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If you have a thin credit profile or want to build your credit, you may come across secured credit cards when searching for a card you can qualify for. But what’s the difference between a secured vs. unsecured credit card? And how can you gauge which one is right for you?

Here, delve into how both types of credit cards work and the differences between secured cards and unsecured credit cards, so you can decide which to choose.

What Is a Secured Credit Card?

Like a traditional, or unsecured, credit card, an unsecured credit card is a type of revolving loan. This means that it offers a line of credit that you can borrow from as needed and then repay. However, with a secured credit card, you’ll need to put down a deposit, which “secures” the credit card.

The bank holds onto that money as a form of collateral if you default on payments, but it’s refundable if you close your account or upgrade to an unsecured credit card. Your secured credit card’s credit limit, an essential part of what a credit card is, usually is the same amount as your deposit. The deposit is typically at least $200 to $500, though it can range as high as $25,000 depending on the specific card and how much you can afford to put down.

A secured credit card is designed for building credit. So, if you’re working on rebuilding your credit or don’t have much in the way of a credit history because you’re young or new to the country, it could be a good option. The age requirement to get a credit card that’s secured is the same as for an unsecured credit card.

How Secured Credit Cards Work

As mentioned, you’ll need to put in a deposit to open a secured credit card. Your available line of credit is usually the same amount as your deposit. Just like how credit cards work when it’s an unsecured card, you’ll need to repay the balance, and your credit limit will get replenished as you make payments.

As with an unsecured credit card, there’s a minimum monthly payment you’re responsible for. If you carry a balance from month to month, you’ll incur interest charges. Your credit card activity, including your payment history, is generally reported to the three major credit bureaus, Experian®, Equifax®, and TransUnion®.

Your deposit on a secured credit card isn’t used to make payments should you fall behind or miss payments altogether. If you’re unable to make payments and your account goes to default, you’ll lose your deposit. Plus, it can hurt your credit. If the balance you owe is larger than the deposit, you might be on the hook for the difference owed.

Secured credit cards may offer a “graduation” option. In other words, if you make on-time payments and show a track record of responsible financial behavior, the credit card issuer might offer you an unsecured credit card.

Recommended: Tips for Using a Credit Card Responsibly

Pros and Cons of a Secured Credit Card

Let’s look at some of the advantages and downsides of a secured credit card:

Pros of a Secured Credit Card	Cons of a Secured Credit Card
May qualify with a low credit score or limited credit history	Need to provide a deposit
Could be easier to get approved for than an unsecured credit card	Credit limit is usually low
Can be a way to build or rebuild credit as activity is reported to credit bureaus	Can have higher interest rates and more fees than secured credit cards
Offers a revolving line of credit you can use as long as you make payments	Could lose your deposit if you’re late or miss payments

What Is an Unsecured Credit Card?

Also known as a traditional credit card, an unsecured credit card doesn’t require a deposit or collateral of any sort. Instead, you’re offered a credit limit based on your creditworthiness and other factors, such as your income and existing debt. The lender simply has your word that you’ll pay back what you borrow, which is why you’ll also generally need a higher credit score and a more robust credit history to qualify.

Just as with a secured credit card, the credit remaining on an unsecured credit card dwindles as you rack up a balance. Once you make a payment, your limit replenishes. For example, say your credit limit is $5,000. If your balance is $500, your credit limit goes down to $4,500. Once you pay off your balance, your credit limit goes back up to $5,000.

The annual percentage rate (APR) and terms associated with an unsecured credit card are usually better than they are for a secured credit card. Typically, the better your credit score, the better your rates and terms are for an unsecured credit card. The average credit card APR is currently 22.3%; meanwhile, many of the top secured credit cards have APRs that are close to 30%.

How Unsecured Credit Cards Work

Because an unsecured credit card is a form of revolving credit, you have access to that credit line as long as you remain in good standing and your account stays open. Unsecured credit cards also require you to make minimum monthly payments to avoid incurring late payment fees and harming your credit score. You’ll owe interest on any balance that carries over from month to month.

