Guide to a Confirmed Letter of Credit

Guide to a Confirmed Letter of Credit

A confirmed letter of credit can be an important document to those who are launching or running a business, particularly those engaging in international trade. These letters are used to help protect both the buyer and the seller in a business-to-business transaction by adding an extra guarantee that the seller will get paid. They essentially mean that a second bank will pay the seller if the first bank fails to do so, which can inspire confidence and allow a deal to go through.

Here’s a closer look at what a confirmed letter of credit is, how it works, and its pros and cons.

What Is a Confirmed Letter of Credit?

Also known as a confirmed LC, a confirmed letter of credit is an additional guarantee for a payment by a secondary bank. It states that this additional bank will be responsible for a payment being on time and in full even if the buyer doesn’t meet their contractual obligations and the first bank (called the issuing bank) defaults on the payment. You might think of it as a kind of insurance policy or Plan B if the initial bank responsible for payment fails to do its job.

This type of document can be common in international trades, such as transactions between export and import businesses. In many cases, a guarantee may be required to conduct international transactions or when a vendor or seller has reason to doubt the first bank’s creditworthiness.

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How Confirmed Letters of Credit Work

Confirmed letters of credit are commonly used as negotiable instruments, which are signed documents that promise to pay a certain sum to a specified person. They can be especially valuable in international business transactions that involve a significant payment amount for goods or services. Since the letter acts as guaranteed payment, it may take the place of a request for advance payment.

To get a regular letter of credit, the buyer will likely need to submit required documents to the first bank, including proof that certain steps have been completed. Then the bank will send appropriate documents to the seller’s bank. This paperwork shares detailed instructions on the terms and conditions, as well as how payment should be made. Depending on the agreement between the buyer and the seller, payment may be made immediately or at an agreed-upon date.

Once the letter of credit has been issued, the buyer may need the backing of a second bank, or a confirmed letter of credit. Worth noting: A fee is likely to be involved. The exact amount of this fee may depend on how good (or questionable) the first bank’s credit is. This letter usually reflects the first letter of credit and uses the same terms.

A confirmed letter of credit can protect both parties because it decreases the risk of default for the vendor or seller. Additionally, it ensures that payment is only made if all the terms are met. It can be a step to building good credit when doing a deal with a new client. It can also be helpful for a business that is just starting out and making connections, building contacts, and monitoring its credit.

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Parties Involved in a Confirmed Letter of Credit

Here’s a listing of all the parties typically involved in a confirmed letter of credit.

•   Buyer or applicant: This is the party who is requesting the letter of credit and who will pay the seller.

•   Beneficiary or seller: The party who is selling goods or services and is the one who receives payment.

•   Issuing bank: This is usually a bank where the buyer already has a business bank account. It’s the one that issues the original letter of credit.

•   Confirming bank: This is the second bank that will guarantee the funds to the seller once the terms in the letter of credit are met. In some cases, the confirming bank is from the seller’s home country (this may be called a correspondent bank) or is a bank the seller already works with.

Recommended: Guide to Irrevocable Letters of Credit (ILOC)

Confirmed Letter of Credit Example

Let’s look at a fictional example of how a confirmed letter of credit could work. Say that Pauline’s Paper Goods receives an order for 100,000 pallets of customized notebooks from JessCo, a stationery company. Pauline’s Paper Goods has never worked with JessCo before and isn’t sure that this company has the means to pay for the goods. Maybe Pauline’s Paper Goods worries that JessCo doesn’t have what is considered good credit.

In order to prevent non-payment after the notebooks are produced and shipped off to the buyer, Pauline’s Paper Goods outlines an agreement that JessCo needs to pay with a confirmed letter of credit on the date the shipment leaves their warehouse.

If JessCo agrees, it would start applying for a letter of credit at its bank, where it has its checking account, in the U.S. If the bank requires it, the company needs to provide proof it has the funds available or it will apply for financing.

As soon as the issuing bank creates the letter of credit, JessCo then applies for a confirmed letter of credit with another bank, possibly the seller’s bank. When Pauline’s Paper Goods receives the completed confirmed letter, it manufactures and ships the customized notebooks. Once Pauline’s Paper Goods provides proof of when and how the goods were shipped, the guaranteed funds are released.

Recommended: Business vs Personal Checking Account: What’s the Difference?

Confirmed vs Unconfirmed Letters of Credit

If you are conducting international business, you will probably hear the terms confirmed and unconfirmed letters of credit. An unconfirmed letter of credit is simply a letter of credit issued by a bank. A confirmed letter of credit, as we’ve described above, is backed by two banks. This can foster trust if, say, there’s reason to worry the payment won’t be made.

