Are Certificates of Deposit (CDs) Taxable?

Are Certificates of Deposit (CDs) Taxable?

Yes. Certificates of deposit (CDs), also known as term deposits or time deposits, are FDIC-insured savings accounts available at most banks. CDs earn interest on the principal deposited for a specific period of time, and that interest is taxable.

CDs come with certain restrictions. For example, you cannot access your money for a fixed period of time (e.g. 3 months, 1 year, 5 years). In exchange, CDs often pay more interest than a regular savings account, though the rates are typically low. In fact, many CD accounts don’t keep up with inflation, so once taxes are paid on the interest earned there may not be much of a return on your investment.

If you’re thinking of buying a CD, it’s important to understand how CDs work and how they are taxed.

What Is a Certificate of Deposit?

A certificate of deposit (CD), also known as a term deposit or time deposit, is a savings account that comes with certain rules and restrictions. The chief difference between a CD and a traditional savings account is that once you deposit funds, you can’t add to the account or withdraw from the account for the entire term of that CD, whether that’s three months or three years. In most cases, if the account holder withdraws the funds before the end of the term, they are charged a penalty.

During that time, however, the funds earn interest (be sure to understand the difference between simple interest and the APY or annual percentage yield), often a higher rate than a traditional savings account.

Are CD accounts taxed? Yes, account holders are taxed on the interest earned. The amount of interest paid depends on the amount deposited and the length of the CD term. Investing in CDs is a fairly conservative endeavor as they are low risk compared to other types of investments. That said, the interest earned on a CD is minimal, and can be reduced by the tax you might pay.

How Do Certificates of Deposit Work?

CDs are guaranteed funds for a bank because the account holder agrees not to withdraw the principal for a certain period (e.g. 6 months, 2 years, 5 years). The bank pays a fixed interest rate to the CD holder in return for using the funds to invest elsewhere to make a profit.

The advantage of a CD vs. a regular savings account with unrestricted withdrawals is that the CD earns a fixed interest rate that can be higher than a regular savings account.

The longer the CD’s term length, generally the higher the interest rate. However, the rate of return is still lower than other investments such as stocks or other riskier investments. Like bonds, CDs are considered relatively safe investments because they are low risk and pay a fixed rate of interest. Also, CD deposits are protected by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) for up to $250,000 per person.

What Happens If a CD Is Redeemed Early?

Most CDs are subject to penalties if funds are withdrawn early. Each bank will set penalties differently, and they may include loss of principal and loss of interest earned. If the penalty charged by the bank exceeds the interest earned by the CD at the time of withdrawal, some of the principal may be used to make up the difference.

Recommended: How CD Early Withdrawal Penalties Work

What Counts as an Early Withdrawal?

How soon the money is withdrawn during the CDs term is significant. According to federal law, if the principal is redeemed in total within the first six days after depositing the money in a CD, a minimum penalty of at least seven days of simple interest is levied, but the total penalty charged by the bank will likely be more. It is possible to lose all of the earnings on the principal.

How Much Are Early Withdrawal Penalties?

Individual banks determine how much interest to withhold as a penalty for early withdrawals based on the CD’s term. The longer the term, the more interest will be charged. For example, some banks may charge a penalty of six months of interest on an 18-month-term CD. Others may charge a set fee of $25 plus 3% of the amount withdrawn.

Some banks will allow partial withdrawals from a CD, and some do not. Before opening a CD, the account holder should check the early withdrawal conditions set by the bank.

Are Penalties Tax Deductible?

Early withdrawals from CDs may reduce your total tax obligation because the penalty paid can be deducted from your taxes, even if the amount is more than the interest earned. For example, if you earned $100 interest but paid a penalty of $200, you can deduct the $200.

What Is a No-Penalty CD?

No-penalty CDs do exist and are known as liquid CD accounts. These often allow the CD holder to withdraw funds without a penalty within seven days of the initial deposit, after a certain period, or during the term, depending on the bank’s rules. However, the interest earned on these liquid accounts will be lower than regular CD accounts, and the bank may require a higher minimum deposit.

What Happens When the CD Term Ends?

When the CD term is up, some banks will automatically renew the CD. However, the account holder will be notified in case they would rather withdraw the funds and the interest earned.

If the account holder dies, the full face value of the CD is paid to the beneficiary with no early withdrawal penalties if the owner died prior to the maturity date.

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How Are Certificates of Deposit Taxed?

The interest earned on a CD is considered income by the Internal Revenue Service (IRS). That applies even if the money is rolled over to a new CD. The interest earned is taxable each year earnings are paid on the CD.

The bank will typically send CD holders a 1099-INT statement for any interest earned over $10, but taxes are due even if the investor doesn’t receive a 1099. The amount of tax you pay will depend on the amount of your earnings and your tax bracket. Also, CDs are taxes as interest income, not as capital gains, which can be a lower tax rate.