Sometimes, unsecured credit cards might offer perks, such as cash-back rewards and travel insurance.

Pros and Cons of an Unsecured Credit Card

Here are some of the pros and cons of traditional, or unsecured, credit cards:

Pros of an Unsecured Credit Card	Cons of an Unsecured Credit Card
Higher credit limits compared to secured credit cards	Can be harder to get approved for
Need at least a fair credit score to qualify (580+)	Can still incur interest and fees
Can help you build your credit	May entice you to spend more than you can afford due to higher credit limits
Opportunity to earn rewards and enjoy other benefits	Could damage your credit if not used responsibly

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

Similarities Between a Secured Credit Card and an Unsecured Credit Card

When it comes to a secured credit card vs. an unsecured credit, there are a number of similarities:

•   Both are revolving lines of credit, so you’ll have access to those lines of credit as long as you keep the card open and your account in good standing.

•   Your payments are reported to credit bureaus. If you make on-time payments, your credit score will improve. Conversely, it can drop if you don’t use your credit card responsibly.

•   The process of how to apply for a credit card is usually similar with a secured vs. unsecured credit card. You can usually fill out an application online, in person, over the phone, via an app, or through the mail.

•   Both secured and unsecured credit cards come with interest rates and fees. Depending on the card, there might be an annual fee.

•   Both types of credit cards usually offer a grace period, which is the period between when your billing cycle ends and your payment due date. During this time, you may not be charged interest as long as you pay off your balance in full by the payment due date.

•   While it’s less common among unsecured credit cards, both types of credit cards might feature perks, such as cash-back rewards, car rental insurance, trip and travelers insurance, extended warranties, and price protection.

Recommended: What is a Charge Card

Differences Between a Secured Credit Card and an Unsecured Credit Card

There are a handful of features that set these types of credit cards apart:

•   For starters, secured credit cards require a security deposit, whereas unsecured credit cards do not.

•   The credit limit for a secured credit card usually matches the deposit amount. With unsecured credit cards, the credit limit usually depends on a handful of factors, such as your creditworthiness.

•   Secured credit cards generally carry higher interest rates and fees, whereas unsecured credit cards typically have lower interest rates and fees.

•   Unsecured credit cards usually have one variable interest rate, meaning the card’s interest rate fluctuates over time based on an index. Secured credit cards can have a fixed or variable rate.

Secured vs. Unsecured Credit Card: Which Is Right for You?

Now that you know the similarities and differences between a secured and unsecured credit card, you can start to assess which one might be right for you. Here’s a high-level overview to help you better compare what sets secured vs. unsecured credit cards apart:

Secured Credit Card	Unsecured Credit Card
Requires a deposit to open	Does not require a deposit
Usually available for those with thin credit histories or lower credit scores	Usually need at least fair to good credit to qualify
Lower credit limits, which are based on the amount of the deposit	Higher credit limits, which are based on creditworthiness
Fewer card options available	Variety of card options, such as cash-back cards, travel cards, business cards, and retail cards

Staying on Top of Your Credit After Choosing a Card

No matter if you decide on a secured credit card or an unsecured credit card, it’s important to stay on top of your payments. Ideally, you’ll pay the balance in full each billing cycle. Otherwise, you’ll owe interest.

At the very least, make sure to make the minimum payment each month. That way, your credit will stay intact and you’ll avoid late fees. If you’re struggling to make payments, reach out to the lender and see what they can do. They might be able to change the payment due date so it’s more in line with what’s feasible for you, or let you temporarily skip a payment to catch back up.

Recommended: When Are Credit Card Payments Due

The Takeaway

Whether you should apply for a secured credit card and an unsecured one may depend largely on your credit history and score. A secured card may be best if you have yet to establish credit or have a low credit score, while an unsecured card can be beneficial if your credit is more established and you want to earn rewards.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Is an unsecured or secured credit card better?

