Mar
21
2023
What Is a Swaption? Understanding Swap Options

What Is a Swaption? Guide to Understanding Swap Options

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is a Swaption? Guide to Understanding Swap Options

A swaption, also known as a swap option, is an option contract that grants the owner the right but not the obligation to enter into a swap contract with specified terms. The swap contracts tend to be interest rate swaps, but can be other types of swaps as well.

With swaptions, one party can exchange a currency of the same value, an interest rate, or the liability of repaying a loan. Read on for how they work, the different types, pros and cons, and more.

How Swaptions Work

As mentioned above, a swaption is an option on a swap rate. Like other types of options contracts, the buyer pays a premium to enter into the swaption, and beyond that they are not obligated to act on the contract.

Although Swaptions are a type of option, they are more similar to a swap than to an option. Similarities to swaps include:

•   They are traded over-the-counter instead of on centralized exchanges.

•   They are customizable and offer a lot of flexibility since they are not standardized exchange products.

When two parties want to enter into a swap option agreement, they decide on the terms of the contract, such as the the premium, the expiration date, the notional amount, the swap’s legs (fixed vs. float), the benchmark for the floating leg, and the frequency of adjustment for the variable leg.

Recommended: Options Trading 101 Guide

Who Often Uses Swaptions

Swaptions are typically used by institutional investors instead of retail investors, although some private banks offer them to their clients. Large corporations, investment banks, commercial banks, and hedge funds use them for various purposes. It takes a lot of work and experience to create a portfolio of swaptions, so they generally aren’t used by individuals or small firms.

They are often used to hedge against macroeconomic risks such as interest rate risk or securities risks. If an institution thinks interest rates might change, they can enter into an agreement to protect against that. Financial institutions can also use them to change their interest payoff terms.

They tend to be used to hedge specific financings, but they can also be used to hedge a broader change in future interest rates. This can be useful if an institution holds a lot of debt maturities for the year and doesn’t want to risk losses.

The way swaptions are generally set up, their strikes are a strike above the current 10 year swap rate. Therefore the borrower takes on risk between the current rate and the higher rate, but not more than that.

Swaptions can be purchased in most major currencies, such as the U.S. Dollar, Euro, and British Pound.

Recommended: Popular Options Trading Terminology to Know

What Are the Different Types of Swaptions?

There are different types of swap options that each have different types of ‘legs’ in the predetermined swap contract they represent. The two types of options are payer and receiver.

Payer Swaption

If a buyer enters into a payer swaption, they are purchasing the right but not the obligation to enter into a future swap contract. When exercised, the buyer would become the fixed-rate (non-changing) payer and receive the floating rate (variable) payments.

Fixed interest rates don’t change with the market, they stay the same through the duration of a loan. Floating rates change based on a reference rate, the most common one being LIBOR. LIBOR is an average of interest rates that are collected from some of the top banks in London.

Receiver Swaption

In a receiver swaption contract, the swap holder has the option to pay the floating rate and receive the fixed rate.

When Can a Swaption Be Exercised?

There are also swaptions that have different terms of execution. The three most common are:

American

American swaptions can be exercised on any date prior to and including the expiration date.

European

European options can only be exercised on the expiration date, making them less flexible.

Bermudan

Bermudan swaptions have several specific dates when they can be exercised prior to the expiration date.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

Swaption Example

A borrower wants to purchase rate protection on their current floating rate debt maturities totalling $50 million. They decide that they would like to purchase the right, but not the obligation, to pay a fixed rate on their debts for ten years.

For this right, they are willing to take on the risk of 10 year interest rates up to 3.8%, but no higher than that.

The borrower enters into an agreement with a settlement date in the current year, for a notional amount of $50 million, with a 10 year term and a strike of 3.8%. The premium they must pay to enter in this contract is $400,000.

Including the premium, the rate is actually hedged higher than 3.8%, but for the sake of this example we will call the strike 3.8%.

