoFi online bank account can send money to any person, anywhere, even if that person doesn’t have a SoFi Checking and Savings account. If the person does happen to be a member of SoFi, the transfer will happen instantaneously. That’s not the only reason to open an online bank account with SoFi, though: You’ll also earn a competitive annual percentage yield (APY), pay no account fees, and, for qualifying accounts, get paycheck access 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 much time does a P2P transfer take?

P2P accounts can take just a few seconds or a couple of days to move funds. Then, if the person who has money in the P2P app wants to transfer their cash to a bank account, that can also take between hours and a few days. Often, you may be charged a fee if you want the money moved ASAP.

Is P2P digital money?

P2P, or peer-to-peer-payments, are a digital way of moving funds from one person to another. Once the transfer is complete, the recipient has money they can use to pay for purchases or transfer into a bank account.

What’s an example of a P2P payment?

An example of a P2P payment would be to use a P2P app such as PayPal or Venmo to send funds to a friend you owe money. Or you might send a payment to a service provider or retailer using P2P apps as well.

Do banks use P2P?

Many banks offer their own version of P2P apps. For example, you might be able to almost instantly send funds from your account to a friend, a retailer, or a service provider.

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

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

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

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

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

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

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

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

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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Feb
23
2023
How to Stop Payment On a Check_780x440

Issuing a Stop Payment on a Check

By | Budgeting & Goals, Financial Independence, money | Comments Off on Issuing a Stop Payment on a Check

At some point in your financial life, you may need to issue a stop payment on a check to prevent it from being cashed. This might happen because a check gets lost or stolen. Or perhaps you need to cancel a check because you filled it out with the wrong information, such as an incorrect payee or amount. Or maybe you accidentally issued a duplicate payment and are worried about overdrawing your bank account. It happens!

Fortunately, if you take action quickly, you can prevent a check or an electronic payment from being processed with a stop payment order. It can be as simple to complete as contacting your bank.

Read on to learn more, including:

•   What is a stop payment on a check?

•   How do I stop payment on a check?

•   What are alternatives to stop-payment orders?

What Is a Stop Payment on a Check?

A stop payment on a check is a way of requesting that a financial institution cancel a check or other payment that hasn’t been fully processed yet. It’s a way of intervening to stop a payment you initiated.

Doing so can help lessen your financial stress if you have a check that’s circulating with incorrect information on it or that could cause you to overdraft your account.

Typically, you will pay a fee for this service and it can only happen if the check or other payment has not yet been processed. If the recipient of the funds has cashed the check, you cannot reverse that.

Recommended: Ordering Checks – A Complete Guide

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Issuing a Stop Payment on a Check

If you are in a situation where you want to stop payment on a check (say, you filled the check out for the wrong amount or to the wrong person), there are steps you can follow. This can also be a method for canceling an ACH payment vs. a check; say, a recurring electronic payment you set up.

Here are the specifics on how to stop payment on a check:

1. Checking Your Bank Account to See if the Check Cleared

Before you start the process of canceling a check or payment, it’s a good idea to make sure it hasn’t already been processed.

You can do this by pulling up your account online or calling the bank’s automated phone line to see if the check or payment has already been deducted from your account.

If the amount has been processed, your opportunity to stop payment is unfortunately gone. If it hasn’t, however, you can likely stop the check or payment from being cashed or deposited.

Note: You cannot stop payment on a cashier’s check or money order as these are prepaid forms of payment.

2. Compiling the Check Info

Next, in order to contact your bank with the full story on the check in question, gather the following information:

•   Your account number and routing number

•   The recipient’s or payee’s name

•   The date you wrote the check

•   The check number

•   The amount of the check

For ACH payments, you may be asked to supply the company name, account number, ACH merchant ID, and the payment amount.

3. Contacting Your Bank

The next step in how to stop payment on a check is contacting your financial institution. You’ll want to do this as quickly as possible. Here’s how this typically works:

•   You might call your bank’s customer service number or reach out online. Some people prefer to go in person to a brick-and-mortar branch if they keep their accounts at a traditional bank.