Taxes on Short-Term CDs

For a six-month CD purchased in one year, tax on any earnings over $10 will be due for that same year. The exception to this rule is if the CD is in a tax-deferred individual retirement account (IRA) or 401(k) — sometimes called an IRA CD.

If you open an IRA and the money you deposit is below the annual contribution limit, interest earned in a given year may be tax deferred (i.e. not taxed until funds are withdrawn in retirement).

How Is Interest Taxed on CDs?

When a CD matures, and if it is cashed in, only the amount above the initial investment is considered income. Here’s an example,

If you purchase a one-year CD for $15,000 and it pays 1% interest, in one year you will have earned roughly $150 (it’s slightly more with compounding). At maturity, the bank will give you $15,150, your original investment of $15,000 plus the interest of $150. You will only pay tax on the $150, and this is what will be shown on the 1099-INT.

Recommended: How Does Compounding Interest Work?

Preparing to Pay Taxes on a CD

•   Make a schedule of the timing and amount of taxes on your CD.

•   Here’s a formula to estimate the annual tax obligation on your CD interest:

   CD value x CD interest rate x your income tax rate = annual tax obligation

•   If you have CDs in a traditional IRA and you are required to make a required minimum distribution or withdrawal from the IRA, first calculate the amount of the RMD you will have to take that year. Second, calculate the income tax on that RMD.

•   Consider rolling over the RMD to a taxable CD outside of the IRA.

•   Consider setting up CDs that mature in time to make your tax payments. This is called a CD ladder, whereby one CD matures each year in an amount large enough to make the tax and/or RMD payments for that year.

For CDs with a multi-year term, the holder will pay taxes each year on the interest earned that year until maturity.

•   Calculate how much you earned in interest for each year on each CD.

•   Remember that if you own a CD with a three-year term, your account will be credited with interest in each of those three years. You will then owe tax each year even before you cash out or roll over the CD at the end of three years.

•   Check that your calculation matches the amount written on Form 1099-INT each year, notifying you of the amount of earned interest you owe taxes on that year.

The Takeaway

So are CD accounts taxable? In effect yes, because the interest earned can be taxed. The amount of tax due will depend on the amount of earnings and the account holder’s tax bracket.

Certificates of deposit (CDs) are FDIC-insured savings accounts available at most banks. CDs generally earn more interest than a regular savings account, but the rates are typically low and can vary depending on the length of the term and the amount of the deposit. Also, CDs do not keep up with inflation, so once taxes are paid on the interest earned, there may not be much of a return on the investment.

CDs are subject to penalties if funds are withdrawn early. If the penalty charged by the bank exceeds the interest earned by the CD at the time of withdrawal, it’s possible to lose all the earnings on the principal (but these penalties are tax deductible, which may help make up for some of the loss).

If you’re ready to start saving, but you’d like a higher rate, consider opening a new bank account with SoFi. It’s an all-in-one account that blends the features of checking and savings accounts. With the special “vaults” feature you can separate your savings from your spending, earn competitive interest on your total balance, and pay no account fees or monthly 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

Are CD accounts taxed?

Yes. CD holders must pay taxes on any interest earned on a CD.

How much is the tax on a CD?

The amount of tax due will depend on the amount of earnings and the account holder’s tax bracket. CDs are taxed as interest income, not as capital gains, which can be a lower tax rate.


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.


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.


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.

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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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What Is ACH Debit Block? And Why Is It Important?

What Is ACH Debit Block? And Why Is It Important?

An ACH debit block is a fraud protection tool: Companies can opt into it to prevent any ACH debits and credits from their bank account. If you suspect that your business is a victim of fraud, an ACH debit block is an easy way to protect your money until you’ve resolved the issue. It can also be a good general practice to discourage unauthorized debits.

In this guide, you’ll learn:

•   What ACH blocks are and how they work

•   The benefits of an ACH debit block for small businesses and enterprise companies

•   An alternative solution to ACH debit blocks

How ACH Debit Block Works

Before you dive into how an ACH debit block works, it’s important to understand some of the basic concepts related to this process, such as the ACH system in general and debit blocks.

What Is ACH?

ACH (Automated Clearing House) is a common payment method that works like a digital check, transferring money from one bank account into another. A common example of an ACH transfer is a direct deposit from an employer into an employee’s checking account.

As an individual consumer, you may also make ACH payments yourself. For example, you might be using ACH when you utilize peer-to-peer payment apps like Venmo, pay your bills online, digitally file and pay your income taxes, or even transfer money over to an investment account like SoFi Invest.

What Is a Debit Block?

