May
25
2024
ACH Return Codes (R01 - R33): Understanding What They Mean and What to Do

ACH Return Codes (R01 – R33): Understanding What They Mean

By | Budgeting & Goals, money, Terminology | Comments Off on ACH Return Codes (R01 – R33): Understanding What They Mean

ACH return codes are generated when an ACH (Automated Clearing House) payment fails to process and therefore gets returned. ACH payments, which essentially transfer funds between financial institutions, can be a huge convenience. They allow you to set up automatic monthly bill pay and receive direct deposit of one’s paycheck, for instance. There are, however, likely to be times when a transaction doesn’t work as expected, perhaps due to incorrect coding or insufficient funds. ACH return codes indicate exactly what went wrong.

Here, you’ll learn about what ACH return codes are and what steps you can take to help complete this kind of banking transaction, especially if you are managing a business that relies upon them.

What Are ACH Return Codes?

First, know that ACH refers to the Automated Clearing House, a U.S. financial network that provides electronic transfers among banks and credit unions. If you receive your paycheck by direct deposit or set up bill pay from your checking account, you are using the ACH system. It’s considered a fast, secure, and simple way to move money.

ACH returns occur when an ACH payment can’t be completed.

There are a few reasons why these transactions aren’t successful, including:

•   The originator (the entity who requested payment) provided inaccurate or incomplete payment information or data.

•   The originator isn’t authorized to debit the client’s account with an ACH payment.

•   There aren’t sufficient funds to complete the transaction.

The ACH return code alerts the parties involved so they know there’s an issue, whether a recurring automatic bill pay suddenly stopped or a one-time payment could not go through. The specific reason can then help the situation be remedied so the payment can hopefully be sent again properly.

Here’s an example to clarify this concept: Perhaps your wifi provider is authorized to withdraw payment monthly from your checking account. If the Originating Depository Financial Institution (ODFI; the wifi provider’s bank) or the Receiving Depository Financial Institution (RDFI; the entity receiving the payment request; aka your bank) isn’t able to transfer funds, a return code will be generated to explain exactly why the transaction wasn’t completed.

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How ACH Returns Work

If an ACH payment can’t be completed, as mentioned above, a specific return code will be generated. The person or business originating the payment request can then work to resolve the issue.

A few details to note about how ACH returns work:

•   If an ACH return occurs due to insufficient funds, the consumer may be on the hook for an ACH return charge. It’s similar to when a check bounces; the end user pays a small fee; in this case, usually $2 to $5.

•   Timing-wise, most ACH returns only take about two banking days, though a few of these ACH codes involve transactions that can take up to 60 days to process.


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Common ACH Return Codes

There are 85 distinct ACH return codes. Here, you’ll learn about some of the most common ones. These return codes are typically received by the entity requesting payment and their bank.

Code: R01
Meaning: Insufficient funds (the account’s available balance isn’t sufficient to cover the funds transfer, similar to being in overdraft)
What to do: The entity requesting payment can attempt the transaction again as a new transaction within 30 days of the original authorization date (up to two times), or contact the customer for an alternate payment method.

Code: R02
Meaning: Account closed (a once-active account has been closed).
What to do: The entity requesting payment can ask the customer to correct their account information or provide a different bank account or form of payment to complete the transaction.

Code: R03
Meaning: No account exists or unable to locate account (even though the account number structure is valid, it doesn’t pass the check digit validation).
What to do: The request’s originator should contact the customer to confirm their routing number, bank account number, and the name on the bank account. If this information differs from what was originally entered, they can submit a new payment with these new details. Or request another form of payment.

Code: R04
Meaning: Invalid account number.
What to do: The entity requesting payment should check the account number, and retry the transaction. Or obtain the correct bank account number and submit a new payment with that account number.

Code: R05
Meaning: This transaction should have been processed as a consumer, not corporate, transaction.
What to do: The request’s originator should check that you have used the right codes. They can contact the customer and ask for a new form of payment. In some cases, they may need to file an appeal with Nacha (the non-profit organization that manages the ACH network) for this kind of returned transaction.

Code: R06
Meaning: Returned at ODFI’s request (ODFI requested that the RDFI return the ACH entry), often because the transaction is believed to be fraudulent.
What to do: The entity seeking payment should contact the ODFI to understand why the transaction was rejected, and then, depending on the response, resubmit or alter the request.

Code: R07
Meaning: The previous authorization for an ACH transaction was revoked by the customer.
What to do: The originator of the request should suspend recurring payment schedules entered for this specific bank account to prevent additional transactions from being returned. Then they need to address the issue with the customer, and try to resolve the issue by getting a new form of payment or asking to debit a different bank account.

