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Imagine if you went to the bank to withdraw money and were told none was available. That frightening scenario is one of the main reasons why financial institutions must have bank reserves. These reserves are a percentage of its total deposits set aside to fulfill withdrawal requests.

These funds comply with regulations and can also provide a layer of trust for account holders. They guarantee that there is always a certain amount of cash on deposit, so the scenario mentioned above doesn’t happen. No one wants to ever withdraw some cash and be left empty-handed.

As a consumer with a bank account, it can be important to understand the role bank reserves play in the financial system and the economy. Read on to learn:

•   What is a bank reserve?

•   How do bank reserves work?

•   How were banking reserves developed?

•   What are the different types of bank reserves?

•   How much money do banks need to keep in reserve?

What Are Bank Reserves?

Bank reserves are the minimum deposits held by a financial institution. The central bank of each country decides what these minimum amounts must be. For example, in the United States, the Federal Reserve determines all bank reserve requirements for U.S. financial institutions. In India, as you might guess, the Reserve Bank of India determines the bank reserves for that country’s financial institutions.

The bank reserve requirements are in place to ensure the financial institution has enough cash to meet financial obligations such as consumer withdrawals. It also ensures that financial institutions can weather historical market volatility (that is, economic ups and downs).

Bank reserve requirements are typically a percentage of the total bank deposit amounts determined by the Federal Reserve Board of Governors. Financial institutions can hold their cash reserves in a vault on their property, with the regional Federal Reserve Bank, or a combination of both. This way, the financial insulation will have enough accessible funds to support their operational needs while letting the remaining reserves earn interest at a Federal Reserve Bank.

How Do Bank Reserves Work?

Now that you know what reserves are, you’re likely wondering how these reserves work. Simply put, they guarantee that a certain amount of cash is kept in a financial institution’s vault.

Suppose you need to withdraw $5,000 to purchase a new car. You understand savings account withdrawal limits at your bank and the amount you need is within the guidelines, so you head to your local branch. When you arrive, you’re told they don’t have enough money in their vault to meet your request. This is what life could be like without bank reserves. The thought of not being able to withdraw your own money might be upsetting, worrisome, and deeply inconvenient. To prevent this kind of situation is exactly why banks must have a certain percentage of cash on hand.

In addition to ensuring consumers have access to their money, bank reserves also can aid in energizing the economy, so it keeps running. For example, suppose a bank has $10 million in deposits, and the Federal Reserve requires 3% liquidity. In this case, the bank will need to keep $300,000 in its vault, but it can lend the remaining $9.7 million to other consumers via loans or mortgages. Consumers can use this money to buy homes and cars or even send their children to college. The interest on those loans is a way that the bank earns money and stays in business.

Bank reserves are vital in helping the economy control money supply, interest rates, and the implementation of what is known as monetary policy. When the reserve requirements change, it says a lot about the economy’s direction. For example, when reserve requirements are low, banks have more opportunity to lend since more capital is at their disposal. Thus, when the money supply is plentiful, interest rates decrease. Conversely, when reserve requirements are high, less money circulates, and interest rates rise.

During inflationary periods, the Federal Reserve may increase reserved requirements to ensure the economy doesn’t combust. Essentially, by decreasing the money supply and increasing interest rates, it can slow down the rate of investments.

Recommended: Understanding Fractional Reserve Banking

Types of Bank Reserves

There are two types of bank reserves: required reserves and excess reserves. The required reserves are the percentage of deposits the institution must have in cash holdings and deposit balances to abide by the regulations of the Federal Reserve. Excess reserves are the amount over the required reserve amount that the institution holds.

Excess reserves can provide a larger safety net for the financial institution and enhance liquidity. It can also contribute to a higher credit rating for institutions. On the other hand, excess reserves can also result in losing the opportunity to invest the funds to yield higher returns. In other words, since the extra money is sitting in cash, it will not generate the same returns it might yield by lending or investing in the market.

Recommended: What Is Quantitative Easing?