Businesses use ACH payments as well, to collect funds and pay expenses. But these can be a target for criminal activity. Scammers can try to pull funds out of your bank account without your approval. If you want to prevent money from leaving a business account via ACH because of this potential risk, an ACH debit block might be a good move.

When enabled, a debit block would impede your company from being able to use the funds in the account in all ACH use cases. It’s important to understand the ramifications of a debit block — and only request one from your bank if your company has alternative methods (or accounts) for making payments.

How Does an ACH Debit Block Work?

An ACH debit block is very straightforward. When this fraud management tool is implemented on a bank account, no one will be able to withdraw funds from the account via ACH.

If you have a debit block on a business account and need to make an ACH payment from that account, you’ll need to take action to make sure it goes through. It’s important to contact your bank to authorize that specific payment before the payment recipient begins the ACH debit process. Otherwise, you will need to make all future payments with paper or electronic checks, debit cards, credit cards, cash, or wire transfers.

Recommended: Understanding ACH Returns

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Benefits of ACH Debit Block

ACH debit blocks can make payments difficult, so why would your business ever get one? It’s all about fraud — and not wanting to be a victim. Here’s a closer look at the advantages of using an ACH debit block.

Reduces Electronic Payment Fraud

One reason to enact an ACH block on a business account is if you suspect your account has been compromised. An ACH debit block can prevent fraudsters from being able to debit money electronically from an account.

An ACH debit block is just one fraud tool available to businesses. Other actions to take if you believe your bank account has been compromised might include contacting business credit bureaus and filing a report with the Federal Trade Commission (FTC).

Individual consumers who are victims of identity theft can also do more than contact their bank. If you believe your identity has been stolen, other steps to consider include filing a police report, reporting the fraud to the FTC, notifying the consumer credit bureaus, and contacting your creditors.

Offers an Additional Security Layer

Debit blocks are sometimes a reactive solution. That is, once a business suspects fraud, they can contact their bank to implement an ACH debit block on the account.

However, some companies — those that don’t need to make electronic payments from a specific business account — may prefer to proactively set up a debit block as an additional security layer. If you do so, just understand that you’ll need to contact your bank every time you want to authorize an electronic payment from your account.

Recommended: How Long Does Direct Deposit Take?

Setting Up an ACH Debit Block

Setting up an ACH debit block is easier than setting up direct deposit. Just call your bank, provide your credentials, and request that they set up debit block immediately. If you are doing this in response to fraudulent account activity, mention that on the call to determine what additional steps you should take.

Removing the debit block or authorizing a one-time payment will follow the same process. Contact your bank over the phone and explain exactly what you need.

Positive Pay vs ACH Debit Block

While an ACH debit block can be a good way to protect your business checking account, it does have its drawbacks. As an alternative, you may be able to implement positive pay.

Positive pay is an ACH filter that allows you to create a list of payees or vendors that will be automatically approved when they initiate an ACH debit from your company’s account. Certain criteria for these funds transfers can also be established. For example, you might put a cap on how much they can debit in a single transaction.

If any other individuals or businesses attempt an ACH withdrawal from your account, you will receive an alert. You can then review the request and approve or deny the ACH transfer.

Positive pay is more hands-on than ACH debit block but can be helpful if you have a list of recurring ACH payments. Positive pay may also be useful because it allows your company to review any unauthorized requests instead of having your bank flat-out reject them without a review, as with ACH debit block.

Worth noting: Because each bank’s offering is different, there might sometimes be an overlap between a debit block and positive pay. Some banks, for example, allow you to review and approve vendor payments when you have an ACH debit block enabled.

Recommended: Understanding ACH Fees

The Takeaway

ACH debit blocks are a secure way to prevent fraudulent electronic transfers from your company’s bank account. If you suspect that your bank account information has been compromised, contact your bank to initiate an ACH debit block and ask what other fraud prevention resources they can provide.

When thinking about your bank’s security, don’t forget about your personal accounts. SoFi is one great option to keep your money safe. Our online banking app is a fee-free option. You’ll earn a competitive APY and get early access to your paycheck. We also offer several security and fraud protection features, including in-app debit card freezes, suspicious activity monitoring, chip card technology, travel notices, and two-factor authentication.

Bank better and super securely with SoFi.

FAQ

Can ACH payments be blocked?

A business can block ACH payments with a feature called ACH debit block. This prevents anyone from electronically withdrawing money from its bank account. You may also be able to set up positive pay, which allows you to approve a list of electronic payments and review all other ACH requests.

How do I stop unauthorized ACH payments?

Set up an ACH debit block (typically, this is for business accounts) to prevent any electronic withdrawals from an account. If you want to allow expected ACH payments to process uninterrupted, set up positive pay, allowing only approved payments to go through. For your personal accounts, you may be able to set up alerts every time an ACH debit occurs in your account. If you notice any unauthorized activity, report it to your bank immediately.