Whether a secured vs. unsecured credit card is better depends on your situation. An unsecured credit card might be better if you’re having trouble getting approved for a secured card and can afford to make the deposit. On the other hand, a secured credit card may be better if you have at least an average credit score, are looking for a higher credit limit, and would like more card options.

Should your first credit card be secured or unsecured?

It really depends. If you have a thin credit history, are looking to build credit, and can afford the security deposit, a secured credit card might be the best route to take as they’re generally easier to qualify for. Note, however, that you’ll probably need to stomach a higher interest rate and a lower credit limit. While an unsecured credit card doesn’t require a deposit, it might be harder to get approved for one if your credit is less-than-stellar or you don’t have much of a credit history yet.

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Photo credit: iStock/cesar fernandez dominguez

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 .

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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Anyone who’s ever had a credit card knows they have an interest rate, which represents the cost consumers pay for borrowing money. What you may not know is that interest rates come in two forms: fixed and variable interest rates.

Fixed interest rates stay the same over time and are generally tied to your creditworthiness. Variable interest rates, on the other hand, may change over time and are connected to economic indexes. Read on to learn how to determine if the interest rate of a credit card is fixed or variable, as well as why it’s important to know.

What Is Credit Card APR?

A credit card’s annual percentage rate, or APR, represents the cost a consumer pays to borrow money from credit card issuers, represented as a yearly cost.

When a cardholder doesn’t pay off their credit card balance in full each month, they’ll owe credit card interest charges on the remaining balance, with the rate based on their APR.

Credit card APRs vary among credit card issuers, individual cardholders, and credit card categories. Currently, the average credit card interest rate stands at 22.8% APR.

Recommended: Pros and Cons of Charge Cards?

Types of Credit Card APRs

Your credit card payment is impacted by what type of APR your credit card has. Let’s have a look at how a fixed rate credit card and a variable rate credit card may affect your credit experience.

Fixed Interest Rate

Fixed rate credit cards have an interest rate that generally doesn’t vary over the course of your credit card contract. Rather than being tied to economic indexes, fixed interest rates are generally determined based on payment history and creditworthiness, as well as any ongoing promotions.

However, just because the term “fixed” is used, doesn’t mean a fixed interest rate can never change. While a fixed rate credit card’s interest rate won’t change based on factors like the prime index, increasing credit card APR can occur if payments are late or missed or if your credit score dips. If that occurs, the credit card company must notify the cardholder at least 45 days before the adjusted rate takes effect.

While fixed rate credit cards offer the benefit of predictability, one downside is that their rates are, on average, higher than variable credit card rates.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

Variable Interest Rate

A variable rate credit card offers interest rates that can shift over time. There’s a reason for that, as variable card rates are tied to major benchmark interest rates, like the U.S. prime rate.

Since major benchmark rates change, so will variable interest rates. That’s why banks and other major financial institutions often shift rates for things like credit cards, home mortgages, auto loans, and student loans. When major interest indexes change, the rates for loans change with them.

What does that mean for a cardholder? For starters, there’s more risk with variable interest rates. Rates can go up, and credit card payments increase when interest rates rise. Conversely, variable rates may go down, which works in favor of the credit cardholder, who will then pay less in interest.

Credit card consumers should check their credit card contracts for the specific conditions that can trigger a variable rate change. Credit card issuers don’t have to notify you of interest rate changes with variable rate cards, so it’s up to the consumer to keep a sharp eye out for changing interest rates.

When Do Variable APRs Change?

As mentioned, the interest rate on a variable rate credit card changes with the index interest rate, such as the prime rate. If the prime rate goes up, so will your credit card’s APR. Similarly, if the prime rate goes down, your APR will drop.

How often your interest rate changes will depend on which index rate your lender uses as a benchmark as well as the terms of your contract. As such, the number of rate changes you may experience can vary widely, often multiple times a year.

Details on how a card’s APR may fluctuate over time will appear in a cardholder’s agreement, which you can generally find on the card issuer’s website. If you’re unable to locate it, you can request a copy from your card issuer.

