Sep
27
2024
How to Stop or Reverse ACH Payments: All You Need to Know

How to Stop or Reverse ACH Payments: All You Need to Know

By | Budgeting & Goals, Financial Independence, money | Comments Off on How to Stop or Reverse ACH Payments: All You Need to Know

Sometimes, no matter how careful you are with your bank account, you may want to cancel an online payment. Fortunately, it’s often possible to do so. Even if you previously sent out a recurring automatic payment, you can typically hit the brakes on an upcoming transaction.

Many of us have learned to rely on ACH payments, which can be used for a business’s payroll, tax payments, bill payments, account transfers, and more. You may well pay many of your monthly bills — from your utilities to your streaming service subscriptions — in this way. As a result, it’s a good idea to understand how ACH works and how to stop or reverse a payment when necessary.

What Are ACH Payments?

ACH payments are a method of money transfer between banks made through the ACH or Automated Clearing House network. NACHA (the National Automated Clearing House Association) governs these transactions, which can be an alternative to other payment options, like credit cards.

With ACH, the funds come directly from a bank account. This makes payments seamless and convenient; no paper checks or postage stamps required. ACH payments are also available to both consumers and businesses alike as long as they have a U.S. bank account.

One downside of ACH transfers, though, is that they can take longer than options like a wire transfer. When you compare a wire transfer vs. an ACH payment, wired funds can transfer within a day. In terms of how long an ACH payment takes, it may be several days. However, ACH has the upper hand in terms of cost: They are generally less expensive than other payment processing methods and often free.

ACH payments can break down into two categories: ACH credit and ACH debit.

An ACH credit is like a virtual check. The payer tells the ACH network to transfer their account funds to the payee’s account. In contrast, ACH debit (the more popular version of ACH transfer) involves a recipient pulling funds from the payer’s account. (For instance, this kind of payment occurs when you authorize your car loan to be automatically debited on a certain day of each month.) Merchants often prefer this kind of automatic debiting as it reduces the possibility of late or failed payments.

Can ACH Payments Be Canceled or Returned?

So, let’s say you just moved and forgot to cancel your gym membership at your old location. You realize that a payment is about to be sent out. Or maybe you set up a one-time payment to a vendor but notice (oops!) that you typo’d the amount? Now what? Can you stop or reverse an ACH payment from a checking account?

Typically, yes. This is partially possible due to the time frame of ACH transfers. ACH transfers can take multiple days to settle, and, as a result, you have more time to stop or reverse your transaction.

Rules vary by bank, but you may be able to cancel an ACH transfer over the phone, or you may need to fill out a stop payment form online or at a branch. Either way, time is of the essence. If the payment has already cleared, you’ll need to request a reversal, which is a more complicated process.

Recommended: Average Savings by Age

How to Reverse ACH Payments

Let’s look at reversing an ACH payment in a little more detail. Occasionally, an ACH transfer may involve a mistake. It’s easy to type in the wrong dollar amount or otherwise err when it comes to making payments without cash in hand. If you act quickly, you may be able to stop the payment by contacting your bank. But if the payment has already cleared your bank account, you’ll need to request a reversal.

The process for how to reverse an ACT payment will vary by bank, but here’s a look at what’s typically involved.

ACH Reversal Requirements

NACHA, the organization that oversees ACH payments, has specific qualifications that determine if an entry is erroneous. If these details are satisfied, you are then allowed to reverse your payment without an issue. To qualify, an entry must meet one of the following conditions:

•   Be a duplicate of a previously initiated entry

•   Transferred on the wrong date

•   Include a mistake in the sender or recipient’s account number

•   Transferred the incorrect amount

These scenarios cover many of the situations that would lead you to cancel or reverse a payment.

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How to Stop an ACH Payment

If you want to stop a transaction, it’s actually to your benefit that ACH payments take several days to settle. This means you have some time to halt an ACH transaction if you need to. However, every bank operates differently and may have its own rules on how to stop an ACH payment. For example, you may find that your bank can cancel an ACH payment online or over the phone. But other institutions may need you to submit a physical form canceling the transaction. Check with the institution that holds your account to find out how to proceed.

You can also cancel your recurring ACH debit payments. You need to do this within three business days before the funds are due. Typically, the process involves contacting the entity expecting your payment and letting them know that you are revoking access to your bank account. Next, you’ll need to contact your own bank to let them know you are no longer allowing automated payments to this payee. You may be able to do this over the phone or you may need to fill out and submit a stop ACH payment form.

Recommended: Understanding ACH Transfer Limits for Incoming and Outgoing Transactions

How to Update Direct Deposit Details

A quick look at the other side of the coin: Let’s say you are receiving funds by direct deposit (perhaps your paycheck or government payments), and realize you need to update your details. If you have changed bank accounts — maybe you found a high-yield online savings account you can’t resist — you’ll need to let the entity that is paying you know your new info. For benefits like Social Security payments, you may be able to do this online. To update your direct deposit information with your employer, contact your company’s HR department to find out what the process is.

The Takeaway

The ACH network is a valuable payment processor that consumers and businesses in the U.S. rely on. However, situations can arise that may trigger you to want to stop or reverse a payment, such as if you had entered details incorrectly. Fortunately, it’s possible to stop ACH payments from your checking account or reverse an ACH payment. You can then notify the others impacted and get your banking transactions back on the right track again.

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


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

FAQ

How long will it take to reverse an ACH payment?

It generally takes two business days to reverse an ACH payment. However, some cases can take longer if the transaction is disputed.

Can you amend an ACH transfer?

