SoFi

If you’re asked to insert rather than swipe your credit card when you go to pay, you’re using a chip credit card. A credit card chip is a small gold or silver microprocessor that’s embedded in the card and intended to offer greater security for your transactions.

Credit card chips are growing dominant in the plastic payment market. According to data from Emvco.com, credit card chips — also known as Europay, MasterCard, and Visa (EMV) chips — comprised about 90% of global credit card transactions in 2021. Read on to learn more about how the credit card chip works.

Recommended: When Are Credit Card Payments Due

What Is a Credit Card Chip?

Credit card chips are small microchips embedded in the card that collect, store, and transmit credit card data between merchants, their customers, and participating financial institutions. Each time you use a credit card to make a transaction, these chips generate a unique code that can only be used for that transaction.

Chip credit cards date back to the mid-1990’s, when the three titans of card payment technology — Europay, MasterCard, and Visa — collectively rolled out the first chip-based credit card to the masses. Also known as EMV chips, credit card chips were introduced as a way to enhance payment security over the existing magnetic-strip credit cards.

Today, chip makers are planning huge expansion as chip credit cards continue to grow in popularity. Contactless credit cards are another advancement underway.

Magnetic Strip vs Chip Credit Cards

Magnetic-strip cards hold data on the magnetic strip that appears on the back of payment cards. Because these strips hold all of a cardholder’s information needed to make a purchase, this type of card is an easy target for thieves.

With industry-wide concerns over data fraud linked to magnetic stripe cards, credit card companies turned to advanced computer microchips as a solution to credit card data security problems, using EMV technology.

Chip-based payment cards have a big advantage over magnetic-strip cards, as each card payment transaction generates a unique data code. Because the chip’s code is a “one-and-done” feature that disappears after the transaction is completed, even if data fraud criminals uncover the code, they can’t use it for future transactions.

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

How Does a Chip Credit Card Work?

Chip credit cards don’t work on a standalone basis. Merchants who want to conduct card payment transactions need payment processing tools, like card terminals and mobile scanners, that are compliant with EMV chip industry standards.

When a consumer inserts a chip credit card into a payment terminal (unlike with a contactless payment), and follows the on-screen prompts to complete the transaction, the chip and the terminal exchange the needed data in an encrypted code. That code is then used to transmit the transaction details to the acquiring bank, which quickly reviews the transaction.

After the cardholder’s financial data is authenticated and it’s determined the consumer has the funds to cover the purchase, the payment software may run fraud filters to further authenticate the user and the transaction.

Then, the transaction is approved by the acquiring bank (or declined if the consumer doesn’t have the funds to cover the purchase, or if fraudulent activity is suspected). The appropriate transaction confirmation codes are relayed back to the EMV payment device in real time, thus concluding the transaction.

Assuming the transaction is approved, the embedded card chip transmits the approval to the cardholder’s bank, which releases funds to pay for the transaction and sends it to the acquiring bank. The transaction is then settled by the merchant’s payment provider and deposited into the merchant’s bank account.

Types of EMV Cards: Chip-and-Signature vs Chip-and-PIN

There are two main types of chip-based cards:

1.    Chip-and-signature cards: The most widely used form of EMV card in the U.S. is the chip-and-signature card. With these, the cardholder simply inserts the card into the point-of-sale terminal and then provides their signature to verify the transaction.

2.    Chip-and-PIN cards: With a chip-and-PIN card, the cardholder is asked to enter a four-digit PIN, or personal identification number, at the point-of-sale. That process authenticates the user and allows for the card transaction process to be completed.

While each type of chip-based payment card model serves the same function — the safe and efficient completion of a transaction — chip-and-pin cards may be the safer alternative.

That’s because with a chip-and-signature card, the cashier or front-of-the-store service provider may not ask to see the back of the card to manually authenticate the signature. That gives fraudsters a leg up, since their signatures may not be checked. With a chip-and-pin card, on the other hand, the thief would need to know the credit card PIN to complete a transaction.

Recommended: What is a Charge Card

Protecting Yourself From Credit Card Fraud

While chip-based credit and debit cards have been a game-changer in improving payment security, card thieves still have ways to either steal your card or lift sensitive personal data from a payment card.

Here are some ways you can protect yourself against credit card fraud:

•   Review your card statements. One of the important credit card rules to follow is checking your card statements regularly for potential security issues. If something looks suspicious, immediately contact your credit card issuer. In the case of unauthorized charges, report the fraudulent activity and follow the steps recommended by the card company, which could include freezing the card temporarily or getting a new card.