History of Bank Reserves

Reserve requirements first came about in 1863 during the passing of the National Bank Act. This act intended to create a national banking system and currency so money could flow easily throughout the country. At this time, banks had to hold at least 25% reserves of both loans and deposits. Bank reserves were necessary to ensure financial institutions had liquidity and money could continue circulating freely throughout the nation.

But despite the efforts to establish a robust banking system, banking troubles continued. Finally, after the panic of 1907, the government intervened. In 1913, Congress passed the Federal Reserve Act to address banking turmoil. The central bank was created to balance competing interests and foster a healthy banking system.

Initially, the Federal Reserve acted as a last resort and a liquidity grantor when the banks faced trouble. During the 1920s, the Federal Reserve’s role expanded to playing a proactive role in the economy by influencing the credit conditions of the nation.

After the Great Depression, a landmark in the history of U.S. recessions and depressions, the Banking Act of 1935 was passed to reform the structure of the Federal Reserve once again. As part of this act, the Federal Open Market Committee (FOMC) was born to oversee all monetary policy.

How the 2008 Crisis Impacted Bank Reserves

Prior to the global financial crisis of 2008, financial institutions didn’t earn interest on excess reserves held at a Federal Reserve Bank.

However, after October 2008, the Federal Reserve was granted the right to pay interest to banks with excess reserves. This encourages banks to keep more of their reserves. The Board of Governors establishes the interest on reserve balances (IORB rate). As of June 2022, the IORB was 1.65%.

Then, after the recession subsided in 2009, the Federal Reserve turned its attention to reform to avoid similar economic disasters in the future.

Recommended: Federal Reserve Interest Rates, Explained

How Much Money Do Banks Need to Keep in Reserve?

During the pandemic, reserve requirements dropped to 0%. This reduced requirement is intended to encourage banks to lend more and stimulate the economy. Thus, it would help needy families whose finances were impacted by COVID-19.

Prior to this revision, banks with between $16.9 to $127.5 million in deposits were required to have 3% in reserves, whereas banks over this amount had to have at least 10% in bank reserves.

Recommended: Investing During a Recession

What Is Liquidity Cover Ratio (LCR)?

Bank reserve requirements aside, financial institutions want to ensure they have enough liquidity to satisfy the short-term financial obligations if an economic crisis occurs. This way, they know they will be able to weather a crisis and not face complete bankruptcy. Therefore, financial institutions use the Liquidity Coverage Ratio (LCR) to prevent financial devastation resulting from a crisis.

The LCR helps financial institutions decide how much money they should have based on their assets and liabilities. To calculate the LCR, banks use the following formula:

(Liquid Assets / Total Cash Outflows) X 100 = LCR

Liquid assets can include cash and liquid assets that convert to cash within five business days. Cash flows include interbank loans, deposits, and 90-day maturity bonds.

The minimum LCR should be 100% or 1:1, though this can be hard to achieve. If the LCR is noticeably lower than this amount, the bank may have liquidity concerns and put the bank’s assets at risk.

The Takeaway

Financial institutions must have a certain amount of cash on hand, referred to as bank reserves. These assets are usually kept in a vault on the bank’s property or with a regional Federal Reserve Bank. These cash reserves ensure financial institutions can support consumer withdrawals and withstand a financial crisis.

Bank reserves build confidence. So can a bank that puts its customers’ needs first. That’s what SoFi does, helping its account holders grow their money faster. When you open a new bank account with direct deposit, you’ll earn an amazing APY and pay no account fees at all. With SoFi’s Checking and Savings, you’ll spend, save, and earn interest in one place, so it’s super convenient, too.

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 bank reserves assets or liabilities?

Bank reserves are considered an asset since they’re an item the bank owns. Other bank assets can include loans and securities.

How are bank reserves calculated?

Bank reserve requirements are calculated as a percentage of the institution’s deposits. So, if the reserve requirement is 3% for banks with $10 million in deposits, the bank would have to hold $300,000 in its reserves.

Where do banks keep their reserves?

Financial institutions usually keep a certain amount of their cash reserves in a vault to meet operational needs. The remaining amount may be kept at Federal Reserve Banks so the balance can generate interest.

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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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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.