•   It’s possible that your bank will want you to fill out a stop-payment form in order to initiate the process. You may need to complete this within 14 days to prevent the stop-payment order from expiring.

•   You may need your ID handy to prove your identity.

Once your bank authorizes your stop-payment request, the check or payment should no longer be valid.

4. Getting in Touch With the Payee

Depending on your reason for requesting a stop-payment order, you may also want to contact the payee in order to let them know about the stop payment. You can then arrange for a new payment if needed.

Recommended: What Is a Duplicate Check?

5. Extending the Stop Payment if Needed

A stop-payment order is a formal request to cancel a check or ACH payment (such as a recurring monthly bill payment) before it’s been processed.

Stop-payment orders on checks typically last for six months. This is the same amount of time as how long personal checks are good after being issued. So that should therefore be a sufficient amount of time to prevent the check from being cashed.

However, many banks allow you to renew a stop-payment order if the check is still outstanding. If your bank charges a stopped check fee, they may also charge a fee to renew the stop-payment order.

Stop-payment orders on ACH payments last indefinitely.

Recommended: Guide to Altered Checks and How to Spot One

How Much Does It Cost to Stop Payment on a Check?

Now that you know how to stop a check, here’s how much it will likely cost you. Just as with cashing a check, fees for stopping payment on a check vary from one bank to the next. The typical fee is between $15 to $33. Some banks will waive the stop-payment fee for customers with premium-tier checking accounts.

Alternatives to Stop-Payment Orders

A stop-payment order is one way to prevent a payment from being processed. With an electronic payment, another option may be to contact the business or vendor directly.

Whether it’s your electric bill or a monthly streaming service, companies can typically stop or delay billing on request. A couple of considerations:

•   If you stop a bill payment via the bank without reaching out to the service provider, the company can respond by cutting off your access to its services.

•   If you instead delay the automatic debit by working with the vendor, you may be able to avoid a disruption in service, and also avoid paying a stop-payment fee to the bank.

The Takeaway

Mistakes and miscommunication can happen, and checks sometimes get lost or stolen. That’s when a stop-payment order can come in handy, canceling a check or electronic debit payment that’s waiting to be processed. While handy in some situations, note that stop payments often incur a fee that can typically range from $15 to $33.

If you’re looking for a bank that makes managing your money simple and convenient on a daily basis and when hiccups occur, consider opening an online bank account with SoFi. Our Checking and Savings account allows you to earn, spend, and save, all in one account. You can easily track your balances, pay bills, and send money to friends right from the SoFi app. More good news: With a SoFi checking account, you’ll earn a competitive annual percentage yield (APY) and pay no account fees, both of which can help your money grow faster.

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 long does a stop payment on a check take?

The time required for a stop-payment request will depend on your financial institution. You may be able to do it very quickly in person, by phone, or electronically with your bank (especially if you have all the pertinent details handy) and have it authorized within minutes. At other banks, you may need to fill out and submit a stop payment request and wait for the bank to process it. Once in place, stop payment orders typically last six months.

Is a stop payment the same as canceling a check?

Yes, a stop payment is the same as canceling a check that has not been processed or paid yet. Note, however, that there is a more complex process of check cancellation that is sometimes available for prepaid checks such as a cashier’s check or money order.

How much does it cost to put a stop payment on a check?

Typically, a stop payment will cost between $15 and $33 when you issue this order. In some cases, a bank may waive the fee; you can check with yours to see if this is possible.

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

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

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

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

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

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

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

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

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Feb
22
2023
Guide to Compound Interest Savings Accounts

Guide to Compound Interest Savings Accounts

By | Growing Wealth, invest, money | No Comments

Whether you are first taking the reins of your financial life or have been managing your money for years, you probably know that compound interest can be a powerful tool in growing your wealth. It can be among the reasons why the money you save today can grow much larger as time passes.