Here’s a look at some other differences between a confirmed vs. an unconfirmed letter or credit.

•   Guaranteed payment: With a letter of credit, the issuing bank guarantees payment. With a confirmed letter of credit, however, two banks confirm payment.

•   Cost: Unconfirmed letters of credit tend to cost less than confirmed letters of credit.

•   Changes: The buyer is allowed to make changes to an unconfirmed letter of credit. With a confirmed letter of credit, both banks can modify the document.

•   Issuance: The seller only has to approach one bank for an unconfirmed letter of credit, but needs to contact two with a confirmed letter of credit.

Recommended: Guide to a Commercial Letter of Credit

Advantages of Confirmed Letters of Credit

Confirmed letters of credit can have several benefits for sellers, particularly those doing business internationally and wanting to ensure smooth transactions. These advantages include:

•   Protection for both the buyer and seller

•   An extra layer of confidence for the seller

•   A lower risk of default thanks to a reputable second bank (perhaps serving as a guarantor if the first bank has a low credit rating)

•   Buyers can seem more creditworthy, which may increase the odds that a seller will do business with them

Disadvantages of Confirmed Letters of Credit

While confirmed letters of credit can be very valuable in business, there are a couple of downsides to recognize. Disadvantages of confirmed letters of credit include:

•   It may take longer to get a confirmed letter of credit since an additional bank is involved

•   Bank fees may be higher than with an unconfirmed letter of credit

The Takeaway

A confirmed letter of credit can be a valuable business tool, especially when conducting international business. For those importing or exporting, the letter will guarantee payment for goods a company is supplying if the buyer and the buyer’s bank can’t complete the deal. Getting a confirmed letter of credit may cost more and take longer compared to an unconfirmed letter of credit, but the effort may be worth it. It can secure a transaction and open doors to doing business with new customers in a way that communicates confidence.

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FAQ

What is an unconfirmed letter of credit?

An unconfirmed letter of credit is a letter of credit that’s only been issued by one bank, known as the issuing bank. In a transaction, the buyer requests an unconfirmed letter of credit to guarantee funds will be paid on time to the seller by the bank.

Is an unconfirmed LC safe?

Yes, an unconfirmed letter of credit is safe because there is a guarantee or confirmation from one bank that payment will be made. Assuming that the issuing bank has a high credit rating, the seller can feel confident that the funds will be paid once all the conditions in the contract have been met. If the seller wants an additional layer of security, they may request a confirmed letter of credit — which means a second bank will provide payment if the first one fails to do so.

What is the risk of an unconfirmed LC?

The risk of an unconfirmed letter of credit is that the issuing bank won’t have the funds to pay the seller. That means that even if the seller completes their end of the contract, they risk losing out on funds if the issuing bank doesn’t fulfill their promise.


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 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 (“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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, 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.

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Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


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Guide to Irrevocable Letters of Credit (ILOC)

Guide to Irrevocable Letters of Credit (ILOC)

An irrevocable letter of credit (or ILOC) is a written agreement between a buyer (often an importer) and a bank. As part of the agreement, the bank agrees to pay the seller (typically an exporter) as soon as certain conditions of the transaction are met. These letters help reduce a seller’s concern that an unknown buyer won’t pay for the goods they receive. It also helps eliminate a buyer’s concern that an unknown seller won’t send the goods the buyer has paid for.

Irrevocable letters of credit are often found in international trade, though they can be used in other types of financial arrangements to ensure that a seller will be paid, even if the buyer fails to uphold their end of the bargain.

Key Points

•   An irrevocable letter of credit is a written agreement between a bank and a buyer to guarantee payment, ensuring that the seller will be paid even if the buyer fails to fulfill their obligations.

•   Irrevocable letters of credit cannot be canceled or modified in any way without the explicit agreement of all parties involved.

•   Irrevocable letters of credit are commonly used in international transactions but can be used in other situations as well.

•   Alternatives to irrevocable letters of credit include trade credit insurance and standard letters of credit, which offer different levels of flexibility and protection.

What Is an Irrevocable Letter of Credit?

Simply defined, an irrevocable letter of credit represents an agreement between a bank and a buyer involved in a financial transaction. The bank guarantees payment will be made to the seller according to the terms of the agreement. Since the letter is irrevocable, that means it cannot be changed without the consent and agreement of all parties involved.

Irrevocable letters of credit can also be referred to as standby letters of credit. Once an irrevocable letter of credit is issued, all parties are contractually bound by it. This means that even if the buyer in a transaction doesn’t pay, the bank is obligated to make payment to the seller to satisfy the agreement.

