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When a checking account is overdrawn, which can happen when a check bounces, an individual may wonder, “Do I need overdraft protection?” The answer is: It depends. Overdraft protection may suit your financial habits, but it will most likely cost you. According to the Consumer Financial Protection Bureau, Americans paid more than $9 billion in overdraft fees in 2023 alone.

What Is Overdraft Protection?

Overdraft protection is a set of measures put in place to ensure you have enough money in your bank account to conduct transactions such as debit purchases and bill payments.

An overdraft on your account means the bank is attempting to make a withdrawal — like an electronic payment or ATM withdrawal — and there aren’t enough funds to cover the amount requested.

If you opted into overdraft protection, the bank authorizes the withdrawal instead of declining it and pays the difference. This can be beneficial in certain situations that crop up — say, you get paid tomorrow but don’t have the funds today for a purchase you really need, or if there’s a lag between your current vs. available balance. You’ll usually be charged a fee in addition to repaying the amount of the overdraft. In other words, you’re borrowing money from the bank to cover the transaction. You’ll need to pay it back by making a deposit to your bank account to get your account balance to zero or above.

This kind of protection gives you a safety net in a couple of ways. It can prevent you from defaulting on or making a late payment of bills, while also ensuring that you won’t have your debit card declined.

Overdraft is not the same as non-sufficient funds (NSF). This is when the bank will decline rather than cover the transaction due to the fact that there isn’t enough money in your account. You could be charged a fee for this event as well.

How Much Does Overdraft Protection Cost?

Overdraft fees currently average around $35. However, some banks allow you to link a checking and savings account from the same financial institution so that you have no-fee overdraft coverage when money transfers between these accounts.

In some cases, you may pay overdraft fees multiple times in a day, though many banks limit the number of times you may be charged. For example, if you went to the grocery store and your bill came to $35 and you only had $10 in your bank account, you’ll be slapped with an overdraft fee. Later in the day, if your recurring utilities auto payment was processed, you’d face an additional fee for the bank covering that payment — that is, unless your bank limits the number of times you may be charged.

Keep in mind that you generally need to opt into overdraft protection in order for a bank to overdraft your account. That being said, it can depend on the type of transaction — check or recurring electronic payments may not require opt-ins. It’s best to check with your bank if you’re not sure whether you’ve opted for overdraft protection.

It’s important to be aware that in January 2024, the Consumer Financial Protection Bureau introduced a new proposal to reduce overdraft fees to as low as $3. If the proposed rule passes, it could go into effect on October 1, 2025.

Pros of Overdraft Protection

To help figure out whether you should opt in or not, carefully consider the pros and cons of overdraft protection. It has several benefits, including:

•   Access to funds when an emergency occurs or during an unexpected event. You can write a check, say, for more than you have available, and it will be paid.

•   May expedite transactions, especially when you’re making a necessary purchase like at the grocery store or gas station.

•   Could potentially save you from being embarrassed when a transaction is declined.

•   May help you avoid fees if you link checking and savings accounts from the same bank.

•   Prevent returned check or payment fees from companies, such as utilities companies.

•   Can also prevent late bill payment by covering costs.

Cons of Overdraft Protection

Although there are perks to opting into overdraft protection, there are also drawbacks, such as:

•   Paying overdraft fees, possibly multiple charges per day

•   Could encourage you to overspend, knowing the bank will step in and cover you, rather than becoming motivated to get better with your money

•   Your bank account may not be in good standing if you have a history of overdrafts

Should I Get Overdraft Protection?

Whether you should get overdraft protection depends on what your priorities are.

It can help to prevent transactions from being declined, especially when you have recurring automatic payments or when you’re paying for necessities, like a tank of gas. It may offer you peace of mind since you don’t have to wonder whether creditors are going to come knocking on your door because of failed payments.

However, this convenience does come at a price. Being charged an average of $35 per transaction can really add up. It can become downright problematic if your account frequently overdrafts. Most people want to avoid paying bank fees, especially when they are this high.

If you’re concerned about making sure you have enough money to cover transactions, you can take measures to prevent your balance from sinking too low. It’s a smart idea to adopt these measures, described below, whether or not you opt into overdraft protection.