•   Keep physical possession of the card at all times. A cardholder’s best defense against physical card theft is to always know where their card is and only carry it when needed. It’s also a good idea to avoid storing your card account number on a digital device — particularly sensitive information like the credit card CVV number — that could be stolen by a savvy cyber thief.

•   Shred any documents that contain sensitive information. To further protect your account information, shred physical payment card files that include your credit card or account number once you’ve paid your monthly bill. Better yet, sign up for paperless billing, so there’s no paper trail at all.

•   Watch out for email scams. Steer clear of “phishing” scams, i.e., fraudulent emails or texts pretending to be from trusted retailers and financial institutions. If you receive an email requesting sensitive information, reach out to the company directly using the contact information listed on their website or on the back of your card.

Recommended: What is the Average Credit Card Limit

The Takeaway

As you can see, the introduction of credit card chips has greatly increased the security of credit card transactions. Credit card chips generate a unique code for each transaction, and that code cannot be used for future transactions. This makes it harder for thieves to intercept your personal data — though that doesn’t mean credit card fraud isn’t still possible.

When choosing a credit card, it’s important to consider the security features the card offers alongside other perks, like cash-back rewards. The SoFi credit card, for instance, offers Mastercard ID theft protection to help protect your personal information through the detection of potential fraud.

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

What is the chip on credit cards?

A credit card chip is a microchip embedded into a credit or debit card that securely stores transaction data. This helps to facilitate safe and efficient payment card transactions.

Are chip-and-signature cards as safe as chip-and-PIN cards?

Not necessarily. That’s because the merchant may not verify the signature provided against the one on the back of the card. This means it may be easier for thieves to get away with signing on behalf of the actual cardholder. It’s likely more difficult for a thief to get ahold of a cardholder’s PIN.

Do all retailers accept EMV cards?

A high percentage of global retailers accept chip-based credit and debit cards. Industry figures show that EMV chip cards comprised roughly 90% of the global credit card transaction market in 2021.

Is dipping or contactless credit cards safer?

Both are secure ways to make transactions. That’s because both contactless and chip credit card transactions generate a new transaction code for each purchase.

---

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.

The SoFi Credit Card 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.

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.

¹Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

Photo credit: iStock/Georgii Boronin
SOCC0522023

Read more

If you have an active credit card account, you might be offered or have already received unsolicited credit card convenience checks. A credit card convenience check lets you draw a portion of funds from your available credit limit without swiping your card.

Although convenience checks offer the benefit of using your credit line toward other bills — either as a cash advance or a check-based payment for a purchase — they also come with their fair share of issues. Keep reading to learn more about what a convenience check is and how to get one from a credit card.

Recommended: What is the Average Credit Card Limit

What Is a Credit Card Convenience Check?

Also known as cash advance checks, access checks, or balance transfer checks, credit card convenience checks let you borrow money against your credit card balance. Card issuers offer this option as a way to encourage spending on your card account. You can use these checks to pay bills, borrow money, make a balance transfer, or transfer loans to your credit card.

Recommended: When Are Credit Card Payments Due

Pros of Credit Card Convenience Checks

Convenience checks have downsides, but there are pros to them as well:

•   They let you make purchases when using a credit card isn’t accepted.

•   You can use one to pay off other debt.

•   You can access cash quickly with a convenience check.

•   A convenience check borrows against your existing credit line, so you don’t need to undergo a credit check for a new line of credit.

Cons of Credit Card Convenience Checks

There are also a number of drawbacks of convenience checks to consider before using one. These include:

•   You’ll incur an additional fee each time you use a convenience check.

•   Using a convenience check might activate a higher APR for the check amount.

•   You don’t get a grace period, so you’ll start incurring interest immediately.

•   You’ll have fewer legal protections if your purchase is defective and you need to withhold payment.

•   Your check purchase might not qualify as an eligible purchase under the card’s rewards program.

Factors to Consider Before Getting a Credit Card Convenience Check

Since convenience checks are treated like a cash advance by your credit card issuer, you’ll incur cash advance fees when the funds are drawn from your account. For example, your card issuer or bank might charge a minimum fee of $10 or 3% of the check amount, whichever is greater. Also, if you exceed your available limit and don’t have sufficient funds in your credit card account, you might be charged another fee.

On top of these extra fees, the interest on the check amount accrues immediately at your cash advance APR. Cash advance interest rates are typically higher than the APR charged for swiping your card for purchases at places that accept credit card payments.