What happens if an ACH transfer fails?

If the initial ACH transfer is not processed, some companies may attempt it a second time. Ultimately, if the ACH debit from your personal account fails, the business expecting the funds can hold you responsible for additional fees, such as late fees. If a bill continues to go unpaid, the company may send it to a collection agency, which will likely have a negative impact on your credit score.

How long does an ACH payment take to clear?

ACH payments are not immediate. In fact, they can take up to three or four business days. However, many banks have moved to next-day ACH transactions, which could mean funds are transferred in just one or two business days.


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.

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.


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.

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Bank Guarantees: What You Need to Know

Bank Guarantees: What You Need to Know

A bank guarantee is a promise by a financial institution that it will assume liability for a contract if one external party fails to uphold its obligation to another. In this way, the bank acts like a cosigner for a buyer or borrower on a business agreement, reducing the risk for the seller or lender.

For a small fee, bank guarantees often enable small businesses to enter into contracts with larger companies with which they otherwise would not be able to do business. In this article, we’ll explore:

•   How bank guarantees work

•   The different types of bank guarantees

•   The benefits and downsides of bank guarantees

•   How they differ from letters of credit.

What Is a Bank Guarantee?

Here’s what a bank guarantee is: It’s a financial instrument that adds confidence to riskier business deals. If, after doing its due diligence, a bank feels confident that an applicant (the debtor) will be able to uphold their contractual obligations, the bank will offer the guarantee to the other party (the beneficiary).

And if the applicant fails to fulfill that obligation to the beneficiary? The bank will cover the loss.

Bank guarantees are usually a part of more complex financial transactions between businesses. The average borrower won’t need to worry about bank guarantees for auto loans, mortgages, or personal loans.

Instead, companies utilize bank guarantees for much more complicated contracts around the provision of goods and services. If a vendor fails to provide goods or services that have already been paid for, a bank guarantee ensures reimbursement for the business using that vendor. Conversely, if a buyer fails to pay for goods or services that have already been delivered or rendered, the bank guarantee covers the unpaid balance for the seller.

Because a bank guarantee might protect a buyer or a seller, it’s easier to think of them in terms of the beneficiary (the company that requires a bank guarantee to move forward with a contract) and an applicant (the company that must apply for the bank guarantee to close the deal).

How Do Bank Guarantees Work?

If a contract includes a bank guarantee, that guarantee will specify an amount to be repaid (or goods or services to be delivered) and a set timeframe for that to happen. In addition, the contract will articulate the bank’s responsibility should the applicant fail to meet their contractual obligations.

To assume this risk, banks charge applicants a fee for the guarantee, expressed as a percentage of the cost or value of the transaction. While the fee will vary (perhaps from 0.5% to 2.5%), it is typically around 1%.

If the bank deems a contract particularly risky, it might require the applicant to offer collateral. Unlike with secured personal loans, where a house or car might serve as collateral, bank guarantee collateral is typically liquid assets, like stocks or bonds.

Types of Bank Guarantees

There are two main types of bank guarantees: financial bank guarantees and performance guarantees.

What Is a Financial Bank Guarantee?

With a financial bank guarantee, a bank has promised to repay a debt if the borrower (or buyer) defaults on the loan, meaning the payment. For example, an applicant may purchase goods and services from a large company, receive said goods and services, and never pay the bill. In this instance, the bank would settle the debt with the large company since it can’t come out of the borrower’s bank account.

What Is a Performance Guarantee?

A performance guarantee is just the opposite: If an applicant fails to perform the obligations laid out in contract (e.g., supplying parts to a company), the beneficiary can make a claim with the bank for the losses incurred from the non-performance of contractual obligations. Performance failure might also mean that, though the goods or services were delivered, they did not meet quality standards specified in the contract. In these situations, the bank would step in to offset those losses.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!


Examples of Bank Guarantees

Bank guarantees can serve many purposes, usually between two businesses. Here are a few kinds of guarantees that banks often issue:

Rental Guarantee

A rental guarantee protects a landlord when entering into a contract with a company (like a restaurant or retailer) that wants to lease a space. This guarantee serves as collateral for a rental lease.

Advanced Payment Guarantee

An advanced guarantee protects a company that has paid in advance for goods or services that weren’t delivered. You may also hear this referred to as a cash guarantee. If the deal isn’t satisfied, the company that has paid will be refunded.

Shipping Guarantee

A shipping guarantee protects a carrier when a shipment (i.e., import) arrives before required documentation. It is designed to smooth this kind of transaction when the documents have not yet become available.