What Happens When You Don’t Have Overdraft Protection?

When you don’t have overdraft protection, your bank will typically decline a transaction if you don’t have the funds to cover it. So a check you write would not be paid or a debit card transaction would not go through if the cash isn’t in your checking account.

However, each bank will determine what action to take depending on the amount overdrawn and the type of transaction. For instance, if you pay someone a small amount via check and there isn’t enough money in your account, your bank might choose to overdraw your account and charge a fee. Or if you’re swiping your debit card to buy something not too costly, some banks may allow the overdraft and not charge a fee as long as you can cover that amount within a certain amount of time.

Tips for Avoiding Overdraft Fees

Your best bet to not pay any overdraft fees is to take measures to avoid your bank balance dipping below zero. Here are a few best practices to avoid overdraft fees:

•   Turn on bank account alerts to monitor your balance and notify you — either via text, email or push notifications — when your balance is at a certain amount.

•   Download a budgeting app and set up alerts for when you’re overspending.

•   Set reminders for when automatic payments go through or when bills are due so you can deposit funds before those dates.

•   Link your savings and checking account together (make sure your bank won’t charge you a fee for this type of protection).

The Takeaway

Overdraft protection could be useful, but you don’t want to rely on it too frequently. Otherwise, you might end up paying hundreds of dollars in fees that could go towards other goals. Think carefully about your cash flow and spending habits to decide whether or not it’s right for you.

Luckily, there are financial institutions that don’t charge overdraft fees. This could help you earn, save, and spend responsibly — and work toward achieving financial fitness.

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

FAQ

Should I have overdraft protection on or off?

Whether you should opt into overdraft protection is a personal choice. You should weigh some of the factors such as how often the balance in your account is likely to be close to zero, how many fees you are willing to pay, if you are comfortable with declined transactions, and how often you are able to check your bank account balance.

Does overdraft protection hurt credit?

Overdrafting your bank account generally doesn’t hurt your credit score because this activity isn’t reported to the credit bureaus. However, if you link your bank account to a credit card account (for automatic payments, for instance) and you fail to make a payment, your score might be affected.

Do you have to pay back overdraft protection?

Yes, you’ll need to pay back the amount that’s overdrawn, plus an overdraft fee if the bank charges you one.

Photo credit: iStock/Prostock-Studio

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.

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. 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.

3.60% APY
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.
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 .

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

SOBK-Q224-1927505-V1

Commercial banks provide financial services for small and large businesses, including checking and savings accounts, loans, lines of credit, letters of credit, underwriting, and payment processing. These services enable businesses to operate in domestic and international markets. What’s more, financing from commercial banks may help businesses grow, which could potentially help drive the domestic economy.

What Is Commercial Banking: A Definition

Commercial banking involves financial institutions that are dedicated to serving businesses. This differs from retail banking, which provides personal banking services to individuals, such as checking and savings accounts.

Typically, a commercial bank offers businesses everything from deposit accounts, loans, and lines of credit to merchant services, payment processing, international trade services, and more. In these ways, a commercial bank can be a vital partner in helping a business succeed and grow.

While commercial banks offer a suite of services for medium and large businesses, small and new business owners can also take advantage of their offerings. Sometimes, people starting an enterprise use their personal accounts for banking. However, it is typically better to seek out commercial banking and open separate accounts for business vs. personal finances. This simplifies record keeping and the payment of taxes, and it also helps keep these two realms separate in case of any legal action.

How Commercial Banking Works

Commercial banks serve small- to large-sized businesses. You may be familiar with their names, as many of them also have retail banking divisions. Three examples of commercial banks in the United States are JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co. All are regulated by the United States Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).

One very important function of commercial banks: providing financing to businesses. Before a commercial bank extends a loan to a business, it assesses the creditworthiness of the borrower by looking at its assets, profitability, and size.

In addition, commercial banks provide an array of services, supporting businesses with transfers from one account to another, lines of credit, lockbox services, payment processing, and foreign exchange services. Here is a closer look at what a commercial bank may offer:

Deposit Accounts

Commercial bank deposit accounts function like retail bank checking and savings accounts. They enable businesses to pay suppliers and employees by holding cash and, in some cases, account holders may earn interest on the balance.