Having an irrevocable letter of credit in place is a form of risk management. The seller is guaranteed payment from the bank, which can help to reduce concerns about the buyer failing to pay. And it ensures that the seller will follow through on their obligations by providing whatever is being purchased through the agreement. In simpler terms, a standby letter of credit or irrevocable letter of credit is a sign of good faith on the part of everyone involved in a transaction.


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How Does an Irrevocable Letter of Credit Work?

An irrevocable letter of credit establishes a contractual agreement between a buyer, a seller, and their respective banks. It effectively creates a safeguard for both the buyer and the seller, in that:

•   Buyers are not required to forward payment until the seller provides the goods or services that have been purchased.

•   Sellers can collect payment for goods and services, as long as the conditions outlined in the letter of credit are met.

The bank issuing the letter of credit acts as a go-between for both sides, guaranteeing payment to the seller even if the buyer doesn’t pay. Assuming the buyer does fulfill their obligations, they would then make payment back to the bank. In a sense, this allows the buyer to borrow from the bank without formally establishing credit in the form of a loan or credit line. (Check with your financial institution to learn what fees may be involved.)

Before an irrevocable letter of credit is issued, the bank will first verify the buyer’s creditworthiness. Assuming the bank is reassured that the buyer will, in fact, repay what’s owed to complete the purchase, it will then establish the irrevocable letter of credit to facilitate the transaction between the buyer and seller. Irrevocable letters of credit are communicated and sent through the SWIFT banking system.

Recommended: How Do Banks Make Money?

Irrevocable Letter of Credit Specifications

The exact details included in an irrevocable letter of credit can depend on the situation in which it’s being used. The conditions that are set for the completion of the transaction will also matter. But generally, you can expect an irrevocable letter of credit to include:

•   Buyer’s name and banking information (that is, their bank account number and other details)

•   Seller’s name and banking information

•   Name of the intermediary bank issuing the letter of credit

•   Amount of credit that’s being issued

•   Date that the letter of credit is issued and the date it will expire

An irrevocable letter of credit will also detail the conditions that must be met by both the buyer and seller in order for the contract to be valid. For example, the seller may need to provide written verification that the goods or services referenced in the agreement have been provided before payment can be issued. The letter of credit must be signed by an authorized bank representative. It may need to be printed on bank letterhead to be valid.

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Do I Need an Irrevocable Letter of Credit?

You may need an irrevocable letter of credit if you’re doing business with someone in a foreign country. You may also require one if you are conducting a transaction with a new company or individual (one with which you don’t yet have an established relationship).

Irrevocable letters of credit can help to mitigate some of the risk that goes along with international transactions. These letters ensure that if you’re the seller, you get paid for any products or services you’re providing. They also protect you if you’re the buyer, promising that products or services are delivered to you.

An irrevocable letter of credit could also come in handy if you’re still working on building credit for your business and you’re the buyer in a transaction. The bank will pay the money to the seller; you’ll then repay the bank. Payment may be required in a lump sum from your business bank account or another source. Or the bank may also offer the option of repaying it in installments over time. Repaying your obligation could help to raise your business’s creditworthiness in the bank’s eyes. This may make it easier to take out other loans or lines of credit later.


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Alternatives to Irrevocable Letters of Credit

An irrevocable letter of credit is not the only way to do business when engaging in international transactions. You may also consider trade credit insurance or another type of letter of credit instead.

Trade Credit Insurance

Trade credit insurance, also referred to as accounts receivable insurance or AR insurance, is used to insure businesses against financial losses resulting from unpaid debts. You can use trade credit insurance to cover all transactions or limit them to ones where you believe there may be a heightened risk of loss, such as transactions involving foreign businesses.

A trade credit insurance policy protects your business in the event that the other party to a financial agreement defaults. It can insulate your accounts receivable against losses if an unpaid account turns into a bad debt. Purchasing trade credit insurance may be an easier way to manage risk for your business overall, as it’s less involved than an irrevocable letter of credit.

Recommended: Business Loan vs Personal Loan: Which is Right for You?

Letters of Credit

A letter of credit guarantees payment from the buyer’s bank to the seller’s bank in a financial transaction. Like an irrevocable letter of credit, it establishes certain conditions that must be met in order for the transaction to be completed. But unlike an irrevocable letter of credit, a standard letter of credit can be revoked or modified.

You might opt for this kind of letter of credit if you’re doing business with someone you don’t know and you want reassurance that the transaction will be completed smoothly. A regular letter of credit may also be preferable if you’d like the option to modify or cancel the agreement.

