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Almost half of all Americans carry a balance on their credit card, month after month. If you’re among their ranks, you know that the combination of high prices and high credit card interest rates can make it challenging to pay that debt off in full.

Many cardholders have seen their interest rates creep up in recent years, in line with the Federal Reserve’s recent rate increases. That means interest payments are gobbling up a bigger share of credit card balances. And those credit card balances can be major. This kind of debt hit a staggering $1.12 trillion for the first quarter of 2024, according to data from the Federal Reserve Bank of New York.

But the situation isn’t hopeless, however. If you’re one of the cardholders who can’t pay credit card debt in full, here are five steps you can take to address it.

Step 1: Check your Credit Card Interest Rate

If you haven’t carried a credit card balance before, you may not be aware of what interest rate your credit card is charging. But it’s important to know exactly how much you’re getting charged so if you need to, you can budget for interest expense as well as your purchases.

The average credit card interest rate for all new card offers was 24.84% in mid-2024. (Depending on what type of credit card you have, your credit score, and your credit history, you may have a higher or lower interest rate than the average.)

With interest rates this high, it can be a real financial setback to carry a balance for an extended length of time, making only the minimum credit card payment. You may find that you are only paying interest and making little headway in paying off what you actually spent.

Recommended: What Is a Charge Card

Step 2: Understand How Your Grace Period Works

If you pay your credit card statement balance in full by the due date, a credit card grace period will usually take effect for the next billing cycle. That means you won’t owe interest on new purchases until the due date for the next billing cycle. If you pay that statement balance in full by the next due date, the grace period will continue into the next cycle, and on and on.

But, if you make only the minimum payment or a partial payment on the full statement balance by the credit card due date, you’ll get charged interest on the remaining balance and lose your grace period for the next billing cycle. This means you’ll owe interest on any purchase immediately. Even if you go back to paying the full balance, your grace period may not renew for several more cycles, depending on the specific terms of your credit card.

If you’re in a position where you can’t pay credit card bills and must move to partial payments, make sure you’re aware of the additional interest expense you’ll incur on the remaining credit card balance. Try your best to stop making new purchases with that card since interest will be charged on those purchases immediately.

Step 3: Look at Changing Your Due Date

If you’re feeling overwhelmed because many of your bills are due at the same time, talk to your credit card company about changing your due date. You might be able to move your credit card due date to a day of the month that works better for your budget, so the payments you owe are a bit more staggered.

While this switch might not help immediately to pay down credit card debt, it could offer some relief in the long run.

Recommended: How to Avoid Interest On a Credit Card

Step 4: Explore Ways to Pay Off Your Balance Faster

You may find that with higher interest rates and inflationary spending, you need a more efficient way to pay off your credit card debt, such as by refinancing credit card debt. Luckily, there are some options for how to pay off credit card debt, though keep in mind the best way to pay off credit card debt will depend on your financial specifics.

Balance transfer credit cards that offer a limited time low or sometimes even 0% interest rate can help — especially if you think you can pay the balance in full during the promotional low-rate period.

Another option you might consider is applying for a low-interest personal loan to pay off credit card debt in full. This could help you secure a lower interest rate, and by consolidating your credit card debt, you’d have fewer due dates to keep track of. Keep in mind, however, that there are pros and cons of personal loans to pay off credit card debt.

Recommended: Tips for Using a Credit Card Responsibly

Step 5: Consider Using a Budgeting Tool

If you’re finding it hard to make your credit card payments, that can be a signal it’s time to take a close look at your spending, perhaps with the help of one of the many online budgeting tools available.

Personal finance tools can help you understand just how much your cost of living has risen in recent months and make it easier to flag places you can cut back. Some can help to pinpoint fees you may be paying unwittingly or the automatic payments you’re making on your credit card that could get trimmed. Cutting these costs can then make it easier to pay off credit card debt.

The Takeaway

If you’re struggling with a credit card balance you can’t pay off, taking steps to pay off credit card debt faster and budget smarter can help. These can involve understanding your rate, changing your payment due date, and other moves.

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

What is a fast way to pay off credit card debt?

You might be able to use a balance-transfer credit card and pay down your debt during the 0% APR promotional period. Or you might consider securing a personal loan to pay off the debt. You would then pay off the personal loan, which could have a lower interest rate.

Can you change your credit card payment due date?

You may be able to change your payment due date. See if your card’s website or app allows this kind of shift, or contact customer service.

Do most Americans carry credit card debt?

According to recent data, approximately 49% of Americans carry credit card debt.