If the strike is lower or the settlement date is farther in the future, this increases the value of the swaption and therefore increases the cost of the premium.

The borrower enters into this agreement to hedge against a large increase in swap rates but without choosing a specific rate they want when the contract expires.

It’s important to note that the swaption isn’t tied to the 10 year Treasury, it’s tied to 10 year swap rates, although their movements tend to be related. Also, swaptions are derivatives, so they aren’t the underlying assets themselves, but contracts derived from rates or assets.

When the settlement date occurs, there are two ways the swaption could turn out.

  1. If 10 year swap rates are below 3.8%, the option contract expires, the lender keeps the premium and the borrower uses the current swap rate.
  2. If 10 year swap rates are higher than 3.8%, the borrower exercises the option. In this case the provider of the swaption pays the borrower the difference between the swap rate and 3.8%. The borrower locks in the current swap rate for a swap agreement, and uses the payment they received to buy down the rate on this new swap.

Pros and Cons of Swaptions

There are a few reasons why financial institutions use swaptions, but there can be downsides to them as well. Some of the pros and cons of swap options are:

Pros

 Cons
Can be used to hedge against risk when there is a possibility that an interest rate will go up. Swaptions can have longer durations than other types of options.
If the swaption is not exercised, the buyer loses the premium amount they put in. There is a risk of the other party defaulting on the agreement.

The Takeaway

Entering into swaption agreements is one type of options trading strategy commonly used by institutional investors. They are usually used to help with restructuring a current financial position, alter a portfolio, hedge options positions on bonds, or adjust payoff profiles.

There are other types of options on the market that retail investors often trade.

If you’re ready to try your hand at options trading, You can set up an online options trading account and trade from the SoFi mobile app or through the web platform.

And if you have any questions, SoFi offers educational resources about options to learn more. SoFi doesn’t charge commissions, and members have access to complimentary financial advice from a professional.

With SoFi, user-friendly options trading is finally here.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Mar
21
2023
What Are Asian Options and How Are They Priced?

What Are Asian Options and How Are They Priced?

By | Growing Wealth, invest, Investing | Comments Off on What Are Asian Options and How Are They Priced?

Asian options (also known as average strike options or average options) are a type of exotic option that is priced according to the average price of the underlying commodity, as opposed to the spot price.

Read on for how they’re priced, how they work, pros and cons, and more.

What Is an Asian Option?

Asian options are a type of exotic option that trade differently than standard American or European options.

American and European options allow the holder to exercise an option at a strike price known on the purchase date. They differ in when the option can be exercised.

American options can be exercised at any time up to and including the expiration date. European options can only be exercised on the expiration date.

Asian options, on the other hand, are priced based on the average price of the asset over a period of time and like European options they are exercised on the expiration date.

The various parameters of an Asian option are negotiable, but there are two different types of Asian options, average strike options and average price options.

Average strike options are sold with an unknown strike price. The strike price will be determined based on the average price of the underlying asset at selected time intervals.

Average price options are sold at a known strike price. The exercise price will be determined based on the average price of the underlying asset at selected time intervals.

In addition, both types of Asian options may be priced according to arithmetic or geometric averages.

Who Buys Asian Options?

Asian options are usually purchased to solve a particular business problem:

  1. A buyer wants to lock in an average price or exchange rate over a period of time.
  2. A buyer wants to protect against price manipulation in the market.
  3. A buyer wants to protect against volatility in the price movement of the underlying asset.
  4. A buyer wants to mitigate against inefficient pricing due to an asset being thinly traded.

How Asian Options Work

Like standard options, the price of a call or put in Asian options depends on the price of the underlying asset when the option expires. But unlike standard options, the price of an Asian option will depend on the average price of the underlying over a specified period of time.

Different kinds of Asian options will define average in different ways, so make sure that you check the details of the contract before investing. It’s common for Asian options to define average either as an arithmetic or geometric mean over a period of time.