It’s pretty common to hear the advice that you should start saving as soon as possible, especially when it comes to stashing away cash for retirement. It can, however, be challenging to accomplish that with all the other expenses that crop up, from student loan debt to high housing costs to inflation hitting you hard at the supermarket.

But even if you can only save a little, you should start as soon as you can. Because the longer you save, the more time you have to watch compound interest work its magic. Here, you’ll learn all about this important financial force, including:

•   What is compound interest?

•   How does compound interest work?

•   What are types of compound interest savings accounts?

•   What are the pros and cons of compound interest?

What Is Compound Interest?

Compound interest is a method by which interest is added to money on deposit (the principal). To put it simply, compound interest is interest that is earned on the initial principal and the interest that accrues on it. So if you were to deposit, say, $200 in a savings account and it earned interest of $5 in its first month, the next month of compound interest would be accrued on $205, or the principal plus the interest earned.

Compound interest can allow individuals to build savings, as the initial investment and interest payments grow almost like a snowball rolling downhill, getting bigger and bigger.

Recommended: APY vs. Interest Rate: What’s the Difference?

How Does Compound Interest Work?

When talking about interest and how it works, you are likely to hear the terms simple interest and compound interest. Comparing the two can be a good way to illuminate what compound interest is.

Simple vs Compound Interest: What’s the Difference?

Simple interest is when interest is paid strictly on the base amount. Let’s say you were to deposit $10,000 in a bank for one year at a rate of 5%. With simple interest, at the end of the year, you would have the $10,000 principal plus $500 in interest, for a total of $10,500.

With compound interest, however, your money would grow faster. If the interest were compounded daily, at the end of the year you would have $10,512.67, and a year later, you would have $11,051.63, while simple interest would yield a total of $11,000. While it may not sound like a huge difference early on, the results are amplified over time and with ongoing deposits.

Here is a chart that captures the differences between compound vs. simple interest:

Simple Interest

 Compound Interest
Accrues on the principal only Accrues on the principal and interest earned
Always calculated annually Can be calculated at different intervals, including daily, monthly, quarterly, and annually
Interest rates typically are fixed, depending on the institution Interest rates may vary, depending on the account type

Types of Compound Interest Savings Accounts

Remember, a good interest rate for a savings account is important, but so is the way that the interest accrues. If you are looking for what is known as a compound interest savings account, you will likely have an array of options. Among the different types of savings accounts that can accrue compound interest are:

•   Standard savings accounts. These are your basic savings accounts that earn interest and may restrict the number of withdrawals you make per month.

•   High-yield savings accounts. High-yield savings accounts typically pay a significantly higher interest rate than conventional accounts. You may often find them offered by online banks.

•   Premium savings accounts. These typically have higher account minimum requirements to snag a higher interest rate and other services and features.

•   Certificate of deposit (or CD) accounts. Certificates of deposit require you to keep your funds on deposit for a specific term and typically have a fixed interest rate, though there are exceptions to that rule.

•   Money market accounts. These often combine features of a checking and savings account.

•   IRA accounts, or Individual Retirement Accounts. IRA accounts allow you to save money for retirement in a way that is tax-advantaged.

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

No account or monthly fees. No minimum balance.

9x the national average savings account rate.

Up to $2M of additional FDIC insurance.

Sort savings into Vaults, auto save with Roundups.


The Compound Interest Formula

If you want to get technical, there’s a compounding interest formula you can use to calculate savings account interest:

A = P(1+r/n)nt

Let’s break this down. “A” is the final amount of money you’ll end up with. “P” is the principal, or original amount deposited. The “r” is the interest rate as a decimal, so 0.1 for 10%. The “n” is the number of times interest compounds each year, and “t” is the number of years you’re looking at.

The “n” in the formula above — how often interest gets compounded — makes a big difference. If interest is compounded monthly instead of yearly, for example, that can really change things.

Compound Interest Example

Here’s a hypothetical scenario in which $5,000 is deposited and receives a very healthy 10% interest rate that’s compounded annually. After the first year, the account would earn $500. But starting with the second year, the 10% interest would be calculated based on the new amount of $5,500, not just the original $5,000.

