A smart card is a plastic card, usually a credit or debit card, that’s embedded with a chip that encodes some information. The chip can serve as an additional layer of security when the card holder conducts transactions. Today, most card transactions in the U.S. utilize this technology.

Read on to learn more about how these cards work, what benefits they offer, and how they are likely to evolve in the future.

Definition and Basic Concept

Smart cards are typically metal and plastic cards with a computer chip embedded in them. The chips contain additional information that can add a layer of security to transactions. You may also hear they referred to as chip cards or EMV cards (EMV stands for Europay, Mastercard, and Visa, the companies that pioneered the technology).

If you’re using smart cards for in-person transactions, you might insert them in a reader or tap to pay, in which case the card transmits information through wireless technology rather than directly through the physical chip.

While there are several different uses for smart cards, probably the most common use is in debit cards connected to a checking account or credit cards.

Components of a Smart Card

Most smart cards are fairly simple and straightforward. Here are some key points to know:

•   There is usually some sort of embedded or integrated circuit in the card that contains information about the card itself. For a credit or debit card, this might be account information like the account number, expiration date, and the name of the account holder.

•   Generally, smart cards are powered by an external source, usually the card reader. Smart cards usually communicate with external card readers in one of two ways. This might be through a direct physical connection, such as an EMV chip on a credit card when it’s inserted into a card reader. Another way that smart cards communicate with a card reader is wirelessly, such as via the RFID (radio frequency identification) protocol when you use contactless checkout.

Recommended: 50/30/20 Budget Calculator

Types of Smart Cards

If you are looking to get a credit card or other form of smart card, you’ll want to be aware of the different types of smart cards. Here are three common varieties:

•   Contact smart cards: This is the most common type of smart card. A contact smart card is inserted into a card reader through a direct physical connection, such as an EMV chip on a smart credit card.

•   Contactless smart cards: Contactless smart cards are becoming more prevalent and transmit card information and other data wirelessly. A contactless smart card uses a tiny embedded antenna to send information to a nearby card reader, without direct physical contact.

•   Hybrid smart cards: Hybrid smart cards are usually cards that have both a physical chip (to use as a contact smart card), as well as the ability to function as a contactless smart card. You can use many debit cards as hybrid smart cards, since they both have an EMV chip as well as the ability to tap to pay wirelessly without a direct physical connection.

Each of these types of smart cards can be used in a variety of ways, such as credit cards, debit cards, and transit cards.

Recommended: How to Apply for a Credit Card

Key Features and Capabilities

Smart cards have a few key features and capabilities that you’ll want to be aware of.

•   Data storage: Smart cards can hold a small amount of data. In a smart credit card, that means the card itself can contain account information such as the account number, cardholder name, and the card expiration date. Having this information stored internally can help make smart cards more secure than credit or debit cards that do not have this information. Smart cards can also allow users to access sensitive information with a PIN or biometric data.

•   Processing power: Many smart cards contain small microprocessors inside the card itself. These microprocessors allow the card to process data directly without a remote connection.

Security Measures in Smart Cards

One of the most common uses for smart cards is to provide a more secure way of transmitting data. Credit cards, for example, used to store account information such as the credit card number on a magnetic strip. That left sensitive financial information potentially vulnerable to thieves or hackers using a magnetic field or electronic interference. Smart cards help mitigate that risk and increase security.

The data stored in a smart card is typically encrypted, which makes it more difficult for hackers to access those personal details. Additionally, the data stored on most smart cards can’t be easily changed or updated. This tamper-resistant feature of smart cards makes it a great use for sensitive information such as checking account or debit card information. When available, using a PIN or biometric data can help to increase security even more.

Recommended: How to Deposit a Check in 5 Steps

Future of Smart Card Technology

Smart cards are commonly used in many facets of society. Beyond smart credit and debit cards, smart cards are used as hotel key cards, transit cards, and access badges for secure areas.

While nobody knows exactly how smart card technology will evolve in the future, here are a few possibilities for what the future of smart cards might include:

•   Passwords: Smart cards may evolve to replace passwords in some instances, either instead of or in conjunction with a user’s PIN or biometric data (such as facial recognition).

•   Data storage: Smart cards may be used for blockchain or health data storage in the future.

•   Size or format: Currently, most smart cards are similar in size to credit cards or a driver’s license, but we may see other sizes or formats in the future.

•   Increased personalization and protection: The data and processing power in a smart card can drive a higher level of personalization, making it more difficult for unauthorized use of smart cards.

The Takeaway

Smart cards are physical cards that also have chips embedded in them, typically storing encrypted information in the card itself. Smart cards are commonly used today as credit and debit cards, and they may have an EMV chip, wireless “tap to pay” technology, or both. Smart cards are generally considered to be more secure than cards with information stored in another way (such as on a magnetic strip), which is one reason why they are becoming more common.