There are three main types of deposit accounts: demand, fixed, and savings.

•   Account holders can use demand deposits or current account deposits for business transactions. They typically do not earn interest and are subject to service charges.

•   The bank holds fixed deposits for a specific term. Deposits likely earn interest, and the account holder can make withdrawals.

•   Savings deposits function as both fixed deposit and current accounts. Depositors can withdraw cash from these accounts, but the amount may be limited. Savings accounts earn interest but probably less than a fixed deposit.

Loans

Businesses need capital to thrive. Whether hiring staff, renting office or manufacturing space, or buying materials and supplies, operating a business and growing it takes cash. Commercial banks extend business loans vs. personal loans and charge interest on the loans. That’s one of the key income streams for banks. The bank likely turns a profit on lending, and the business gets the funds it needs to launch its enterprise or to expand or buy real estate or new equipment.

Lines of Credit

Commercial banks usually provide businesses with lines of credit. A line of credit is short-term funding that can help a company manage its obligations while it waits for cash flow to improve. For example, a company may have to wait for receivables’ payment in order to meet this month’s payroll. A line of credit can help bridge that gap.

Letters of Credit

A business may need to request a letter of credit from a commercial bank to show creditworthiness and to secure goods or services from an overseas trading partner. A letter of credit can serve as a guarantee from the issuing bank of payment for the goods once the letter’s requirements are met. The requirements might include the shipping date and the address the goods should be shipped to. In this way, a commercial bank can smooth international trade and help its clients’ business grow.

Lockbox Services

Lockboxes facilitate faster payments for businesses. Bank customers can send payments to a post office box near the bank, and the bank deposits the payments or funds to the customer’s account. This helps expedite the receipt of deposits and subsequent payments from the client to its providers. It can be a helpful cash flow tool for commercial enterprises.

Payment and Transaction Processing

Commercial banks typically facilitate the payments that businesses receive from their customers through electronic checks, paper checks, and credit card payments. Commercial banks may also provide services such as chargeback management fraud protection. All of these services can help keep a business humming along.

Foreign Exchange

Cross-border payments are complex because of exchange rates and the fact that each country has a different legal system. Commercial banks can provide foreign exchange services so that a company can do business overseas with a minimum of time and effort. This can streamline operations for a business enterprise so they can focus their attention on other activities.

The Significance of Commercial Banks

Commercial banks play a vital role in the financial life of the U.S. They help support the country’s economy by providing capital and services to businesses. By providing loans, they likely allow businesses to increase production and potentially expand, which may, in turn, boost the economy, lower unemployment, and encourage consumer spending. In addition, commercial banks support cross-border trade and transactions (say, by issuing revolving letters of credit) so that businesses can operate in international markets.

Commercial Banking vs Investment Banking

When considering the definition of commercial banking, it can be helpful to compare and contrast it to other kinds of banking. For instance, investment banking is a subset of banking that is focused on creating capital for companies, governments, and other organizations.

While some financial institutions may combine commercial and investment banking, because of the Gramm-Leach-Bliley Act of 1999, the two kinds of banking serve different markets. Here’s more detail of what investment banks do:

•   Underwriting

•   Overseeing mergers and acquisitions and initial public offerings (IPOs)

•   Facilitating reorganizations

•   Aiding in the sale of securities

•   Brokering trades for institutions and private investors

Commercial Banks vs Retail Banks

Another important distinction is how commercial banks differ from retail ones. Some banks will offer both sets of services, but here’s what retail banks typically offer in terms of personal banking services:

•   Savings accounts and checking accounts (you can often open these bank accounts online)

•   Mortgages

•   Personal loans

•   Debit cards

•   Certificates of deposit (CDs)

There are also alternatives to traditional banking that can assist with personal finance transactions.

Examples of Commercial Banks

It can be helpful to have specific examples of commercial banks to better understand what they do and how they work. There are three types of commercial banks: public sector banks, private banks, and foreign banks.