Recommended: The 70/20/10 Rule for Budgeting

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 bad shoes could lead to injury or avoiding activity. Feel free to give yourself some wiggle room in deciding what’s essential for you.

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

•   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.

Recommended: 15 Ways to Save Money on Food

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 friends to join the challenge and make it a 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

Dust off that old projector and DVD player, and watch a movie in your backyard. (Don’t forget the mosquito repellent.) 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 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, experiment, 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 don’t.

Before the challenge, review your monthly spending habits with SoFi. With its budgeting app and debt payoff planner, you can easily examine all your financial accounts and save money for what’s really important to you.

Tracking your money like a champion just got easier with SoFi.

FAQ

What is the no-spend challenge?

A no-spend challenge is a stretch of time – a week, month, or longer – when 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.

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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.

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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It’s not a secret that the cost of attending college is more expensive than most people can afford to pay for in cash. Many students turn to federal student loans to help pay for college. But what can someone do if they’ve already tapped out their federal student loan resources or don’t want to take on any federal loans?

Thankfully, there are a variety of resources available to help students pay for their education. From scholarships to savings — continue reading for 14 ways to make college tuition more affordable. It may even be possible to figure out how to pay for college without loans.

14 Ways to Make College Tuition More Affordable

The key to figuring out how to pay for college without loans or financial aid is to make the overall cost of college a lot less expensive. Here’s a few ways someone can make the cost of college more affordable.

1. Apply for FAFSA

It’s always a good idea to apply for federal financial aid — even if you don’t think you’ll qualify. That’s because the Free Application for Federal Student Aid (FAFSA®), is absolutely free to fill out. This form helps determine the type and amounts of aid a student qualifies for. While it’s not a guarantee that students will get financial aid granted to them, it’s worth applying to try to lower the overall cost of pursuing higher education.

Federal financial aid includes both need-based aid like Direct Subsidized Loans or Pell Grants and non-need based aid like Direct Unsubsidized Loans. After submitting the FAFSA, schools will use the information to determine your financial aid package — which will detail the aid you qualify to receive for the school year. The FAFSA must be completed annually.

Sometimes, federal financial aid isn’t enough to allow a student to pay for the full cost of college. The following tips can help students find other ways to lower the costs of attending college in the event they didn’t receive enough financial aid to make it easy to pay for school.

2. Qualify for Merit Scholarships

Because scholarship funds don’t need to be paid back, they can be a valuable tool to help pay for school. While there are need-based scholarship opportunities there are also merit-based scholarships that focus on giving money to students that meet or exceed certain standards set by the person or organization issuing the scholarship — such as academic excellence or athletic ability.

Merit scholarships may be available from your college or university, from local companies or nonprofit organizations, and other institutions. Contact your school’s financial aid office for information on scholarships available at your academic institution.

3. Apply for Private Scholarships

While colleges often offer scholarship opportunities, so do private companies, nonprofits, and other organizations such as religious groups. Both school-based and private scholarship opportunities are worth looking into. You can find information on private scholarships from both your school’s financial aid office and by searching online databases, like Scholarships.com, that aggregate information on available scholarships.

4. Apply for ROTC Scholarships

If someone is considering joining the military they may be able to receive up to 100% in tuition assistance if they do so. College’s may have ROTC programs that make it possible to qualify for scholarships before joining the military — unlike the GI Bill which gives education money to those already enrolled in the military.

5. Attend a Community College

Attending a community college before transferring to a four-year university is another option to cut tuition costs. Some community colleges even offer tuition-free programs. Not to mention, when attending a local community college it may be easier to remain living at home with mom and dad which can cut down living expenses massively.

6. Earn College Credit in High School for Free

Some community colleges partner with local school districts to give high school students the opportunity to take college classes for free which allows them to earn college credits in high school. Taking advantage of free college classes while in high school can make the cost of attending college later cheaper — especially if the student can graduate early as a result.

7. Ask for Family Donations

While there’s no guarantee family will be able to or willing to help pay for someone to go to college, it can be worth asking parents, grandparents, and other close family members for assistance. Together, their contributions may help lighten the overall load of attending college.