If your account is a rewards credit card, purchases or draws using a convenience check are often ineligible for earning rewards. So not only are you paying more money to use the check, you’re losing the benefits of your rewards credit card program.

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

How to Get Convenience Checks From a Credit Card

You’ll often get convenience checks in the mail. If you have an existing credit card account, your card issuer might include the checks in your monthly statement. A card issuer might also mail you a promotional offer with convenience checks inside to encourage you to apply for a credit card.

If you have an existing credit card account but haven’t received convenience checks in the mail, you can request them directly. Contact the phone number printed on the back of your credit card to reach a customer service agent. Make sure to ask about fees you might incur by requesting printed convenience checks, as different types of credit cards carry different fees.

Using Credit Card Convenience Checks

There are many ways to use a convenience check, including:

•   Using it as a cash advance. In this case, you’d write a convenience check to yourself and cash it to access physical currency.

•   Using it to pay off other debts. This could include a loan or other credit card balance. In this scenario, the convenience check acts like a balance transfer vehicle that pays off a third-party credit account. You’ll then repay that balance, plus fees and interest, through your card issuer that provided the checks.

•   Using the checks to pay for goods and services directly. This might come up if you’re dealing with a merchant or vendor that doesn’t accept credit card payments, but accepts checks.

If you decide to use a convenience check, it’s more like a physical check from your personal checking account as opposed to how credit cards work. A convenience check has the same familiar fields as a personal check, including a place to write in the date, payee name, amount, optional memo, and your signature.

How Credit Card Convenience Checks Can Affect Your Credit Score

A convenience check borrows money against your existing credit card line, so your credit isn’t verified when using a check. Since convenience checks let you access your credit line through another method other than swiping or tapping your card, there’s a greater chance to borrow more from your account.

If you borrow large amounts from your credit card account, it can increase your credit utilization ratio. Keeping a high credit utilization ratio can adversely impact your credit score. However, if you repay your balance responsibly and are mindful of your utilization — both key credit card rules to follow — convenience checks can have minimal impact on your credit.

Alternatives to Credit Card Convenience Checks

Although convenience checks are a viable option when you need cash, there are other lower-cost options than turning to your credit card.

Personal Loans

Borrowing a personal loan gives you access to cash at a lower, fixed APR compared to the variable cash advance APR from your credit card. Some lenders also don’t charge fees of any kind for personal loans. However, you’ll need to undergo a credit check and have strong credit for the most competitive rates.

Earning Extra Income

If time is on your side, increasing your cash flow can help you avoid high interest charges and fees for your next large purchase. Consider selling items that are taking up space in your garage, picking up additional shifts at work, or starting a side gig, like tutoring, for some additional income.

Recommended: What is a Charge Card

The Takeaway

A convenience check can be a fast way to access cash in hand or make a purchase when a credit card isn’t accepted. However, the disadvantages of using convenience checks, like costly fees, increased APR, and no grace period, often negate the perks.

If you need access to credit, consider applying for a SoFi credit card. It offers up to 2% cash back rewards for every dollar spent on eligible purchases. Cardholders earn 1% cash back rewards when redeemed for a statement credit.¹ Plus, if you make on-time payments of at least the minimum amount over a 12-month period, SoFi lowers your APR by 1%.

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

Is a convenience check linked to your account?

Yes, convenience checks from credit card companies are tied to an existing credit card account you have with that card issuer. The amount that you write on a convenience check will directly be added to your credit card balance, plus fees.

Can I write a convenience check to someone else?

Yes, you can write a convenience check out to another person or business as a method of direct payment. For example, you can use a convenience check to pay for a utility bill or as rent to your landlord. Keep in mind that this will mean you’ll pay more toward that purchase thanks to fees and a higher APR. Proceed with caution.

Where can I cash a convenience check?

You can cash a convenience check anywhere you’d cash a personal check. Your personal banking institution can cash the check for you, or you can visit a third party like a check-cashing establishment.

What are the disadvantages of using credit card convenience checks?

The biggest disadvantage when using a convenience check from your credit card company is the added fees and interest you’ll pay. Each check incurs a flat fee or a fee based on a percentage of the check amount. Additionally, convenience checks are considered a cash advance, which incurs a higher APR on the borrowed amount. Plus, there’s no grace period so interest starts accruing immediately.

---

¹See Rewards Details at SoFi.com/card/rewards.

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.

The SoFi Credit Card 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.