The Takeaway

An irrevocable letter of credit is something you may need to use from time to time if you run a business and regularly deal with international transactions. It adds a layer of protection to buying and selling, as a bank is saying it will cover the transaction. An ILOC, as it’s sometimes known, can provide reassurance when working with a new business or establishing your company overseas. The letter cannot be changed, so you’re getting solid peace of mind.

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

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

FAQ

What is the difference between a letter of credit and an irrevocable letter of credit?

A letter of credit and irrevocable letter of credit are largely the same, in terms of what they’re designed to and in what situations they can be used. The main difference is that unless a letter of credit specifies that it is irrevocable, it can be changed or modified by the parties involved.

What is the cost of an irrevocable letter of credit?

You generally need to pay a transaction fee for an irrevocable letter of credit. The fee is typically a small percentage of the transaction amount. The rate will vary from bank to bank.

Does an irrevocable letter of credit expire?

Yes, an irrevocable letter of credit will typically state the date by which the seller must submit the necessary paperwork in order to receive payment.


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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 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 (“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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


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How Refinancing Credit Card Debt Works

Spending is on the rise — and so is consumer debt. Americans carry, on average, three credit cards and have $6,501 in credit card debt. Overall, U.S. credit card debt is $129 billion higher than it was one year ago.

That amount of debt can be a challenge to pay down along with regular monthly household expenses. Some people may choose to refinance their high-interest credit card debt in an effort to secure a lower interest rate or a lower monthly payment. Refinancing credit card debt can be one way to make progress toward eliminating it completely.

What Is Credit Card Debt?

If you’re putting more purchases on credit cards than you can pay off in a monthly billing cycle, you have credit card debt.

Interest will accrue on the balance that carries over to the next billing cycle. If you don’t pay at least the minimum amount due, you’ll likely also be charged a late fee. Since credit cards use compound interest, you’ll be charged interest on accrued interest and fees. That can add up quickly and make it more difficult to get out of debt.

Carrying a balance on more than one credit card can make the debt even more difficult to manage. If your goal is to be free of credit card debt, refinancing can be one way to achieve that.

What Are Some Benefits of Refinancing Credit Card Debt?

Credit cards are revolving debt and typically have variable annual percentage rates (APRs).

Refinancing credit card debt with an installment loan that has a fixed interest rate, such as a personal loan, will mean you’ll have a fixed end date to your debt and will have the same APR for the entire term of the loan.

If you’re refinancing multiple credit card balances into one new loan or line of credit, you’ll have fewer bills to pay each month. That could potentially make monthly budgeting a simpler task.

Recommended: What Is a Good APR for a Credit Card?

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How Might Debt Refinancing Affect Your Credit Score?

Something to keep in mind when your goal is to pay down debt is that it’s a long game.

That being said, in the short term your credit score can decrease slightly when you apply for new credit and the lender looks at your credit report. During the formal application process, the lender will perform a hard inquiry into your credit report, which may result in a slight temporary drop of your credit score.

If you’re comparing multiple lenders, and they offer prequalification, they’ll do a soft inquiry into your credit report, which won’t affect your credit score.

Building your credit — or rebuilding it — through refinancing credit card debt can be possible if you make on-time, regular payments on the new loan. Reducing your credit utilization can be another positive result of refinancing credit card debt. Both of these can potentially increase your credit score.

It’s important not to overuse the credit cards you refinanced into a new loan, however, or you might accumulate even more debt than you started with.

Will Canceling My Unused Credit Cards Affect my Credit Score?

After you’ve refinanced your existing credit card debt into a new loan, you might be tempted to cancel those credit cards. But that strategy could negatively affect your credit score.

Whether it’s a good idea to cancel a credit card really depends on the card. If you’ve had the credit card for a long time, closing it would shorten your credit history, which could result in a credit score drop. But if it’s a card you genuinely don’t have a reason to keep, such as a retail card for a store you no longer shop at or a card that has a high annual fee that can’t be justified with your current spending habits, closing the account might be the right step for you.

If you plan to keep a credit card open, it may be a good idea to use it for a small, recurring charge so the card issuer doesn’t close it for inactivity. Setting up autopay can make this a convenient way to ensure the card stays open but is paid in full each month.

What Are Some Options for Refinancing Credit Card Debt?

Your overall creditworthiness will be a determining factor in finding available refinancing options. Lenders will look at your credit report and credit score, paying attention to how you’ve handled credit in the past and how much total debt you have in relation to your income.

Balance Transfer Credit Card

If you can qualify for a low- or no-interest credit card, you could use it to transfer a balance from another credit card. You’ll typically be charged a balance transfer fee equal to a percentage of the balance you’re transferring. The promotional rate on these types of cards is temporary, sometimes lasting up to 18 months or so, but can be as short as 6 months.