8. Consider Private Student Loans

If someone wants to take out loans but didn’t receive enough federal student loans to fully cover their education and living expenses while in college, they can apply for private student loans to help make up the difference. Unlike federal student loans which are awarded based on the FAFSA, private student loans are awarded from individual lenders and require their own application. Because private student loans tend to be more expensive than federal loans, it’s a good idea to exhaust any potential federal options before applying for private student loans.

9. Choose an Affordable School

Usually, attending an in-state public school is more affordable than attending an out-of-state public school. Additionally, private universities tend to cost more to attend than public universities. If a student can go to an in-state public university, that is likely the most affordable route they can pursue. Especially if they attend community college first to get some general education classes out of the way.

While public schools are generally more affordable than private institutions, financial aid packages can potentially even the playing field. When evaluating colleges, be sure to factor in the actual costs after any scholarships or grants and other aid.

10. Work During School

It can be challenging, but if a student can work part time while enrolled in college, they can pay some if not all of their way as they go. If they took out loans, they may be able to use their earnings to start paying them down early so they can avoid paying interest after they graduate.

11. Budget for College With Parent’s 529 Plan

If a student’s parents set up a 529 plan (which is a tax-advantaged investment account that can be used to pay for qualifying educational costs) they can budget out those savings to see how much of their education they can pay for — a budgeting app could help.

Though some students may not have the benefit of supportive parents. Students figuring out how to pay for college without their parents’ help may want to focus on finding an affordable school, filling out the FAFSA, applying for private scholarships, working while in college, and wisely using student loans.

12. Complete College Earlier Than Four Years

If a student hustles, even shaving off one semester of college can save them a decent chunk of change in tuition, fees, and room and board. If they can take an extra class each semester, they may be able to graduate early and save a lot of money.

13. Live Off Campus and Commute

As convenient as living on a college campus is, it can also be expensive. The cheapest living option is to live at home with parents if that’s possible and commute to school. If a student does need to live on their own, renting an apartment or a room in a house off campus may still be more affordable than living on campus. Cost out the different options to see which is most affordable and in-line with your budget.

Recommended: Does Net Worth Include Home Equity

14. Negotiate With College Campus

Some colleges offer tuition payment plans that don’t necessarily reduce expenses but can make it easier to pay for tuition by spreading payments out over several months instead of expecting one lump sum payment up front. This can be an especially good option for students working to pay for school.

The Takeaways

Paying for college is a big endeavor, but one that can be made easier if a student takes certain steps to reduce the overall costs of college. Figuring out how to pay for college without loans is challenging, but starting by applying for scholarships and financial aid can help.

To make it easier to reach major financial goals like paying for college, SoFi can help. With SoFi’s money tracker app, it’s possible to connect all accounts on one mobile dashboard to get a bird’s-eye view of all account balances, to track spending and set monthly spending targets, and to work with a financial planner to set goals.

Learn more about how SoFi makes meeting financial goals easier.

FAQ

What can I do if my parents won’t pay for college?

Students can apply for financial aid by filling out the Free Application for Federal Student Aid (FAFSA), can take out federal or private student loans, or can work their way through school. It may be challenging, but students do have options outside of their parents for financing higher education.

How can I pay for college by myself?

If someone needs to pay for college on their own, they’ll want to fill out the FAFSA each year to see how much financial aid they qualify for and how much federal student loan coverage they can get. If they need more money to pay for school, they may consider applying for private student loans.

Is Sallie Mae a federal loan?

Sallie Mae student loans are not federal student loans. They offer private student loans.

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Photo credit: iStock/AntonioSolano

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.

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.

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While business checks and personal checks may seem like the same thing, there are actually some important differences. Sure, all checks can be used to pay bills or cover other expenses using funds in a linked checking account. But the main difference between a personal check and a business check is the source of funds. Personal checks are drawn on personal accounts; business checks are drawn on business checking accounts.

Each sort of check has its time and place. To understand how business checks vs. personal checks work in more detail, here you will learn:

•  What is a business check and how does it work

•  What is a personal check and how does it work

•  When to use a business check vs. a personal check

•  The differences between business checks and personal checks.