¹Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

Photo credit: iStock/Ivan Pantic
SOCC0522004

Read more

After reviewing a credit card statement, it might be tempting to just throw it away to cut down on clutter. But sometimes, there’s good reason to hold onto credit card statements.

There’s no hard-and-fast rule regarding how long to keep credit card statements, However, there are some helpful timelines worth keeping in mind for different situations. Keep reading for more insight if you’re wondering how long you should keep credit card statements.

Why Should You Keep Your Credit Card Statements?

It’s fair to wonder, why should I keep my credit card statements and how long should I keep credit card statements? Let’s start with the why.

Aside from your credit card statement balance or current balance, your credit card statements contain some pretty helpful information that can come in handy down the road — especially come tax season. If payments are made by credit card, it’s possible to review old statements to look up business expenses or other write-offs like mortgage, student loan, or tuition payments that you put on your card.

It can also be helpful to keep credit card statements in case someone needs to review them for errors or signs of fraud. It’s easy to miss mistakes when quickly reading a credit card statement while sorting the mail and checking for when credit card payments are due.

Online vs Hard Copy Statements

If you want to avoid holding onto a lot of paperwork, you also have the option to access online statements for your credit card. Credit card issuers may store this information for a while — though they won’t necessarily hold onto old statements forever.

The length of time your records are stored will vary by financial institution. Some credit card issuers only provide the past 12 months of statements, while others hold onto them for up to seven years. In many cases, five years is a common timeline.

If an old statement isn’t appearing online, the account holder may be able to call their credit card issuer and request a copy of an older statement. Still, there’s no guarantee that this will work. It can also cost money to get a copy of an older statement.

Factors That Determine How Long to Keep Credit Card Statements

So, how long should you keep credit card statements? Like the rules around keeping financial documents in general, it depends on each consumer’s unique needs. That being said, a good rule of thumb is to at least hold onto them until it’s time to prepare taxes for the year — especially if you hope to deduct expenses and may need help confirming them.

If someone does use their credit card statements to help them prepare their taxes, they should hold onto them for at least seven years just in case the IRS comes knocking with any questions.

How Long Should You Keep Your Credit Card Statements?

It’s worth noting though that consumers may have different needs than business owners when it comes to holding onto old credit card statements. Here’s a look at how the two groups can answer the question: How long do you keep credit card statements?

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

For Consumers

How long consumers should keep credit card statements depends on how someone uses their statements. In general, it’s wise to keep your credit card statements for 60 days due to credit card rules. Under the Fair Credit Billing Act (FCBA), credit card issuers must receive written notice of any errors within 60 days of them sending the consumer the statement containing the error.

However, it might be smart to keep your statements for longer in the following scenarios:

•   If you use your statements to make deductions on your taxes: In this case, it’s wise to keep statements for seven years. That way, if you’re ever audited by the IRS, you’ll have those statements handy as supporting documentation for deductions.

•   If you decide to dispute charges: If you’re disputing charges on your credit card, it’s best to hold onto the statement in question for 90 days, as that’s how long the dispute process can take.

•   If you want to track your spending: Those looking to learn more about their spending habits and create a better budget may find that holding onto a year’s worth of statements is helpful. That way, they can sit down on January 1 and get a clear picture of how you spent your money in the last year and where you can cut back. This can help with using a credit card responsibly.

•   If you have an extended warranty: It’s also helpful to hold onto statements that contain purchases that came with extended warranties. For example, if someone buys a TV with a three-year warranty, the credit card issuer may offer an extended one-year warranty as a cardholder benefit. Keep that statement at the ready as a proof of purchase in case that extended warranty is needed.

For Business Owners

Similar to consumers, business owners can benefit from holding onto credit card statements for at least a year in order to track business expenses. If referenced for tax purposes, it’s wise to keep credit card statements stored away for seven years to help resolve any future potential tax issues that may arise.

When You Should Keep Credit Card Statements Longer

As mentioned earlier, if someone is going to use their credit card statements to help them prove deductions on their taxes, they’ll want to keep their own copies of their credit card statements (whether they save them on paper or digitally) for seven years. This is generally the longest someone needs to keep their statements for.

Recommended: What is the Average Credit Card Limit

Different Ways to Store Statements

Because credit card statements contain sensitive personal and financial information, it’s important to keep them safe. Here are a couple ways to store them:

•   In a password-protected file on your computer: If someone downloads a digital copy of their statement, they can store them in a password-protected file on their computer.

•   In a safe: If you want to hold onto hard copies, keep them in a locked, fireproof safe to protect them from both theft and damage.