If you pay the transferred balance in full within the promotional period, you may not pay any interest at all, or a minimal amount. However, if you still have an outstanding balance on the card when the promotional period is over, the APR will revert to the card’s standard rate for balance transfers.

Home Equity Loan

A potential source of refinancing funds might be your home, if you have equity in it. Funds from a home equity loan can be used for just about anything, even things unrelated to your home. You can calculate how much equity you have in your home by subtracting the amount you owe on your mortgage from the current market value of your home.

In addition to the amount of equity you have in your home, lenders will typically also look at your income and your credit history to determine how much you might qualify for. It’s common for lenders to limit a home equity loan to no more than 80% to 85% of the equity you have in your home. There are typically closing costs with a home equity loan including appraisal fee, title search, origination fee, or other fees, and can be between 2% and 5% of the loan amount.

A home equity loan is a second mortgage secured by your home. If you fail to repay the loan, the lender can foreclose on your home.

Debt Consolidation Loan

Some lenders offer loans specifically for debt consolidation. These are actually personal loans, the funds from which can be used to pay off your existing credit card debt. Then, you’ll be responsible for repaying the debt consolidation loan. There may be fees charged on this type of loan, so be sure to look over the loan agreement carefully before signing it.

For a credit card consolidation loan to be as effective as possible at reducing your debt, it will ideally have a lower APR than you’re paying on your credit cards. In this way, you would be paying less in interest over the life of the loan. If a lower monthly payment is your goal, you may opt for a longer-term loan, but may pay a higher interest rate.

Recommended: How to Get a Debt Consolidation Loan with Bad Credit

The Takeaway

If your credit card debt is piling up and you’re finding it challenging to pay it down, you may be considering refinancing. Some credit card refinancing options include balance transfer credit cards with a promotional APR, a home equity loan, or a debt consolidation loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.


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


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


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 .

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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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What Is Market Overhang?

What Is Market Overhang?

Market overhang is a market phenomenon whereby investors hold off trading a stock that’s seen a drop in price, because the expectation is the price will drop even further. A market or stock overhang can be precipitated by the awareness that a large block of shares — say, from an institutional investor — is about to hit the market, potentially driving a stock’s price down.

But it can result from other factors as well. Although the event has not happened, investors may hesitate to sell or buy shares in anticipation of price drop — and this can further depress the stock price. While there is also a business use of the term “overhang,” for investors, it may be useful to focus on how market overhang works in finance, specifically.

Market Overhang Definition

In its broadest use, an overhang describes a somewhat artificial market condition brought on by an anticipated shift in supply and demand (aka the price of a stock). Market overhang has a couple of uses in the business and finance worlds, and in an IPO market as well.

What Is an Overhang in Business?

An overhang in a business context can refer to the practice whereby a company, typically an industry leader, delays the release of a new product in order to stoke greater consumer demand for that product.

A familiar example might be the release of a new technology product or video game. The anticipation of the new release may cause consumers to avoid buying other products as they wait for the arrival of the new one. The overhang may result in lower purchases for existing products — and higher purchases of the newly released product. While this practice can be considered manipulative, it’s not uncommon.

What Is an Overhang in Finance?

More commonly: An overhang in finance is used to describe a dynamic that’s specific to how investors’ expectation about supply and demand can impact a company’s share price.
A market overhang is when a stock’s price declines because investors expect a further price drop on the horizon. Thus, some shareholders may hesitate to sell their shares, because that could further drive down the share price. Other investors may also hesitate to buy shares because of the anticipated price drop.

The business use of the term and the finance use describe different situations, but the common element is how investors’ anticipation of a future event can impact a company’s revenues or share price.

Needless to say, a market overhang can cast a shadow over a company’s performance, influencing share price, liquidity, and more, especially if the situation is prolonged. In many cases, though, market overhang is relatively short-lived and temporary. The difficulty for investors is knowing when the overhang, like bad weather, is finally going to pass. To that end, it helps to know some conditions that can cause a market overhang.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How Market Overhang Is Created

There are a few conditions that can lead to a market overhang. Often these conditions can overlap.

A Stock Decline

The first is where a stock is already declining, perhaps owing to a change in key economic indicators or market conditions, and there is a buildup of selling pressure as investors hesitate to let go of their shares in a down market. This type of market overhang may be resolved once there are signs of price stability (even if it’s at a lower level).