What Is a Business Check?

A business check is a check that’s written from a business checking account. Banks and credit unions can offer business checking accounts to sole proprietors, limited liability companies (LLCs), and other kinds of businesses that need a safe, secure place to keep their money. Business checks are often one of the features included with these accounts.

Business bank accounts can also offer a debit card for making purchases or cash withdrawals. They typically allow for ACH transfers of funds to pay bills or vendors. But there are some instances where it could make sense — or even be necessary — to use business checks instead. For example, you may need to write or print paper checks to cover payroll for employees.

How Does a Business Check Work?

When someone opens a business bank account, the bank may give them a set of business checks and a checkbook. If you are wondering what a checkbook is, they are simply a small folder or book that contains your checks and a check register, which is where you’ll write down deposits and credits for your account. Check registers can help you balance your checkbook.

To use a business check, you’d simply make the check out to the payee, then fill in the required information. That includes the date and amount of the check, as well as a signature. Business checks typically have a memo line where you can record what the check is being used for.

The payee can then take that business check to their bank to deposit it or cash it. The amount written on the check is then deducted from the business checking account on which the check is drawn. When the check is deposited, it typically takes two days to clear (or for the funds to become available).

What Does a Business Check Look Like?

Business checks look much like personal checks, in terms of the type of information they include. On the front of a business check, you should see the following:

•  Business name and address

•  Check number (in the upper right hand corner)

•  Payee name (where it says Pay to the Order of)

•  Date

•  Dollar amount, in numbers

•  Dollar amount, in words

•  Payer’s signature

•  Memo line

•  The bank’s routing number

•  The account number

•  Bank’s name and address

Business checks may also include room to include the business logo or a watermark.

There may be an attached transaction stub on the left hand side of the check. You can use this stub to record the details of the transaction, including the date the check was written, the amount, and to whom it was paid.

Business checks can be hand-written like personal checks, or they can be filled digitally and printed out.

What Is a Personal Check?

A personal check, on the other hand, is a check that’s drawn against a personal checking account. Most but not all checking accounts offer checks and check-writing; some even offer free starter checks to new customers.

Personal checks are paid using personal funds. So you might write a personal check to repay a friend you borrowed money from, for example, or to pay your rent. Likewise, you could receive a personal check made out to you that you could deposit into your bank account or cash it. In terms of where to cash personal checks without a bank account, the options include check cashing services, supermarkets, and convenience stores.

Personal checks are not the same as other types of checks, including certified checks and traveler’s checks. (If you’re unfamiliar with how to use travelers checks, these are paper certificates that can help you pay for things overseas without having to exchange hard currencies.)

How Do Personal Checks Work?

Personal checks work by allowing individuals to pay bills or make other payments to individuals, businesses, and other organizations. When you open a checking account, the bank may give you paper checks with your name and account number printed on them. You can then use these checks to make payments.
When someone receives a personal check and deposits it in their account, their bank requests the transfer of funds from the bank on which the check was drawn. These transfers are processed electronically. Processing times can vary, though it typically takes a couple of business days for a check to clear.

If someone writes a personal check and doesn’t have sufficient funds in their account to cover it, that check will “bounce”. When a check you write bounces, your bank can cover the amount for you but they can charge overdraft or non-sufficient funds fees for that convenience.

Bounced checks typically don’t show up on consumer credit reports or affect credit scores, though banks may report them to ChexSystems. A consumer credit reporting agency, ChexSystems collects information about closed checking and savings accounts.

Can I Use a Personal Check for a Business Account?

Personal accounts and business accounts are separate banking products. That being said, you could use personal checks to pay for business expenses. For example, you could write out a personal check to pay a business lease or make payments to a business loan. And you could use funds in a business account to pay for personal expenses.

If you’re using personal checks for a business account or business checks for personal expenses, it’s a good idea to maintain good records of what expenses you’re paying. That can make it easier to add up your deductible business expenses when it’s time to file taxes. Also, if you ever need to review your business or personal account (say, for legal reasons or an audit), it can be hard to remember which funds were used where. This is a good reason to keep the accounts separate or make sure your record-keeping is very thorough.