One example might be for an Asian option to be priced as the arithmetic mean of the underlying stock’s price as measured every 30 days.

Maximum Payoff

Like standard options, the maximum payoff for an Asian option will depend on whether it is a call or put option. Even though the prices in an Asian option are determined by the average price instead of the spot price, the maximum payoff for Asian options works in the same way.

For a call option, the maximum payoff is unlimited, since there is no limit on how high the stock’s price can go.

For the purchase of a put option, the maximum payoff will be if the stock’s price goes to zero.

Maximum Loss

Losses on Asian options are limited to the premiums paid at initiation of the trade. Because of average pricing and lowering the volatility of large price swings, the purchase premiums are also typically lower than available with regular options.

Breakeven

The breakeven price of an Asian option depends on the strike price of the option and the amount of premium that you paid for the option originally. If you paid $1.50 for a call option with a strike price of $50. Your breakeven price in this scenario will be $51.50 (the strike price of 50 plus the $1.50 in premium paid originally).

If the stock’s average price when the option expires is above $51.50, you will earn a profit on the option investment.

It’s more complicated to know in advance what the breakeven will be on an Average strike option but the calculation is the same.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

Pros and Cons of Asian Options

Here are some of the pros and cons of trading with Asian options:

Pros

 Cons
Less volatility than standard options due to the averaging of the price Not supported by all brokers
Generally less expensive than standard options due to lower volatility Lower liquidity than standard options
Useful for traders who have exposure to the underlying asset over time, like suppliers of commodities More complicated to price than standard options

Asian Option Pricing

Because Asian options are priced based on an average price instead of the closing price on the date of expiration, they experience lower volatility. This makes intuitive sense, since averaging several price values over time will tend to dampen out extreme values. Because volatility is a key measure of the price of an option, the lower volatility of Asian options generally means lower prices for options.

How Asian Option Pricing Works

The pricing of Asian options is calculated using an average value. Different types of Asian options calculate the average in different ways, and it’s important to understand how the average will be calculated before you purchase the contract. The two most common ways that an average is calculated with Asian options are the arithmetic mean and the geometric mean.

Asian Options Pricing Example – Average Price Option

On March 1, you buy a 90-day call option for stock XYZ with a strike price of $50. This option costs you $1.25 and the average price is defined as the arithmetic mean of the underlying asset price taken every 30 days.

XYZ has a price of $51.00, $48.50 and $52.00 at the 30, 60 and 90 day mark. The arithmetic mean of those 3 prices is ($51 + $48.50 + $52) / 3, or $50.50. Since the option has a strike price of $50, the option closes with a value of $0.50 (calculated price at expiration less spot price, $50.50 – $50).

Because you purchased the option for $1.25 originally, in this scenario you would take a loss on the position.

As with standard options, if the average price of the underlying asset is below the strike price (for a call option), the option expires worthless.

Asian Options Pricing Example – Average Strike Price Option

On March 1, you buy a 90-day call option for stock XYZ. This option costs you $1.25 and the average strike price is defined as the arithmetic mean of the underlying asset price taken every 30 days.

XYZ has a price of $51.00, $48.50 and $52.00 at the 30, 60 and 90 day mark. The arithmetic mean of those 3 prices is ($51 + $48.50 + $52) / 3, or $50.50. Therefore, at expiration the strike price will be $50.50. The option closes with a value of $1.50 (price at expiration less calculated spot price, $52 – $50.50).

Because you purchased the option for $1.25 originally, in this scenario you would have a gain on the position.

The Takeaway

Unlike standard options that are valued based on the spot price of the underlying asset when the option expires, Asian options are valued based on an average price taken in discrete time periods before expiration.

Because the value of an Asian option is based on an average of prices, there is less volatility in the prices. Lower volatility leads to generally cheaper prices than standard options.

If you’re ready to try your hand at online stock options trading, You can set up an Active Invest account and trade options from the SoFi mobile app or through the web platform.