Yes, you can typically amend or cancel an ACH transfer by contacting your bank. If the transaction hasn’t been initiated yet, you may be able to stop it from happening. If the transfer has already cleared, you’ll need to work with your bank to reverse the ACH transaction.

How do I stop ACH payments on my checking account?

If you want to stop an ACH payment, you’ll need to contact your bank at least three days before the ACH transfer’s date. This may involve an ACH payment stop request submitted in writing. A small fee may be involved in halting the payment.

Photo credit: iStock/insta_photos

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*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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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Sep
27
2024
What Is a Certificate Program? A Student's Guide in 2022

Student’s Guide to Certificate Programs

By | Going to College, Student Loans, student_loan | Comments Off on Student’s Guide to Certificate Programs

Certificate programs offer a flexible, focused, and often more affordable way for individuals to gain specialized skills and knowledge without committing to a full degree program. Whether you’re a recent high school graduate looking to supplement your education, a working professional seeking career advancement, or someone wanting to switch industries, certificate programs provide valuable credentials in a relatively short time frame. 

Keep reading to learn what certificate programs are, their benefits, and how to choose the right one to meet your personal and professional goals.

What Is a Certificate Program?

Certificate programs are courses or vocational training provided by colleges or professional associations that last less than two years, and typically just six to nine months. They can prepare you for immediate placement in trade, technical, and vocational careers. 

Trade schools prepare you for jobs such as welder, electrician, and cosmetologist. Vocational schools focus on in-demand jobs that can be trained in two years or less, such as working as a paralegal or a dental hygienist. Technical schools teach skills for one trade and typically involve an apprenticeship. Programs include HVAC, auto repair, and some nursing certifications.

“Certifications” are the outcome of certain certificate programs to prove successful mastery of the program. Exams are officiated by state or authorized organizations, and formal licenses, diplomas, or certificates are awarded on completion. Certificates can also be career training programs for bachelor’s degree holders to expand a student’s expertise without earning a degree. For instance, a marketing professional can enroll in a social media marketing course, a niche area of marketing, to broaden their skillset. 

Certificate Programs vs College Degrees

Certificate programs and college degrees differ in curriculum, program length, cost, and program outcome.

Curriculum. Colleges require a general education curriculum, whereas certificates teach only the skills for a trade or subject. No academic courses, such as humanities, are included in the training.

Length. Certificate programs are shorter. College degrees are a minimum of two to four years for full-time students. Certifications can sometimes be just one month, but are typically three to four months for one-off courses. Training programs for certifications are usually one to two years.

Cost. A college education has a substantial price tag. The average college tuition in 2024 costs $38,270 per student per year, according to the Education Data Initiative, compared to certificate programs that can range from $1,000 to $5,000 (though some may be more expensive). 

Program outcome. Finally, program outcomes differ. Certificates train students for a specific skill and immediate placement in careers with those skills. College programs provide an extensive and expansive education that can provide opportunities in multiple disciplines within a field. For instance, someone who earns a bachelor’s in economics can enter finance analytics, business consulting, and various disciplines in finance-related fields.

Recommended: A Guide to Choosing the Right College Major

How Long Are Certificate Programs?

Certificate programs can range from a few weeks to two years. San Diego University’s paralegal program can take four to eight months to complete in-person, for example. A cosmetology program at Fullerton College in California requires 1600 hours at a student’s own pace — so the program length depends on you and the field you are planning on studying.

Types of Certificate Programs

The two most common types of certification programs are undergraduate and graduate. They follow compulsory education, and outside of a degree, provide education needed for specific fields such as business, administration, and healthcare.

Undergraduate

Undergrad programs build technical skills and subject mastery via career training programs or one-off courses. Enrollees usually must have a high school diploma for certain courses. They can often be completed in one academic year or less.

Some programs, such as cosmetology, award a license at the end of the program. Ensure your program is formally accredited by the state or professional organization and will prepare you for required licensing exams.

Graduate

Graduate courses enhance a college degree. Students test and earn a certificate to satisfy course completion without earning a degree. Some courses require prior knowledge of a topic. For example, students employed in computer engineering can earn a certificate in a new computer language.

They are offered by universities and colleges, and programs are credit-based. Some programs’ credits can be transferred to other colleges.

Online Certificate Programs

Online certificate programs offer multiple advantages, with convenience being at the top of the list. The online universe has a library of extensive certificate programs, and prestigious courses are accessible to everyday learners. For example, eCornell has a large library of graduate courses. Also, MOOCs (massive open online courses) offer free and paid programs from universities, nonprofits, and for-profit companies.

Online courses also offer flexibility. Asynchronous courses, those that don’t have a specific meeting time, allow students to take a course at their own pace. You can access pre-recorded content anytime and follow class discussion on comment boards. On the other hand, synchronous online programs are more restricted to a schedule. They work like in-person courses where students attend live online lectures, meet due dates, and engage in online class activities.

Finally, online courses may be less expensive than in-person ones. Cutting the commute and certain campus fees can result in cheaper overall prices than in-person learning.

Not all certificate programs offer online learning, however. Hands-on vocations, such as landscaping, plumbing, and electrical engineering, often require apprenticeships to demonstrate material understanding and to meet minimum requirements.

Is a Certificate Program Right for You?

Certificate programs might be a good fit for someone who wants to try a trade career. They are an affordable way to test out vocations without incurring student debt. And college credits from some courses can be put toward a formal college degree if you decide to pursue a bachelor’s.

If you want to learn a new skill for work, graduate certificate courses are one alternative to a master’s or professional degree. For instance, some companies will pay employees to get a Project Manager Professional (PMP) certificate to better equip their employees and improve workforce productivity.