Pros of a Bank Guarantee

When considering bank guarantees, you’ll see the term “beneficiary.” Don’t jump to conclusions about which party that might be. Bank guarantees can provide benefits for both the beneficiary and the applicant.

Benefits for the Beneficiary

First, let’s consider how a bank guarantee can help the beneficiary.

•   Reduced costs: A large, international company might save money in a specific region or country by doing business with a local vendor who does not have an international presence. By requiring that vendor to acquire a bank guarantee, the large company can feel confident about the decision while reducing costs.

•   Reduced risk: As mentioned above, the bank guarantee reduces the risk for the beneficiary. If the applicant fails to pay or to provide services or goods as outlined in the contract, the beneficiary can expect reimbursement from the bank.

Benefits for the Applicant

Now, here’s how a bank guarantee can benefit the applicant.

•   Increased opportunity: Bank guarantees let smaller companies and startups earn business they might not otherwise. Their newness in an industry might otherwise elicit hesitation from potential customers; a bank guarantee is often the boost needed to get business deals rolling.

•   Low cost option: All things considered, typical bank guarantee fees are low, especially when small business owners are used to dealing with higher interest rates (5.5% to 11.25%) on their small business loans, according to Experian, one of the major credit reporting agencies.

•   Credibility: Before offering a guarantee, a bank does a comprehensive, accurate assessment of an applicant’s financial standing. Earning a bank’s backing through a guarantee demonstrates that the bank finds the applicant company to be credible.

Cons of a Bank Guarantee

Both beneficiaries and applicants may encounter drawbacks to bank guarantees when initiating a contract.

Added complexity

First and foremost, a bank guarantee adds a layer of complexity to deal-making and may slow down business decisions. Companies operating in fast-paced markets may not be able to afford the delay.

Collateral requirement

If a venture seems particularly risky, banks may require collateral from applicants; this can be risky for startups with limited funding.

Lack of guarantee

Ultimately, a bank may not offer a guarantee, which means the beneficiary needs to be ready to continue its search for a new company to partner with.

Bank Guarantees vs Letters of Credit

Bank guarantees, as we’ve mentioned above, are typically used by companies bidding on large projects. The bank guarantee can underscore the business’ financial credibility. It provides assurance that a company has the financial means to complete the project in question.

Though they share some similarities with bank guarantees, letters of credit are more common in international trade. With a letter of credit, the bank is involved to a greater extent. Essentially, the bank releases the funds that the buyer owes the seller only when the seller has completed its contractual obligation (i.e., shipment has been received.)

Letters of credit instill confidence in sellers (exporters) that they will receive payment once they have shipped their goods. Likewise, importers only have to make payments (to their bank) after they have received the goods, so their funds aren’t tied up with no goods to show for it.

The Takeaway

A bank guarantee is a useful financial instrument that instills confidence between two external parties entering into a contract together. Such bank guarantees promise that the financial institution will cover any debts to one party if the other party does not meet its obligations. Larger companies often require small businesses and startups to obtain a bank guarantee before doing business with them. These guarantees can help a small or new business secure large deals since the bank has shown confidence in them.

If you want confidence in your bank for your personal accounts, consider SoFi. We help you bank smarter by offering you higher interest and no fees when you open our online bank account with direct deposit. You’ll earn a competitive APY while paying no monthly, minimum-balance, or overdraft charges.

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

What is the purpose of a bank guarantee?

The purpose of a bank guarantee is to add confidence to a contract between two parties; if one party fails to uphold its contractual obligations or defaults on a loan, the bank promises to step in and uphold the contract.

How can I get a bank guarantee?

If a business is requiring a bank guarantee to enter into a contract, contact your bank (or your business’ bank) and request an application. The bank will then review the application to determine your creditworthiness.

What are the types of bank guarantee?

There are two main types of bank guarantees: financial bank guarantees and performance guarantees. In a financial bank guarantee, the bank assures that a buyer will repay any debts owed to a seller. If the buyer does not, the bank will take on the debt. In a performance guarantee, the bank assures that the applicant will fulfill the tasks laid out in a contract. If the applicant does not, the bank will compensate the beneficiary to cover losses from the lack of contractual fulfillment.


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.

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.


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.

Photo credit: iStock/eclipse_images
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Can I Use Checks With an Old Address?

Can I Use Checks With an Old Address?

If you’re wondering if it’s okay to use checks with an old address, the answer is yes…most of the time.

Encountering a checkbook with your old address isn’t so unusual these days. Checks can come in handy from time to time, but many of us don’t need to use them all too often in this era of online electronic payments. Because of this, it’s easy to see how a checkbook might collect dust and the address on the checks might become outdated.

Read on to learn when it’s possible to use checks with an old address. You’ll find out:

•   Can you use a personal check with an old address?