If you’re looking for a bank that takes security seriously, see what SoFi offers.

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 3.60% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

How does a smart card enhance security compared to traditional cards?

A smart card can contain sensitive banking information that’s encrypted and is stored on the chip’s embedded card. This can allow it to enhance security compared to a traditional card that stores account information only on a magnetic strip. The vast majority of debit and credit cards today use either the EMV chip or support wireless technology such as tap to pay or offer both types of functionality.

Can smart cards be used for multiple purposes?

Yes, it is common for smart cards to be used for multiple purposes. For example, many transit systems allow you to use a smart credit or debit card as your transit card as well. This means that you don’t need to carry a separate transit card with you as you access public transportation.

Are smart cards vulnerable to hacking or data theft?

There are very few things in the world that are completely invulnerable to hacking or data theft. However, smart cards are generally thought to be more secure than cards that store information in other ways, such as on a magnetic strip. This is one of the reasons that many merchants have moved away from having you swipe a credit card at the point of sale and instead have you insert the EMV chip or tap to pay.

photo credit: iStock/Jajah-sireenut

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SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. 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.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*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.

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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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Annual percentage rate (APR) and annual percentage yield (APY) are finance terms that describe how interest accrues, but they don’t mean the same thing. APR represents the yearly borrowing cost of loans or lines of credit, while APY measures how much interest you could earn from savings or investments.

Understanding the difference between APR vs. APY can help you make more informed decisions about your money.

Understanding APR (Annual Percentage Rate)

APR, in simple terms, is the cost you pay to borrow money over time, or per year. When you apply for a loan, credit card, or line of credit, the APR is an important consideration. The APR on a loan is expressed as a percentage.

Definition and Components

The Consumer Financial Protection Bureau (CFPB) defines APR as “a measure of the interest rate plus the additional fees charged with the loan.” A higher APR means a more expensive loan.

In relation to APR, an interest rate is the cost you pay to the lender to borrow on a loan or line of credit. It’s also expressed as a percentage.

APR is an annualized rate, meaning it measures the cost of borrowing yearly based on two factors:

•  Your interest rate

•  Fees

When thinking about APRs, you may wonder what a good interest rate on a loan is. The short answer is it’s probably the lowest rate you can get, based on your credit score and other qualifications. That rate will also vary depending on economic and global forces (for example, rates were slashed during the COVID pandemic to stimulate borrowing).

Fees included in APR can vary by loan type and lender. A personal loan, for instance, may have an origination fee while a mortgage loan may include discount points, which are fees you pay to buy down your interest rate. If there are no fees involved, there’s no difference between the APR vs. interest rate.

How APR Is Calculated

APR is calculated using a set formula, which looks like this:

APR = [((Interest charges + fees) ÷ Loan principal amount) ÷ Number of days in loan term x 365] x 100

You may also see it simplified this way:

APR = (Periodic interest rate x 365) x 100

In the second formula, the periodic interest rate represents the sum of the interest and fees divided by the loan amount, which is then divided by the number of days in the loan term.

Here’s an example of how to calculate APR for a $10,000 loan, assuming a 12% interest rate, a 2% origination fee, and a four-year term.

•  First, calculate simple interest on the loan by multiplying the loan principal by the interest rate by the loan term: $10,000 x 0.12 x 4 = $4,800

•  Next, calculate the origination fee ($10,000 x 0.02), and add it to the interest charges: $4,800 + $200 = $5,000

•  Divide this sum by the principal: $5,000 / $10,000 = 0.5

•  Divide the result by the number of days in the loan term, then multiply by 365: 0.5 / 1,460 x 365 = 0.125

•  Multiply the result by 100 to get the APR: 0.125 x 100 = 12.5%

That’s quite a bit of work, but you can do it if you have all the numbers. If you’d like to make calculating APR easier, you can use an online calculator instead.

Understanding APY (Annual Percentage Yield)

To understand APY vs. APR, you have to shift your perspective from borrowing money to saving it. APY measures how much interest you can earn on your money when you deposit it in a savings account or other vehicle, rather than what you pay to a lender.

Definition and Purpose

The CFPB defines APY as a measurement of “the total amount of interest paid on an account based on the interest rate and the frequency of compounding.”

When you’re saving money, the APY tells you how much your money may grow. The higher the APY, the more interest you could earn on your savings over time.

Calculation Method for APY

If you’re wondering how to calculate APY, you’ll use a formula that’s different from the one for APR. Here’s how it works.