Code: R08
Meaning: The customer has issued a stop payment on the item.
What to do: The entity requesting funds should contact the customer to resolve the issue, and then re-enter the returned transaction again with proper authorization from the customer. Or request a new form of payment.

Code: R09
Meaning: Due to uncollected funds, the originator can’t access enough money to cover the transaction.
What to do: The originator should try the transaction again, and re-enter it as a new one within 30 days of the original authorization date (up to two times in 60 days).

Code: R10
Meaning: The customer advised this transaction is not authorized or is improper in some way.
What to do: The entity requesting payment should check the details and authorization on the transaction to determine if an error was made. They can connect with the customer to determine why this code was triggered. If the details can be rectified, they can resubmit the transaction per ACH guidelines.

Code: R11
Meaning: An electronic check deposit was not executed correctly.
What to do: The originator of the request can correct the underlying error and resubmit the corrected electronic deposit within 60 calendar days.

Code: R12
Meaning: The branch where the account is held was sold to another DFI (development financial institution).
What to do: The entity making the request should obtain the customer’s new routing and bank account information, and submit a new transaction.

Recommended: What is Liquid Net Worth

More ACH Return Codes

The following ACH return codes are less common than those mentioned previously, but still occur and are worth knowing. Here’s a look at what makes these codes tick:

Code: R13
Meaning: Invalid routing number provided.
What to do: The request’s originator should get the correct routing number from the customer to use when resubmitting the request.

Code: R14
Meaning: The account was being managed by someone who is now deceased or can no longer continue overseeing the account (such as an account held for a minor or an incapacitated person).
What to do: This is handled on a case-by-case basis; the request’s originator might try to contact the beneficiary or new representative for the account.

Code: R15
Meaning: Beneficiary or account holder is deceased.
What to do: No further action can typically be taken.

Code: R16
Meaning: Account is frozen and funds are unavailable.
What to do: The entity making the request should obtain a new payment form.

Code: R17
Meaning: Known as a “file record edit criteria” code, this indicates that there is a discrepancy in the file code, and the transaction cannot be processed.
What to do: The fields causing the processing error need to be identified (typically by the originator of the request) in the addenda record information field of the return to complete the transaction.

Code: R20
Meaning: The receiving account is not a transaction account (aka, it’s an account against which transactions are prohibited or limited).
What to do: The entity making the request can contact the customer, and request either the authorization to charge a different bank account or a new form of payment.

Code: R21
Meaning: The ACH file contains an invalid or incorrect company identification number.
What to do: The originator of the request should double-check their information, or contact the company to obtain the correct information.

Code: R22
Meaning: The individual ID number is invalid.
What to do: The entity making the request should check their information and resubmit, or contact the customer to obtain the correct information.

Code: R23
Meaning: The account holder or their bank is refusing to accept the transaction.
What to do: The originator of the request can work with the customer to clear up the issue, or ask them to contact their bank to resolve it.

Code: R24
Meaning: Duplicate entry.
What to do: If the transaction is indeed a duplicate, there’s nothing else to do. If it isn’t, the entity making the request can contact their customer or their customer’s bank to resolve the error.

Code: R29
Meaning: The customer has notified their bank that the requesting entity is not authorized to conduct this transaction.
What to do: The originator of the request should suspend recurring payment schedules, and then address the issue with the customer. For instance, they could request new payment information from the customer or ask them to contact their bank to authorize the payment.

Code: R31
Meaning: This indicates that the receiving bank is requesting to return a certain kind of ACH transaction (a CCD, or cash concentration disbursement, and CTX, or corporate trade exchange, only).
What to do: The entity making the request can reach out to their customer to resolve this issue or request a different form of payment.

Code: R33
Meaning: There is an issue with a transaction involving a converted check (known as XCK), such as when a damaged paper check is converted to an electronic version.
What to do: The originator of the request should contact their customer for another payment form.

Recommended: Average Savings by Age

The Takeaway

ACH return codes express the reason why an electronic Automated Clearing House payment could not be completed. Knowing what each code represents can help determine what the next steps should be to keep payments flowing smoothly or get refunds completed.

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FAQ

What causes an ACH return?

ACH returns occur when an Automated Clearing House payment can’t be completed, perhaps due to inaccurate or incomplete information or insufficient funds. When this happens, an ACH return code is generated, providing a reason for the return.

What is ACH return fee?

When ACH returns occur, especially due to insufficient funds, a fee can be charged. It’s similar to how a bounced check incurs a fee. The amount is generally around $2 to $5.

How long does an ACH refund take?

Typically, an ACH refund takes about five to 10 banking days to occur, though some situations can take longer to resolve..