Future Value of $5,000 Deposit Compounded Yearly at 10%

Year

 Investment

 Interest Earned (10%)

 New Balance
1 $5,000 $500 $5,500
2 $5,500 $550 $6,050
3 $6,050 $605 $6,650
4 $6,650 $665.50 $7,310.50
5 $7,310.50 $731.55 $8,042.05
6 $8,042.05 $804.21 $8,846.26
7 $8,846.26 $884.63 $9,730.89
8 $9,730.89 $973.09 $10,703.98
9 $10,703.98 $1,070.40 $11,774.38
10 $11,774.38 $1,177.44 $12,951.82

The numbers add up quickly. After 10 years, the account would be worth around $12,951.82. (If you want to see how this works for yourself, an online compound interest calculator can generate hypothetical results depending on the initial deposit, interest rate, additional contributions, and length of time.)

The Rule of 72

Another simple and helpful formula that might be used to estimate compound interest is known as the Rule of 72. This calculation can allow individuals to look at their rate of return, estimating how long it may take before they double their money (with a fixed rate).

For the Rule of 72, it’s possible to divide 72 by the fixed interest rate. In this sort of calculation, the interest rate percentage would be represented by a numeral — not as a decimal. Say an individual has $1,000 that they want to save at a 3% interest rate. To use the Rule of 72, they might divide 72 by the numeral three to find that it could take 24 years to double the principal at this rate.

The Rule of 72 could be a useful tool when deciding quickly between savings accounts or other financial products that offer different possible returns.

Recommended: Different Types of Savings Accounts

Why Making Additional Contributions Matters

While saving early helps you take advantage of compound interest, so does saving regularly. Say after starting an emergency fund savings account with an initial deposit, you add money each year. That will give compounding interest the chance to grow your funds even further.

Getting results via compound interest doesn’t mean you need to have $5,000 to deposit today. Even small contributions can make a difference. The earlier you start saving and the more time you have, the more of a chance compound interest has to help build your wealth.

To illustrate, let’s revisit the equation above with a smaller hypothetical initial deposit. Let’s say $500 is contributed to a savings account today, compounded annually at 10%, and nothing else was done for 10 years. At the end of that time, the account would have:

A = 500 (1+0.1/1)(1*10)
A = 500 * 1.110
A = 500 * 2.5937424601
A = $1,296.87

But if you wait 40 years, you get a different answer:

A = 500 (1+0.1/1)(1*40)
A = 500 * 1.140
A = 500 * 45.2592555682
A = $22,629.63

That’s quite a jump! And all it took was time.

If you were also to add just $50 a month to that initial $500 contribution, you’d have around $10,860 in 10 years. And after 40 years? You’d have $288,185. Even adding small amounts, especially consistently over time, can pay off, depending on the rate of interest and how often it is compounded.

This type of growth can apply to different kinds of retirement accounts as well.

Pros and Cons of Compound Interest

The pros and cons of compound interest can depend significantly on whether you are earning compound interest or paying it.

On the plus side:

•   Compound interest can help your money on deposit grow more quickly, thanks to its “snowball effect” of your interest earning interest.

•   The sooner you begin saving with compound interest, the longer you have to reap its benefits of helping your money increase.

However, there can be a downside to compound interest:

•   If you are paying compound interest on some kind of debt, you may find it challenging to pay off what you owe since the interest can increase so swiftly.

Making the Most of Compound Interest

Compound interest, on its own, can boost savings. Yet, there are other ways individuals can make more out of this financial strategy.

Saving early and often really matters. Time is compound interest’s “special sauce.” Compounding interest grows exponentially over time. So, the longer an individual can leave their money untouched, the more potential it has to grow.

Try these tactics to increase the power of compound interest:

•   Making additional contributions: Whenever they’re possible, extra contributions add to an individual’s principal (the money that accrues earnings), increasing the total savings on which they’ll gain interest and speeding up their potential financial goals.