Different Ways to Dispose of Statements

Once someone is ready to dispose of their credit card statements, it’s important to destroy the documents so no one can find them and glean information from them. Here are your options to get rid of your old credit card statements:

•   Shredding or cutting them up: Shredding old documents is ideal, but if you don’t have a shredder, you can cut the statement up into very small pieces using scissors. Then, throw away the various pieces into different garbage cans.

•   Deleting all files: For digital copies, simply delete the files fully from your computer — including any backup copies — once you no longer need them.

Managing Online Statements: What to Know

When it comes to online statements, you can easily save those digitally if you don’t like storing paper documents or if you’ve opted to receive paperless statements. All the cardholder has to do is download their statements and keep them stored in their digital files, ideally with password protection.

Recommended: What is a Charge Card

The Takeaway

How long someone should keep their credit card statements depends on their unique needs. If someone has extended warranties through their credit card issuer, they may keep them for the length of their warranty in case they need a reference. Or, if someone uses the statements to help them with their tax deductions, it can be a good idea to hold onto them for up to seven years in case any questions arise.

Further, holding onto your credit card statements can help you easily see your spending habits and how well your credit card is serving you. Looking for a new credit card? The SoFi Credit Card offers unlimited 2% cash back rewards on eligible purchases, and charges no foreign transaction fees. Cardholders earn 1% cash back rewards when redeemed for a statement credit.¹

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

How can I get old credit card statements?

If someone didn’t save their old credit card statements, they can look for them in their online account or can call their credit card issuer to request them.

Do you need to keep credit card receipts?

The ideal timeline for how long to keep credit card statements depends on the individual’s needs. It can be a good idea to keep old credit card statements for up to seven years if someone is going to use them for tax purposes. Holding onto them for at least one year is helpful when it comes time to review spending habits and create a budget.

How long should you keep credit card statements with tax-related expenses?

If someone uses their credit card statements to help them figure out tax deductions, they should keep old credit card statements for up to seven years. That way, if the IRS has questions about their deductions, they can have the documentation to back them up.

How can you keep digital credit card statements safely?

If someone downloads a digital copy of their statement, it’s best to store them in a password-protected file on their computer. Once you no longer need the statements, fully delete the files from your computer.

---

¹See Rewards Details at SoFi.com/card/rewards.

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.

The SoFi Credit Card 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.

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

¹Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

Photo credit: iStock/Rawpixel
SOCC0522013

Read more

A letter of credit is a business-to-business document guaranteeing that the provider of goods or services to a buyer will receive payment. As part of a sales agreement, a seller may require the buyer to deliver a letter of credit before a deal takes place.

More specifically, letters of credit are often vital in international trade where the two parties involved are not yet familiar with one another. Letters of credit facilitate new trade and prompt payments.

Read on to learn more, including:

•   What a letter of credit is

•   How a letter of credit works

•   What the different types of letters of credit are

•   The pros and cons of letters of credit

•   How to get a letter of credit.

What Is a Letter of Credit in Banking?

Here’s what a letter of credit in banking is: It’s a document that a bank issues to a seller that guarantees payment from their customer for an order or service. The bank where the buyer’s business account is held usually assumes responsibility for the payment for the goods. However, the conditions laid out in the letter of credit must be fulfilled. The bank or financial institution charges the buyer a fee for guaranteeing the payment and issuing the letter.

Letters of credit are common in international trade situations because various factors can affect cross-border transactions. It’s not necessarily a matter of the buyer having a bad credit score. Rather, the deal may involve different legal frameworks, a lack of familiarity between the parties involved, and geographic distance.

How a Letter of Credit Works

When used properly, letters of credit can work to minimize credit risk and smooth international trade. A vendor selling products or services overseas may want assurance that a buyer of their products or services will pay. Perhaps the buyer is new to them or just a new business, period.

So how does a letter of credit work? It serves as a guarantee from a bank that it will pay the vendor once the requirements are met. The letter lays out the conditions of payment, such as the amount, the timing of the payment, and the delivery specifications. The letter can help the business placing the order build their credit, too.

The bank charges the buyer a fee for issuing a letter of credit (often around 0.75% to 1.5% of the amount of the deal), but it also does the due diligence to assure creditworthiness. The bank requires collateral or security from the buyer for the payment guarantee. In essence, the bank acts as a third party facilitating the deal.

Recommended: Why is Having a Good Credit Score Important?

Types of Letters of Credit

The following are four types of letters of credit.

•   Commercial Letter of Credit: The issuing bank pays the seller directly. For a stand-by letter of credit, the bank only pays the seller if the buyer cannot transfer funds.