The Role of Institutional Investors

Another type of stock overhang can be created by institutional investors — or companies that manage investments on behalf of clients or members of a firm. Institutional investors tend to have a larger stake in a particular stock compared with individual investors. This means that when the institutional investor plans to sell a large portion of their shares, a market overhang could kick in when investors become aware of this possible sale.

The anticipation of a large block of shares entering the market could drive prices down, and thus investors might hold off trading this particular stock — affecting its price, even before the institutional investor has made a move.

The stock overhang might be worse if it occurs during a price decline. In that case, investors may see the decline in share price, become aware that a large investor may sell a block of shares (which could further depress the price), become even more wary of buying or selling the company’s shares.

IPOs and Market Overhang

A third way that market overhang may occur is after an initial public offering (IPO). An IPO market can be a hot market, after all, and a company may get significant press coverage as its IPO approaches, which can drive up the stock price.

But if the IPO isn’t a big hit, and the share price isn’t what investors hoped (in IPO terms), there might be a bit of an overhang as investors wait for the lock-up period to end. The lock-up period is when company insiders can sell their shares, potentially flooding the market and further lowering the price.

Understanding the Effects of Market Overhang

Market overhang can last for a few weeks or even months — sometimes longer. The chief impact of a market overhang is that it can artificially depress the price of a stock, and if the market overhang is prolonged, that can have a negative impact on company performance.

As noted above, a market overhang typically ends when a stock price stabilizes. Unfortunately that often occurs at a lower price point than before the shares began to decline.

Example of Market Overhang

While some consider the market overhang phenomenon more anecdotal than technical, it’s something to watch out for. It could present an opportunity. And it doesn’t require a complicated, technical stock analysis to understand.

For example, let’s say a large tech company is trading at $300 a share. But there are reports that the company has been facing some headwinds, and it may undergo a rebranding and repositioning. In the face of this change and uncertainty, it’s natural that it might impact company performance and the share price might wobble a bit. But then, if enough investors are concerned about the company’s “new direction,” there could be a bigger shift in trading behavior that might further depress the share price in advance of the company pivot — creating an overhang.

While this isn’t ideal for current shareholders, a market overhang like this could be a “buy” opportunity for other investors. It depends on a number of factors, and it’s always important to understand market trends as well as company fundamentals. But it’s possible that some investors may view the company as a good prospect, despite a currently undervalued share price, and buy shares with the hope they might rise to their previous levels.

Why Market Overhang Matters

Market overhang is a valuable phenomenon for investors to be aware of, largely because it reflects many of the basic tenets of behavioral finance, which is the study of how emotions can impact financial choices. A market overhang could be viewed as the result of loss aversion and herd mentality — two well-documented behavioral patterns among investors.

Loss aversion is, as it sounds, the wish to avoid incurring losses. Herd mentality is, not surprisingly, the tendency for investors to behave as a group: buying or selling in waves. You can see how these two very human impulses — to protect oneself from losses, and to follow the herd — might create a market overhang.

The good news, though, is that investors are capricious and markets can be volatile, which means the market overhang will usually pass, and the stock will regain its normal momentum, whatever that may be. As an investor watching the market change, it’s up to you whether a stock overhang might present a buy opportunity or a sell opportunity — if you need to harvest some losses, for tax purposes.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

What Market Overhang Means for Shareholders

Market overhang affects different shareholders differently. Since institutional investors tend to be the ones who create market overhang, they also tend to have the upper hand on what it means for their investments.

Regular investors might worry that some of their shares are losing value. But with the ebbs and flows of the stock market, a price can rise and fall at various times throughout the year — even throughout a given day. Fluctuation is normal and this is part of the risk in investing in the stock market. Consider waiting out the storm to make an informed decision. There’s a chance the stock could rise to new highs and your investment will be worth even more.

The Takeaway

A market overhang is a type of trend that is considered more behavioral in nature, but it can be worthwhile for investors to keep it in mind when a stock isn’t performing as expected. In some cases, when investors anticipate an event that could drive down a stock’s price, they may hold off on trading that stock, further depressing the price and creating a market overhang. In that sense, a market overhang can become a self-fulfilling prophecy.

Institutional investors can create a market overhang, for example, when they contemplate selling a large portion of their holdings. This might spook other investors, who likewise decide not to trade their shares, creating a sort of temporary downward spiral in the share price. But because two common investor dynamics are at play here — the fear of losses, and the desire to comply with what other investors are doing — the emotions are usually temporary, and the market overhang passes.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.


Photo credit: iStock/kupicoo

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.


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.