•   Can you use a personal check with a wrong address?

•   What about business checks with an old or wrong address; are they okay to use?

•   Do checks expire?

•   How can you update checks when you move?

•   What are alternatives to using personal checks?

Can You Use a Personal Check With an Old Address?

Can you use a check with an old address? It is possible to use a check with an old address on it as long as it still has the correct routing and account numbers on it. If those numbers properly identify which bank and account the money should come from in order to pay a check, you’re good to go. That being said, it’s a good idea to let the bank know about a change of address to ensure they send statements and other important info about the account to the correct location.

If someone were to use a check with an old address on it, it can be helpful to let the recipient know about the address being wrong just in case they need to send a receipt or create any other correspondence regarding the payment via mail.

But what if the check writer got a new bank account number or the bank changed routing numbers (this can happen, for instance, when one bank merges with another)? In this situation, it is necessary to order new checks with the correct information on them. This is a great time to update the address on the check, too. Making sure a check’s routing numbers and account number are accurate is something to take seriously. If someone knowingly writes a check for an account that has already been closed, this is considered a form of fraud known as writing a bad check. Because of this, it’s a good idea to confirm check details are current and accurate whenever you move or switch banks to, say, open a new checking account.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!


Can You Use a Business Check With an Old Address?

It is possible to use a business check vs. a personal check that has an old address on it as long as the account number and routing number are accurate. The main difference between business checks and personal checks is that business checks can be a bit harder to deposit in a personal checking account. This however doesn’t really affect the person writing the check.

Can You Use a Personal Check With a Wrong Address?

It’s fair to wonder, is it okay if my checks have the wrong address? Whether it’s a typo or you moved, this situation definitely happens.

While writing a personal check with the wrong address on it isn’t ideal, it is possible to use one. As mentioned earlier, as long as the routing number and account number for your checking account are accurate, the check can be cashed properly. All of that being said, the check writer may want to inform the check recipient of their current correct address in case they need to mail them a receipt or any other type of communication.

Can You Use a Business Check With a Wrong Address?

As explained earlier, it is possible to write a business check with the wrong address on it as long as the routing number and account number listed on the check remain accurate. Most businesses will want to order new checks with the correct address on them to avoid confusion surrounding where their business is located and where correspondence should be directed. But they don’t need to worry if they have old checks left to use up. They should still be fine to issue.

Do Unwritten Checks Expire?

How long will a check be good for? As long as someone keeps their account open and the correct account number and routing number remain on a check, they won’t expire. However, there is still a situation to consider. If someone closes a bank account, this means the checks associated with the account become unusable. Another situation to be aware of is that bank routing numbers can change, especially when banks merge. So it’s always worth confirming if a check’s information is up to date.

When Are Checks With an Old Address Unusable?

As we mentioned, checks with an old address on them only become unusable if the routing number or account number listed on the check are inaccurate. This causes problems because these numbers are used to verify that the check is good and identify the account the money needs to be withdrawn from in order to process the check.

Ordering New and Correct Checks

If someone needs new checks for any reason — such as a desire to update their address — these are the steps they’ll generally take to order new ones.

•   Log on to their online bank account. It’s usually possible to order checks online or via a mobile account dashboard.

•   Request a counter check. If someone is really in a rush and can’t wait for new checks to come in the mail, they can go to a local bank branch and purchase counter checks. These will have your account information on them, and they typically cost $1 or $2 per check.

•   Review terms and fees. All banks charge different fees to buy checks or a checkbook, so double check how much doing so will cost.

Changing Your Address on Checks

Can you use checks with your old address? You can.

•   If you need to change the address listed on the checks in your personal checkbook, order more checks via one of the methods previously mentioned. This can be done online or in-person at the bank.

•   An alternative would be to use stick-on address labels to cover and replace the old address that appears on your checks.

Do You Need to Write Your Address on a Check?

Checks typically have an address already printed on them. Therefore it is not necessary for the check writer to write it on the check themselves. However, some people may prefer that only their name appears on their checks. Maybe they know they’ll be moving soon, or perhaps they simply prefer this for privacy and security reasons. If you do need to write your address on a check that doesn’t have your address:

•   Use blue or black pen

•   Print your new address under your name at the upper lefthand corner of the check

•   See if the business or merchant wants your phone number as well; this is a fairly common request so they can reach you if necessary. An altered check may not inspire complete confidence.

Do Checks Need an Address?

Checks do not need to have an address printed on them. However, if you choose to omit an address (say, because you know you’ll likely be moving soon), some businesses may hesitate to accept the check. They might ask for a form of ID or a phone number in case they need to contact you.

Alternatives to Personal Checks

If someone doesn’t want to write a check for whatever reason, these are some of their alternative payment options.