Certificate programs are a great way to kick-start a career change. Some popular certificate programs for career changes include business analysis, law, human resources, and accounting. They are offered by professional organizations, such as the American Institute of Certified Public Accountants for accounting.

Program Type

Certificate Programs

Certification Programs

College Degrees

What do you gain?

Add skills with specific courses for your current job

Fast-track into trade careers or career advancement

Gain career opportunities not limited to trade vocations

How long do you study?

Programs last a few weeks to a few months

Programs last a few months and up to two years

Programs for full-time students last two to four years

How many credits are programs?

15-30 credits, though requirements may vary

4-30 credits, requirements may vary

60 for associate, 120-130 for bachelor’s, and 30-60 credits for graduate programs

This program is good for…

Kick-starting a career change; adding skills to your existing job

Starting a new career (usually in trade vocations); advancing careers into management

Starting a new career or changing a career

Benefits of a Certificate Program

Certificates can propel students directly into the workforce with on-demand skills. According to a Georgetown University study, nearly all certificates (94%) are awarded in career-oriented fields.

Future success in earnings depends on the trade field you choose. For instance, the median earnings for a dental hygienist were $87,530 per year in 2023 according to the Bureau of Labor Statistics (BLS). In comparison, the median wage for cosmetologists was $35,080 in 2023 according to the BLS.

Certificates can also complement a college degree or help a professional acquire skills to advance upward within a field. A marketing professional can expand his or her skillset with an InDesign certificate — often a skill needed for content marketers. And it pays to learn. A total of 77% of Coursera students reported career benefits, such as promotions, raises, and career changes.

Certificate programs also can save time and money. Programs are fewer credits than full degrees and are shorter in length, so cost substantially less than a degree.

Drawbacks of a Certificate Program

Certificates alone can increase income value modestly — and the gains can be diminished in a rapidly evolving workplace. Some studies even show negative returns for certificate holders without a college degree, according to the nonprofit New America.

One BLS report shows bachelor’s degree holders earn median weekly earnings of $1,541, while “some college or associate degree” earners make $1,057 per week on average.

Furthermore, more vocations require a college degree. According to BLS, a bachelor’s degree is required for 174 occupations while an associate degree or a postsecondary nondegree award is required for only 99 occupations.

While certificate programs equip you with skills to land an entry level job after a short time, it may not pay off in the long run.

What to Look for in a Certificate Program

Evaluate programs by accreditation. Quality courses are accredited by the U.S. Department of Education or the Council for Higher Education Accreditation. They might also be verified by certifying bodies within that industry, such as HRCI for Professional Human Resources certification.

Determine flexibility. Some learners might benefit more from in-person courses, while an online course can give busy learners an opportunity to gain valuable expertise and skills. Furthermore, an asynchronous program can provide further flexibility for students who have unpredictable schedules.

Look out for for-profit institutions. For-profits are often synonymous with poor training for exorbitant costs. In short, it can be a scam. The College Scorecard is a government tool that can tell you whether your school is for-profit. On your school’s page, you will see its designation, such as “Private For Profit.”

What Certificate Programs Are in Demand in 2024?

There’s no shortage of demand for certificate programs. The National Center for Education Statistics says the number of certificates awarded increased from 53% to 70% from 2011-12 to 2021-22.

Top certification categories in demand in 2024, according to the International Association of Career Coaches, include:

•   Information Systems and Cybersecurity ($73K to $123K average salary)

•   Project Management ($99K to $122K average salary)

•   Healthcare ($41K to $203K average salary)

•   Finance and Accounting ($72K to $111K average salary)

•   Human Resources ($65K to $128K average salary)

The top paying certifications include:

•   Certified Registered Nurse Anesthetist: $203K

•   Google Cloud Professional Data Engineer: $129K

•   Global Professional in Human Resources: $128K

•   AWS Certified Solutions Architect: $123K

•   Chartered Financial Analyst: $104K

•   Certified Professional in Healthcare Quality: $100K

Coursera’s top 10 courses with professional certification include Google Data Analytics, Google Project Design, Google UX Design, IBM Data Analytics, Google IT Support, Meta Marketing Analytics, IBM Cybersecurity Analyst, IBM Data Science, IBM Data Analyst Capstone Project, and International Business Essentials Specialization. 

How to Pay for Certificate Programs

When deciding how to pay for certificate programs, it’s important to explore all your options. Some might include savings, student loans, and other forms of financial aid.

To get a student loan for a certificate program, you can fill out the Free Application for Federal Student Aid (FAFSA®). The FAFSA will tell you what you qualify for, including federal student loans, grants, and scholarships.

You can also look into private student loans. Private student loans are given by banks, credit unions, and online lenders. While they don’t offer the same benefits and protections as federal student loans, they can be a good option for students who need funding to pay for their certificate program.

Recommended: Guide to Student Loans for Certificate Programs

The Takeaway

Certificate programs can start, enhance, or change careers for learners. They can prepare students for immediate placement in a specific trade without a college degree. They can also boost your career by providing specialized skills, enhancing your qualifications, and demonstrating expertise to employers.

Certificate programs are less expensive and shorter in duration than college degrees. To pay for a certificate program, you can look into employer assistance programs, use cash savings, or rely on federal or private student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.


Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

What does a certificate program mean?

A certificate program is a short-term educational course designed to provide specialized skills or knowledge in a certain field. It typically takes a few months to two years and is aimed at enhancing career opportunities, professional development, or gaining expertise in a particular subject.

Is a certificate program worth taking?