Differences Between Fixed and Variable Credit Card Rates

Both fixed and variable credit card rates have pros and cons. Here’s a look at the major differences with a credit card with a variable or fixed interest rate.

Fixed Interest Rate	Variable Interest Rates
The interest rate usually remains the same	Variable rates change on an ongoing basis
Fixed rates are calculated with payment histories in mind	Rates are based on a benchmark index, like the U.S. primate rate
The card provider is required to let you know when the rate does change (usually for late or missed payments)	The credit card issuer is not required to let you know when rates shift

How Credit Card Interest Rates Are Determined

Credit card interest rates are generally determined based on your creditworthiness — meaning, your payment history and credit score — as well as prevailing interest rates and the card issuer and card type.

For instance, a basic card may have a lower rate than a premium rewards card. Additionally, credit cards can have different types of APRs, such as an APR that applies for credit card charges and another rate for cash advances or balance transfers.

Another factor that can impact credit card rates is promotional offers. Sometimes, credit card issuers may offer low or no interest periods. After that period ends, the card’s standard APR will kick in, and the card’s rate will go up.

Once determined, how and why a credit card’s interest rate changes over time depends on whether the interest rate is fixed or variable. A fixed rate will generally stay the same, though it may increase if payments are late or missed, or if the cardholder’s credit score takes a dive. Meanwhile, variable rates fluctuate depending on current index rates.

Recommended: Tips for Using a Credit Card Responsibly

Reducing Interest Charges on Credit Cards

Perhaps the easiest way to reduce interest charges on credit cards is to pay your statement balance in full each billing cycle. By doing so, you’ll avoid incurring interest charges entirely.

Of course, this isn’t always feasible. If you may end up carrying a balance and want to decrease how much a credit card costs, there are ways to do so. For one, you can call your credit card issuer and request a lower rate. Of course, for this to be successful, you’ll likely have needed to stay on top of payments and have a history of responsible credit card usage.

Perhaps the surest way to secure a better interest rate on your credit card is to build your credit score. In general, lower interest rates are awarded to those who have higher credit scores and follow the credit card rules, so to speak.

You can build your credit score by making your payments on time, every time, and by keeping your credit utilization ratio (how much of your available credit limit you’re using) well below 30%. You might also avoid applying for new credit accounts, which results in hard inquiries and temporarily lowers your score.

And if you simply feel in over your head with credit card debt and a skyrocketing APR, you may choose between credit card refinancing or consolidation as potential solutions.

Recommended: When Are Credit Card Payments Due

Fixed vs Variable Interest Rate Cards: Which Is Right for You?

In a word, choosing between a fixed rate or variable rate credit card comes down to whether you prefer stability or risk versus reward.

A fixed rate credit card offers a known quantity — a rate that stays the same over time, as long as you pay your credit card bill on time. On the other hand, a variable rate credit card offers an element of risk and reward. If the rate goes up, the cardholder usually spends more money using the card. If card rates go down, however, the cost of using the card usually goes down, too, as interest rates are lower.

Of course, cardholders can largely negate the impact of credit card interest rates by paying their bills in full every month. Of, for those who don’t quite feel ready to tackle the responsibility, there’s always the option of becoming an authorized user on a credit card of a parent or another responsible adult.

The Takeaway

As you can see, it’s important for a number of reasons to know whether a credit card is fixed or variable. Fixed interest rates offer more predictability (though there’s no guarantee they’ll never change), but rates also tend to be higher compared to variable rates. With variable rates, your interest rate will fluctuate over time based on market indexes.

As you shop around for credit cards, interest rate is critical to pay attention to. It can have an impact on your ability to pay your credit card bill and use credit responsibly.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Do all credit cards have fixed interest rates?

No, actually most credit cards come with variable interest rates tied to major interest rate indexes. That connection to interest rate changes enables card companies to keep rates competitive on a regular basis.

How do I get notified of an interest rate increase?

By law, credit card companies must notify cardholders in writing at least 45 days ahead of an interest rate change taking effect. Card companies are not allowed to change interest rates during the first year an account is open.