•   Revolving Letter of Credit: The bank guarantees payment for a number of transactions within a set period.

•   Traveler’s Letter of Credit: Travelers can make withdrawals in a foreign country. The issuing bank guarantees to honor any withdrawals.

•   Confirmed Letter of Credit: A seller using a confirmed letter of credit involves a secondary bank, typically the seller’s bank. They guarantee payment if the first bank fails to pay.

You may also hear an irrevocable letter of credit mentioned; this is a letter of credit that can’t be changed or canceled unless all parties agree.

There is also a stand-by letter of credit which may be used when deal requirements are not initially met; see below for more details.

Letter of Credit Example

Here’s an example of a letter of credit: Wells Fargo provides commercial letters of credit and stand-by letters of credit within two weeks. The funds are secured through deposits at Wells Fargo, and the terms are renewable. These documents can help reassure parties doing business internationally, with new-to-them businesses or clients who have recently started a business.

The Money Behind a Letter of Credit

When it comes to letters of credit, you may wonder, Where do the payment funds for a letter of credit originate? The party paying for the goods or services typically deposits funds in advance to the bank that issues the letter of credit to cover the payment. Alternatively, the amount might be frozen in the payer’s account or the payer might borrow from the bank using a line of credit.

When Does Payment Happen?

Payment usually occurs when the seller has completed all the stipulations in the letter of credit. For example, the seller might have to deliver the goods to a specific address or onto a ship for transportation in the case of international trade. In the latter case, shipping documents would serve as proof that the requirements for payment have been fulfilled. They might trigger the payment transaction.

What to Watch Out for

Here are some common mistakes sellers may make when relying on a letter of credit for payment.

•   Failing to check all of the requirements in the letter of credit.

•   Failing to understand the documents required for the deal.

•   Failing to confirm whether the time limits for delivery and payment are reasonable.

•   Failing to meet the time limits.

•   Failing to get the necessary proof of delivery documents to the bank.

Letters of Credit Terminology

Here are some terms and phrases to know if you may be using letters of credit.

•   Advising bank: This is the bank that informs the seller that the letter of credit has been completed. The advising bank is also called the notifying bank.

•   Applicant: The party or the acquirer of products or services who applies for the letter of credit from the bank.

•   Beneficiary: The party, or seller, who will receive payment. The seller usually requests a letter of credit to guarantee payment.

•   Confirming bank: The bank that guarantees the payment of the required funds to the seller. If a third party is involved, the confirming bank is the bank most familiar to the seller.

•   Freight forwarder: A shipping company that provides the transportation documents to the seller.

•   Intermediary: These are companies that link buyers and sellers and may use letters of credit to ensure transactions are executed.

•   Issuing bank: The bank that issues the letter of credit.

•   Negotiating bank: If a third party is involved, the negotiating bank works with the beneficiary and the other banks involved. They likely determine the letter of credit requirements to complete the transaction.

•   Shipper: The transportation company that ships goods.

•   Stand-by letter of credit: A subsequent letter of credit that’s used when a deal requirement has not been met. For example, if payment does not occur within the specified timeframe, a stand-by letter of credit would then be used to help guarantee that the deal goes through.

Pros and Cons of Letters of Credit

A letter of credit provides security for both parties involved in a trade, but it can also add costs and time to business transactions.

Pros	Cons
•   Reduces the risk that payment will not be made for goods or services, thereby providing security •   Allows for additional requirements to be built into a letter of credit, such as quality control and delivery stipulations •   Provides transaction security for both the buyer and the seller •   Forges new trade relationships	•   Incurs bank fees for the letter of credit, which increases the cost of doing business •   Adds time by preparing a letter of credit; transactions can be delayed •   May require a separate letter of credit for each transaction •   Demands that the buyer usually provide collateral to the bank

How to Get a Letter of Credit

Getting a letter of credit typically requires a few steps. It’s wise to get the necessary paperwork together first. Various documents will usually be listed as requirements for a trade, such as a shipping bill of lading, a commercial invoice, insurance documents, a certificate of origin, and a certificate of inspection.

Here are the steps typically taken to obtain a letter of credit.

1.    The buyer and seller come to agreement on the sale terms and the use of a letter of credit.

2.    The buyer contacts their bank where they have a checking account and requests a letter of credit and provides necessary documents.

3.    The issuing bank prepares the letter based on the terms of the sales agreement and sends it to the confirming bank or advising bank, which is typically in the seller’s home country.