And if you have any questions, SoFi offers educational resources about options to learn more. SoFi doesn’t charge commissions, and members have access to complimentary financial advice from a professional.

With SoFi, user-friendly options trading is finally here.

FAQ

Are Asian options cheaper?

Asian options are usually (but not always) cheaper than standard American or European options. This is because Asian options are priced using an average price rather than the spot price of the underlying commodity on the date of expiration. Because an average price is used, this makes Asian options less volatile, and consequently, generally cheaper.

How are Asian options priced?

Rather than using the spot price of the underlying stock or commodity on the date of the option’s expiration, Asian options are priced using an average price over the preceding period of time. While there are different methods for calculating the average price, it’s usually calculated as either the arithmetic or geometric mean of the underlying stock or commodity.

Why can’t Black-Scholes models value Asian options?

The Black-Scholes pricing model is one of the most common ways to price standard American or European options. To price options, the Black-Scholes method makes a variety of assumptions about the price of the underlying stock. One assumption required by Black-Scholes is that the stock’s price will move following something called Brownian motion. Because arithmetically-priced Asian options do not follow Brownian Motion, the standard Black-Scholes pricing model does not apply.

Photo credit: iStock/Boris Jovanovic

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Mar
21
2023
Opening a Foreign Currency Bank Account Online

What You Need to Know About Foreign Currency Bank Accounts

By | Financial Independence, Life & Career, money | Comments Off on What You Need to Know About Foreign Currency Bank Accounts

A foreign currency bank account, also known as a multicurrency account, can facilitate transactions made in foreign currencies; that is, not in U.S. dollars. This can be a significant benefit for businesses. They may use multicurrency (or foreign currency) bank accounts for international transactions as well as to support operations overseas. This can offer a major convenience because of the flexibility with different currencies.

But these multicurrency accounts aren’t just for businesses. Some Individuals may also want to fund a bank account with foreign currency in certain situations. Read on to learn more about this topic, including:

•   What a foreign currency account is

•   How to open a multicurrency account

•   The pros and cons of a foreign currency account

•   The fees associated with this kind of bank account

🛈 Currently, SoFi does not allow bank accounts to be opened in any currency other than USD.

What Is a Multicurrency Account?

A foreign currency bank account, or multicurrency account, is an account that’s designed to hold money denominated in foreign currencies. It may also be referred to as a borderless account. It is a simpler way to deal with regular deposits of foreign currencies.

The types of currencies accepted for deposit or used for withdrawals can be determined by the bank. Some of the currencies your bank may process include:

•   Australian dollars (AUD)

•   Canadian dollars (CAD)

•   Euros (EUR)

•   Great Britain pound sterling (GBP)

•   Japanese yen (JPY).

As mentioned, foreign currency accounts can be opened for business or personal reasons. Businesses that operate globally may require these accounts in order to send payments to vendors or receive payments from international clients.

You might open a foreign currency account for yourself, as an individual, in a few different circumstances. Perhaps you live or are working abroad, Or maybe you regularly make payments overseas or need to send money to friends and family internationally.

How Does a Multicurrency Account Work?

With a multicurrency account, you are able to deposit, hold, and send money in different currencies, just as the name implies. Depending on the financial institution, you may be able to earn interest on deposits, as well.

You may be able to convert funds back and forth into foreign currencies as needed without paying the usual fees associated with these operations.

A multicurrency bank account that’s set up as a savings account might follow typical savings account rules. For example, the bank may limit you to six withdrawals from the account per month (though these regulations have been loosened since the COVID-19 pandemic; check with your financial institution). If that limit applies and you exceed it, the bank may impose an excess withdrawal fee. Keep in mind that any fees assessed for a foreign currency account may be processed in U.S. dollars.

Multicurrency accounts at Federal Deposit Insurance Corporation (FDIC) member banks enjoy FDIC protection, up to the established limit. The FDIC insures banking customers up to $250,000 per depositor, per financial institution, per ownership category. This may well reassure you about the safety of your funds.