•   A public sector bank is one where the government owns a major share. Public banks provide funding for projects that benefit the local public and community, which could include infrastructure projects or affordable housing. The Bank of North Dakota (BND) is the only active public bank in the United States.

•   Most of the banks in the United States are private banks run by individuals or limited partners. Examples are JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo.

•   A foreign bank is any bank headquartered in another country but doing business in the United States. Two examples are Barclays Bank PLC, headquartered in the United Kingdom, and the Royal Bank of Canada (RBC).

Benefits of a Commercial Bank Account

There are several reasons for a business to consider opening a commercial bank account.

•   Clients are likely to feel more confident making payments for services rendered to a business rather than an individual. Simply put, it’s more professional and may be perceived as more trustworthy.

•   Having separate bank accounts for business and personal transactions can simplify accounting and taxes (business expenses are more easily deducted).

•   If a business owner faces legal or financial challenges with their business activity, their personal liability could be limited and protected.

•   A business can apply for business loans from a commercial bank and finance expansion or costly equipment purchases with favorable lending terms.

•   Business accounts are FDIC-insured in the event the bank fails.

Is My Bank a Commercial Bank?

If your bank provides services to businesses, such as checking accounts, financing, lines of credit, and international trade services, it is likely a commercial bank. A retail bank, on the other hand, will provide services to individuals (joint vs. separate accounts, debit cards, personal loans, and more) and could be a department within a commercial bank.

The Takeaway

Commercial banking differs from retail banking in terms of the clientele it serves. Retail banks provide checking and savings accounts, loans, and other services to individuals to manage their day-to-day finances. Commercial banks help businesses launch, operate, and potentially grow with services like deposit accounts, loans, lines of credit, payment services, and more.

If you are hunting for personal banking services, explore what different retail banks have to offer, such as direct deposit, low or no account fees, and mobile banking, to find the best option for your financial needs.

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

FAQ

What is the difference between commercial banking and retail banking?

Retail and commercial banking serve different clients. Retail banking provides checking and savings accounts, financing, lines of credit, credit cards, and other services to individuals. Commercial banking usually provides checking and savings accounts, financing, underwriting, letters of credit, lines of credit, and other functions to businesses.

Is my money safe in a commercial bank?

Your money is essentially as safe in a commercial bank as it can be. It is generally protected from loss due to bank failure by federal insurance up to $250,000.

What role does a commercial bank play in the economy?

Commercial banks may support the economy by providing capital and services to organizations. These, in turn, could stimulate the economy by doing business, growing, and employing more workers. Commercial banks may also facilitate cross-border payments so that businesses can move into international markets.

Photo credit: iStock/Passakorn Prothien

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.

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. 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.

3.60% APY
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.

SOBK-Q224-1927483-V1

Dormant bank accounts have had no activity for a certain period of time, typically three to five years. That means no deposits, withdrawals, transfers, or other processes. They have just been sitting untouched. These inactive accounts can be charged inactivity fees by financial institutions, and if there is no activity for an additional period, the account may be closed.

This can be a rude awakening for some consumers, but a bank or credit union has the right to close a dormant account without your permission. Here are the facts you need to know to protect yourself.

What is a Dormant Account?

A dormant account is a financial account in which there hasn’t been any posted activity for a time period set by the bank or credit union. Activity includes such transactions as deposits, withdrawals, ATM usage, or transfers. FYI, earning interest doesn’t count as a posted activity because it is not initiated by you, the account holder.

The official definition of a dormant bank account varies by state and account type, but it most often happens if an account is inactive for three to five years. As with having a negative bank account balance and letting it sit, an inactive account is not a good sign for your wealth health.

How Does a Dormant Account Work?

These steps change a bank account from active to dormant:

1.    No deposits, withdrawals, or transfers for one year. Some accounts get no love. Perhaps you ignore rainy-day savings while balancing your day-to-day budget and forget about an account. But 12 months with no transactions in an account will set this dormancy process in motion. (One of the top benefits of bank account linking on your bank’s website or app is that you can see all accounts at a glance. This can be a good way to fend off an account going dormant.)