APY = 100 [(1 + Interest/Principal)(365/Days in term) − 1]

You may also see this simplified as in a formula with r representing the nominal rate offered by the institution, while n is how often the interest compounds:

APY = (1 + r/n)ⁿ – 1

The frequency of compounding matters for APY calculations. Compounding happens when you earn interest on your interest and it gets added to the principal, which can help accelerate your money making you money. Say, for example, you deposit $10,000 into a CD with a 5% interest rate. The CD has a 12-month term.

If interest compounds…

•  Annually, the APY would be 5.00% and you’d end up with $10,500 at the end of the CD term.

•  Monthly, your APY works out to 5.116% and you’d have $10,511.62 when the CD matures.

•  Daily, the APY is 5.127% and your savings would grow to $10,512.67.

Is there a huge difference in the numbers? Not really. But these examples show how a frequency shift can affect your money’s growth potential. When you are talking about money that is on deposit for years or decades, the frequency of compounding interest on savings accounts can have a more significant impact.

If you don’t have time to do the math yourself, you can use an APY calculator to run the numbers.

Key Differences Between APR and APY

The APR vs. APY difference comes down to how they’re calculated, how they’re used, and what they tell you. Here’s a side-by-side comparison of the two that can make the differences clearer.

APR	APY
Measures the cost you pay to borrow money	Measures the interest you could earn when you save or invest money
Associated with loans, credit cards, and lines of credit	Associated with savings accounts, CD accounts, and some checking accounts and investments
Does not factor in compound interest	Does factor in compound interest
When paying an APR, a lower number is better	When earning an APY, a higher number is better

When APR Is Used

Broadly speaking, you’ll run into APR any time you plan to borrow money. Here are some examples of products that can have an APR.

Loan Products

Loans allow you to borrow money, usually in a lump sum, and pay it back with interest and fees. Some of the loans that will have an APR include:

•  Mortgage loans, including home equity loans or reverse mortgages

•  Auto loans

•  Personal loans

•  Small business loans

•  Student loans

•  Personal and business lines of credit

One thing to note is that loan APRs may be fixed or variable. A fixed-rate APR means your loan rate won’t change. Variable APR loans, on the other hand, have rates that are attached to an underlying benchmark or index and will vary along with its fluctuations.

If the benchmark rate increases or decreases, your loan APR can also shift. That means your loan rate (and consequently your monthly payment) can change over time. An example of how benchmark rates can fluctuate over time: The highest Fed fund rate was 20% in March 1980 and the lowest was 0.00 to 0.25% from December 2008 to December of 2015 and again during phases of the Covid pandemic.

Credit Cards

Credit cards typically have an APR, and some cards have more than one. For example, your card agreement might specify a:

•  Purchase APR, which applies to purchases you charge to your card

•  Balance transfer APR, if your card accepts balance transfers

•  Cash advance APR, if your card allows you to withdraw cash from your credit limit

•  Penalty APR, which may apply if you violate the terms of your card agreement

If your card has multiple APRs for different transaction types, they might all be different. For example, your purchase APR might be 19.99% while your cash advance APR could be 29.99%.

Credit card companies may offer low introductory APRs to entice you to open an account. For example, you might be offered a 0% APR on purchases and balance transfers for the first 12 months or a somewhat longer period.

Introductory offers can save money on interest, but it’s important to know when the promotional rate expires, which charges it applies to, and what the regular APR will be. Also, keep in mind that credit card APRs are most often variable and your credit card company can change your rate at any time as long as they give you proper notice first.

When APY Is Used

When you shift from talking about borrowing money to saving money, the key metric will be APY instead of APR. Here are some examples of when you’d need to know the APY you’re earning.

Savings Accounts

Savings accounts are designed to hold money that you don’t plan to spend right away. Banks and credit unions can offer different types of savings accounts, including:

•  Traditional savings accounts

•  High-yield savings accounts

•  Money market savings accounts

•  Certificate of deposit, or CD, accounts

Each of these types of savings accounts can earn interest, though it’s up to banks to determine what APY to offer.

Except for most CDs (which are likely fixed-rate), savings account rates are subject to change. So the APY you earn on day one after opening your account may be higher or lower than the APY you earn on day 100 or 1,000. With CDs, your APY is usually locked in for a set period until the CD matures.

Investment Products

While investments typically offer potential profit through dividend payments and/or capital gains, there are a few cases where you might see APYs mentioned:

•  Annuities are insurance contracts that you purchase for a premium and receive payments from later on. These investment vehicles are designed to provide you with supplemental income in retirement. Fixed annuities can offer what is called either a payout rate or APY rate, which is likely similar to what you’d get with a CD, allowing for predictable growth.