One thing to note is that foreign currency bank accounts aren’t used for forex trading. If you’re interested in trading foreign currency as an investment, you’d need to open a separate brokerage account for that. There are a number of online brokerages that offer the option to trade forex alongside other investments, such as stocks and exchange-traded funds (ETFs).

Typical Requirements to Apply for a Foreign Currency Bank Account

If you’re interested in opening a foreign currency account, it’s important to know what documents you’ll need. That way, you can gather the necessary materials and speed through the application process. The specifics can vary from bank to bank but generally, you must:

•   Be of minimum age to open an account, typically 18 or 19

•   Have a valid, government-issued form of identification

•   Provide identifying information, including your name, address, date of birth and Social Security number

•   Meet minimum-deposit requirements

•   Provide proof of income and employment

The requirements to open a foreign currency account aren’t that different from those for a foreigner opening an account in the U.S. Whether you can apply for a foreign currency bank account online or not will depend on the bank. Some banks do allow you to start the application online, while others require you to open an account over the phone or in-person at a branch. Check with yours to learn the exact protocol.

You may also need to already have at least one other account open with the bank before you can apply for a multicurrency account. If the bank imposes this requirement, you may also need to maintain a specific minimum balance in that account to qualify.

Pros of Foreign Currency Account

If you’re curious about multicurrency accounts, it may well be because you are tangled in some red tape as you try to bank in, say, both U.S. dollars and euros. A foreign currency bank account can help meet certain money management needs, like toggling back and forth between two kinds of currency.

Here, the pros of multicurrency accounts.

•   When you deposit funds into your account, you can hold it as multiple currencies, including leftover foreign currency from travel, in one place. You don’t have to exchange foreign currency before you can use it.

•   You typically avoid foreign transaction fees you might otherwise incur.

•   Being able to switch among different currencies could allow you to leverage the most favorable exchange rates.

•   You may be able to earn interest on your balances.

•   If the institution where your account is has FDIC insurance, you are covered for $250,000 per depositor, per ownership category, in the rare event of a bank failure.

•   Multicurrency bank accounts can be used for personal or business purposes.

•   Sending payments or money in foreign currencies can be more convenient.

A foreign currency account could also come in handy if you travel. You can use a linked debit card to make purchases or withdraw cash in each country you visit, without having to get traveler’s checks from your bank.

So how do traveler’s checks work? If you’ve never used them, you might not know that these are paper financial instruments that can be used the same way you would a paper check or cash. Thanks to the convenience of credit cards and debit cards, however, travelers don’t need to rely on them as much to make payments when visiting destinations outside the U.S.

Cons of Foreign Currency Account

While a multicurrency bank account might be appropriate in some situations, there are a few drawbacks to consider. Specifically:

•   Your financial institution might charge you account and minimum balance fees the same as you might pay for any other bank account.

•   Interest rates and APYs may be low.

•   Initial deposit requirements or minimum balance requirements may be on the higher end.

•   Changing currency rates can affect the value of the money in your account.

Another drawback of foreign currency accounts is that not all banks offer them. And some banks may only offer these accounts for businesses, not individuals.

Multicurrency Account Fees

Foreign currency accounts can have fees, just as any other type of bank account may. Depending on the bank, some of the fees you might pay include:

•   Monthly maintenance fees

•   Excess withdrawal fees (for savings accounts)

•   Overdraft or non-sufficient funds (NSF) fees

•   Foreign transaction fees

•   Currency conversion fees

When comparing multicurrency bank accounts, take time to review the details thoroughly. It’s important to understand which currencies you can hold, which fees you might pay, and whether you’re required to maintain a minimum balance in the account.

Once you’ve scoped those details out, see if the benefits of this kind of account will outweigh the fees. It could wind up being a good way to simplify your banking life if your financial life requires frequent foreign transactions.