A certificate program can be valuable for gaining specialized knowledge quickly and affordably. However, it’s important to consider the program’s relevance to your field and potential return on investment.

What are the benefits of attending a certificate program?

Attending a certificate program offers three key benefits: It provides specialized skills and knowledge in a short time, enhances your qualifications to improve job prospects, and offers a flexible, cost-effective alternative to a degree, allowing you to advance your career or switch fields efficiently.

Photo credit: iStock/PeopleImages

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

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Sep
27
2024

A Beginner’s Guide to Investing in Your 20s

By | Debt Payoff, invest, Terminology | No Comments

Deciding how to invest money in your 20s can seem overwhelming at first; many people have differing opinions or goals, and it’s hard to know where to start. But remember that you don’t need to have a lot of money upfront to be a successful and savvy investor.

Perhaps the most important thing is to start investing early, even if your initial investments are small. Here are a few different strategies for investing money in your 20s.

Think About Financial Goals

When determining your financial goals, you may want to break down short-, medium-, and long-term milestones. You want to ask yourself what you want from your money and figure out when you’ll need to use the money. For example, the money you save for a medium-term goal, like a down payment on your first home, should be treated differently than the retirement savings you won’t touch for 40 or more years.

So, you may want to start buying stocks right away, but you may also want to give some strategic thought as to how that may fit into your overall financial goals.

If you have not earmarked savings for a specific financial goal, take some time to think about what purpose you’d like to apply it to. A great first saving goal is to have three to six months of living expenses in an emergency fund. After that, it might be good to turn your attention toward savings and investing for longer-term goals, like retirement.

Decide Where to House Your Money

where to put your money in your 20s

When deciding how to invest money in your 20s, it can help to think about immediate, mid-term, and long-term financial needs. Once you have outlined some money goals, you could consider setting up your accounts. The type of account you open often depends on when you need the money.

Where to Put Immediate Money

Food, bills, rent, and everything else you must pay for on a month-to-month basis are immediate needs. Often people keep this money — along with a cushion so as not to overdraft their account — in an online bank account. These types of accounts allow you to withdraw money instantaneously, generally without penalties, making them ideal for your immediate financial needs.

Where to Put Mid-term Money

Mid-term money is any money you might need in the next couple of years, such as a travel fund, wedding fund, or home down payment savings. It might make sense to keep this money in a high-yield savings account, which provides a better return on your money than traditional savings accounts.

High-yield savings accounts, along with other cash equivalents like certificates of deposits (CDs) and money market accounts, are usually considered to be lower-risk investments (though CDs are not helpful for emergency funds because of the early termination penalties).

Where to Put Mid- to Long-term Money

For money you’ll use in five to 20 years, you may be prepared to take slightly more risk than a high-yield savings account. You might choose to keep the money in your high-yield savings account or in CDs, or a online brokerage account where you can invest that money in stocks, bonds, mutual funds, or other asset classes. You can also do a combination of the different types of accounts.

Longer-term savings options, like a tax-advantage 529 plan, can also be appropriate if you’d like to start planning for higher education needs for current or future children.

Where to Put Long-Term Money

Think of long-term money as cash you won’t need for several decades. A retirement account is a great example of an appropriate place to hold long-term money. Retirement plans like a Traditional IRA, Roth IRA, or a 401(k) account can offer significant tax benefits.

💡 Ready to invest in your retirement? Consider opening a Traditional or Roth IRA with SoFi.

Get a 1% IRA match on rollovers and contributions.

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1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Potential Assets to Invest in During Your 20s

potential assets to invest in during your 20s

One important thing to understand about investing in your 20s is the tradeoff between risk and reward when implementing your investing strategy. You cannot have one without the other. With this risk and reward calculation in mind, you need to determine what asset classes you might consider when investing in your 20s.

Stocks

A stock is a tiny piece of ownership in a publicly-traded company. When you invest in a stock, you could earn money through capital appreciation, dividends, or a combination of the two.

Stocks can be volatile because prices fluctuate according to supply and demand forces as they trade on an open exchange. Even though stocks can be volatile and experience losses, they tend to provide positive returns over time. The S&P 500 index has had an average annual growth rate of 10.3% from 1957 through the end of 2023.

Bonds

Although not risk-free, experts generally consider bonds less risky (though not risk-free) than stocks because they are a contract that comes with a stated rate of return. Bonds backed by the U.S. government, called treasury bonds, are the safest within the category of bonds because it is unlikely that the U.S. government will go bankrupt.

Bonds are debt investments, meaning investors fund the debt of some entity. The money you earn on that investment is the interest they pay you for borrowing your money. In addition to treasuries and corporate bonds, there are municipal bonds, which state and local governments issue, and mortgage- and asset-backed bonds, which are bundles of mortgages or other financial assets that pass through the interest paid on mortgages or assets.

Mutual Funds and Exchange-Traded Funds

Some investors might want to utilize mutual funds or exchange-traded funds (ETFs) to gain exposure to certain asset classes.

A fund is essentially a basket of investments — stocks, bonds, another investment type, or a combination thereof. Funds are helpful because they provide immediate diversification: safety against the risk of having too much money invested in one stock, sector, or any other single asset.

Funds are either actively or passively managed. A fund that is passively managed is attempting to track a specific index. An actively managed fund is maintained with a hands-on approach to determine investments in a portfolio. ETFs tend to be passively managed, but there are many actively managed ETFs funds on the market. Mutual funds can be either passively or actively managed.

Tips for Investing In Your 20s

Once you’ve become familiar with the basics of investing, it’s time to put that knowledge into action. These tips can help you shape a strategy for how to invest money in your 20s and beyond.