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A Guide to How Credit Card Travel Insurance Works

A Guide to How Credit Card Travel Insurance Works

With flight disruptions, natural disasters, and other issues, travel insurance has become a popular option for travelers. While you can purchase travel insurance through third-party providers (and get specific insurance when booking flights, hotels, and rental cars), you may already have credit card travel insurance at your disposal.

So, should you choose a credit card specifically because it offers travel insurance? Below, we’ll take a closer look at what credit card travel insurance is, how it works, what it covers, and why you might want a credit card with travel insurance ahead of your next adventure.

What Is Travel Insurance?

Travel insurance protects consumers against financial losses when traveling domestically or internationally. It can cover everything from lost luggage to new hotel arrangements because of canceled flights to medical emergencies while on vacation.

Travel insurance can also protect you before your trip. If something changes, like a family emergency, that will keep you from traveling as planned, travel insurance might get you a refund for your expenses.

You can find travel insurance through insurance companies, travel agents, and insurance comparison sites. Your car insurance policy may insure you even in a rental car, and certain hotel booking sites may allow you to make refundable accommodations for a fee. But did you know that your credit card may also already cover portions of your trip?

How Does Credit Card Travel Insurance Work?

Credit card travel insurance is a set of coverages offered by select credit cards to protect you when traveling on qualified trips. How credit card travel insurance works varies by card, however. It’s important to read the fine print of your credit card to understand what may and may not be covered.

The main thing to remember is that you typically need to use the credit card when booking your major travel expenses (airfare, lodging, and transportation) for those costs to be covered should something happen.

Recommended: Tips for Using a Credit Card Responsibly

Types of Travel Covered by Travel Insurance

Each travel credit card will have its own inclusions and exclusions for travel insurance. But generally, credit cards with travel insurance may offer trip protection and coverage for unexpected medical expenses.

Trip Protection

Trip protection covers a wide range of potential insurances your credit card might offer when traveling:

•   Trip cancellation and interruption insurance: If you prepaid for a trip and have to cancel it, or are on a trip and need to end it early, your credit card may cover this. Read your credit card’s policy closely to understand how your credit card works and what qualifies as a covered trip cancellation or trip interruption. Unexpected injuries or illness, inclement weather, terrorist action, a change in military orders, and jury duty are examples of reasons a trip may be canceled or end early — and be covered by credit card travel insurance.

•   Trip delay insurance: If your flight, bus, cruise, or other transportation (called a common carrier) is delayed or canceled and you miss activities or lodgings that you’ve already paid for, your credit card may cover this. In addition, such policies might cover your expenses as you scramble to find new lodging, meals, and transportation.

•   Rental car insurance: Check with your car insurance provider before booking a rental to understand if your coverage extends to rentals. If it does not (or if you do not want to make a claim with your car insurance provider), your credit card might also serve as an insurance option in the event of an accident. Read the fine print carefully; many credit cards require that you decline the insurance from the rental company for the credit card travel insurance to apply. Some credit cards only offer secondary car insurance, meaning they require you to file a claim through your personal car insurance first.

•   Delayed or lost baggage insurance: If an airline loses or damages your baggage, you can make a claim for the (depreciated) contents of the bag. Some credit cards may even cover delayed baggage since it can put a dent in your plans. Just check your policy: You may have to put in a claim with the airline before your travel credit card will step in.

Medical Coverage

Travel insurance through credit cards may cover medical expenses as well, including:

•   Medical insurance: If your health insurance doesn’t cover medical costs incurred abroad, travel medical insurance might cover qualified expenses. In most cases, Medicare does not cover health costs incurred outside of the U.S., so travel insurance can be helpful for seniors relying on a government health plan.

•   Accident insurance: While we don’t want to assume the worst can happen, this insurance sometimes offered through credit cards offers a payout if you are killed or seriously injured (such as dismemberment or loss of sight, hearing, or speech). This applies while traveling on a common carrier or on a covered trip paid for with the card. In this way, accident insurance can operate like life insurance while traveling.

•   Emergency evacuation: If you fall ill or are injured while traveling and need to be evacuated, including through emergency airlift, this coverage will pay for associated expenses. This also may cover emergency evacuations due to extreme weather or political unrest.

Recommended: Preparing Financially for Travel

Benefits of Credit Card Travel Insurance

Credit cards offering travel insurance have multiple benefits. Not all credit cards offer travel insurance, however, so it’s a good idea for consumers to weigh these benefits against benefits of other credit cards to determine which card is right for them.

Among the benefits of credit card insurance are:

•   Financial security: Travel can be a big expense. When unplanned events cut trips short or leave you stranded, travel insurance can protect the money you have spent.

•   Emergency coverage: Whether you encounter dangerous weather, a terrorist incident, or a medical emergency during travel, having travel insurance can make it easier to deal with crises while on vacation.