Photo credit: iStock/Delmaine Donson

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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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25
2024
Guide to a Confirmed Letter of Credit

Guide to a Confirmed Letter of Credit

By | Budgeting & Goals, money | Comments Off on Guide to a Confirmed Letter of Credit

A confirmed letter of credit can be an important document to those who are launching or running a business, particularly those engaging in international trade. These letters are used to help protect both the buyer and the seller in a business-to-business transaction by adding an extra guarantee that the seller will get paid. They essentially mean that a second bank will pay the seller if the first bank fails to do so, which can inspire confidence and allow a deal to go through.

Here’s a closer look at what a confirmed letter of credit is, how it works, and its pros and cons.

What Is a Confirmed Letter of Credit?

Also known as a confirmed LC, a confirmed letter of credit is an additional guarantee for a payment by a secondary bank. It states that this additional bank will be responsible for a payment being on time and in full even if the buyer doesn’t meet their contractual obligations and the first bank (called the issuing bank) defaults on the payment. You might think of it as a kind of insurance policy or Plan B if the initial bank responsible for payment fails to do its job.

This type of document can be common in international trades, such as transactions between export and import businesses. In many cases, a guarantee may be required to conduct international transactions or when a vendor or seller has reason to doubt the first bank’s creditworthiness.

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How Confirmed Letters of Credit Work

Confirmed letters of credit are commonly used as negotiable instruments, which are signed documents that promise to pay a certain sum to a specified person. They can be especially valuable in international business transactions that involve a significant payment amount for goods or services. Since the letter acts as guaranteed payment, it may take the place of a request for advance payment.

To get a regular letter of credit, the buyer will likely need to submit required documents to the first bank, including proof that certain steps have been completed. Then the bank will send appropriate documents to the seller’s bank. This paperwork shares detailed instructions on the terms and conditions, as well as how payment should be made. Depending on the agreement between the buyer and the seller, payment may be made immediately or at an agreed-upon date.

Once the letter of credit has been issued, the buyer may need the backing of a second bank, or a confirmed letter of credit. Worth noting: A fee is likely to be involved. The exact amount of this fee may depend on how good (or questionable) the first bank’s credit is. This letter usually reflects the first letter of credit and uses the same terms.

A confirmed letter of credit can protect both parties because it decreases the risk of default for the vendor or seller. Additionally, it ensures that payment is only made if all the terms are met. It can be a step to building good credit when doing a deal with a new client. It can also be helpful for a business that is just starting out and making connections, building contacts, and monitoring its credit.

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Parties Involved in a Confirmed Letter of Credit

Here’s a listing of all the parties typically involved in a confirmed letter of credit.

•   Buyer or applicant: This is the party who is requesting the letter of credit and who will pay the seller.

•   Beneficiary or seller: The party who is selling goods or services and is the one who receives payment.

•   Issuing bank: This is usually a bank where the buyer already has a business bank account. It’s the one that issues the original letter of credit.

•   Confirming bank: This is the second bank that will guarantee the funds to the seller once the terms in the letter of credit are met. In some cases, the confirming bank is from the seller’s home country (this may be called a correspondent bank) or is a bank the seller already works with.

Recommended: Guide to Irrevocable Letters of Credit (ILOC)

Confirmed Letter of Credit Example

Let’s look at a fictional example of how a confirmed letter of credit could work. Say that Pauline’s Paper Goods receives an order for 100,000 pallets of customized notebooks from JessCo, a stationery company. Pauline’s Paper Goods has never worked with JessCo before and isn’t sure that this company has the means to pay for the goods. Maybe Pauline’s Paper Goods worries that JessCo doesn’t have what is considered good credit.

In order to prevent non-payment after the notebooks are produced and shipped off to the buyer, Pauline’s Paper Goods outlines an agreement that JessCo needs to pay with a confirmed letter of credit on the date the shipment leaves their warehouse.

If JessCo agrees, it would start applying for a letter of credit at its bank, where it has its checking account, in the U.S. If the bank requires it, the company needs to provide proof it has the funds available or it will apply for financing.

As soon as the issuing bank creates the letter of credit, JessCo then applies for a confirmed letter of credit with another bank, possibly the seller’s bank. When Pauline’s Paper Goods receives the completed confirmed letter, it manufactures and ships the customized notebooks. Once Pauline’s Paper Goods provides proof of when and how the goods were shipped, the guaranteed funds are released.

Recommended: Business vs Personal Checking Account: What’s the Difference?

Confirmed vs Unconfirmed Letters of Credit

If you are conducting international business, you will probably hear the terms confirmed and unconfirmed letters of credit. An unconfirmed letter of credit is simply a letter of credit issued by a bank. A confirmed letter of credit, as we’ve described above, is backed by two banks. This can foster trust if, say, there’s reason to worry the payment won’t be made.

Here’s a look at some other differences between a confirmed vs. an unconfirmed letter or credit.