•  Brokered CDs work like regular bank CDs, with a twist. You buy them through a brokerage, and they can offer potentially higher rates of return. For example, a 12-month bank CD might have a 4.50% APY while a 12-month brokered CD might offer 5.25% instead. That’s typically because they reflect a more competitive market, with the broker having invested a larger sum in CDs that earns a higher APY, which they then pass along to those who buy smaller increments.

•  Cash management accounts are another option. These are checking accounts offered at brokerages that can earn interest like a savings account. Some cash management accounts offer an APY that’s comparable with the top high-yield savings account rates.

Impact on Financial Decisions

Knowing the difference between APR vs. APY can help you build your financial literacy and make smarter choices with your money.

For example, say that you’re planning to buy a new car. You have $20,000 in a high-yield savings account that’s earning a 4.50% APY compounded monthly. You’re thinking about buying a car for $20,000 and you’ve been preapproved for a three-year car loan at 7%.

You’re debating whether to finance the whole amount, use half of your savings for a down payment and finance the rest, or use all your savings to buy the car outright. Here, it would help to know:

•  How much interest you’d pay on the loan in each scenario

•  How much interest you’d earn on your savings in each scenario

For example, take a look at how these scenarios could play out:

1.   Say you use all your savings to buy a car. You won’t pay any interest since you won’t have a car loan. However, you won’t earn any interest either since your savings balance is $0.

2.   What if you go half and half? Assuming you take the full three years to pay off the loan, you’d pay around $1,116 in interest. If you don’t add anything to the $10,000 you have left in savings and you maintain the same 4.50% APY over the three years, by calculating savings account interest, you’d see that you’d earn about $1,442. By doing the math of $1,445 minus $1,116, you’d come out $329 richer.

3.   If you keep your savings in the bank and finance the whole amount (in reality, you’d likely need to make a down payment, however), you’d pay $2,232 in interest on the loan and earn $2,885 on your savings. So you would net $653.

These examples assume you don’t refinance your car loan at any point or add anything to savings, and that your savings APY stays the same. But they offer insight into how APR and APY affect you financially.

Recommended: How to Write a Check

The Takeaway

The difference between APY vs. APR is important since they express two different financial rates. An annual percentage yield, or APY, reflects the interest you can earn on savings and other funds, while the annual percentage rate, or APR, communicates what it will cost you to borrow money.

If you’re looking for a home for your savings where your money can grow, see what SoFi offers.

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 3.60% APY on SoFi Checking and Savings with eligible direct deposit.

FAQs

Which is typically higher, APR or APY?

APR tends to be higher if you’re comparing loans or credit card rates to savings account rates. As of late 2024, it’s common to find credit cards with APRs in the 20% or higher range but high-yield savings account APYs are typically in the 4.00% to 5.00% range.

Why do banks use APY for savings accounts and APR for loans?

Banks use APY for savings accounts and APR for loans because they measure two different things. When you open a savings account, the bank pays interest to you. The APY tells you how much you could earn per year, with compounding taken into effect. When you get a loan or line of credit, you pay interest to the bank. The APR tells you how much the bank charges for you to borrow, with fees included.

How does compound interest affect APY?

Compounding affects APY based on frequency. The more often interest accrues and gets added to the principal (say, weekly vs. monthly), the more interest you can earn over time, and the higher the APY will be. Using an online calculator can give you an idea of how much interest you could earn from a savings account.

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Photo credit: iStock/shih-wei

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. 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.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*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.

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

SOBNK-Q424-016

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Online banking offers a convenient way to manage your money. Plus, online banks typically offer attractive perks like competitive rates on savings and no-fee checking accounts. Still, many consumers worry that online banks aren’t as safe, dependable, or customer-friendly as the big traditional players. Are they right to be concerned?

While all types of banks have pros and cons, many fears about online banks are actually based on misinformation. Below, we debunk five common myths about online banks, and uncover some important truths about online vs. traditional banks.

Myth: Online Banking Isn’t Safe

Security is often the largest concern about online banking, and in a world where we’re constantly hearing of data breaches, that’s a valid consideration. But online banks and traditional banks store your data digitally and both are susceptible to data breaches.

That said, both online banks and traditional brick-and-mortar banks go to great lengths to protect your personal and banking information, including the use of encryption software (which blocks your accounts to unauthorized parties) and multi-factoring authentication (which requires you to enter unique personal information in order to access your account). Many online, and some traditional, banks also offer 24/7 account monitoring, instant card freezes, and real-time alerts so you’re aware of any unusual account activity as soon as it happens.

There are also steps you can take on your own to keep your accounts safe (regardless of where you bank). These include choosing a unique user ID and password, not using public wifi when you access your accounts, and avoiding phishing attempts to get your banking information.