Using Business Checks vs. Personal Checks

When you need to write a business check vs. personal check can depend on the circumstances. For instance, some of the most common uses for business checks include:

•  Employee payroll

•  Federal and state tax payments

•  Making payments to vendors

•  Paying operating costs, such as rent or utilities

•  Repaying a business loan

•  Making any large purchases that are necessary for the business.

Personal checks can be used to meet a different set of needs. Examples of when you might write a personal check include:

•  Paying utility bills, rent, or the mortgage

•  Buying groceries

•  Repaying personal debts

•  Making payments to loans

•  Covering school-related expenses if you have kids (like lunch money or PTA fundraisers)

•  Paying college tuition

•  Covering doctor bills.

You can also sign over a personal check you receive to someone else. That’s a type of third-party check.

Recommended: How do I sign over a check to someone?

Whether you need business checks or personal checks, it helps to know where to order checks safely. You can get checks online from check-printing companies or order them through your bank.

Differences Between a Business and Personal Check

Whether you’re using business checks or personal checks, one thing is true: They can be a dependable, convenient alternative to using a debit card, credit card, ACH transfer, or wire transfer. But if you’re still wondering how are business checks different from personal checks, here are a few other noteworthy distinctions.

Size of the Check

Personal checks are usually somewhere around 6″ x 2″ x 3″ in size. Business checks, on the other hand, may be larger in size. For example, they may be 8″ x 2″ x 3″ instead. The larger size allows for easier printing and more room for writing out checks by hand.

Security of the Check

Check fraud can threaten a business’s bottom line. For that reason, many check printers include built-in security measures to minimize the chances of a business check being stolen or otherwise used fraudulently. Those measures can include watermarks, thermochromatic ink, fluorescent fibers, chemical sensitivity indicators, and special security on the back of the check. These features all help to verify check authenticity.

How Much Each Check Costs

As mentioned, banks can sometimes offer starter checks for free when you open a new checking account. This benefit may not be included with business checking accounts, which means you’ll need to buy checks yourself. The amount you pay can depend on the type of check, any added features you choose to include, and the number of checks printed. You might pay three cents per check or a quarter or more per personal check, depending on where you order from, the features you want, and how quickly you want them printed and delivered.

Business checks range from about $28 for 600 checks (barely a nickel each) to 20 cents or more per check.

There can be other charges associated with checks. For example, you may also pay separate fees when purchasing cashier’s checks for a business or personal account. Cashier’s checks are drawn against the bank’s account, not yours. In terms of what does a cashier’s check look like, they’re similar in appearance to personal and business checks. However, they’ll typically have the words “Cashier’s Check” printed on the front in an area that’s easily visible.

Check Conversion Protection

Check conversion is a process in which paper checks are converted to electronic ACH debits. Both consumer and business checks can be converted in this way. Converted checks usually clear faster, but it’s possible that you may not want this for checks written from a business account. In that case, you could order business checks that include an optional Auxiliary On-Us field to exclude them from conversion.

Why to Consider Having Separate Checks

Using one bank account for business and personal expenses might seem less stressful, since you’re moving money in and out of the same place. Having a business checking account and a separate personal checking account can offer some advantages, however.

Here are some of the most notable reasons for having a separate checking account for your business:

•  Writing checks with your business name can add credibility to your venture, since it looks more professional.

•  Maintaining separate accounts can make it easier to keep track of business finances and expense reporting for tax purposes.

•  Establishing a business checking account could make it easier to get approved for business loans or lines of credit if you have a good banking history.

You may also prefer to have separate business and personal checking accounts as an added protection against creditor lawsuits. Depending on how your business is structured, money in a personal checking account may be safe from collection efforts if you’re sued by a creditor.

The Takeaway

Business checks and personal checks serve similar functions; they both transfer funds from one account to another. However, they do have some important differences, and knowing when to use a business check vs. personal check can help keep your finances organized.