•   Guaranteed payment: With a letter of credit, the issuing bank guarantees payment. With a confirmed letter of credit, however, two banks confirm payment.

•   Cost: Unconfirmed letters of credit tend to cost less than confirmed letters of credit.

•   Changes: The buyer is allowed to make changes to an unconfirmed letter of credit. With a confirmed letter of credit, both banks can modify the document.

•   Issuance: The seller only has to approach one bank for an unconfirmed letter of credit, but needs to contact two with a confirmed letter of credit.

Recommended: Guide to a Commercial Letter of Credit

Advantages of Confirmed Letters of Credit

Confirmed letters of credit can have several benefits for sellers, particularly those doing business internationally and wanting to ensure smooth transactions. These advantages include:

•   Protection for both the buyer and seller

•   An extra layer of confidence for the seller

•   A lower risk of default thanks to a reputable second bank (perhaps serving as a guarantor if the first bank has a low credit rating)

•   Buyers can seem more creditworthy, which may increase the odds that a seller will do business with them

Disadvantages of Confirmed Letters of Credit

While confirmed letters of credit can be very valuable in business, there are a couple of downsides to recognize. Disadvantages of confirmed letters of credit include:

•   It may take longer to get a confirmed letter of credit since an additional bank is involved

•   Bank fees may be higher than with an unconfirmed letter of credit

The Takeaway

A confirmed letter of credit can be a valuable business tool, especially when conducting international business. For those importing or exporting, the letter will guarantee payment for goods a company is supplying if the buyer and the buyer’s bank can’t complete the deal. Getting a confirmed letter of credit may cost more and take longer compared to an unconfirmed letter of credit, but the effort may be worth it. It can secure a transaction and open doors to doing business with new customers in a way that communicates confidence.

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


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

FAQ

What is an unconfirmed letter of credit?

An unconfirmed letter of credit is a letter of credit that’s only been issued by one bank, known as the issuing bank. In a transaction, the buyer requests an unconfirmed letter of credit to guarantee funds will be paid on time to the seller by the bank.

Is an unconfirmed LC safe?

Yes, an unconfirmed letter of credit is safe because there is a guarantee or confirmation from one bank that payment will be made. Assuming that the issuing bank has a high credit rating, the seller can feel confident that the funds will be paid once all the conditions in the contract have been met. If the seller wants an additional layer of security, they may request a confirmed letter of credit — which means a second bank will provide payment if the first one fails to do so.

What is the risk of an unconfirmed LC?

The risk of an unconfirmed letter of credit is that the issuing bank won’t have the funds to pay the seller. That means that even if the seller completes their end of the contract, they risk losing out on funds if the issuing bank doesn’t fulfill their promise.

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

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

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

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

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

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

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

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

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25
2024
Guide to a Retirement Money Market Account

Guide to a Money Market Account Held Within a Retirement Account

By | Growing Wealth, Investing, money, Preparing for Retirement | Comments Off on Guide to a Money Market Account Held Within a Retirement Account

When you open an individual retirement account (IRA) or 401(k), you can generally choose from a variety of different types of investments, such as stocks, bonds, options, real estate, and more. You may also be able to put some of the money in a money market account, where it will typically earn a higher annual percentage yield (APY) than in a traditional savings account yet still remain liquid.

While you might choose to keep most of your retirement savings in potentially higher-return investments, it may make sense to keep some of your retirement funds in a money market account, since it is a relatively low-risk place to store cash. Even if the return may be lower than other investments, it’s predictable.

Another reason to have some of your retirement money in a money market account is to serve as a holding place as you sell investments or transfer money between investments.

Unlike a regular money market account, a money market account that is offered as a component of a retirement account is subject to the benefits and restrictions of those accounts. Here’s what else you need to know about retirement accounts that offer a money market component.

What Is a Money Market Account That Can Be Used for Retirement?

While there is no such thing as a “retirement money market account,” some retirement accounts allow you to keep some of your money in a money market within the account. The money market account (MMA) could be within a traditional, rollover, or Roth IRA, a 401(k), or other retirement account, which means those funds are governed by the rules of that account.

If the MMA is a component of a traditional IRA, that means you can contribute pre-tax dollars (up to certain limits), your money can grow tax deferred, and you won’t be able to withdraw funds before age 59 ½ without paying taxes and penalties.

Money held in the money market component is liquid. This is usually where money is held when you first transfer money into your retirement account, or when you sell other investments in your account. You can use the funds in the money market to purchase investments within the retirement account.

Recommended: The Different Between an Investment Portfolio and a Savings Account

What Is a Money Market Fund?