Myth: You Can’t Get Help From a Human

Many consumers like being able to walk into a physical location and speak to a real human when they need assistance. And that’s simply something online banks can’t offer. By nature, there are no brick-and-mortar locations; all customer service is virtual. But that doesn’t mean mobile banking doesn’t come with good customer service.

Online banks typically offer phone-based customer service, where you can easily speak with a live customer service representative when there’s an issue or you simply want someone to walk you through setting up bill pay or making an online transfer. In addition, many offer 24/7 customer service via live online chat (with a human not a bot on the other end), as well as help via email. A lack of physical locations doesn’t necessarily equate with a lack of good customer service.

Recommended: How to Deposit a Check

Myth: It’s Hard to Access Money From an Online Bank

It’s true you can’t visit a bank branch and withdraw money at a teller window. But online banks typically partner with wide ATM networks to offer customers a convenient and free way to withdraw cash from their accounts. Some online banks will also reimburse for out-of-network ATM charges, though you may be capped to a certain max per month.

You can also access money in an online account by transferring it to an account at a different bank or using the bank’s bill pay function. If you have an online checking account, you can use your debit card for purchases and may be able to order checks. Some online banks also offer a peer-to-peer (P2P) payment service, so you can send money to friends and family directly from your bank account.

Myth: Online Banks Aren’t Insured

Like traditional banks, online banks are typically insured by the Federal Deposit Insurance Corporation (FDIC). This means your deposits are protected up to $250,000 (per depositor, per insured bank, per account ownership category) if the bank were to go out of business. Co-owners of joint accounts are each insured up to $250,000 for the total they have in joint accounts at an insured bank.

If you opt for an online credit union instead of an online bank, your money won’t be insured by the FDIC but it will still be protected. Credit unions are covered by the National Credit Union Association (NCUA), which offers similar insurance.

Before opening an account at an online (or brick-and-mortar) bank, it’s always a good idea to make sure it’s insured. You can do this by using the FDIC’s “Bank Find” tool or the NCUA’s Credit Union Locator tool.

Myth: The Big National Banks Offer Better Rates

You might assume big banks offer the best deals due to their size and scale. But it’s more likely to be the opposite: Online banks typically beat out the major national banks when it comes to annual percentage yields (APYs) on savings accounts, with some offering 9x the national average.

How do they do it? Online-only banks generally have lower overhead costs and can pass that savings to their customers in the form of higher-than-average yields. Many of these banks also offer better rates as a way to compete with the bigger players for customers.

In addition to better rates, online banks also tend to charge fewer and lower bank fees compared to the big traditional banks. Many online accounts don’t charge monthly service fees, for example, and some don’t charge overdraft fees, either.

Understanding Digital Banking Features and Limitations

Online banks offer several advantages over traditional banks, which often include higher APYs on checking and savings accounts and lower (or no) fees. They also tend to outshine traditional banks when it comes to technical innovation, offering state-of-the art banking platforms and apps.

That said, digital banking does have its limitations. Here are some downsides to consider:

  No branches: Since they lack physical locations, online banks aren’t able to provide customers a way to interact face-to-face with a teller or other bank representative. They also can’t offer services that require a physical location, such as getting a cashier’s check or renting a safe deposit box.

  Cash can be harder to deposit: It’s not always as straightforward to deposit cash into an online bank account. You may need, for example, to deposit cash at a participating retailer for a small fee rather than at an ATM or use another option, such as depositing your cash into a traditional bank account and transferring it to your online bank account.

  Fewer financial services: Unlike large traditional banks, online banks sometimes aren’t a one-stop shop. Some only specialize in a few types of accounts. While others offer a range of products and services, including credit cards and loans, they generally don’t have as many products and services as the biggest brick-and-mortar banks provide.

Recommended: Pros and Cons of Online Banking

The Takeaway

Online banks work very similarly to traditional banks. They just lack physical locations to conduct in-person services. They typically offer the same kinds of checking and savings accounts that you may find at brick-and-mortar banks. And since online banks don’t need to maintain and staff physical locations, they can often offer higher interest rates on both checking and savings. While some people are concerned about the safety and security of online banks, you can feel confident that online financial institutions are just as secure as brick-and-mortar options.

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 3.60% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

Is online banking safer than traditional banking?

Online banking and traditional banking are considered equally safe. Both online and traditional banks generally use robust security measures like encryption, multi-factor authentication, and fraud monitoring to protect customer accounts. In addition, both types of banks are usually insured by the Federal Deposit Insurance Corporation (FDIC), which means your funds will be covered (up to the insured limits) even if the bank were to go out of business.

Can I do everything online that I can do in a physical bank?