Gauge Your Personal Risk Tolerance

gauging your risk tolerance

One of the key things to remember about investing in your 20s is that time is on your side. You have a significant time horizon window to allow your portfolio to recover from bouts of inevitable stock market volatility. Because of this, you could take more risks with your investments to try and achieve higher rewards.

Getting to know your personal risk preferences can help you decide where and how to invest in your 20s to achieve your investment goals. It’s also important to understand how risk tolerance matches your risk capacity and appetite.

Risk tolerance means the level of risk you’re comfortable taking. Risk capacity is the level of risk you prefer to take to reach your investment goals, while risk appetite is the level of risk you need to hit those milestones. When you’re younger, playing it too safe with your portfolio might mean missing out on significant investment returns.

Know the Difference Between Asset Allocation and Asset Location

asset allocation when investing in your 20s

People often invest in a combination of stocks and bonds, which is easy to do using mutual funds and ETFs. One strategy for investing in your 20s is to invest a higher allocation of your long-term investments in stocks and less in bonds, slowly moving into more bond funds the closer you get to retirement. This big picture decision is called asset allocation.

But asset allocation is only part of the picture. One might also consider asset location: the types of accounts where you’re putting your money, like savings accounts, an online brokerage account, a 401k, or an IRA.

Asset location matters when it comes to investing money in your 20s because it can maximize tax advantages if you’re utilizing a 401k or IRA. But these retirement accounts also have restrictions and penalties for withdrawing money. So if you want to be able to access your investments quickly, an online brokerage may be a complimentary investing account.

Take Advantage of Free Money

One of the simplest ways to start investing in your 20s is to enroll in your workplace retirement plan like a 401k.

Once you’ve enrolled in a plan, consider contributing at least enough to get the full company match if your employer offers one. If you don’t, you could be leaving money on the table.

And if you can’t make the full contribution to get the match right away, you can still work your way up to it by gradually increasing your salary deferral percentage. For example, you could raise your contribution rate by 1% each year until you reach the maximum deferral amount.

Don’t Be Afraid of Investment Alternatives

Stocks, bonds, and mutual funds can all be good places to start investing in your 20s. But don’t count out other alternative investments outside these markets.

Real estate is one example of an alternative investment that can be attractive to some investors. Investing in real estate in your 20s doesn’t necessarily mean you have to own a rental property, though that’s one option. You could also invest in fix-and-flip properties, real estate investment trusts (REITs), or crowdfunded real estate investments.

Adding alternative investments such as real estate, cryptocurrency, and commodities to your portfolio may improve diversification and could create some insulation against risk.

Learn more: What Are Alternative Investments?

The Takeaway

Learning how to invest money in your 20s doesn’t happen overnight. And you may still be fuzzy on how certain parts of the market work as you enter your 30s or 40s. But by continually educating yourself about different investments and investing strategies, you can gain the knowledge needed to guide your portfolio toward your financial goals.

One thing to know about investing in your 20s is that consistency can pay off in the long run. Even if you’re only able to invest a little money at a time through 401k contributions or by purchasing partial or fractional shares of stock, those amounts can add up as the years and decades pass.

If you’re ready to start saving and investing for your financial goals, the SoFi investment app can help. With SoFi Invest®, you can begin building a portfolio of stocks, and ETFs for as little as $5 to meet all the critical financial goals and milestones in your life.

Find out how SoFi Invest® can help you take a big step towards reaching your financial goals.

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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.

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26
2024
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How to Set Financial Goals and Set Yourself Up for Success

By | Budgeting & Goals, Financial Independence, money | No Comments

Many people harbor hopes and dreams for how they will live, achieve professional success, start a family, travel, and more. Whether that means launching a nonprofit by age 30, having three kids, sailing around the world, or all of the above, reaching those goals takes planning and focus.

The same is true of your finances. Money helps fund your aspirations, and it needs care and tending. Solid financial planning can help you realize those dreams, from having your child graduate college debt-free to being able to retire early.

So here’s your guide to setting smart money goals and achieving them, step by simple step.

Check out our Money Management Guide.

This article is from SoFi’s guide on how to manage your money, where you can learn basic money management tips and strategies.


money management guide for beginners

What Are Financial Goals?

Financial goals are the aspirations you have for how you will bring in income, spend it, and save it. These can be short-term dreams, like financing a vacation to Tulum next winter, or longer-term ones, such as retiring by age 50.

Identifying these goals and then creating a roadmap to achieve them is what smart financial management typically boils down to.

Short-Term Financial Goals

Short-term goals are usually defined as things you want to achieve with your personal finances within anywhere from a few months to a couple of years.

Examples of short-term financial goals could be anything from starting an emergency fund to finding a budget that works for you to saving up for a new mobile phone.

Long-Term Financial Goals

When you pull back and think big-picture about money management, you have likely entered the realm of long-term financial goal setting. These are goals that can take several years or even decades to achieve.

Examples of long-term goals would be saving enough money to buy a house, putting your kids through college, or retiring comfortably.

What Are S.M.A.R.T. Goals?

s.m.a.r.t. financial goals

When you are thinking about your financial goals and doing some research, you may come upon the acronym S.M.A.R.T. Think of this as a guideline to help you set and achieve your money aspirations. Here’s what it stands for:

•   S for Specific: Instead of your goal being “to be financially comfortable,” try to be more precise. Perhaps your goal would be to have no debt except your mortgage and a certain amount in your retirement fund.

•   M for Measurable: It can be wise to assign real numbers to your goals. For instance, to save $200K in your kids’ college funds is a measurable aspiration. Just saying, “to pay for college” can be too vague to work toward.