Bear in mind an important distinction: A money market fund, which is technically a type of mutual fund, is different from a money market account. A money market fund is an investment that holds short-term securities (and is not insured by the Federal Deposit Insurance Corporation, or FDIC). For example, these funds may hold government bonds, municipal bonds, corporate bonds, cash and cash equivalents.

A money market account is essentially a type of high-yield savings account and it’s FDIC insured up to $250,000.

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How Does a Money Market Within Your IRA Work?

If you are starting a retirement fund that has a money market component to it, you’ll want to make sure that you understand how these money market accounts work. One major way they differ from regular money market accounts is that they are governed by a retirement plan agreement.

This can place some limits on what you can do with the money. Typically, that will mean that you can’t withdraw the money until you have reached a certain age. But one advantage is that the money in the account will grow tax-free or tax-deferred (depending on what type of retirement account it is in).

For example, a money market account in a Roth IRA would follow different rules than money in a traditional IRA.

•   You can deduct contributions to a traditional IRA, but a Roth IRA is funded with after-tax money.

•   You can’t withdraw money from a traditional IRA until you’re 59 ½, except under special circumstances.

•   Because contributions to a Roth are post tax, you can withdraw your contributions at any time (but not the earnings).

Advantages of a Money Market Account Held Within a Retirement Account

•   Since these accounts are held at a bank, they are insured by the FDIC up to $250,000. By contrast, money held in a brokerage account is not FDIC-insured.

•   The money market component can be used to store proceeds of the sales of stocks, bonds, or other investments.

•   Many money market accounts offer the ability to write checks against the account (just keep in mind that withdrawals are subject to restrictions).

Disadvantages of a Money Market Account Held Within a Retirement Account

•   Money market accounts offer a relatively low rate of return compared to what you might be able to earn in the market over time.

•   Opening this type of money market account requires opening a retirement account.

•   You may not be able to withdraw money until retirement age without paying a penalty.

Money Market Account Within a Retirement Account vs Traditional Money Market Account

The biggest difference between a money market account that is a component of a retirement account vs. a traditional money market account is where they are held. Unlike a regular money market account, the money market component is held inside a retirement account, such as a 401(k) or IRA account.

While you can generally access money in a traditional money market account at any time, early withdrawal from a money market that is part of a retirement account can trigger taxes and penalties.

Recommended: What is an IRA and How Does it Work?

What Should I Know About Money Market Accounts Held Within IRAs?

If you are wondering how to save for retirement, there are a few things to keep in mind before opening a retirement account with a money market component.

The most important is that money put into the money market component is subject to the same conditions as any other money you invest into a retirement account. You generally will not be able to access it without penalty until you retire.

You’ll also want to bear in mind that these are low-risk, generally low-return accounts. The money that you deposit, or money that is automatically transferred, is not going to provide much growth.

In some cases, when you open a retirement account, the funds will be automatically deposited in the money market component. In these instances, be sure to check that the money in that part of your account is then used to purchase the securities you want. Given the relatively low yield of an MMA, you may only want a certain portion of your savings to remain there.

Opening a Money Market Account That Is Part of an IRA

If you want to put some of your retirement savings in a money market account, you likely won’t be able to open the account separately, as you can with a traditional MMA.

Instead, you would open a retirement account with your bank, brokerage firm, or company provider. Depending on your IRA custodian, they may automatically include a retirement money market account as an investment option inside your IRA account.

Does It Make Sense to Put Retirement Funds in a Money Market?

There are many different types of retirement plans, so you’ll want to make sure to choose the options that make the most sense for you. While it might make sense to put some money into the money market component of your 401(k) or IRA, you might not want to put much money in it.

The reason for this is due to the relatively low interest rate that money market accounts pay. In some cases, the interest rate may be lower than the rate of inflation. If so, the money kept in the money market component will lose purchasing power over time.

The one exception to this rule would be retirees who are currently living off of the money in their retirement accounts. These investors already in retirement will often want to keep some of their money in money market accounts so they have to worry less about market volatility.

Alternatives to Money Market Accounts Held Within Retirement Accounts

There are any number of low-risk alternatives to money market accounts within retirement accounts, including vehicles outside a retirement account, such as a high-yield savings account. For similar alternatives within a retirement account, you could consider investing in bonds, bond funds, and other lower risk investment options.

The Takeaway

A money market account is often a component of a retirement account, such as an IRA or 401(k). This type of account has the advantages of being FDIC-insured and fairly liquid. However, it may not earn enough interest to outpace inflation. Many investors will want to keep the money in their retirement accounts in investments that can provide higher rates of return. That said, one advantage to keeping some of your retirement funds in a money market is that it can become part of the low-risk, cash/cash equivalents portion of your portfolio.

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FAQ

Can you keep some of your retirement funds in a money market account?