You can do nearly everything online that you can do in a physical bank. This includes opening an account, making transfers, paying bills, depositing checks, and managing your account. Many banks also offer one-on-one customer service via phone or online chat. However, certain services like obtaining cashier’s checks, notary services, or large cash withdrawals generally require visiting a physical bank.

How does online banking affect my privacy?

Information that is stored digitally (by an online or traditional bank) could potentially have an impact on your privacy, as online information is susceptible to cyber attacks. However, reputable banks use strong encryption and cybersecurity practices to protect customer data. There are also steps you can take on your own to protect your accounts. These include choosing a unique user ID and password, not using public wifi when accessing your accounts, and logging out of your account after every session.

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Photo credits: iStock/AleksandarNakic

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. 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.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*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.

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

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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What Is a High Interest Rate on a Personal Loan?

A personal loan with a higher interest rate is one that charges close to the maximum APR limit set by your state. This type of loan can be expensive but can help applicants with lower credit scores qualify for financing.

Find out how high-interest rate personal loans work and how to avoid potential red flags from lenders.

Understanding Personal Loan Interest Rates

When you apply for a personal loan, you’ll see an interest rate quote as part of your offer. You’ll also see the annual percentage rate (APR) vs. interest rate; the APR is usually a little higher because it considers the cost of lender fees as part of the percentage. The higher your rate, the more interest you’re charged over the life of the loan.

The interest rate is applied to your loan balance throughout the entire repayment term. Every time you make a scheduled payment, the payment is split up between principal and interest. You can use a personal loan calculator to figure out how much different interest rates will cost over time.

Most personal loans come with a fixed rate, meaning it doesn’t change over time. If you choose a type of financing with a variable rate instead of fixed, that means the interest rate can change, potentially causing your payment to increase.

What Is Considered a High Interest Rate?

Wondering what’s considered a high interest rate on a loan? The maximum limit for high-interest loans is regulated by individual states. There may be different rate caps based on the size of the loan and the length of the loan term.

Here’s an overview of the median state APR limit by loan size and term:

Loan amount and term	Median state APR limit
$500 / six-month loan	39.5%
$2,000 / two-year loan	32.5%
$10,000 / five-year loan	27%

As you start exploring personal loans, be careful of interest rates at these levels or higher. It’s also important to watch for the states that don’t have rate caps.

Recommended: APY vs Interest Rate

Factors Influencing Personal Loan Interest Rates

When applying for a personal loan, there are five factors that impact your eligibility as well as your interest rate. Understanding each category gives you a better sense of whether you’ll need a high-interest rate loan in order to qualify.

•   Credit score: Having a lower credit score usually means you’ll pay a higher interest rate on any type of financing, including personal loans. Credit scores range from 300 to 850, and anything above 670 is considered good. If your score is lower than that, you may have trouble qualifying for a good interest rate.

•   Income: Your lender may require a minimum income in order to qualify. On top of that, earning more can help you get a better interest rate because you may be more likely to make your monthly payments on time.

•   Debt-to-income ratio (DTI): Your DTI compares how much debt you pay each month and how much income you bring in before taxes. With a high percentage of your monthly income going toward existing debt, you may not be able to borrow as much. Similarly, you may also have to pay a higher interest rate.

•   Loan term: Longer loan terms usually come with higher rates because there’s more of a chance that your financial situation will change. Getting a personal loan with a shorter term could help lower your interest.

•   Loan amount: A higher loan usually causes rates to rise, since the lender takes on more risk with a larger loan amount.

💡 Quick Tip: Not sure what certain loan terms mean? Check out the Personal Loans Glossary for a simple guide to the basics.

Identifying High-Interest Personal Loans

High-interest personal loans can be expensive and even predatory. Do your due diligence by comparing at least a few different loan offers to make sure your terms are normal for your credit profile.

Also look for red flags that could indicate predatory lending practices, like lenders that advertise no credit check or employ high-pressure sales tactics. Carefully review contract terms and look for any conflicting information or expensive fees. You can also check your state attorney general’s website to make sure a lender is licensed to do business where you live.

While there are reputable high-interest personal loans out there, make sure you’re finding the right ones with the best financing terms available.

Recommended: What Is a Personal Loan?

Consequences of High-Interest Personal Loans

Taking out a high-interest personal loan can affect both your short-term and long-term financial health. Pay attention to these three areas when considering whether or not this type of loan is right for you.

Monthly Budget

Make sure the principal and interest payments for your personal loan work with your budget. Over-stretching yourself can hinder your other financial goals. And if you don’t have much of an emergency fund, any change in your circumstances could make it difficult to stay on top of your loan payments.