The Takeaway

Foreign currency accounts can simplify money management if you regularly send or receive money in currencies other than U.S. dollars. Opening one of these multicurrency bank accounts is not that different from opening any other type of account. It can be a major convenience if your daily life involves receiving and/or sending funds overseas — and a good way to take control of your international financial life.

FAQ

What is the purpose of a multicurrency account?

A multicurrency or foreign-currency bank account allows you to receive, hold, and send funds in more than one currency. This can be convenient for businesses and individuals who frequently make international transactions and would like to have an account that recognizes multiple currencies.

What types of banks offer multicurrency accounts?

Many but not all banks offer multicurrency accounts. Some of the U.S. banks that offer foreign currency accounts at press time include Citi, HSBC, and TIAA Bank. For businesses, Wells Fargo and PNC offer foreign currency accounts. You can contact your current bank to find out if multicurrency accounts are available.

How does a multicurrency account work?

A multicurrency bank account allows you to deposit, keep, and send funds in more than one currency. You can decide if you keep the funds in different currencies or convert them. This kind of account can help you conduct international transactions without necessarily paying all the usual fees involved.

Photo credit: iStock/RgStudio

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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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Mar
21
2023
Apply for a Credit Card and Get Approved: Step-By-Step Guide

Apply for a Credit Card: Step-By-Step Guide

By | Credit, credit card, Family Finances | Comments Off on Apply for a Credit Card: Step-By-Step Guide

A credit card can be a useful tool for managing your money. But before tapping into the benefits, the first thing to know is how to get a credit card. There are some requirements, and some tips that can help when it comes to getting approved.

Here’s the lowdown on the key things to know to apply for a credit card — and most importantly, to get approved for a credit card.

What to Consider When Applying for a Credit Card

Before you worry about how to get a credit card, it’s helpful to first understand what a credit card is. As the first word in its name suggests, a credit card is a line of credit, which is a type of flexible loan that enables you to borrow money up to a fixed limit.

When an individual charges a transaction at a business that accepts credit card payments, the credit card company pays the merchant. The cardholder must then pay back the credit card company by a designated date. Otherwise, they’ll incur interest charges.

This basic premise of how credit cards work means the card company is taking a risk when extending credit to any individual. They assess that risk via an application that determines not only whether the individual gets approved for a credit card, but also factors like their credit card limit and annual percentage rate (APR) on a credit card.

Before applying, there are some important considerations that can help improve your chances of getting approved for a credit card.

Recommended: Tips for Using a Credit Card Responsibly

Learn About the Terms Associated with Your Credit Card

Evaluating different credit cards can feel overwhelming for a newbie, so it’s a good idea to get familiar with some basic credit card terms that are common across all credit cards. Here are some common terms you might run into in a credit card application and as you begin to use your new card:

•   Balance: Your balance is the amount of money you owe on your credit card. This can include purchases (even paying taxes with credit card) as well as any fees, balance transfers, and cash advances.

•   Balance transfer: A balance transfer is when you move money from one credit card to another credit card, ideally one with a lower APR. This can allow you to pay off your debt more easily, though you’ll often pay a balance transfer fee to move over the balance.

•   Billing cycle: A credit card billing cycle is the period of time between the regular statements you receive from your credit card company. Usually, billing cycles occur on a monthly basis.

•   CVV: The card verification value, or CVV number on a credit card, is a three- to four-digit number that appears on a physical credit card. It serves as an additional layer of security in transactions that occur over the phone or online.

•   Expiration date: A credit card expiration date represents when a credit card is valid until. Usually shown as a month and a year, you can use your credit card up until the last date of that month in that year.

•   Late fee: The late fee is a charge you’ll incur if you miss making at least your minimum payment by your payment due date. To avoid this fee, it’s important to alway pay on time, even if you’re in the midst of disputing a credit card charge, for instance.