Consider a person who tucks away $1,000 for 20 years at a 6% return (compounding annually). At the end of that period, they will have roughly $3,200. If the same person made an additional monthly contribution of $100, at the end of the period they could have over $47,000.

•   Avoiding making withdrawals: Removing money from an account slows the effects of compounding interest, as it reduces the amount of money on which an individual could earn returns.

•   Checking interest and return rates: The higher the rate of the return, the greater the impact it will have on your savings. You may want to consider this factor when choosing savings accounts (or other financial products). The average savings account offers relatively low interest rates — around 0.33% in mid-February of 2023. Looking for a high-yield savings account, where the interest rate can be many multiples of that (say, 13 times higher), can be a smart move.

Stock market investments may offer much higher returns as well, up to an average of 10% to 12%. But keep in mind that there’s always the risk that these investments will lose money, given market volatility.

The Takeaway

Compound interest vs. simple interest is a way to earn interest on your money’s principal as well as the interest itself. It can be a good way to accelerate your savings, especially long-term ones. Many different savings vehicles offer compounded interest; check to see the frequency as the shorter the compounding window (say, daily vs. quarterly), the more your money can grow.

Opening an online bank account with SoFi can be a good way to harness the power of compound interest.With a SoFi Checking and Savings account, you’ll also earn a competitive annual percentage yield (APY) and pay no account fees, all of which can help your money grow faster. Plus, you’ll enjoy the convenience of spending and saving in one convenient place.

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 much do people typically make in compound interest?

There is no typical amount that people make in compound interest because there are several variables involved: the principal, the interest rate, how long the interest accrues for, and how often it is compounded. To check specific scenarios, you can use an online compound interest calculator.

Is it better to have simple or compound interest?

If you are depositing money and hoping to have it grow over time, earning compound interest vs. simple interest will help it grow faster. However, if you are paying interest on a debt, simple interest will accrue more gradually and therefore be easier to pay off.

Do all banks offer compound interest savings accounts?

Many banks offer savings accounts with compound interest. It can be worthwhile to check to see how often the interest is compounded: daily, monthly, quarterly, or annually. The more frequent the compounding, the faster your money will grow.

Photo credit: iStock/tzahiV

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

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

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

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

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

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

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

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

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Feb
21
2023
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What Are Round-Up Savings?

By | Budgeting & Goals, Financial Independence, money | Comments Off on What Are Round-Up Savings?

Round-ups are an automatic savings tool that rounds up purchase prices to the nearest dollar. The difference between that somewhat higher figure and the actual price then gets deposited into a savings or investment account.

One of the key benefits of this savings technique is that it’s effortless. The money accrues without your doing any calculations or transfers. It’s akin to the saving technique in which people pay cash for purchases using bills and accumulate change. That loose change eventually gets deposited into a savings account. Round-ups accomplishes the same goal, but there’s no lugging coin jars involved.

If this round-ups concept sounds interesting, read on to learn more, including:

•   How does round-up savings work?

•   Do banks offer round-up savings?

•   What are round-up savings apps?

•   What are the pros and cons of round-ups?

How Does Round-Up Savings Work?

Need a real-world example of how round-up savings works? Say you stop at your local coffee shop for a latte to go. It costs $4.65. With a round-up, the price is rounded up to $5, with $4.65 going to the merchant and 35 cents to the account you have designated.

Now, 35 cents might not sound like much, but think of how many times you swipe or tap that card. It’s not uncommon for people to make 30 transactions per week and save more than $10 per week with round-ups. That would be in excess of $520 a year, not including the power of compound interest which can boost the amount higher still.

With some providers, these small amounts of change accrue and then are deposited into the user’s account in a lump sum once they hit a certain dollar-amount threshold or a specific time period has passed.

With others, the funds may be deposited as soon as the transaction settles.

Do Banks Offer Round-Up Savings?

Some bank accounts and debit card products offer round-ups for transactions. Not all financial institutions offer round-up savings accounts, so if the notion sounds like the right tactic to help you save, consider investigating whether the feature is offered before deciding where to open an account.