2.    The financial institution flags account as inactive. Nada is happening, not even a deposit, withdrawal, or transfer to pay for a Starbucks latte. The bank takes note and declares it a dormant bank account.

3.    The financial institution starts charging an inactivity fee. Some banks charge zero, but others slap on fees of $5 to $15 per month. Look for these fees on your monthly bank statement.

4.    After beginning one year, there’s no account activity for another two years. The timing varies by state. In California, Connecticut, and Illinois, for example, most bank accounts go dormant after three years. In Delaware, Georgia, and Wisconsin, five years must pass.

5.    The financial institution changes the account from inactive to dormant. The bank will try to contact the account holder (a problem if you moved and didn’t update your address) and allow a certain amount of time for a response.

6.    The financial institution closes the account and sends any leftover funds to the state. This is an automatic legal process called escheatment. But the story is still not officially over. You do have options if your assets have been transferred to the state due to a forgotten or lost bank account (more on this below).

Types of Accounts That Can Be Considered Dormant

Several different types of bank accounts can fall under the dormant account heading, including checking accounts, savings accounts, money market accounts, certificates of deposit (CDs), and investment accounts. Even safe deposit box holdings can be considered a dormant account if inactive for a number of years.

Worth noting: Your bank account might also be locked, or frozen, because of suspected fraud, unpaid child support, or unpaid bills. These are reasons why you have a frozen bank account, which is different from a dormant one.

What Is Escheatment?

If you have a bank account that is dormant, escheatment will likely occur. Escheatment is the process by which unclaimed assets are automatically transferred by the bank to the state. When this transfer happens, it means you can no longer reclaim your funds from your financial institution. If you want to get them back, you will have to take other steps.

Recommended: Guide to Bank Account Closure Letters

How Can I Reclaim Escheated Funds?

Every state must follow procedures to document the escheatment and is required to allow time for the original owner to come forward. Here is the process to get your money back:

1.    Search a public database such as Unclaimed.org or MissingMoney.com to link to your state’s unclaimed funds. The search should be free of charge. Don’t put your trust in fraudster sites that charge any fee at all, even $1 for a “trial search period.”

2.    If you see your name and property listed, follow the stated procedure to verify ownership. You will need to provide specific documents and of course, identification.

3.    The money will be released to you.

Consequences of Having a Dormant Account

Having an account go dormant can impact your ability to access and use the funds.

•   No withdrawals at ATM or branch

•   No address changes

•   Cannot add or delete joint account holder

•   No online banking transactions

•   No investment transactions

•   No ATM card renewal

•   You might wait months or even years to reclaim escheated funds from the state

•   Risk of fraudsters stealing your escheated funds

Difference Between a Dormant and Frozen Account

A dormant account is a bank or investment account so named after showing no transactions over a period of three to five years.

A frozen account is a bank or investment account that is temporarily locked, meaning you cannot withdraw money or funds. Usually, an account is frozen because you owe money to a creditor or the government. You may need to take steps to remove a hold on your bank account.

Whether dormant or frozen, both situations can cause you financial hardship.

Why Does an Account Go Dormant?

An account goes dormant when the bank does not see any activity in it for three to five years. This can indicate that the account has been abandoned or forgotten.

Keeping Your Account From Going Dormant

To keep your checking or savings account from going dormant, be sure to use it regularly, even if it’s just to make a transfer or deposit from another of your linked bank accounts a couple of times a year. If you let it sit without any activity, you run the risk of the account going dormant.

When an account goes dormant but the funds haven’t been transferred out or your bank account is closed for any other reason, it’s wise to take steps to remedy the situation and either reopen your bank account or officially close it.

The Takeaway

Banks and credit unions take note of accounts that show no transactions for a long period of time. The dormant account process starts with one year of no activity. After three to five years, depending on your state, ends with your money being turned over to the state.

Looking for options for a bank account you’ll use often?

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

FAQ

What happens if my account is dormant?

If your account is deemed dormant due to inactivity for three to five years, your bank will try to notify you before closing it. If you don’t respond in the given period of time, the account will be closed and the money turned over to the state.

How do I reactivate my dormant account?