When you open an online bank account with SoFi, paper checks are included at no charge with our Checking and Savings. If you sign up with direct deposit, you’ll also be rewarded with no fees and a super competitive APY.

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

Can you cash a business check?

You can cash a business check if your bank allows it. You’ll need to endorse the check properly and show proof of identification to cash it, the same as you would with any other type of check.

What should be on a business check?

A business check should include the business name and address, the payee’s name, the amount of the check, the date, and the payer’s signature. The check will likely be pre-printed with the bank’s name and address, a routing number and account number, as well as a check number. A business check may also include a memo line to record the purpose of the check.

Do checks need to say LLC?

Checks do not need to say LLC unless your business is structured as an LLC. If your business operates as a sole proprietor, partnership, S corporation, or anything other than an LLC, then you wouldn’t need to include that designation.

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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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A joint credit card account is a way for you and a spouse, partner, family member, or trusted friend to co-own a line of credit. A joint credit card is in both of your names, meaning both parties are equally responsible for the debt that the card accrues.

Joint credit cards can make sharing finances with a domestic partner easier, but if you’re not on the same page about using the card and paying off debt, it could mean trouble for your credit score and your relationship. In this guide, we’ll take a closer look at how joint credit cards work, their pros and cons, how they differ from authorized users, and how to get a joint credit card.

What Is a Joint Credit Card Account?

A joint credit card allows two people to fully share in the responsibility of spending with a credit card and paying it off. Each cardholder receives a physical card to use, and each also has full access to credit card statements and payments.

Otherwise, a joint credit card operates just like a traditional credit card — with a credit limit and interest rate on borrowed funds. If you carry over a balance month to month, that balance will accrue interest, and both joint account owners are equally on the hook for paying it back, even if one person is doing most of the spending.

Because a joint credit card is in both owners’ names, it impacts both users’ credit scores. Making regular monthly payments in full and maintaining a low credit utilization could improve both cardholders’ scores. On the other hand, late payments and accumulated debt might bring credit scores down.

Recommended: When Are Credit Card Payments Due

Ways You Can Share a Credit Card

Joint credit card accounts are just one type of shared credit card. Before deciding to apply for a joint credit card, consider whether adding someone as an authorized user on a credit card might be a better option for your situation.

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

Authorized User

Instead of applying for a credit card with a co-owner, you can make someone an authorized user on an existing credit card. Unlike with a joint account credit card, only one person serves as the cardholder and bears the full responsibility of the card.

The authorized user, on the other hand, can get their own physical card and use it as they see fit. However, the authorized user cannot make larger changes to the card, like requesting an increase in credit limit.

Some, though not all, credit card issuers report authorized users’ activity to the three major credit bureaus. Assuming the main cardholder uses the card responsibly (meaning they make on-time payments and keep credit utilization low), this can reflect well on the authorized user and potentially improve their credit score.

Adding an authorized user can be a good solution for spouses or domestic partners with shared expenses. If one partner has a strong credit score but the other is struggling, the struggling partner might benefit from becoming an authorized user on the other’s card. Additionally, parents who want their children to learn about using a credit card or find comfort knowing their teenage kids have a spending option in emergencies might also benefit from a card with an authorized user.

A caveat: If the main credit cardholder mismanages their credit card and the card issuer reports authorized users to the credit bureaus, this could potentially lower the authorized user’s score rather than helping to build it.

Recommended: What is the Average Credit Card Limit

Joint Cardholder

As previously mentioned, joint cardholders share equal responsibility for how the card is used and paid off. Just as there are pros and cons of joint bank accounts, this arrangement can have benefits and drawbacks. A joint credit card enables spouses and domestic partners to approach their finances on equal footing, but a poorly managed card can have major negative impacts on the other.

Sharing a joint credit card requires implicit trust between the co-owners. Partners who disagree about managing finances might not find a joint credit card a good option.

Recommended: Comparing Joint and Separate Bank Accounts in Marriage

Differences Between Authorized Users and Joint Accounts

Let’s take a closer look at the differences between authorized users and joint accounts.