Yes, some retirement accounts offer a money market component. To keep some of your retirement savings in a money market account, you’ll need to open up an individual retirement account (IRA), 401(k), or other type of retirement account. Many retirement account custodians will include a money market account as one “investment“ option for your account.

What is the difference between an IRA and a money market account?

A standard money market account is similar to a regular savings account. An Individual Retirement Account (IRA) is an account that allows you to save for retirement with tax-free growth or on a tax-deferred basis. An IRA account can be used to invest in a variety of different ways. Many IRAs will have a money market component to them.

What is the difference between a money market account and a 401(k)?

A money market account is similar to a savings account in that the money is liquid and earns interest. A 401(k) is a special tax-advantaged account designed to help people prepare for retirement.

With a 401(k), contributions are typically tax-deductible and the money grows tax-deferred until retirement. By contrast, a money market account is funded with after-tax dollars, and there are no tax benefits associated with these accounts. The only exception is if the money market account is a component of a retirement account. In that case, it is governed by the rules of the retirement account it’s in.

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

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

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

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

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

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

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

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

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.

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24
2024
Guide to Irrevocable Letters of Credit (ILOC)

Guide to Irrevocable Letters of Credit (ILOC)

By | Credit, money | Comments Off on Guide to Irrevocable Letters of Credit (ILOC)

An irrevocable letter of credit (or ILOC) is a written agreement between a buyer (often an importer) and a bank. As part of the agreement, the bank agrees to pay the seller (typically an exporter) as soon as certain conditions of the transaction are met. These letters help reduce a seller’s concern that an unknown buyer won’t pay for the goods they receive. It also helps eliminate a buyer’s concern that an unknown seller won’t send the goods the buyer has paid for.

Irrevocable letters of credit are often found in international trade, though they can be used in other types of financial arrangements to ensure that a seller will be paid, even if the buyer fails to uphold their end of the bargain.

Key Points

•   An irrevocable letter of credit is a written agreement between a bank and a buyer to guarantee payment, ensuring that the seller will be paid even if the buyer fails to fulfill their obligations.

•   Irrevocable letters of credit cannot be canceled or modified in any way without the explicit agreement of all parties involved.

•   Irrevocable letters of credit are commonly used in international transactions but can be used in other situations as well.

•   Alternatives to irrevocable letters of credit include trade credit insurance and standard letters of credit, which offer different levels of flexibility and protection.

What Is an Irrevocable Letter of Credit?

Simply defined, an irrevocable letter of credit represents an agreement between a bank and a buyer involved in a financial transaction. The bank guarantees payment will be made to the seller according to the terms of the agreement. Since the letter is irrevocable, that means it cannot be changed without the consent and agreement of all parties involved.

Irrevocable letters of credit can also be referred to as standby letters of credit. Once an irrevocable letter of credit is issued, all parties are contractually bound by it. This means that even if the buyer in a transaction doesn’t pay, the bank is obligated to make payment to the seller to satisfy the agreement.

Having an irrevocable letter of credit in place is a form of risk management. The seller is guaranteed payment from the bank, which can help to reduce concerns about the buyer failing to pay. And it ensures that the seller will follow through on their obligations by providing whatever is being purchased through the agreement. In simpler terms, a standby letter of credit or irrevocable letter of credit is a sign of good faith on the part of everyone involved in a transaction.


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How Does an Irrevocable Letter of Credit Work?

An irrevocable letter of credit establishes a contractual agreement between a buyer, a seller, and their respective banks. It effectively creates a safeguard for both the buyer and the seller, in that:

•   Buyers are not required to forward payment until the seller provides the goods or services that have been purchased.

•   Sellers can collect payment for goods and services, as long as the conditions outlined in the letter of credit are met.

The bank issuing the letter of credit acts as a go-between for both sides, guaranteeing payment to the seller even if the buyer doesn’t pay. Assuming the buyer does fulfill their obligations, they would then make payment back to the bank. In a sense, this allows the buyer to borrow from the bank without formally establishing credit in the form of a loan or credit line. (Check with your financial institution to learn what fees may be involved.)

Before an irrevocable letter of credit is issued, the bank will first verify the buyer’s creditworthiness. Assuming the bank is reassured that the buyer will, in fact, repay what’s owed to complete the purchase, it will then establish the irrevocable letter of credit to facilitate the transaction between the buyer and seller. Irrevocable letters of credit are communicated and sent through the SWIFT banking system.

Recommended: How Do Banks Make Money?