It can be a good perk that helps add to your savings, whether your goal is accruing the money you need for an emergency fund or getting enough moolah together for next summer’s vacation.

How does a round-up savings account work? Typically, you will have linked checking and savings accounts at a bank. The debit card for the checking account can be activated to round up the price of purchases. The difference between the actual cost and the rounded-up price is then transferred to the checking account.

Quick Money Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

Round-Up Savings Apps

There are also standalone round-up apps, which users can typically connect to a credit card, debit card, or checking account.

The app then monitors transactions and either transfers the proceeds of round-ups in batches or allows users to transfer money on demand.

Some standalone round-up apps also charge a monthly user fee.

In such cases, consider the monthly volume of transactions to make sure the cost doesn’t exceed the amount of money round-ups will help to accrue for savings. The point here, of course, is to grow your wealth, not nibble away at your money.

Recommended: 5 Types of Savings You Should Consider Having

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Round-Up Savings Can Add Up

While saving 23 or 85 cents here and there may not sound like much, any coin-jar saver who ever went to the bank with $100 in change can attest that putting away small amounts can add up fast. Consider the following:

•   Saving just five extra dollars a week in round-ups adds up to $260 over the course of the year. This may not sound like a lot of money to save in total, but it can provide a nice boost to augment a more intentional savings strategy.

•   Just like other savings or investments, round-ups deposited into a savings or an investment account have the potential to earn a good interest rate. If the proceeds of round-up purchases are deposited to a savings account on a regular basis, that spare change would grow — and could continue growing — each time interest compounds.

For round-up investing, those small savings can, over time, help in the purchase of additional shares which may also grow in value.

Pros and Cons of Round-up Savings

It’s a fact that many Americans have trouble saving money. For example, almost half of all Americans have no retirement savings at all, according to a recent U.S. Census Bureau survey.

There are lots of reasons people have trouble saving — and for some, setting up round-ups can help them consistently set money away without having to think about it or expend any effort.

Wondering whether round-ups are right for you? Here are some pros and cons to note:

Pros of Round-Up Savings

Among the benefits of round-ups are:

•   Round-ups are a positive step in financial selfcare. One reason round-ups can be a useful savings tool is they help someone pay themselves with each transaction. Kind of like tipping oneself, round-ups pay the saver a little something extra on their purchases, making everyday spending a little more rewarding.

•   Round-ups are automatic. Part of why saving can feel painful is that it requires the saver to make difficult decisions on a regular basis. Once round-ups are set up, no conscious sacrifices are required. You don’t have to engage in any potentially painful decisions about, say, how to save money on streaming services or your utility bill.

Automating personal finances can be a helpful tactic to encourage healthy habits, and round-ups can be a valuable part of this seamless approach to personal finances.

•   Round-ups show visible progress on your savings goals. For those who are already putting money into savings on a regular basis, taking advantage of round-up features can help to grow that money more rapidly, putting savings goals within even closer reach. For those who aren’t currently saving, seeing round-ups grow as you swipe or tap your debit card can be an encouraging experience.

•   Round-ups may help counter savings procrastination. While some people save early and often, others may put it off. There are lots of reasons for procrastinating on starting a savings plan and surely many other tempting ways to spend your cash. Round-ups can help motivate savings procrastinators by demonstrating the effects of putting money away on a regular basis.

Cons of Round-Up Savings

While round-ups work well for many people, there are some downsides to consider as well.

•   Round-ups may come with fees. When opting into a round-up service, review the fees. Saving $5 a week seems great, but if fees are going to cost you $2, is that worth it?

•   Round-ups could throw off a careful budget. If you are on a very tight budget, rounding up could tip things out of balance. Also, people who often have a low balance in their checking account could overdraw their account due to the automatic round-ups fee being debited. That, in turn, can lead to overdraft or NSF (non-sufficient funds) fees. Review program requirements for round-ups and your bank accounts’ guidelines before opting into anything.