Total Cost of Borrowing

Calculate how much a high-interest personal loan will cost you from start to finish. Include interest as well as lender fees.

Potential Debt Cycle

Some lenders may offer to refinance your loan if you have trouble making payments. But what they’re really doing is extending the repayment term to keep you paying interest for longer.

Alternatives to High-Interest Personal Loans

Before you take out a high-interest personal loan, consider some other options first.

•   Credit unions: These community-based financial institutions may have more flexible lending criteria, especially if you’re a member.

•   Peer-to-peer lending: P2P lenders used to connect individual investors with borrowers, but now most of them work with institutional investors like banks. Still, you may find different financing terms with this type of loan.

•   Secured loans: A secured loan uses some type of collateral that the lender can take if you default on your payments.

•   Balance transfer credit cards: If you plan to use a personal loan to consolidate debt, you may find a balance transfer card with an introductory interest rate. You can transfer existing balances to one card and try to aggressively pay off your balance with the introductory APR.

Factors That Can Lower Interest Rates

Taking some time to search for lower interest rates can help you save money on a high-interest personal loan. If you don’t need the money right away, check your credit report and work on the issues that are hurting your score.

Also shop around for multiple loan offers. Request quotes that only do a soft inquiry on your credit score so you don’t cause any damage. Finally, consider asking a trusted friend or family member to be a cosigner on the loan.

The Takeaway

Do personal loans have high interest rates? Some can, especially if you have a lower credit score and large existing debt balances. That said, a higher credit score and less debt could help you qualify for a better rate and terms. SoFi, for instance, offers personal loans with competitive interest rates for individuals with strong credit profiles.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

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

FAQ

What’s the difference between APR and interest rate?

A loan’s annual percentage rate (APR) includes additional costs like origination fees as part of the interest rate calculation, whereas the interest rate itself only applies to the percentage charged based on your principal balance.

Can I refinance a high-interest personal loan?

Yes, you can refinance a high-interest personal loan by taking out another loan and paying off your balance. Then you would start making new payments with the updated loan terms.

Are online lenders more likely to offer high-interest loans?

It depends. Online lenders tend to have fewer operating expenses since they don’t have brick-and-mortar branches like traditional banks. But they also may have more flexible lending requirements, which could mean higher rates for borrowers with bad credit.

How do personal loan interest rates compare to credit card rates?

A personal loan interest rate is usually fixed, while credit card rates are variable. Loans may come with lower rates as well, but it’s not guaranteed, especially if you have a lower credit score.

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photo credit: iStock/staticnak1983

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

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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The average credit score for a 22-year-old is currently 680, which is in the good range and can qualify you for various types of credit. Your credit score depends on a variety of factors, including your history of paying your bills on time and your length of credit history. The average 22-year-old may not have had much time to build a credit history yet, but on average, people this age are managing credit responsibly.

Understanding what a credit score is and what this number means is an important part of accessing credit and taking control of your personal finances. Read on to learn more.

Average Credit Score for a 22-Year-Old

The average credit score for individuals aged 18 to 25 is 680 as of January 2025. In general, this is considered to be a good score, one that you’ll need to access credit such as a home loan, for example.
As a point of comparison, the average credit score for all Americans is currently 717 as of mid-2024. As you see, the typical score for a young adult is somewhat lower, which may reflect the fact that they likely haven’t been using credit products as long as older people have.

It’s worth noting that credit scores, which usually run from 300 to 850, don’t start at 300. A starting credit score is often between 500 and 700.

Recommended: What Is the Average Salary in the U.S.?

What Is a Credit Score?

Your credit score is a three-digit number ranging from 300 to 850, as noted above, that represents your credit history. It basically provides a snapshot of how well you manage credit. Lenders and others may use it to determine your credit risk. In general, the lower your score, the more lenders will worry you’ll have trouble paying back your debt. The higher your score, the less risk you represent.

What Is the Average Credit Score?

The average credit score in the U.S. is 717 according to FICO® Score, the most commonly used credit scoring system.

There are other credit scoring companies such as VantageScore vs. FICO that may have a different scoring system. The average VantageScore in the U.S. is 705 as of mid-2024.

The average VantageScore for 22-year-olds isn’t broken out by specific age, but those in their 20s were recently found to have an average score of 662, which is a bit lower than a FICO Score of 680 but still in the good range.

Average Credit Score by Age

The average credit score varies and rises steadily by age. Compare average scores across generations to see how you stack up against other age cohorts.

Age	Average Score
18 – 25	680
26 – 41	690
42 – 57	709
58-76	745
77+	760

What’s a Good Credit Score for Your Age?