You can reactivate a dormant account with your bank or credit union between the time it has been declared dormant and the time the funds are turned over to the state. The key is responding promptly to the bank’s communication saying your account will be closed.

How many years is an account dormant for?

After a total of about three to five years “asleep” with no transactions (though this can vary by state), a bank moves an account to dormant status. The account remains dormant while the bank tries to contact the account holder before turning the funds over to the state.

Photo credit: iStock/AntonioSolano

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.

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.

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.

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A 30-day no-spend challenge is a set period of time — 30 days, in this case — during which you can only spend money on absolute necessities. Allowed expenses include utility bills, rent, transportation costs, and groceries. Anything that falls outside the necessity bucket is banned for the 30-day duration.

With many people looking to cut back on expenses due to recent price increases, a 30-day no-spend challenge can be a great way to take stock of your spending habits and find ways to use your money more wisely.

How Does the 30-Day No-Spend Challenge Work?

Again, a no-spend challenge is a time period during which you stop spending money on anything other than what you absolutely need to live. To get started, you create a list of items and services you consider essential. When you review the list, ask yourself if all of your so-called essentials really are that important, or are some superfluous or impulsive?

Keep in mind that this challenge is designed to help curb troublesome overspending or more specific bad spending habits. So don’t beat yourself up if you do spend some money on wants versus needs.


💡 Quick Tip: We love a good spreadsheet, but not everyone feels the same. An online budget planner can give you the same insight into your budgeting and spending at a glance, without the extra effort.

Allowed Expenses During the 30-Day No-Spend Challenge

During the no-spend challenge, you will still need to pay your rent or mortgage, gas, utility bills, insurance, and things like your internet and phone bills. You can purchase essential personal care items, too, such as medications, groceries, and cleaning products. A budget planner app can help you decide on your “needs” list.

But the lines can get blurry. For instance, what happens if you wear out your shoes and want/need a new pair? After all, walking in cheap, poorly made shoes could lead to injury or avoiding activity. Feel free to give yourself some wiggle room in deciding what’s essential for you.

Recommended: The 70/20/10 Rule for Budgeting

Forbidden Expenses During the 30-Day No-Spend Challenge

Remember that before you begin the challenge, you’ll be questioning what’s essential and how strict you want to be. It’s smart to decide in advance which of the following will be on your do-not-spend list:

•   Eating out: fast food, restaurants, takeout, alcohol, coffees, etc.

•   Personal care items or services

•   Clothing

•   Gifts and gift cards

•   Home decor and furnishings

•   Hobbies

•   Entertainment: movies, concerts, books, streaming services

You may determine ahead of time that there will be certain exceptions to these categories. For example, you can decide on “no gifts” except for your mom’s birthday. Or no salon appointments except for a needed haircut.

Tips for Completing the 30-Day No-Spend Challenge

Anticipate what will be the most difficult part of the challenge for you, and create strategies for coping. Is your busy social life going to tempt you to break the rules? Or will the siren call of online shopping be your undoing?

Come up with a plan on how you will get past your specific spending challenges. If your social life will be tough to navigate that month, recruit pals to join the challenge and make it a friendly competition. If online shopping is your budget-killer, unsubscribe from retail email lists and delete shopping apps from your phone. The point is to make the challenge as easy on yourself as possible.

Here are a few additional ways to set yourself up for success:

•   Unsubscribe from memberships and apps

•   Set aside time during the week for meal prep, and bring lunch to work

•   Dust off your travel mug, and skip the coffee shop

•   When you get an urge to buy something, add it to a post-challenge wish list

•   Print out a 30-day calendar and make a checkmark at the end of each successful day. Visual reinforcement can motivate you to keep going.

10 Free Things to Do Instead of Spending Money

Taking part in a 30-day no-spend challenge doesn’t have to mean isolating yourself at home in an effort to save money. This is a time to get creative and search out free activities. You may find that some free experiences are more fun than what you normally spend money on.

1. Take a Hike

Whether you’re walking a mile or seven, hiking is a great way to spend the day outdoors. You can invite friends or go solo and get in tune with nature.