Pay Yourself — Every Time

Saving money can be hard work but using round-ups can automate savings and eliminate some of the pain of growing your finances.

With a SoFi Checking and Savings online bank account, you can enroll in the Round-up program to help grow your savings. What’s more, you’ll earn a competitive annual percentage yield (APY) and pay zero in account fees, which also can boost your savings. Need more incentive to see what SoFi can do for you? Another perk is that qualifying accounts can get paycheck access 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

Do round-up savings work?

Round-up savings can work by increasing the price you pay on transactions to the next higher dollar amount and depositing the difference in a savings or other account. However, be aware that some round-up apps may charge a fee, which may diminish the amount you save.

What is a round-up savings account?

A round-up savings account is one in which your debit card transactions from a linked checking account are rounded up to the next dollar amount. The rounded-up amount (the difference between the actual price of the goods or service and the price you paid as a round-up) then goes into your savings account where interest can help it grow.

Do banks offer round-up savings?

Various banks offer round-up savings. How it works: When you use the debit card linked to your checking account at the bank, the cost of a purchase will be rounded up to the nearest dollar. The extra money then gets deposited into your linked savings account where it can grow.

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

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

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

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

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

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

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

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

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Feb
14
2023
The Complete Guide to Using Your Debit Card

The Complete Guide to Using Your Debit Card

By | money | Comments Off on The Complete Guide to Using Your Debit Card

A debit card is a payment card that is linked to your bank account. These cards can help you make purchases either online or in-store, as well as withdraw cash at an ATM. A debit card can allow you to breeze through your day, paying to pick up a few things at the drugstore or grab some sushi for dinner.

Debit cards can also facilitate your financial life in other ways. They offer many benefits, but if you are new to using one, you may have questions. That’s where this guide comes in. Read on to learn:

•   What is a debit card?

•   How do you use a debit card?

•   When and where can you use a debit card?

•   What are the pluses of using a debit card?

What Is a Debit Card?

A debit card is a payment card that is typically linked to a bank account. These cards can be used in place of cash when making purchases.

Debit cards have many of the same characteristics as credit cards, such as a 16-digit card number, expiration date, and CVV or a similar code. In addition, they often use the same payment networks as credit cards, like Visa or Mastercard.

Usually, you will receive a debit card when you open a checking account at a bank. However, debit cards can be linked to other types of accounts in some cases, like a health savings account (HSA).

How Does a Debit Card Work?

You can use your debit card to make purchases in-store, online, or use it to withdraw cash. When you use it in a store, you can swipe, insert, or tap, provided the card supports contactless payments.

What distinguishes a debit card from other kinds of plastic is where the money comes from. While a credit card works like a loan you pay off over time, a debit card typically draws directly from your checking account. Hence, a debit card will be allied with the bank that holds your cash balance. Contrast that with credit cards, which you can open with any of a number of banks, even if you haven’t deposited cash there.

How to Use a Debit Card

Learning how to use a debit card is usually a simple process. In general, it’s a matter of transmitting your card’s information to a merchant or service provider. You can do this by swiping, inserting, or tapping your card. When making purchases online, you must provide basic information on your card that is linked to your checking account or another cash account. Typically, that means sharing the card’s number and three-digit code, along with other personal information.

In most cases, using a debit card is much the same as using a credit card. However, you might have to sign for purchases more often when using a debit card. Likewise, you might be required to enter a PIN, while credit card purchases don’t usually require that.

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Ways That You Can Use a Debit Card

There’s no shortage of ways to use a debit card. You can use your debit card to make everything from in-store purchases to ATM withdrawals. As long as you have cash available, debit cards are a convenient way to pay.

•   In-Store Purchases You can pay with your debit card at an array of businesses in the United States, from the dry cleaner to your local yoga studio. Many debit cards have a Visa or Mastercard logo on them, which doesn’t mean they are credit cards but does indicate that they are likely accepted wherever those cards can be used.

   To pay, either swipe the card, insert it into a terminal, or simply tap your card near the sensor. You may or may not have to sign for the purchase. Also, you may be able to access features you don’t usually see with a credit card, like the ability to request cash back.