•   A for Achievable: Setting unrealistic expectations can lead to frustration and disappointment. Think about your lifestyle, income potential, cost of living, and other key factors, and set reasonable goals.

•   R for Realistic: Similarly, plan steps to achieve your goals realistically. Don’t expect to cut your expenses to the rock bottom or ignore the impact of inflation over time.

•   T for Time-based: Give yourself specific goals and due dates, such as “Save $500 a month until I have $5,000 in my emergency fund 10 months from now.”

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

How to Set Financial Goals

Next, consider the specific steps of setting financial goals. Break it down as follows:

1. Assessing Your Finances

Figuring out exactly what your current finances look like is a vital step. Sure, you probably know when you get paid, but have you checked how much is going toward your retirement savings fund every pay period or — gulp — exactly how much you’re spending on food delivery? Keeping a close eye on your finances might help you set smarter money goals.

It might seem easy to ignore the finer details of our finances in favor of blissful ignorance, but failing to know where you and your money stand might harm your financial health down the line.

So if you haven’t looked at where your money is going in a while, taking a look at how much money you’re bringing in, how much you’re spending, and how much you’re saving might help you set more meaningful money goals.

•   Check out your bank statements, credit card statements, and even online banking records to help you determine where your money is going every month.

•   Write down big numbers like credit card, personal loan, or student loan debt. This can help you plan for payoff.

•   Consider using tech tools to help you wrangle your finances. There are plenty of apps you can download, and online banking might be able to help you too. Typically, banks offer apps where users can easily access details about their spending and balances. Your credit card bill or app can also often provide a graphic representation of where your dollars fly off to each month.

2. Figuring Out What Is Most Important to You

Once you have a snapshot of your overall financial situation, it can be worthwhile to spend some time reflecting on your money goals: what is really important to you.

While there are many things a person ideally should be saving for, like a down payment on a house or retirement fund, your financial goals might not be the same as your sibling’s or your coworker’s.

Just like your parents always told you: You’re unique. And so is the process of setting financial goals. What might they look like?

•   You might want to pay off student debt as fast as possible in order to free up more cash every month.

•   You might be working toward public service loan forgiveness and not be as focused on quickly paying off student loans.

•   Perhaps your financial goal is to save up an emergency fund or take a vacation in six months.

•   You might want to retire and move to another country by the time you’re 55.

It’s likely that your goals will be a mix of short-term and long-term aspirations, as described above.

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3. Establishing a Fun Budget

Okay, but what if you just want to go clothes shopping once a month without feeling guilty or take that Budapest vacation you’ve been dreaming about?

Make it work! Setting a financial goal is all about having your money serve you. Here are some pointers:

•   Planning out your discretionary spending might not only help keep your finances on track but can also help you inject an extra fun quotient into your life. That’s a win-win.

•   When a budget is too harsh and punitive, you might wind up making impulse buys or otherwise overspending. If you know you have some cash stashed for mood-lifting purposes, you can hopefully avoid that scenario.

But whether you’re focused on saving up for a down payment on a house or a trip to Disneyland, you won’t get there without a plan. Making a budget will get you focused and help you take control of your finances.

4. Staying On Track

Once you’ve decided on a money goal or two, it’s time to put a plan into action. Your plan will vary depending on whether you’re tackling a long-haul climb out of credit card debt or saving an emergency fund. A bit of advice:

•   Managing your money isn’t a “set it and forget it” proposition. Life happens. You may get a raise one month, and then have a (surprise!) major dental bill the next. It’s important to check in with your money regularly.

•   Adapt your budget when things shift. Everything from getting a nice bonus to having a baby can be a good reason to check in with your money goals and recalibrate.

•   Whatever your financial goals, there are tools that can help you along on your financial journey. Having the right banking partner can play a crucial role. Look for a bank that can help you set up automatic deductions from your checking account on payday to savings toward your financial goals. And find a bank that doesn’t charge you all kinds of fees; after all, they’re enjoying the privilege of using the money you’ve deposited!

6 Examples of Financial Goals to Consider

types of financial goals

If you’re looking for help brainstorming how to manage your money aims, here are some popular financial goal examples to consider:

1. Build an Emergency Fund

Whether you’re easily covering your monthly expenses or grabbing change from the bottom of your bag to buy a coffee, many people are living paycheck to paycheck. But what if that paycheck disappeared or if you had a large, unexpected expense? Enter the emergency fund.

Recent history has taught us a lot about how emergencies can arise. Stashing away an emergency fund might help you comfortably weather a pandemic, a “company-wide restructuring” that eliminates your position, or an unexpected illness that cuts into your freelance earnings.

Consider a long-term financial goal of setting aside about three to six months’ worth of expenses to help you weather any rough financial waters that may lie ahead.

💡 How much should you have in an emergency fund? Use SoFi’s emergency fund calculator to help find out.

2. Track Your Spending

As mentioned above, keeping track of your expenses is important. Sometimes, spending that starts as an occasional thing (that TGIF latte) becomes a regular expense that drags down your budget.

Or you might find that you are dealing with lifestyle creep, which occurs when you earn more but your spending rises too, keeping you at the same level of wealth.

If you track your expenses, you can see how your money is tracking. You might decide to cut back on streaming services or realize that now that you’ve paid off your credit card debt, you could put more toward retirement.

3. Pay Down Credit Card Debt

High-interest credit card debt can feel like a treadmill: You keep putting in more and more effort, seemingly without getting closer to the finish line. Many of us struggle with it. The average balance that consumers carry as of the start of 2023 was over $7,000, and the average interest rate as of mid-2023 topped an eye-watering 24%.