Irrevocable Letter of Credit Specifications

The exact details included in an irrevocable letter of credit can depend on the situation in which it’s being used. The conditions that are set for the completion of the transaction will also matter. But generally, you can expect an irrevocable letter of credit to include:

•   Buyer’s name and banking information (that is, their bank account number and other details)

•   Seller’s name and banking information

•   Name of the intermediary bank issuing the letter of credit

•   Amount of credit that’s being issued

•   Date that the letter of credit is issued and the date it will expire

An irrevocable letter of credit will also detail the conditions that must be met by both the buyer and seller in order for the contract to be valid. For example, the seller may need to provide written verification that the goods or services referenced in the agreement have been provided before payment can be issued. The letter of credit must be signed by an authorized bank representative. It may need to be printed on bank letterhead to be valid.

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Do I Need an Irrevocable Letter of Credit?

You may need an irrevocable letter of credit if you’re doing business with someone in a foreign country. You may also require one if you are conducting a transaction with a new company or individual (one with which you don’t yet have an established relationship).

Irrevocable letters of credit can help to mitigate some of the risk that goes along with international transactions. These letters ensure that if you’re the seller, you get paid for any products or services you’re providing. They also protect you if you’re the buyer, promising that products or services are delivered to you.

An irrevocable letter of credit could also come in handy if you’re still working on building credit for your business and you’re the buyer in a transaction. The bank will pay the money to the seller; you’ll then repay the bank. Payment may be required in a lump sum from your business bank account or another source. Or the bank may also offer the option of repaying it in installments over time. Repaying your obligation could help to raise your business’s creditworthiness in the bank’s eyes. This may make it easier to take out other loans or lines of credit later.


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Alternatives to Irrevocable Letters of Credit

An irrevocable letter of credit is not the only way to do business when engaging in international transactions. You may also consider trade credit insurance or another type of letter of credit instead.

Trade Credit Insurance

Trade credit insurance, also referred to as accounts receivable insurance or AR insurance, is used to insure businesses against financial losses resulting from unpaid debts. You can use trade credit insurance to cover all transactions or limit them to ones where you believe there may be a heightened risk of loss, such as transactions involving foreign businesses.

A trade credit insurance policy protects your business in the event that the other party to a financial agreement defaults. It can insulate your accounts receivable against losses if an unpaid account turns into a bad debt. Purchasing trade credit insurance may be an easier way to manage risk for your business overall, as it’s less involved than an irrevocable letter of credit.

Recommended: Business Loan vs Personal Loan: Which is Right for You?

Letters of Credit

A letter of credit guarantees payment from the buyer’s bank to the seller’s bank in a financial transaction. Like an irrevocable letter of credit, it establishes certain conditions that must be met in order for the transaction to be completed. But unlike an irrevocable letter of credit, a standard letter of credit can be revoked or modified.

You might opt for this kind of letter of credit if you’re doing business with someone you don’t know and you want reassurance that the transaction will be completed smoothly. A regular letter of credit may also be preferable if you’d like the option to modify or cancel the agreement.

The Takeaway

An irrevocable letter of credit is something you may need to use from time to time if you run a business and regularly deal with international transactions. It adds a layer of protection to buying and selling, as a bank is saying it will cover the transaction. An ILOC, as it’s sometimes known, can provide reassurance when working with a new business or establishing your company overseas. The letter cannot be changed, so you’re getting solid peace of mind.

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

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

FAQ

What is the difference between a letter of credit and an irrevocable letter of credit?

A letter of credit and irrevocable letter of credit are largely the same, in terms of what they’re designed to and in what situations they can be used. The main difference is that unless a letter of credit specifies that it is irrevocable, it can be changed or modified by the parties involved.

What is the cost of an irrevocable letter of credit?

You generally need to pay a transaction fee for an irrevocable letter of credit. The fee is typically a small percentage of the transaction amount. The rate will vary from bank to bank.

Does an irrevocable letter of credit expire?

Yes, an irrevocable letter of credit will typically state the date by which the seller must submit the necessary paperwork in order to receive payment.

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

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

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

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

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

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

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

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

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.

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24
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person holding blue credit card

How Refinancing Credit Card Debt Works

By | Credit, Debt Payoff, personal_loan | No Comments

Spending is on the rise — and so is consumer debt. Americans carry, on average, three credit cards and have $6,501 in credit card debt. Overall, U.S. credit card debt is $129 billion higher than it was one year ago.

That amount of debt can be a challenge to pay down along with regular monthly household expenses. Some people may choose to refinance their high-interest credit card debt in an effort to secure a lower interest rate or a lower monthly payment. Refinancing credit card debt can be one way to make progress toward eliminating it completely.

What Is Credit Card Debt?

If you’re putting more purchases on credit cards than you can pay off in a monthly billing cycle, you have credit card debt.

Interest will accrue on the balance that carries over to the next billing cycle. If you don’t pay at least the minimum amount due, you’ll likely also be charged a late fee. Since credit cards use compound interest, you’ll be charged interest on accrued interest and fees. That can add up quickly and make it more difficult to get out of debt.