•   A sense of comfort: Ultimately, insurance policies can ease consumers’ worries when traveling. Knowing that there is a Plan B when your best-laid travel plans go awry can be comforting, especially when facing an emergency in an unfamiliar place.

Recommended: Tips for Finding Travel Deals

Picking a Credit Card for Travel Insurance

When looking for a new credit card, you can search specifically for cards that offer travel insurance among ​​different credit card rewards. Note that many of these can have annual fees, so they might only be a good choice if you’re a frequent traveler.

Before applying for a credit card, check your credit score to ensure you can qualify.

If travel insurance is not your top priority for choosing a credit card, you can consider other incentives, like credit card bonuses for new customers or cash back rewards.

Recommended: What Is a Charge Card?

Filing a Travel Insurance Claim

If you experience an unexpected event, like a delayed flight, during your trip, calling your credit card company to ensure your emergency expenses will be covered can be a smart idea. This might keep you incurring credit card payments for meals or lodging that won’t actually be covered.

Look at the back of your credit card to find the phone number for a benefits administrator. They can help you as you begin your claim process.

As explained previously, certain credit cards may require you to file a claim with another entity before they get involved. For example, a credit card offering secondary auto insurance requires that you file with your personal car insurance company first. Likewise, if an airline loses your luggage, a credit card’s travel insurance policy may stipulate that you file first with the airline.

When you know you will be filing a claim, saving your receipts (and taking photos of them as you go) can be a smart way to stay organized. Filing as soon as you’re home (or even while still traveling) may expedite the process. In fact, some credit card insurance policies might have deadlines for filing claims.

The Takeaway

Some credit cards include travel insurance among their perks. Insurance coverage can vary, but it might cover delayed flights, trip cancellations, emergency medical expenses, and lost luggage. Travel cards with such coverage often have annual fees, so it’s a good idea for consumers to weigh multiple options when selecting a credit card and insurance policies.

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.

SoFi Travel has teamed up with Expedia to bring even more to your one-stop finance app, helping you book reservations — for flights, hotels, car rentals, and more — all in one place. SoFi Members also have exclusive access to premium savings, with 10% or more off on select hotels. Plus, earn unlimited 3%** cash back rewards when you book with your SoFi Unlimited 2% Credit Card through SoFi Travel.

Wherever you’re going, get there with SoFi Travel.

FAQ

How do I know if my trip is covered?

Not every credit card offers travel insurance. Always read the fine print of your credit card before making travel insurance decisions ahead of and during your trip. If the legal jargon is confusing, you can typically contact a benefits administrator for clarification. Look at the back of your credit card to find the number.

What does travel insurance cover?

Every credit card travel insurance policy is different. Common coverages include trip cancellation or interruption, accident and medical, lost luggage, and even rental car insurance. Research your card’s policy ahead of your next vacation.

Will the expenses not charged to my card be covered?

Some credit cards with travel insurance require that you use those cards on travel expenses for the insurance to apply. Others may automatically apply certain types of coverage, like medical coverage, regardless of what card you used to book your trip. Reach out to your card’s benefits administrator before travel if you need help interpreting the travel insurance policy.


Photo credit: iStock/Atstock Productions

**Terms, and conditions apply: The SoFi Travel Portal is operated by Expedia. To learn more about Expedia, click https://www.expediagroup.com/home/default.aspx.
When you use your SoFi Credit Card to make a purchase on the SoFi Travel Portal, you will earn a number of SoFi Member Rewards points equal to 3% of the total amount you spend on the SoFi Travel Portal. Members can save up to 10% or more on eligible bookings.
Eligibility: You must be a SoFi registered user.
You must agree to SoFi’s privacy consent agreement.
You must book the travel on SoFi’s Travel Portal reached directly through a link on the SoFi website or mobile application. Travel booked directly on Expedia's website or app, or any other site operated or powered by Expedia is not eligible.
You must pay using your SoFi Credit Card.

SoFi Member Rewards: All terms applicable to the use of SoFi Member Rewards apply. To learn more please see: https://www.sofi.com/rewards/ and Terms applicable to Member Rewards.
Additional Terms: Changes to your bookings will affect the Rewards balance for the purchase. Any canceled bookings or fraud will cause Rewards to be rescinded. Rewards can be delayed by up to 7 business days after a transaction posts on Members’ SoFi Credit Card ledger. SoFi reserves the right to withhold Rewards points for suspected fraud, misuse, or suspicious activities.
©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender. NMLS #696891 (Member FDIC), (www.nmlsconsumeraccess.org).


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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