With numbers like that, it can take a very, very long time to pay off what one owes, especially if you only make the minimum payment. What’s more, if your balance is more than 30% of your card’s credit limit, your credit-utilization ratio may not look too attractive to the credit reporting agencies (Equifax, Experian, TransUnion), and your credit score may skid south. In fact, some say that it’s financially healthiest to use only 10% or less of the credit your card extends to you.

It’s no wonder that for many of us, setting a financial goal involves the words “pay off my credit card.” Indeed, making a plan to pay down debt instead of focusing on those minimum monthly payments could help you dramatically improve your finances. Your credit card statement will tell you how much to pay to get rid of debt in three years; that can be a helpful guideline.

If you need other options, consider:

•   A balance-transfer credit card, which offers low or no interest for a period of time (typically 6 to 18 months), may also be useful.

•   A personal loan, which may offer a lower interest rate. You can use that to pay off the credit card debt and then have a lower amount due to pay off the loan.

•   You might also consider a debt management plan or meeting with a nonprofit debt counseling agency if you feel you need additional help.

When you get out from under the burden of this kind of debt, other doors (like to a home you own) may open. It can give your budget just the kind of breathing room you crave.

4. Pay Off Student Loans

Paying off student loans is another move that can help you reach your financial goals. Doing so frees up funds in your budget for other uses. Some ideas:

•   Make extra payments toward the principal when possible. That might mean a little more every month or applying a windfall like a tax refund.

•   Refinance a student loan. This could potentially lower your rate and help you pay off your debt sooner.

•   Pay biweekly instead of monthly. This means you make an extra payment each year, again helping shorten the timeline to becoming free of student loan debt.

•   Enroll in autopay. Federal student loan servicers and many private lenders will lower your interest rate a bit if you opt into automatic payments. While it won’t make a huge dent in what you owe, every little bit can help.

5. Contribute to Your Retirement Fund

Most of us know we should be saving for retirement, but that financial goal can be easier said than done when there are so many competing places to put our money.

The good news is that when you set up a retirement account and start saving, even small amounts can grow over time, which makes saving for your golden years a great financial goal. Contributing regularly — whether through your employer’s plan or an IRA — is worthwhile, especially when inflation is high.

Many experts say that a smart financial goal is to be saving 10% to 15% of your pre-tax paycheck for your retirement. One smart move: If your employer offers a company match of dollars put toward retirement, put in at least the minimum required to snag it. So if your company says you must contribute 6% of your salary to get a 50% match, that means if you put in 6%, they will add 3% to your savings. Don’t leave that money on the table!

6. Save More Money

Another way to hit your financial goals, big and small, is to save more money. Here are a few techniques:

•   Automate your savings. Set up seamless recurring deductions from checking to savings for just after payday. Doing so means you don’t have to remember to allocate the funds. And you won’t see the money sitting in checking, tempting you to go shopping with it.

•   Challenge yourself each month to give up an expense. For instance, don’t buy any pricey coffees for one month and put aside the savings. Next month, no movies. The following, no takeout lunches. You can do it!

•   See about bundling insurance premiums or paying annually vs. monthly to save money.

•   Negotiate bills. See if your credit card provider will lower your rate, for starters.

How to Adjust Your Financial Goals if Your Circumstances Change

Sometimes, life throws you curveballs. You don’t get the raise you were hoping for. A family member has a medical issue that requires more money to manage than you expected. Or you move to a new town with a higher cost of living.

In these situations, you may need to ramp down some of your financial goals. Perhaps you can’t have that emergency fund fully saved by the end of this year. You could lower how much you put away and reconcile yourself to the fact that you won’t meet your goal as soon as you would have liked.

This is just another reason why checking in with your money and adjusting your budget often is important.

And don’t forget the bright side: If you get a major salary bump or a windfall, you can use that to crush your goals that much sooner. Staying flexible can be vital, regardless of which way your finances are trending.

Setting smart financial goals is an important step in managing your money and achieving your life goals.

By taking such steps as evaluating your financial situation, creating a budget, and setting smart benchmarks, you can be on track to check off your aspirations. Whether that means saving for summer vacations, eliminating credit card debt, or retiring early, taking control of your money can be a very good feeling. And finding the right banking partner can help make the process even easier.

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 a good financial goal?

Financial goals need to reflect what’s important to you, but for most people, they are a mix of short-term aspirations (like having an emergency fund and minimizing credit-card debt) and long-term plans, like retirement savings.

How do you stick to a financial goal?

Sticking to a financial goal can be easier if you set up automatic deductions that transfer money from checking (where you might be tempted to spend it) to savings. Also, getting familiar with your finances, developing a plan, and regularly checking your progress are good moves.

What are some money management tips?

It’s a good idea to assess your finances and make short- and long-term goals. Then, allocate a percent of your earnings and set up automatic deductions to your savings; pay down high-interest debt (like credit cards); establish an emergency fund; and start saving for retirement. Even if it’s just a small amount, it will grow!

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

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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.

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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
What Is a Credit Card Convenience Fee? How to Avoid It

What Is a Credit Card Convenience Fee? How to Avoid It

By | Financial Independence, money, Terminology | Comments Off on What Is a Credit Card Convenience Fee? How to Avoid It

A credit card convenience fee is an additional charge that a merchant collects on a purchase to compensate them for accepting your card vs. their usual form of payment. Perhaps they usually accept cash, check, or an electronic transfer, and allowing you to use plastic requires more time and effort for them or it triggers fees for them.