4.    The confirming bank verifies the terms and forwards the letter to the seller.

5.    The goods can then be shipped, and the exporter sends documentation to the advising or confirming bank.

6.    Document verification and settlement of payment can then occur.

When to Use a Letter of Credit

A letter of credit is beneficial for sellers entering into a new trade relationship or an international trade relationship. It can provide assurance that the seller will receive payment because the issuing bank guarantees payment once the requirements have been met. Sellers may also use the guarantee of payment to borrow capital to fulfill the buyer’s order.

The Takeaway

A letter of credit is usually requested by an exporter or seller to minimize credit risk. The buyer of the goods or services applies to a bank and requests a letter of credit based on the sales agreement. This document helps guarantee that payment will be made. It can provide priceless peace of mind when conducting international trade or doing business with a new customer.

Here’s another path to financial peace of mind: Banking with SoFi. Your money is FDIC-insured and secure, and it grows faster. Open a new bank account with direct deposit to earn a competitive APY and pay zero account fees.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

How much does a letter of credit cost?

A typical fee for a letter of credit is typically 0.75% percent to 1.5% of the amount of the deal, but the rate will vary depending on the country and other variables.

How do you apply for a letter of credit?

Once the terms of a trade are agreed upon between the buyer and the seller, a buyer contacts their bank to request a letter of credit. They then gather the required documentation and fill out an application with that bank.

Why do you need a letter of credit?

The parties involved in a trade typically use a letter of credit to minimize risk. For the seller, a letter of credit can guarantee payment for goods once certain requirements have been met and the buyer confirms their creditworthiness as a trade partner.

---

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government 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, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% 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 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 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. 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. ©2023 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.

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.

Photo credit: iStock/Lesia_G
SOBK0422039

Read more

Understanding exactly what it means to be an authorized user on a credit card account is important for both the cardholder and the credit card authorized user. There are some rules and restrictions involved, but in general, becoming an authorized user on a solid cardholder account can help build an authorized user’s credit history and potentially boost their score.

Here’s what you need to know, from what an authorized user on a credit card is exactly to the process of adding an authorized user to a credit card.

Recommended: What is the Average Credit Card Limit

What Is an Authorized User?

An authorized user is someone that the primary cardholder — the individual who owns the credit card account and is responsible for charges to the card — has authorized to use their card.

Unlike a primary cardholder, an authorized user on a credit card is not subject to credit checks and other credit card issuer requirements in order to use the card. However, the individual — who is often a spouse, child, or other family member — must meet the card issuer’s age requirements. The primary cardholder may also have to pay a fee to add the authorized user. The number of authorized users allowed on each card varies depending on the credit card issuer.

An authorized user may get a card with their name and the primary cardholder’s account number on it that they can then use. Or, they can simply use the primary cardholder’s card to make purchases.

Additionally, authorized users may have access to the cardholder’s account information, such as their credit limit, available balance, and fees. They can make payments, report lost or stolen cards, and initiate billing disputes.

That said, any charges made by an authorized user are ultimately the responsibility of the primary cardholder. Authorized users also generally can’t close an account, add another authorized user, or change the card’s PIN, credit limit, or interest rate.

Recommended: Tips for Using a Credit Card Responsibly

Responsibilities of an Authorized User

Even though authorized users are allowed to make monthly payments, they’re not responsible for payments — no matter how much they may have spent on the card. Rather, the responsibility of making on-time monthly minimum payments always falls to the primary cardholder.

In many cases, primary cardholders will work out some type of payment system under which an authorized user can reimburse the primary cardholder for their share of the bill. With this system, the primary cardholder can keep track of credit card charges and more easily spot unusual or potentially fraudulent activity on the card as well as credit card chargebacks. Additionally, a system can ensure payments are made on time and that any spending on the credit card is done responsibly.

In other cases, authorized users may make their payments directly to the credit card issuer. With this arrangement, however, the primary card holder still holds the ultimate responsibility of making the minimum monthly payment on time.

Recommended: When Are Credit Card Payments Due

Authorized User vs. Joint Credit Card

It’s easy to confuse authorized users with joint credit card holders. But there are some key differences between the two.

With a joint account, both cardholders are legally responsible for making payments. Joint cardholders also must meet credit card issuer requirements, such as a minimum credit score, and go through the application process in order to get the card.

Joint accounts are commonly used by partners who share their finances. Not all credit card issuers allow joint accounts though, and they are becoming less common.