2. Get Some Exercise

Many great athletes and trainers offer workouts on social media and YouTube. Or download one of the many free apps that feature yoga, strength training, and high-intensity workouts.

3. Set Up a Sports League

Call your friends and organize a weekly game of flag football, basketball, or frisbee. Encourage folks to BYO beverages and snacks so that there’s no need to visit a restaurant or bar after the game.

4. Dine Al Fresco

Get your picnic blanket and paper plates ready, and propose a pot-luck in the park.

5. Host a Movie Night

Try a free, library-affiliated streaming service like Hoopla or Kanopy, and immerse yourself in a great film. If you’re feeling inspired, select a classic film, and ask friends to come dressed in the style of that time period.

6. Sand and Surf

Sticking to your challenge budget during summer is simple: Head to the nearest free parking beach. Bring towels, chairs, and umbrellas and set up shop for the day. And of course, pack a cooler full of sandwiches and drinks.

7. Have an At-home Spa Night

You don’t need to spend hundreds at the spa. Set the tone with candles and music.
And use personal care items that you already have to pamper yourself.

8. Check Out a Local Park

Odds are, there’s at least one park near your home that you’ve never visited. If you live near a botanical garden, even better. Also, see if any national or state parks nearby have free visitor days.

9. Visit Art Galleries and Museums

Support local artists by visiting small art galleries, or see if any local museums have free visitor days.

10. Whip Up a Gourmet Meal

Instead of dining out, try recreating your favorite meal yourself. Take your time, find recipes, get groceries, and have fun with it. You can pull up an online recipe or follow along with a cooking show.

The Takeaway

Intended to encourage better spending habits, the 30-day no-spend challenge asks you to limit your purchases for one month to essential items and services only. Utilities and groceries are allowed; dining out and other “treats” are not. You’ll likely learn a lot about your money habits, and perhaps let go of some “needs” that you really aren’t.

Before the challenge, review your monthly spending habits with SoFi.

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.

FAQ

What is the no-spend challenge?

A no-spend challenge is a stretch of time during which participants vow not to spend money unnecessarily. Essentials are still allowed, such as bills, transportation, and groceries. Anything that falls outside of your predetermined needs has to wait until the challenge is over.

How do you do a no-spend month challenge?

Don’t spend any money you don’t have to — it can be as simple as that. Before you begin the challenge, ask yourself which items are essential (such as groceries) and how strict you want to be. The goal is not to purchase anything unnecessary.

How do you challenge yourself to not spend money?

Make spending less money a game by trying a 30-day no-spend challenge. Motivate yourself to stick with it by setting up a reward once the challenge is over. And be sure to track how much you save over those 30 days.

Photo credit: iStock/Seiya Tabuchi

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.

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

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

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There are two basic types of income: earned and unearned. Earned income is the money you make from working, and unearned income is money you receive that isn’t tied to a business or job.

The difference between these two types of income is very important when it comes to saving for retirement and paying your taxes. Here’s what you need to know about each of them, and how they affect your finances.

What Is Unearned Income?

Unearned income is a type of passive income. It’s money you make without working or performing some kind of professional service. For example, money you get from investing, such as dividends, interest, and capital gains is unearned income.

Other types of unearned income include:

•   Retirement account distributions from a 401(k), pension, or annuity

•   Money you received in unemployment benefits

•   Taxable social security benefits

•   Money received from the cancellation of debt (such as student loans that are forgiven)

•   Distributions of any unearned income from a trust

•   Alimony payments

•   Gambling and lottery winnings

Dividends from investments in the stock market and interest are two of the most common forms of unearned income. Dividends are paid when a company shares a portion of its profits with stockholders. They may be paid on a monthly, quarterly, semi-annual, or annual basis.

Interest is usually generated from interest-bearing accounts, including savings accounts, checking accounts, money market accounts, and certificates of deposit (CDs).

How Is Earned Income Different From Unearned Income?

Earned income is the money you make from a job. Any money you earn from an employer — including wages, fees, and tips in which income taxes are withheld — counts as earned income.

If you’re part of the freelance economy and the companies you work for don’t withhold taxes, those wages still count as earned income. These could be wages earned by performing professional or creative services, driving a car for a ride share service, or running errands.