Money Orders

It’s possible to buy a money order from the post office and other select locations. Money orders are a very quick form of payment, and can cost less than $2 in fees.

Cashier’s Checks

A cashier’s check, which usually costs a small fee, can be bought at the bank and is a check that is guaranteed by the bank. It will usually require a visit to the bank to get one, though.

P2P Money Transfer Apps

Here’s a very convenient payment option: P2P money transfer apps — like Venmo — that allow users to instantly transfer cash electronically to an individual as long as they have enough money in their bank account. These may be free to use or can involve a small fee (a percentage of the transaction) depending on a few variables. (Sometimes e-checks, or electronic checks, are a payment option for utilities and other accounts. While not a P2P app, they do allow for a seamless transfer of funds.)

The Takeaway

As long as the routing and account numbers on the check are accurate, it’s possible to use a check with an old, incorrect address on it. That said, it’s a good idea to order new checks with the correct address on them to help lessen any confusion the wrong address might cause with check recipients. Having all your details correct can help make banking as simple as possible.

Here’s another way to simplify your financial life: Manage your money with SoFi. It’s a better way to bank. Sign up for online banking with direct deposit, and you’ll earn a competitive APY. What’s more, we don’t charge you any of the usual fees, like monthly, minimum-balance, or overdraft charges.

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

Does it matter if the address on my check is wrong?

If you’re wondering, “Can I use old address checks?” here’s the answer: It is possible to use a check with a wrong address on it. The key is to make sure the routing number and account number is still accurate on the check before using it.

Can you cash a check with an incorrect address?

Cashing a check without the correct address on it is possible. Just make sure the recipient knows the writer’s current address in case they need to contact them.

Do checks need an address?

Checks commonly have an address on them, but it’s not a requirement. If you are using a check without an address, the business or service you are playing may require some additional ID or info.


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/MicroStockHub
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Guide to Cleared Funds

Guide to Cleared Funds

We live in a fast-paced world and are accustomed to immediate gratification. Just as we can get groceries delivered in minutes and order a new movie online with a few clicks, so too do we often expect our bank deposits to be available immediately.

But it doesn’t always work that way when it comes to finances. Some things do require a wait, even though it may seem like they should happen instantaneously. When money is put into a bank account, it can take a while for the deposited funds to appear and become available. When that does happen, they are considered cleared funds.

Wondering how this timing works? Keep reading to find out. You’ll learn:

•   What are cleared funds and how do they work?

•   How long does it take for funds to clear?

•   When can you withdraw cleared funds?

•   How do cleared funds and available funds differ?

•   Why are deposits sometimes delayed?

What Are Cleared Funds?

Depositing money into a bank account doesn’t always make those funds appear immediately. It can take time for cleared funds (aka the funds the account holder can access and use) to appear in an account. This is because banks and credit unions place temporary holds on the deposit. When this happens, the account holder can see their “total balance” on their account and their “available balance.” The latter is the amount of the total balance minus any pending deposits. The available balance is, as the name indicates, what is available for use.

Why Banks Put a Hold on Deposits

Here’s why banks don’t immediately declare deposits to be cleared funds: The waiting period can help avoid issues that can arise when a deposit bounces. This process helps protect customers from fraud and from paying unnecessary fees. If a bank were to allow a customer to spend funds from a check that ends up bouncing, the customer would then need to repay the bank the amount they deposited and probably pay an overdraft fee (even if the customer wasn’t at fault).

Some holds take longer than others. Keep in mind that all banks and credit unions have their own policies regarding how long it will take for funds to become available after a deposit. Another factor in terms of funds clearing is that the federal government regulates how long banking institutions can hold onto the funds before they make them available to the account holder.

It can be helpful to review a bank’s policies for holding deposits so you can get a better idea of when cleared funds will become available. That way, you won’t accidentally overdraw your account.

How Do Cleared Funds Work?

Cleared funds appear in a bank account (typically a checking account) after the holding period ends. Usually, this holding period lasts until the next business day, but it can take longer. Weekends and holidays can slow this process down. The type of deposit made can also affect the timeline.

Here’s a specific example: If you deposit a paycheck via an ATM that is not part of your bank’s network, you will probably have to wait a while to access the money. It may take up to five days before that check becomes available cash in your account.

Compare that to the case of electronic deposits made via an ACH. The cleared funds can actually be available as soon as the same day. Having a paycheck deposited via direct deposit or funds put into a flexible spending account that way can help you access your money a lot faster than if you deposited a check at an ATM.

Recommended: How to Set Up Direct Deposit

Breakdown of Times of Cleared Funds

All banks and credit unions have their own timeline they follow surrounding cleared funds. In addition, the federal government sets a maximum limit for how long they can make consumers wait to access their deposit.