Benefits of Having an Authorized User on Your Credit Card

There are compelling reasons why you may want to either become an authorized user or add an authorized user to your credit card account. Here are the benefits for both parties involved.

Benefits for the Authorized User

Becoming an authorized user can help someone to establish their credit and boost their credit scores if the primary cardholder has a history of on-time payments and low credit utilization (in other words, not charging cards to the max). This can be especially helpful for teenagers and young adults who may not yet have had the opportunity to establish a credit record.

Most credit card issuers will report authorized user credit activity to the credit bureaus, thus building a credit history for the authorized user. The primary cardholder can check with their credit card issuer to see if authorized user’s activity is being reported and if the card issuer has all of the relevant information necessary to do the reporting. If the issuer does report, all of the details of the card will be included in the authorized user’s credit history, including the credit limit, the amount of credit being used, and payment history.

By the same token, if the primary cardholder misses payments or makes late payments, this could negatively impact the authorized user’s credit score.

Benefits for the Primary Cardholder

Building credit for the authorized user can also benefit the primary cardholder who’s looking to help a child or other family member establish themselves financially. By helping the authorized user establish a good credit record, the authorized user will be more likely to qualify for their own credit card sooner and potentially secure lower interest rates and access to better rewards.

Plus, cardholders have the benefit of knowing that a child or other user has access to a credit card in an emergency or other situation where funds are immediately necessary.

Adding or Becoming an Authorized User on a Credit Card

Only a primary cardholder can add an authorized user to their card. To do so, you’ll generally go through the following steps:

1.    Notify your credit card issuer. Let your card issuer know that you would like to add an authorized user to your card. In most cases, you can do this over the phone or by filling out a form online.

2.    Have the necessary information on hand. You may need the name, Social Security number, date of birth, and contact information for the authorized user you intend to add to the card.

3.    Check what will get reported to the credit bureaus. It’s important to find out if the card company will report credit information about the authorized user to the credit reporting bureaus. This will help the authorized user to establish a credit history.

4.    Determine if you’ll get a card for the authorized user in their name. If so, this second credit card will get sent to you. From there, you can decide if you want to give the card to the authorized user or only have them use your card.

Removing an Authorized User on a Credit Card

A primary cardholder can remove an authorized user from their card at any time. Simply call or go online to request a change.

Keep in mind that the authorized user may see a change in their credit score if they are removed. This is because credit score calculations take into account both the age of credit accounts and the number of open accounts, both of which may decrease when an authorized user drops off the card of someone with a more established credit history.

What Are the Next Steps After Becoming an Authorized User?

As mentioned above, authorized users and primary cardholders will want to come up with a solid plan. Specifically, they’ll want to discuss how the card can be used, how much the authorized user can spend, and when and how the authorized user will make payments (either to the cardholder or directly to the card issuer). Making payments on time is extremely important to help avoid late fees and credit score dings for both the primary cardholder and the authorized user.

How to Monitor Your Credit as an Authorized User

If you’re an authorized user eager to build credit, it can be helpful to monitor your credit report to make sure your activity is being accurately reported. You can retrieve a free copy of your credit report each year from all three credit bureaus — Experian, TransUnion and Equifax — through AnnualCreditReport.com.

It’s also important for both the authorized user and the primary cardholder to be cautious and mindful about how their activity can affect one another’s credit, which is something credit monitoring can help keep in check. Irresponsible credit usage by either party can have implications for the credit of both the primary cardholder and the authorized user.

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

The Takeaway

Authorized users are typically added to an account held by a family member or other responsible adult. held by a family member or other responsible adult. However, it’s important for both parties to keep in mind that while their credit usage has the potential to improve their credit, it can also cause damage if payments are late or credit is maxed out.

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 many authorized users can I add to a single card account?

Each credit card issuer has different rules concerning the number of authorized users permitted. You’ll find this information in the terms and conditions for your credit card. Some credit card issuers charge a fee for each authorized user added on your account.

Is credit activity reported to the credit bureau for an authorized user?

In most cases, credit card issuers report activity to the credit bureaus for an authorized user as well as the primary card holder. Building or improving credit in this way can be a benefit of becoming an authorized user. Check with your credit card issuer to find out if authorized user credit activity is reported.

Does adding someone as an authorized user help their credit?

Building or improving your credit record can be a big benefit of becoming an authorized user, especially if the primary cardholder has a good credit rating and continues to make on-time payments. In order to boost your credit record, however, the credit card issuer needs to report your activity to the credit bureaus.

---

Photo credit: iStock/cokada

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

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

SOCC0422010

Read more