A basis point is a unit of measure that is primarily used to precisely communicate a change in interest rate. You might hear “basis point” or “bps” (basis points) in reference to a Federal Reserve rate hike or a change in interest rate for a savings account, credit card, or mortgage. Basis points are also used to measure a difference in percentages in political polls and in scientific data.
Whether you want to better understand the news or you’re tracking rates on loans or bank accounts, it’s important to grasp the concept behind basis points. Here’s a simple guide to what basis points are, their uses, and how to quickly convert a bps into a percentage.
Key Points
• A basis point is a unit of measure equivalent to 0.01%, commonly used to describe changes in interest rates and financial metrics for clarity and precision.
• Financial institutions utilize basis points to communicate changes in interest rates, bond yields, investment fees, and spreads between different yields in the market.
• Converting between basis points and percentages is straightforward; dividing by 100 converts basis points to percentages, while multiplying percentages by 100 converts them to basis points.
• Understanding basis points is essential for consumers and investors as even minor changes in interest rates can significantly impact financial decisions and investment outcomes.
• Basis points enhance transparency in finance, helping to ensure clear communication regarding fees, yields, and interest rates, which ultimately aids in informed decision-making.
Understanding Basis Points
A basis point is a unit of measure equal to one one-hundredth (1/100) of a percentage point, or 0.01%. That means that 100 basis points equal 1%. Sometimes abbreviated to “bp” or “bps,” basis points are often used to precisely express changes in interest rates, including rates for high-yield savings accounts, credit cards, and consumer loans.
Basis points offer a standardized way to discuss and quantify minor variations in percentages, and they help avoid confusion that might arise from using fractional percentages or decimal points. For example, if an interest rate increases from 4.00% to 4.25%, this change can be described as an increase of 25 basis points. Similarly, a decrease from 3.50% to 3.25% would be a reduction of 25 basis points. This level of precision is particularly useful in financial markets, where even the smallest changes can have substantial effects on investment returns and borrowing costs.
Converting Between Basis Points and Percentages
Calculating between basis points and percentages is simple once you know the formula.
To convert basis points to a percentage: Divide the number of basis points by 100. For example, 200 basis points is equal to 200 / 100 = 2%.
To convert a percentage to basis points: Multiply the percentage by 100. For example, 10% x 100 = 1,000 basis points.
The table below shows common basis point values and their corresponding percentages:
| Basis Points | Percentage |
|---|---|
| 25 | 0.25% |
| 50 | 0.50% |
| 75 | 0.75% |
| 100 | 1.00% |
Recommended: What Is a Good Interest Rate for a Savings Account?
Earn up to 4.00% APY with a high-yield savings account from SoFi.
No account or monthly fees. No minimum balance.
9x the national average savings account rate.
Up to $2M of additional FDIC insurance.
Sort savings into Vaults, auto save with Roundups.
Uses of Basis Points
Basis points are widely used in the world of finance. Understanding the meaning of basis points can help you in the following contexts:
• Interest rates Banks, central banks, and other financial institutions often use basis points to communicate changes in interest rates. For example, basis points may be used to communicate the change in the annual percentage yield (APY) on a savings account or the annual percentage rate (APR) on a loan product, such as a credit card or mortgage.
• Bond yields Investors and analysts use basis points to describe changes in bond yields. For example, if a bond has a yield of 2.10% and the yield increases to 2.35%, the yield has risen by 25 basis points. This precise description helps investors compare bonds and understand movements in the market.
• Spreads In the context of financial markets, spreads between different rates or yields are often expressed in basis points. For instance, the spread between corporate bond yields and government bond yields is commonly measured in basis points to provide a clear comparison.
• Investment fees Basis points are often used to express fees and expenses in the financial industry. For example, if a mutual fund has an investment management fee of 75 basis points, it has an annualized fee of 0.75%. This standardized way of expressing fees makes it easier for investors to compare costs across different funds
While basis points are popular in finance, they have other applications as well. You may hear talk of basis points when news outlets review the results of a political poll; basis points are also useful in scientific research papers.
Recommended: 5 Investment Strategies for Beginners
Examples of a Basis Point Application
Let’s take a look at two examples of how basis points might be used in the financial industry.
Federal Reserve Interest Rate Hike
The Federal Reserve’s Federal Open Market Committee meets eight times a year to discuss monetary policy, including whether or not to make changes in the federal funds target rate. This benchmark rate influences rates on everything from savings accounts to credit cards. The Fed may raise interest rates when the economy starts overheating and inflation is too high; it may cut rates when the economy is weakening and unemployment is rising. If the Fed decides to change the Federal Funds target rate, this change is described in terms of basis points.
For example, on July 26, 2023, the Fed increased the Federal Funds rate by +25 bps, which made the Federal Funds rate rise from 5.25% to 5.50%.
An Adjustable-Rate Mortgage
If you have an adjustable-rate mortgage, your interest rate can change during the term of the loan in response to changes in market rates. For example, suppose you learn your mortgage rate, which is currently 3.75%, is increasing by 25 basis points. That means the rate is increasing .25% (25 / 100). Your new interest rate will be 4.00%.
Importance of Basis Points in Finance
Basis points are an important term in finance because they eliminate ambiguity and provide clarity and precision, which is essential for analysts and policymakers.
Basis points are also important for consumers and investors. Since even minor changes in interest rates or spreads can have significant impacts, understanding bps can help people make informed decisions about where to put their money and manage risk.
Basis points also enhance transparency in finance, since financial institutions often use bps to disclose fees, expenses, and performance metrics. This transparency helps investors make better choices and understand the costs associated with their investments.
The Takeaway
Basis points are a useful way to talk about how percentages have changed or will change. If you’re confused by bps, some quick math can help: Simply divide basis points by 100 to convert them into percentages, or multiply a percentage by 100 to get the basis point equivalent.
Using basis points helps to ensure more transparent discussions, allowing all parties to have a clear understanding of how a change in interest rate or yield will affect their finances.
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.
FAQ
What is the definition of a basis point?
A basis point (bp) is a unit of measure that represents one one-hundredth of a percent. Thus, 1 basis point is equal to 0.01%.
In finance, basis points (bps) are used to precisely express small changes in interest rates, yields, and other financial percentages. BPS helps avoid confusion that might arise from using fractional percentages or decimals. For instance, a change from 3.00% to 3.25% is a 25 basis point increase.
How do you convert basis points to percentages?
To convert basis points to a percentage, divide the number of basis points by 100. For instance, 1,000 basis points = 1,000 / 100 = 10%.
Conversely, to convert percentages to basis points, multiply the percentage by 100. For instance, 0.75% is equal to 0.75 x 100 = 75 basis points.
In what financial contexts are basis points commonly used?
Basis points are used in a variety of financial contexts to ensure precision and clarity. Key areas include:
• Interest rates Banks and central banks will often use basis points to communicate changes in interest rates.
• Bond yields Investors and analysts typically describe changes in bond yields in basis points.
• Spreads The difference between interest rates or yields, such as the spread between corporate and government bond yields, is often expressed in basis points.
• Fees and expenses Financial institutions often use basis points to describe fees, such as mutual fund expense ratios and advisory fees. This provides a standardized way to compare costs.
Photo credit: iStock/eclipse_images
SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
*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.
SOBK-Q224-1891703-V1