Here’s a quick breakdown of the federally allowed wait times for different types of transactions, from wiring money to check deposits.

Type of Deposit

Timeline

Direct DepositDay of Deposit
Wire TransferNext Business Day
First $200 of Any Non-”Next-Day” Check DepositedNext Business Day
Cash*Next Business Day
U.S. Treasury CheckNext Business Day
U.S. Postal Service Money Order*Next Business Day
State or Local Government Check*Next Business Day
Casher’s, Certified, or Teller’s Check*Next Business Day
Checks and Money Orders Drawn on Another Account at the Same Financial InstitutionNext Business Day
Federal Reserve Bank and Federal Home Loan Bank Checks*Next Business Day
Any Other Checks or Non-U.S. Postal Service Money OrdersSecond Business Day After the Day of Deposit
Deposits of Items Noted by “*” at an ATM Owned by the Customer’s Financial InstitutionsSecond Business Day After the Day of Deposit
Deposits Made at an ATM Not Owned by the Customer’s Financial InstitutionFifth Business Day After the Day of Deposit

*Deposited in person.

It’s worth noting that these are the maximum hold times allowed; in many cases these deposits happen much quicker. Again, it’s worth reviewing the bank’s funds availability policy. This will be listed in the account agreement given to you, the account holder, when you opened an account. You can also ask the bank for a copy of their holding policies or look online for it.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!


When Can You Withdrawal Cleared Funds?

Deposits often clear in segments. That is, a portion of the funds will become available in your checking account before the whole amount deposited is ready for use. In most cases, the bank has to allow the customer to access $225 from the deposit at the start of the next business day. You could either withdraw cash or write a check. Usually the rest of the deposit is available on the second business day, unless something occurs to trigger a delay.

Cleared Funds vs Available Funds

It’s worthwhile to highlight the difference between cleared and available funds. Knowing the distinction between the two can help you avoid overdrawing your account or bouncing checks. Simply depositing a check doesn’t mean you can use the money right away.

•   Regarding a deposit, the $225 that must be made available by the next business day is known as your available funds. So on the next day, you can go ahead and use that amount.

•   However, the rest of your deposit is not yet available. If you try to draw against it, you are risking overdraft and charges. The full amount of the deposit may take up to a few more days to become ready for use. When this happens, it is known as cleared funds.

Reasons Why Deposits May Be Delayed Until They Become Cleared Funds

There are a few different reasons why deposits can be delayed on their path to becoming cleared funds. Let’s examine some of these.

Deposits Over $5,000

When it comes to deposits over $5,000, the bank is usually required to make the first $5,000 of the deposit available within one business day. (Some banks, however, say they can take up to four days to clear the amount.) And as for the rest of a deposit that’s over $5,000? A financial institution can put a longer hold on the remaining amount since it’s such a large amount, and you may find this scenario holds true if you try to use other check-cashing options.

Brand New Customer Accounts

Newer customer accounts (less than 30 days old) can experience deposit delays up to nine days. Although with official checks and electronic payments, partial funds can be available the next day. (If you are in this situation and in a rush to make a payment, you can look into other ways to send money to another’s bank account, such as P2P apps. These can draw upon other available funds.)

Post-Dated or Fraudulent Checks

If a bank has reason to suspect a deposit is suspicious (such as if a check appears to be fraudulent), then it may hold the funds for longer than normal. A couple of examples of what might cause this kind of hold:

•   A check is post-dated, meaning it’s been filled out to show a date that is in the future.

•   A check is more than 60 days old.

The Takeaway

Cleared funds are the funds that become available once a deposit to a bank account clears. That means the money is ready for use. The timeline for funds clearing depends on several factors, such as where, when, and how the deposit was made and how large the amount is. Some funds may clear right away, while others can take a few days. However, federal laws are in place regarding how long a bank can wait to clear funds. By understanding this process, you can likely manage your financial life a little better and avoid situations that involve overdrafts or bounced checks.

Looking for quicker deposits? See how SoFi can help you bank smarter and faster. When you open an online bank account with direct deposit, it’s possible to get paid up to two days early! Plus you’ll earn an amazing APY which will help your money grow faster.

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

What is the difference between a cleared balance and an available balance?

Before a deposit fully clears and turns into cleared funds, the bank may make some of the deposit available by the start of the next business day. That partial deposit is known as available funds or an available balance.

How long does it take to get money cleared?

Some deposits can happen as soon as the same day, with most happening the next business day. In some cases, though, a deposit can take as long as nine days to clear. Check with your bank to know their timelines.

Can you reverse a cleared check?

Once a check has cleared, there is little that can be done to reverse the transaction. If, however, a cleared check is to be found fraudulent, it may be possible for a bank to intervene.


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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.


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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