Money you make from self-employment — if you own your own business, for example — also counts as earned income, as does money you earn from a side hustle.

Other types of earned income include benefits from a union strike, disability benefits you receive before you reach full retirement age, and nontaxable combat pay. This guide can help you learn about all the different types of income there are.

You can keep tabs on all the types of income you have by tracking your checking, savings, investment, and retirement accounts in one place with an online money tracker. It allows you to organize your accounts on a single dashboard, as well as monitor your credit score and budget for financial goals.

How Income Types Affect Taxes

All earned income is taxed at your usual income tax rate. Taxes on unearned income are more complicated and depend on what type of unearned income you have, including:

Interest

Interest, which is unearned income from things like bank accounts and CDs, is taxed the same as earned income that you work for.

Dividends

Dividends from investments fall into two categories: qualified and non-qualified. Generally speaking, qualified dividends are those paid to you by a company in the U.S. or a qualified foreign company, and are taxed at a lower rate. Non-qualified dividends don’t meet IRS requirements to qualify for the lower tax rate and are taxed at the same rate as ordinary income.

Capital Gains

Investments that are sold at a profit are subject to capital gains taxes. If you held the investment for less than a year, your profits are subject to short-term capital gains rates, which are equal to your normal income tax rate. If you kept the investment for a year or more, it’s subject to long-term capital gains rates, which means it will be taxed at 0%, 15% or 20%, depending on your taxable income and filing status. The higher your taxable income, the higher your rate.

Social Security

If your income is more than $25,000 a year for individuals or $32,000 a year for married couples filing jointly, you will pay federal income tax on a portion of your Social Security benefits. You’ll be taxed on up to 50% of your benefits if your income is between $25,000 and $34,000 for an individual, or $32,000 to $44,000 for a married couple. And you’ll be taxed on up to 85% of your benefit if your income is more than that.

Alimony

As a result of the Tax Cuts and Jobs Act of 2017, alimony payments that are part of divorce agreements made after January 1, 2019, are not taxable by the person who is paying the alimony, nor are they taxable for the person receiving the alimony.

Gambling Winnings

Money you earn from gambling — including winnings from casinos, lotteries, raffles, and horse races — are all fully taxable. This applies not only to cash, but also to prizes like vacations and cars, which are taxed at their fair market value.

Debt Cancellation

If you have a debt that is canceled or forgiven for less than the amount you were supposed to pay, then the amount of the canceled debt is subject to tax and you must report it on your tax return.

If you have debts to pay off, debt payoff planning can help you pay what you owe.

How Earned vs. Unearned Income Affects Retirement Savings

Retirement accounts, including 401(k)s, IRAs, and the Roth versions of both, provide tax advantages that help boost the amount that you are able to save.

For example, 401(k) contributions are made with pre-tax dollars, which can then be invested in the account. The investments are then allowed to grow tax deferred until withdrawals are made in retirement, and then they are subject to income tax. Contributions to Roth accounts are made with after-tax dollars. These grow tax free, and withdrawals made in retirement are not subject to income tax.

You must fund your retirement accounts with earned income. You cannot use unearned sources of income to make contributions.

There are certain exceptions to this rule. If you’re married and you file a joint return with your spouse and you don’t have taxable compensation, you may be able to contribute to an IRA as long as your spouse did have taxable compensation.

The Takeaway

The difference between earned income and unearned income is an important distinction to comprehend, especially when it comes to paying your taxes. Unearned income, which is income you make not from a job but through other means, such as investments, can be taxed at different rates, depending on what type of unearned income it is. Make sure you understand yours — and the tax implications. Doing so can have a big impact on how you save for your future.

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.

FAQ

Why do I need to know the difference between earned and unearned income?

It’s important to understand the difference between earned and unearned income because the two may be taxed differently. Also, in most cases, you must use earned income to fund your retirement accounts.

What is an example of unearned income?

Unearned income is money you receive without working for it. Interest, such as that from a bank account, and dividend payments are two of the most common types of unearned income.

Photo credit: iStock/FluxFactory

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.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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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