Given that more than 80% of Americans use credit cards, it’s likely that most people get hit with a convenience fee at some point. Here’s what you need to know about how they work and how to avoid them.

What Is A Convenience Fee?

A convenience fee is a flat fee, such as $1, or a percentage of your purchase (up to 4%) that’s tacked onto the cost of your transaction that you, the cardholder, are expected to pay. Here’s some more intel about these fees:

•  A credit card convenience fee is typically charged by merchants when a customer uses a credit card in a payment channel that isn’t the usual one for the business. For instance, if a trade school usually accepts payments in-person and you choose to pay online, you might be assessed the additional fee for the convenience of not turning up at their place of business.

•  The fee can reflect a merchant trying to pass along some fees they pay when you choose to use a credit card vs. other methods. When merchants allow a customer to use a credit card as a payment method, they (the retailer) are charged a credit-card processing fee for the transaction. By charging a convenience fee, the merchant may offload that processing fee.

In some cases, a retailer will factor such credit card fees into their business model and won’t pass along the additional charge. That is why you may notice that convenience fees seem somewhat random. However, convenience fees must be disclosed when they are charged; they can’t be added without a consumer being informed of them.

Example of a Convenience Fee

Here are examples of convenience fees in action:

•  When you fill up your tank at a gas station, you may notice that the price for gas is, say, 2.5% or 3% higher per gallon if you pay with a credit card vs. cash. That could be how the gas station owner recoups the credit card processing fees they must pay on such transactions.

•  You might pay an extra charge of a couple of dollars when you buy movie tickets online or via an app instead of at the box office. You enjoy the convenience of buying something with your card (and perhaps snagging seats to a show that could sell out), and the merchant is able to offset their costs somewhat.

Recommended: How Does a Credit Card Work?

Why Do Convenience Fees Exist?

The main reason you’re getting stuck with these convenience fees is because the merchants have to pay processing fees to payment networks, as noted above.

•  The payment networks or payment processors work with credit card issuers (like your bank) and the card network (Visa, Mastercard, Discover, American Express) to make sure the transaction is secure and processed smoothly.

•  The bank that issues the cards often charges the merchant a credit card processing fee for allowing them to accept this card. This is typically between 1.5% and 4% per transaction. The merchant might pass those fees on to you, the consumer, as a convenience fee.

This is also another reason some small businesses may not accept credit cards at all: They don’t want to have to pay the fees associated with taking them or pass them on to you

Credit Card Company Rules on Convenience Fees

Here’s the breakdown for how some of the major credit-card brands handle fees.

Brand

 Rules for Merchants on Convenience Fees
Visa

Merchants can typically add convenience fees on all nonstandard payment methods.

The fee must be disclosed to customers, and an alternate payment method must be offered.

Merchants usually charge a flat fee vs. a percentage of the sale.
Mastercard

Retailers must inform customers about the charge before finalizing the sale.

The fee must apply to all similar transactions, such as all online credit card sales, not just those made with a Mastercard.
American Express Typically, convenience charges are not allowed, with some exceptions, such as for government agencies.
Discover The retailer cannot charge convenience fees to Discover cardholders unless it charges the same fees to those using credit cards from other card issuers.

Convenience Fees vs Surcharge Fees: What’s the Difference?

While they both add to a purchase’s cost, here is the difference between what you may hear referred to as convenience fees and surcharge fees.

•  A surcharge fee covers the cost of you having the privilege of using a credit card. It’s added before taxes. Sometimes called a “checkout fee,” it is usually a percentage of the sale. Credit card surcharges are prohibited by law in a number of states. These charges are currently illegal in Connecticut, Maine, Massachusetts, New York, and Puerto Rico, but these laws are subject to change.

•  A convenience fee, as noted above, typically covers the cost of doing a transaction with a credit card instead of another payment method. Sometimes this is charged as a percentage of the transaction. Other times, it is charged as a flat fee, regardless of the cost of the products or services purchased..

How Can Convenience Fees Be Avoided?

When you’re trying to avoid credit card convenience fees, you can use these tactics:

•   You can choose to pay with a method other than plastic, such as cash, check, or money orders at some merchants. Or you may be able to use an electronic payment, such as an e-check or ACH payment.

   For example, if you’re paying for college tuition, you might be able to set up an online payment using an electronic check, money order, or personal check. At some schools, this could save you nearly 3% per payment transaction. (That being said, if you have a high-rewards credit card, conducting an expensive transaction might be beneficial if you can get cash back.

•   You can scan for notices about convenience fees before conducting a transaction. You can look for posted signs in brick-and-mortar locations and read the payment terms on websites and in apps.

•   You can ask before purchasing a product or service if paying by cash will save you money (this can sometimes be the case with service providers) or if using a credit card will trigger a fee.

Credit card fees are fairly common today, so you want to be alert to how they can crop up and avoid them when you can.

Recommended: How to Use a Credit Card

The Takeaway

Knowing that credit card convenience fees (and surcharge fees) exist, whether they are legal in your state, and how to avoid them can help save you money in the long run.

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

Why am I being charged a convenience fee?

A credit card convenience fee typically reflects that the merchant is willing to accept plastic vs. other payment methods they usually take. These fees may be a way that merchants recoup the processing fees that they then must pay when they allow customers to use a credit card.

Is it legal to charge a convenience fee for credit cards?

Credit card convenience fees are currently legal in all U.S. states but must be disclosed; they can’t be added on without a customer being informed.

How to avoid credit card convenience fees?

You can usually avoid credit card convenience fees by using an alternate payment form, such as cash, check, or electronic payment.

Photo credit: iStock/blackCAT

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