•   Minimum payment: The credit card minimum payment is the least amount you must pay each month on your outstanding balance. This can be a flat amount or a percentage of your outstanding balance.

•   Purchase APR: The APR for purchases represents the total annual cost of borrowing money through purchases made with your credit card. This APR applies only on remaining balances after the statement due date.

Decide on the Type of Credit Card You Need

There are a number of different types of credit cards out there that can serve different needs. For instance, there are:

•   Travel rewards credit cards

•   Cashback credit cards

•   Credit-building credit cards

•   Balance transfer credit cards

While most of the above types of cards are unsecured credit cards, meaning no deposit is required, there are also secured credit cards. These do require a deposit, though they may also be more accessible to those with limited or low credit.

Different types of cards offer different benefits, and they may also vary when it comes to things like annual fees or average credit card limits.

There may also be differences in the requirements for getting approved. It’s not so much a question of how old you have to be to get a credit card — rather, different cards may have varying requirements for minimum income or credit score needed to qualify.

Before applying, it’s a good idea to do some comparison shopping to find a card that not only fits your needs but also that you’re eligible for.

Check Your Credit Score

Your credit score is a number that indicates the likelihood that you’ll repay a debt. It’s based on your credit history, and banks use it as a tool for evaluating credit card applications and deciding whether to approve them.

Here are some common factors that can affect your credit score:

•   Payment history, including on-time payments, missed payments, and having an account sent to collections

•   Credit utilization, or how much one owes relative to their total available revolving credit

•   Length of credit history

•   Types of credit accounts

•   Recent activity, such as applying for or opening new accounts

Generally, the higher an individual’s credit score, the more creditworthy they’re considered. If using the FICO scoring model, here’s a general breakdown of what various scores mean:

•   Less than 580: Poor

•   580-669: Fair

•   670-739: Good

•   740-799: Very good

•   800+: Exceptional

It’s a good idea for an individual to know their score and their chances of getting approved before applying for a credit card. The minimum credit score for a credit card will vary depending on the type of card it is.

For example, rewards credit cards, which come with big perks, tend to require a good credit score. But some types of credit cards, such as secured credit cards, may be more accessible to those with lower credit scores because they pose a lesser risk to lenders. This can make the latter category more appealing if, for instance, you’re getting your first credit card.

It’s worth noting that pulling one’s own credit information is considered a “soft inquiry” and does not reduce their credit score. When you apply for a new credit card, however, it will generate a “hard inquiry,” which can lower your credit score temporarily.

Where to Apply for a Credit Card

Credit cards are offered through banks, credit unions, retailers, airlines, colleges and universities, and a host of other institutions. This means that there are a variety of places where one can apply for a credit card — and often a number of ways to apply.

You can apply for a credit card in person, such as at a bank branch or retail location. Or, you may apply over the phone. Most credit card issuers also offer online applications, which add convenience to the process.

How to Apply for a Credit Card in 3 Steps

Ideally, by the time you sit down to actually apply for a credit card, you’ll have done the necessary homework to determine if you should get a credit card. This includes checking your credit score and potentially getting preapproved (though more on that later).

1. Gather the Necessary Information

The application process will be easier — and likely quicker — if you’re prepared. This means gathering any necessary documentation (more on what you’ll usually need in the next section) and having reverent information on hand, such as your income and Social Security number.

2. Fill Out and Submit an Application

Next, it’s time to fill out the application. There are a few ways you can do this: online, over the phone, or through the mail. It’s generally quickest to complete an application online.

You’ll need to fill in the requested fields and upload (or make copies of) any necessary documents. Once you submit your application, you should hear back within a few weeks at the most — sometimes, you’ll hear back almost the same day.

3. Be Ready for the Credit Impact and Repayment

As you wait for your credit card to arrive in the mail, you should take stock of the recent hit you took to your credit from the hard inquiry. It’s generally advised to avoid applying for multiple credit cards or loans within a short period of time to minimize the credit impact.