•   Online Purchases You can use your debit card for online purchases much the same way you would a credit card. Ordering flowers to send your mom on Mother’s Day? Or perhaps snapping up some new shoes on sale? Your debit card may well be accepted.

   At checkout, you’ll have to enter information like the name on the card, the card number, and the card’s expiration date.

•   At an ATM You can perform several tasks at an ATM using a debit card. Those include withdrawing and depositing cash at an ATM, depositing a check, viewing your balance, and transferring money. Usually, you must enter your personal identification number (PIN) to complete a transaction.

Recommended: What Is A Cardless Withdrawal?

Debit Card vs Prepaid Card: What’s the Difference?

Debit cards and prepaid cards have many similarities, but they are not the same. The main difference is that debit cards are linked to a checking account, while prepaid cards must be loaded with money before you can use them.

There are pros and cons to prepaid debit cards. For instance, the fact that they aren’t linked to a checking account makes them a great gift. However, they can also come with high fees.

Here are the debit card vs. prepaid card differences in chart form:

Debit Card

Prepaid Card

Linked to checking account?YesNo
Reloadable?No. It’s linked to an account’s cash balanceTypically yes
FeesNot in many cases, though some checking accounts may have monthly feesYes. Many prepaid cards have monthly, transaction, and other fees
Minimum balance?VariesNo

Benefits of Using a Debit Card

Debit cards have a number of benefits that may make them a valuable part of your money management. Some of their benefits include:

•   Convenience: Most stores in the United States will let you pay with a debit card, making them an easy way to pay. Plus, you can use them in place of cash, so you don’t have to fumble through your wallet or purse for dollars and cents.

•   Cash back: Some stores let you request cash back when making a purchase with a debit card, saving you a trip to the ATM.

•   No interest charges: When you first get a credit card, you may realize that they are like a loan and so you will be charged interest on the money borrowed. Debit cards, however, don’t involve any such fees.

•   Limits overspending: When you compare debit cards vs. credit cards, you may realize that credit cards can lead to ringing up significant debt. With a debit card, you are drawing from your own cash balance, so you can only spend the cash you have on hand.

Open a Debit Card With SoFi Banking

Debit cards are typically provided when you open a bank account. They let you conveniently shop online or in-store. You can also use them to make deposits and withdrawals at an ATM. Debit cards are often branded as Visa or Mastercard, allowing you to use them at a broad array of merchants and service providers.

Getting a debit card can be an important factor when picking a bank. If you’re opening an online bank account, see what SoFi offers. You’ll have access to the global Allpoint Network of no-fee ATMs. In addition, you’ll enjoy spending and saving in one convenient place, earning a competitive annual percentage yield (APY), and paying no account fees. All this may help your funds grow faster.

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 my debit card is declined?

This depends on the reason it was declined. For instance, it could be that your bank suspects unusual activity or that you have an insufficient balance. Depending on the reason, you may have a hold placed on your card, overdraft protection might kick in, or your recurring payments might fail. Contact your bank to learn more.

Are debit cards better than credit cards?

Both debit cards and credit cards and credit cards have their advantages, and one is not necessarily better than the other. Debit cards have benefits like a lack of interest charges, helping to limit overspending, and the ability to request cash back at some stores.

What are the drawbacks of a debit card?

Perhaps the biggest drawback of a debit card is that it can make it more difficult to recover from fraud than credit cards, mainly because debit cards are tied directly to the cash balance in your checking account. Because credit cards don’t draw money directly, it’s easy to reverse a fraudulent transaction. Debit cards also lack the rewards and benefits that certain credit cards offer, and they don’t contribute towards your credit score either.

Where can I not use a debit card?

Many debit cards can be used anywhere that accepts Visa or Mastercard. That means you can use them at most stores. Some establishments, like independently owned restaurants or rental car agencies, may not let you use your debit card.

Photo credit: iStock/chabybucko

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

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

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

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

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

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

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

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

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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