Credit scores are categorized in a range from poor to exceptional. For FICO scores, the most widely used score in the U.S., here is how the scores shape up:

•  300-579: Poor

•  580-669: Fair

•  670-739: Good

•  740-799: Very good

•  800-850: Exceptional or excellent

As mentioned above, the average score of 22-year-olds is 680, which is considered good. On average, those aged 58 and older crack into the very good range.

How to Build Your Credit Score

Building your credit score can potentially give you greater access to borrowing and at more favorable rates and terms. Follow these tips:

•   The biggest step you can typically take to maintain or build your score is always pay your bills on time.

•   The next most important step you can take is to avoid using too much of your available credit. A common rule of thumb suggests using no more than 30% of available credit at any given moment.

•   Having a mix of different types of credit (such as credit cards, home loans, and personal loans) may also build your score. For this reason, you may want to avoid closing old lines of credit, even if they are something you don’t use regularly or at all.

•   Similarly, having a longer credit history can positively impact your credit score. So if you are thinking of closing an account (such as a credit card you rarely use), keep in mind that doing so could lower your score. You might therefore decide to keep it open and use it occasionally.

•   Another wise move can be to avoid applying for too much credit in a short period of time. Otherwise, it could contribute to a lower score. If you are, say, looking for a single home loan from multiple lenders, that kind of rate shopping should not be an issue. But if you apply for a mortgage, car loan, and two new credit cards within a couple of months, that may well lower your score.

How Does My Age Affect My Credit Score?

Your age is not a factor that is included in your credit score. It may have an indirect impact on your score however. It can take time to build credit. If you’re younger, you may not have had much time to build a credit history, which may mean your score is lower than average. But as you age and build your credit through on-time payments, a longer history, and a broader mix of debt, your score may be positively impacted.

At What Age Does Credit Score Improve the Most?

It is perhaps unsurprising that the oldest Americans who have spent years building a credit history tend to have the highest scores, as noted above. This doesn’t mean, however, that you cannot achieve a high score when you are younger if you are responsible with your debt.

How to Build Credit

If you’ve never had credit before, there are several ways you can begin to build credit. Beyond the tips above about managing credit responsibly once you have it, you could open a secured credit card, which requires that you put up an amount of money as collateral for your debt. (Another way to think about this: Your deposit acts as your credit limit. As you pay your bill monthly, your activity is reported to the credit bureaus.) It is often easier to qualify for than other credit cards.

You could also become an authorized user on another person’s credit card account. This is typically something you might request of an older family member. Provided the account is used responsibly, it could help build your score.

If you’re looking to take out a loan, you could have a friend or family member with good credit cosign the loan. By doing so, they agree to make payments if you fail to do so. But be aware that loan activity will show up on both of your credit scores. Failure to make payments could bring your cosigner’s score down.

Credit Score Tips

In addition to keeping an eye on the factors that go into calculating your three digits (noted above), it’s also wise to monitor your credit score carefully to be sure that your credit history is accurate, as incorrect data could be dragging down your score.

You can check your credit score without paying, by requesting a free credit report every week from each of the three major credit reporting bureaus: Equifax, Experian, and TransUnion.

In general, the reporting bureaus will make credit score updates whenever any action has taken place related to your credit.

Check your credit report for errors. If you spot any, be sure to dispute the information with the credit reporting bureau immediately.

Developing healthy financial habits can help you manage your debts. Consider using spending apps and money tracker apps to help you understand your spending, where you may be taking on unnecessary debt, and where you could be saving toward financial goals, including debt repayment.

The Takeaway

The average 22-year-old’s credit score is currently 680, which falls in the good range. Credit scores tend to rise with age, and responsible usage over time can help build a score into the very good or excellent range. To positively impact your score, be sure to pay bills on time and make sure not to take on more debt than you can manage. It’s good practice to monitor your credit score regularly for errors and to see if there are any steps you need to take to build your score and qualify for more favorable rates and terms when accessing credit.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

What is a good credit score for a 22 year old?

The average 22-year-old has a credit score of 680, which is in the good range.

Is a 750 credit score at 22 good?

A score of 750 is considered to be very good and is between the good and excellent ranges on credit-scoring scale.

How rare is an 800 credit score?

Just over 20% of Americans have a credit score of 800, making it relatively common.

What is the average credit limit for a 22 year old?

The average credit limit for 22-year-olds is currently almost $13,000.

Can a 20 year old have a 700 credit score?

While someone who is 20 years old probably has a relatively short credit history, it is possible to have a score of 700. The average credit score for people in their 20s is 680, which is fairly close to that number.

How much debt is normal for a 22 year old?

The amount of debt you carry will depend on your own financial circumstances. On average, Americans 18–23 years old carry more than $9,500 in debt.

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Photo credit: iStock/insta_photos

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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

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

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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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