Also start to consider your strategy for how you’ll repay your credit card balance once you start swiping. Consider setting up automatic payments from your bank account each month to make sure you’re not late, or you might set a reminder on your phone or in your calendar.

What Do You Need to Apply for a Credit Card?

While application requirements will depend on the credit card issuer, what you need to apply for a credit card generally includes:

•   Annual income

•   Address and length of time at that address

•   Date of birth

•   Phone number

•   Social Security number

•   Employment status and sources of income

•   Financial accounts and/or assets

•   Financial liabilities

•   Country of citizenship and residence

Credit Card Preapproval and Prequalification

Getting prequalified or preapproved for a credit card means you’ve been prescreened for a credit card and meet at least some of the eligibility requirements. The two terms can be used interchangeably, though preapproval might carry slightly more weight in terms of your odds of eventual approval.

You’ll still need to go through the formal application to get approved for a credit card though, as neither preapproval or prequalification means you’ve been approved. The formal application process will involve a hard inquiry, whereas prequalification and preapproval generally only involve soft inquiries.

Still, preapproval or prequalification can be a good way to suss out potential credit card options and likelihood of getting approved before you move forward with an application and risk the impact to your credit.

What Happens If Your Application Is Turned Down?

Getting turned down for a credit card is indeed disappointing. When a credit card application is declined, you have the right to know why. You can request details about your application in the form of an adverse action letter, which includes the reason for the denial, details about your credit score, and notice of the right to dispute the accuracy of information provided by the credit reporting agency.

This can serve as helpful context for understanding why an application was declined. It can also help in determining what the appropriate next steps are for improving one’s chances of approval, if and when you apply for another credit card. For instance, you may consider applying for a credit card that has less stringent credit requirements, or you may take steps to improve your credit score and try again at a later date.

Secured and Prepaid Credit Cards

If you were turned down for a credit card, you might take some steps to improve your credit before trying again, or you might consider other options. Two alternatives you might look into are secured credit cards and prepaid credit cards.

With a secured credit card, you put down a deposit, which serves as collateral and usually acts as the card’s credit limit. Because there’s collateral there for the credit card issuer to fall back on if you fail to make your payments, secured credit cards are generally easier to get approved to than the more traditional, secured credit cards.

Prepaid debit cards don’t let you work on building your credit, as you’re not actually borrowing funds. Rather, you load the card with funds that you can then use in person or online. This can offer some of the convenience that a credit card offers over cash, without the application and approval process.

The Takeaway

Applying for a credit card can be a simple three-step process of gathering the required details, submitting an application, and handling the likely credit impact. You will probably have many options when selecting a card, so take your time to find the right fit.

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

How do I choose a credit card?

Choosing a credit card is a personal decision that depends on your needs, preferences, financial habits, and eligibility. Before applying for a credit card that appears to fit your needs, it’s a good idea to check your credit score and any other requirements, such as minimum income, to improve your chances of getting approved.

How long does it take to get a credit card?

The length of time it takes to get a credit card can depend on a number of factors, including the eligibility requirements and how an application is submitted. Some online credit card applications offer fast or even instant approval, although it can take some additional time for the credit card to arrive in the mail.

Does your credit get pulled when applying for a credit card?

Generally, a credit card company will do a hard credit inquiry before extending final approval. However, there may be some scenarios where a credit card issuer may only do a soft inquiry, such as if an individual has been preapproved for a credit card or already has a banking relationship with the credit card issuer.

What are the requirements needed to get a credit card?

The requirements to get a credit card will typically vary from card to card. However, you’ll generally need to provide information on your annual income, your employment status, and your current debt obligations. Your creditworthiness also comes into play, though credit score requirements will differ depending on the card.

Can you get a credit card with no credit history?

It is possible to get a credit card with no credit history, though your options may be more limited. You may have an easier time getting approved for a secured credit card or a basic, no-frills credit card.

Photo credit: iStock/Dome Studio

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.

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

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

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