Can I control whether I have a fixed or variable interest rate?

Yes, you can opt for a fixed or variable rate credit card, but know that most credit cards come with variable rates. It’s tougher to find a fixed rate card, but banks and credit unions, which are more likely to offer both, are a good place to start your search.

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Photo credit: iStock/AlekseiAntropov

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 .

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You can check a credit card balance in a variety of ways, including online, in an app, over the phone, or on your statement. This can be a smart financial move. It’s easy to swipe a credit card and lose track of exactly how much you’re spending. That’s why it’s critical to check your credit card balance on a regular basis.

By checking your credit card balance, you’ll know how much you owe so you can make payments or adjust your spending accordingly. Here, you’ll learn more about how to check a balance on a credit card and why your credit card balance matters.

What Is a Credit Card Balance?

There are two different types of balances consumers will come across when it comes to their credit cards: current balances and statement balances.

The statement balance is the total balance owed at the end of the billing cycle. If someone wants to avoid paying interest, they need to pay off their statement balance in full each month. The current balance, on the other hand, is the total amount owed plus any fees, charges, credits, and payments that have been added to the account since the billing cycle ended. Given how credit cards work, it’s not necessary to pay the entire current balance to avoid interest charges.

In addition to their current balance and statement balance, each month the cardholder will also be told what their ://www.sofi.com/learn/content/credit-card-minimum-payment/”>credit card minimum payment is. This is the lowest amount of their balance that they can pay in order to remain in good standing with their credit card issuer. They’ll need to pay interest on the remaining unpaid balance.

Recommended: Charge Cards Advantages and Disadvantages

Why Is It Important to Know Your Balance?

A credit card balance represents the total amount owed to the credit card issuer. If the cardholder wants to avoid paying interest on their remaining balance, they’ll need to pay off their credit card balance in full each month. So, for budgeting purposes, it’s helpful to know what that balance is.

A credit card balance also can indicate how high or low someone’s credit utilization ratio is. This ratio compares how much credit someone is using to how much credit they have available based on their credit card limits.

It’s generally advised to keep your credit utilization ratio under 30% — but the lower, the better. Paying off a credit card balance in full each month can also help keep credit utilization low.

Additionally, checking your credit card balance each month can allow you to spot any unusual or potentially fraudulent charges on your credit card. If anything is amiss, you could then quickly contact your issuer and dispute the credit card charge.

This could result in a credit card chargeback, allowing you to get the money back.

Reviewing a credit card statement can also help consumers identify where to cut back their spending so they can save more or afford to pay down more credit card debt.

How to Check a Credit Card Balance

Even if you’re confident you can pay off your balance in full each month, it’s smart to stay on top of your credit card balance for the reasons mentioned above. Read on to learn how to check the balance on your credit card.

Log In to the Mobile App or Go Online

Thanks to mobile banking and credit card apps, it only takes a few seconds to check a credit card balance from a smartphone. Mobile apps can make it very easy to check a credit card balance on the go. It’s also possible for consumers to check their credit card balances by logging onto their online accounts from a computer, smartphone, or tablet.

Contact the Card Issuer

It’s also possible to call the credit card issuer directly to confirm what your current credit card balance is. The phone number to call is printed on the credit card and also listed on the credit card issuer’s website. Keep in mind your issuer may provide different numbers to call depending on your reason for calling.

Send a Text to Your Bank

Don’t love making phone calls? Some banks and credit card issuers also allow account holders to text them to check their account balance, which is a speedy and convenient way to get an update.

Check Your Statements

Each month, an account holder usually receives a paper credit card statement through the mail or over email. The Account Summary section of the statement will outline what the statement balance on the credit card as well as the following details, which are given what a credit card is:

•   Payments and credits

•   New purchases

•   Balance transfers

•   Cash advances

•   Past due amount

•   Fees charged

•   Interest charged

Recommended: When Are Credit Card Payments Due

The Takeaway

Regularly checking your credit card balance is smart for a number of reasons. In addition to helping you stay on top of your spending and how much you owe, it can also help you to monitor your credit utilization and check charges for any fraudulent activity. Checking your credit card balance is easy to do online, on an app, with a phone call, via text, or on your credit card statement.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Can you transfer a balance to a new credit card?