Carrying a balance on more than one credit card can make the debt even more difficult to manage. If your goal is to be free of credit card debt, refinancing can be one way to achieve that.

What Are Some Benefits of Refinancing Credit Card Debt?

Credit cards are revolving debt and typically have variable annual percentage rates (APRs).

Refinancing credit card debt with an installment loan that has a fixed interest rate, such as a personal loan, will mean you’ll have a fixed end date to your debt and will have the same APR for the entire term of the loan.

If you’re refinancing multiple credit card balances into one new loan or line of credit, you’ll have fewer bills to pay each month. That could potentially make monthly budgeting a simpler task.

Recommended: What Is a Good APR for a Credit Card?

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How Might Debt Refinancing Affect Your Credit Score?

Something to keep in mind when your goal is to pay down debt is that it’s a long game.

That being said, in the short term your credit score can decrease slightly when you apply for new credit and the lender looks at your credit report. During the formal application process, the lender will perform a hard inquiry into your credit report, which may result in a slight temporary drop of your credit score.

If you’re comparing multiple lenders, and they offer prequalification, they’ll do a soft inquiry into your credit report, which won’t affect your credit score.

Building your credit — or rebuilding it — through refinancing credit card debt can be possible if you make on-time, regular payments on the new loan. Reducing your credit utilization can be another positive result of refinancing credit card debt. Both of these can potentially increase your credit score.

It’s important not to overuse the credit cards you refinanced into a new loan, however, or you might accumulate even more debt than you started with.

Will Canceling My Unused Credit Cards Affect my Credit Score?

After you’ve refinanced your existing credit card debt into a new loan, you might be tempted to cancel those credit cards. But that strategy could negatively affect your credit score.

Whether it’s a good idea to cancel a credit card really depends on the card. If you’ve had the credit card for a long time, closing it would shorten your credit history, which could result in a credit score drop. But if it’s a card you genuinely don’t have a reason to keep, such as a retail card for a store you no longer shop at or a card that has a high annual fee that can’t be justified with your current spending habits, closing the account might be the right step for you.

If you plan to keep a credit card open, it may be a good idea to use it for a small, recurring charge so the card issuer doesn’t close it for inactivity. Setting up autopay can make this a convenient way to ensure the card stays open but is paid in full each month.

What Are Some Options for Refinancing Credit Card Debt?

Your overall creditworthiness will be a determining factor in finding available refinancing options. Lenders will look at your credit report and credit score, paying attention to how you’ve handled credit in the past and how much total debt you have in relation to your income.

Balance Transfer Credit Card

If you can qualify for a low- or no-interest credit card, you could use it to transfer a balance from another credit card. You’ll typically be charged a balance transfer fee equal to a percentage of the balance you’re transferring. The promotional rate on these types of cards is temporary, sometimes lasting up to 18 months or so, but can be as short as 6 months.

If you pay the transferred balance in full within the promotional period, you may not pay any interest at all, or a minimal amount. However, if you still have an outstanding balance on the card when the promotional period is over, the APR will revert to the card’s standard rate for balance transfers.

Home Equity Loan

A potential source of refinancing funds might be your home, if you have equity in it. Funds from a home equity loan can be used for just about anything, even things unrelated to your home. You can calculate how much equity you have in your home by subtracting the amount you owe on your mortgage from the current market value of your home.

In addition to the amount of equity you have in your home, lenders will typically also look at your income and your credit history to determine how much you might qualify for. It’s common for lenders to limit a home equity loan to no more than 80% to 85% of the equity you have in your home. There are typically closing costs with a home equity loan including appraisal fee, title search, origination fee, or other fees, and can be between 2% and 5% of the loan amount.

A home equity loan is a second mortgage secured by your home. If you fail to repay the loan, the lender can foreclose on your home.

Debt Consolidation Loan

Some lenders offer loans specifically for debt consolidation. These are actually personal loans, the funds from which can be used to pay off your existing credit card debt. Then, you’ll be responsible for repaying the debt consolidation loan. There may be fees charged on this type of loan, so be sure to look over the loan agreement carefully before signing it.

For a credit card consolidation loan to be as effective as possible at reducing your debt, it will ideally have a lower APR than you’re paying on your credit cards. In this way, you would be paying less in interest over the life of the loan. If a lower monthly payment is your goal, you may opt for a longer-term loan, but may pay a higher interest rate.

Recommended: How to Get a Debt Consolidation Loan with Bad Credit

The Takeaway

If your credit card debt is piling up and you’re finding it challenging to pay it down, you may be considering refinancing. Some credit card refinancing options include balance transfer credit cards with a promotional APR, a home equity loan, or a debt consolidation loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.


SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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

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 .

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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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✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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