Privileges

Joint cardholders share the same level of privileges on a credit card. Authorized users, however, cannot increase the credit limit or add additional authorized users. On top of that, primary cardholders can sometimes impose spending limits on authorized users.

Number of Users

Two co-owners share a joint credit card account. With an authorized credit card, there is a single primary cardholder and one or more authorized users. The max number of permissible authorized users varies by card issuer. Some may let you add up to five.

Responsibility

Both co-owners share equal responsibility for a joint credit card account. Authorized users are not responsible for payments, but how the credit card is managed can impact the authorized user’s credit score.

Impact on Credit Score

Both joint credit cards and cards with authorized users can impact credit scores of everyone attached to the card. Authorized users just have less control over how the card is managed, so they must put their faith in the hands of the primary cardholder.

Recommended: How to Avoid Interest On a Credit Card

Pros of a Joint Credit Card Account

What are the benefits of a joint credit card? Here are some potential perks of this setup:

•  Equal control: Spouses and domestic partners who want equal control of their finances can benefit from a joint credit card, which affords them equal access to spending, statements, and payments.

•  Convenience of one shared card: If you share finances with a partner, having one credit card with one payment date might be easier than juggling multiple cards and due dates.

•  Potential to boost credit score or get a better rate: If one co-owner lacks a credit history or has a lower credit score, being a co-owner on a well-managed joint credit card could boost their score. The person with the lower score might even qualify for a card with a better rate by applying with a joint cardholder.

Cons of a Joint Credit Card Account

There are some drawbacks to joint credit cards, however:

•  Shared repercussions for mismanagement: If one co-owner maxes out the card or misses a payment they said they would make, both cardholders share the burden, which can include late fees, a credit score impact, or growing interest. And if your partner decides not to do anything about the growing credit card debt, you could be on your own in paying off their shopping spree.

•  Difficulty of removing someone: Removing someone from a joint credit card can be challenging. Your only option for getting out of a bad situation might be paying off and closing the card.

•  Possibility of damage to the relationship: If you and a partner do not share the same financial philosophy, entangling your debts might do more harm than good. Couples who already fight about making financial decisions may find that sharing a joint credit card is detrimental to their relationship.

Recommended: What Happens to Credit Card Debt When You Die?

Applying for a Joint Credit Card

Does a joint account sound right for your situation? Here’s how to apply for a joint credit card:

1.   Find a credit card issuer with a joint credit card option: Not every credit card issuer offers joint cards. Understand that your options will be more limited than if you applied for a credit card by yourself. Just as you would if you were choosing a joint bank account, take the time to compare a few options and find a joint credit card you’re both happy with.

2.   Understand the qualification requirements: Read the fine print to make sure you and your co-owner can qualify. It’s not just your own credit score and credit history you have to consider; credit card issuers will be reviewing both applicants to determine if you can get a joint credit card.

3.   Fill out the application: Have all of the necessary information for both applicants handy. It’s a good idea to apply together at a computer, if possible.

4.   Set the ground rules: Make sure both of you are on the same page about how you will use the card and who is responsible for making on-time payments. If you’re not sure where to start, check out these basic credit card rules, which can promote healthy card usage.

The Takeaway

Joint credit cards give both co-owners equal responsibility for credit card usage and payments. Using a joint credit card can be a good way to combine finances and help boost a partner’s credit score. However, applicants might benefit from going the authorized user route instead. Understanding the risks of both options is important before completing a joint credit card application or making someone an authorized user on an existing card.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Do joint credit cards affect both credit scores?

Joint credit cards affect both users’ credit scores equally. A well-managed card that is paid off in full each month might boost both users’ scores. On the other hand, regularly late payments and a high credit utilization could bring both scores down.

Can I add someone to my credit card as a joint account holder?

Not every credit card issuer offers joint account credit cards. However, most allow you to add authorized users to existing credit cards. Contact your credit card issuer to learn more.

What requirements are needed to get a joint credit card account?

Requirements for getting a joint credit card account will vary by credit card issuer. Credit card companies typically consider factors like age, credit score, and income to determine whether you can get a joint credit card.

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

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

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