It’s possible to transfer a balance from one credit card to a new one by using a balance transfer credit card. Typically, balance transfer cards come with a low or 0% introductory APR, which makes it possible to pay down debt without spending too much on interest for a temporary period of time. Keep in mind that balance transfer fees will typically apply.

What is a credit card balance refund?

When someone pays off their credit card balance before getting a refund for a purchase they made, that results in a negative credit card balance. To get that money back, you can either request a refund or wait for the funds to get applied to your future credit card balance.

What happens if I overpay my credit card balance?

If someone overpays their credit card balance for whatever reason, they can either have that balance applied to a future purchase or they can request a credit card balance refund.

What does a negative balance on a credit card mean?

Having a negative credit card balance means that someone has a credit card balance that is below $0. For example, if someone pays off their credit card balance and then requests a $250 refund from a merchant, they would end up with a negative balance of $250. The credit card issuer would then owe that money to the account holder.

What happens if you cancel a credit card with a negative balance?

If someone chooses to close a credit card that has a negative balance, they need to request a refund before they close their account. Some credit card issuers will issue this refund automatically, but it’s best to confirm the refund is happening before closing an account.

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Photo credit: iStock/milan2099

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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Investors with a long-term savings outlook who are looking for a safe investment may want to consider investing in Series I Savings Bonds, commonly known as I Bonds. I Bonds are similar to most bonds in that they are essentially a loan to an entity (in this case the U.S. government), with the promise to return your money, typically with interest. I Bonds are different in that they may offer some tax breaks as well. Here are nine important things to know before you invest in I Bonds.

9 Important Things to Know Before You Invest in I Bonds

1. I Bonds May Offer a Higher Rate, But Not a Fixed Rate

For those looking for low-risk investment returns, I Bonds may be a good option, but they are not traditional fixed-income securities. I Bonds are a type of savings bond offered by the U.S. Treasury and backed by the full faith and credit of the U.S. government. They are unique in that they offer two types of interest payments: a fixed rate and a variable rate, which together provide the bond’s composite rate (or yield).

The fixed-rate portion is determined when the bond is purchased, and remains the same for the life of the bond. The variable rate gets adjusted twice a year, based on inflation rates. Investors may hold I Bonds for up to 30 years.

To illustrate how the rate can change, in May 2022, when inflation was high, I Bonds paid a composite rate of 9.62%. But when inflation cooled, the variable rate dropped and the composite rate dropped as well. For instance, in November 2022, the composite rate fell to 6.89%. Currently, the composite rate on Series I Savings Bonds issued as of May 1, 2024 is 4.28%.

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

2. Your I Bond Principal Is Guaranteed

Because I Bonds are backed by the U.S. government they have a low risk of default and offer tax-advantaged interest income. Furthermore, the principal is guaranteed. This means (unlike traditional, non-government bonds) that the redemption value will never decrease. This is one of the advantages of savings bonds as a whole. As a result, I Bonds are considered low-risk investments.

3. I Bonds Offer Some Tax Breaks

Tax-efficient investors may want to consider certain I Bond features. Because I Bonds are exempt from municipal or state taxes, this can be a boon for some investors. That said, while federal taxes usually apply, they could be deferred until the bond is ultimately sold or matures; whichever happens first.

Additionally, I Bond investors may use the interest payments for qualified higher education expenses, and receive a 100% deduction (this is called the education exclusion). Some restrictions apply, including:

•   You must cash out your I Bonds the year that you want to claim the education exclusion.

•   You must use the interest paid to cover qualified higher education expenses for you, your spouse, or your dependent children the same year.

•   You cannot be married, filing separately.

4. I Bonds Are Similar to E Bonds & EE Bonds

Investors who are familiar with the Series E Bond may also find I Bonds appealing. While Series E Bonds are no longer available from the Treasury, they can still be purchased from other investors who currently hold them. Historically, Series E bonds were also known as defense or war bonds.

Series E bonds were replaced by Series EE bonds (aka “Patriot Bonds”) in 1980. Today, like Series I Bonds, investors can buy EE Savings Bonds from TreasuryDirect .

An interesting feature of Series EE Savings Bonds is that, over a 20-year period, these bonds are guaranteed to double in value. And should the interest not be enough to double the value, the U.S. Treasury will top it up, giving the bond an effective interest rate of 3.5% per year during that period.

While I Bonds don’t offer the same guarantee, your principal is guaranteed and the bonds are designed to keep pace with inflation.

5. I Bonds Are Easy to Purchase

Investors can purchase electronic I Bonds online through TreasuryDirect in denominations over $25. The maximum amount of electronic I Bonds someone can purchase is $10,000 per calendar year.

In paper format, investors may use their tax refund to purchase up to $5,000 a year.

6. I Bonds Are a Long-Term Investment

In general, the primary risks in buying bonds revolve around redemption. What if you need your money before maturity?

I Bonds are generally a long-term investment. To start with, investors must understand that they have their money locked up for one year. After that, investors who redeem their I Bonds before they’ve held the bond for five years will forfeit the last three months of interest. (You can redeem an I Bond after five years with no penalty.)

As a result, those looking for a shorter-term investment may want to consider investing in Treasury bills.

7. Other Investments Might Offer Better Returns

One possible advantage of investing in stocks, mutual funds, and ETFs is that investors could potentially make a profit if the stock or fund does well. For instance, historically, stocks have been shown to be one of the best ways to build wealth over time. However, there is also risk involved, and you could lose money if the investment performs poorly.

TIPS, or Treasury Inflation-Protected Securities, are also a type of government bond designed to protect investors from inflation. The principal amount of a TIPS bond will increase with inflation, while the interest payments remain fixed. I Bonds are similar to TIPS but offer additional protection against deflation.

💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.

8. It’s Hard to Predict an I Bond’s Return Over Time

To maximize your return on investment when purchasing I Bonds, it is essential to understand the differences between the two interest rate components of the bond, and how they can play out over time.

I Bonds offer a fixed interest rate, which remains the same for the life of the bond, and the inflation-protection component, which adjusts with changes in inflation rates twice per year.

So if you buy an I Bond, the composite rate would be the same for the first six months after the issue date. After that, your rate would adjust with the current inflation rate. If inflation goes up, so would the rate of return. If inflation goes down, the bond’s inflation rate would likewise decrease.

And if you hold onto your I Bond for 10, 20, or 30 years, you would likely see some years with higher inflation rates and some years with lower inflation rates.

9. You Must Meet Certain Criteria to Buy an I Bond

To be eligible to buy I Bonds you must be:

•   A United States citizen, no matter where you live,

•   A United States resident, or

•   A civilian employee of the United States, no matter where you live.

Also, investors can only purchase I Bonds with U.S. funds. You cannot buy them with foreign currency.

The Takeaway

If you’re looking for a generally safe and reliable investment option, I Bonds may be worth considering. They offer tax breaks and other benefits that can make them a low- risk choice for your long-term savings goals. That said, because I Bonds come with a composite rate of return, it’s hard to predict how much your money will actually earn over time.

With I Bonds, your principal is guaranteed. If you buy a $1,000 I Bond, no matter what happens, you will get your $1,000 back.

If you’re interested in savings vehicles, there are alternatives to government bonds, including savings accounts with a higher APY (annual percentage yield). By exploring your options, you can choose the best option — or options — for you.

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 4.60% APY on SoFi Checking and Savings.

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Photo credit: iStock/Bilgehan Tuzcu

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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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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4.20% APY
SoFi members with direct deposit activity can earn 4.20% 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 4.20% 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 4.20% 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 10/31/2024. 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.

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