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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.

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Good dental health can be essential to your overall well-being, but the cost of dental work — even after dental insurance — can make it challenging to pay upfront. According to the American Dental Association (ADA), the average cost of a porcelain or ceramic crown is $1,213, while the cost of a root canal can range as high as $1,539 for a single session.

A dental credit card is a white-label version of a credit card intended to be used on dental care expenses. It is one way to cover these costs in smaller, more manageable installment payments. Although a credit card for dental work can serve as a useful financing tool, it’s also important to be mindful of the caveats of using credit for dental care.

What Is a Dental Credit Card?

A dental credit card is a credit card that’s designed specifically to pay for your out-of-pocket dental health care costs. These cards are typically offered in dental offices that accept the particular medical card it advertises as a form of payment.

Like a basic credit card, a dental credit card requires patients to undergo a credit check for qualification. The card’s use is limited to dental offices within the card issuer’s network for the purpose of financing your dental bills.

Dental care credit cards typically have high interest rates, even if they offer a temporary deferred interest period.

Recommended: Tips for Using a Credit Card Responsibly

How Do Dental Credit Cards Work?

Your dental provider’s office might mention a dental credit card as a payment option if you’re unable to cover the expense in one lump sum. Typically, the office facilitates the process of completing your application for credit approval, but it is not financing the cost directly. In other words, your dental office isn’t the lender.

Instead, credit for dental care is provided by a third-party credit card issuer. Similar to how a conventional credit card works, your application is reviewed by the issuer’s underwriting team, and your credit history and score are evaluated.

If you’re approved, the card issuer will send you a physical credit card that you can use for services at an in-network health care office up to your approved credit card limit. Your dental provider is paid in full by the card issuer, and you’ll repay the issuer through monthly payments, plus interest if you carry a balance.

Deferred Interest Periods on Dental Credit Cards

Some credit cards for dental work offer zero interest charges for a limited period, also called deferred interest. This option can be advantageous if you’re confident that you can successfully repay the full balance before the deferment period ends.

However, if there’s a remaining balance after the deferment period ends, interest charges that accrued throughout the deferment period are added to the principal balance that’s due. Additionally, the new higher balance continues to accrue interest charges at the dental credit card’s APR, or annual percentage rate.

Because of this, use medical credit cards for dental work cautiously, as it’s a high-interest financing option that can lead to higher medical debt if you’re unable to repay your dental expenses quickly.

Recommended: What Is a Charge Card

Choosing a Dental Credit Card

When applying for a credit card specifically for dental care expenses, make sure you ask about the card’s features, terms, annual percentage rate (APR), and how it calculates interest during and after any deferment period.

If you’re approved, ensure that your dental office provides you with a copy of your dental credit card’s disclosure agreement. Also pay attention to the agreed-upon amount for any dental services you receive so you can verify that the card was charged for the correct amount.

You’ll want to note the deferment dates for your card, if any, and the interest rate you’re offered. That way, you can make enough monthly payments to repay your balance in full before interest kicks in.

Paying for Dental Care If You Have Bad Credit

Getting approved for a dental care credit card might be challenging if you have bad credit. If you’re in a difficult position and need help paying for expensive dental work now, here are some options to explore:

•   Inquire about a low-fee payment plan. Even if your dental provider doesn’t typically offer payment plans, it’s worth asking. They might accommodate you.

•   Shop around with other dental providers. Prices vary across dental offices, so compare costs across a handful of affordable sources. You might consider a non-profit dental clinic or a dentistry school.

•   Seek help from a family member. Ask a relative if they’re willing to offer a low-interest loan for your dental care.

•   Explore local government programs. Some state and local governments offer low-cost dental care programs to residents.

Alternatives to Dental Credit Cards

If a dental credit card isn’t an option for you, there are a handful of other financing options to cover dental work, such as the cost of a root canal.

Credit Cards With 0% Interest Rates

Other types of credit cards, like a 0% APR card, are a good alternative to dental care credit cards. They offer a promotional period — sometimes from six months to 18 months — during which you don’t incur interest charges.

This kind of card may differ from deferred interest programs. With some promotional APR cards, interest only starts accruing on your outstanding balance after the promotional period ends. Still, the credit card rule applies to try to pay off your balance in full before the promotional period ends to avoid paying interest.

Payment Plans Through Your Provider

Some medical providers offer a payment plan at no additional cost or at a small installment fee. In this situation, you’re arranging low installment payments directly through your dental office until you’ve repaid your balance in full.

Not all dental offices offer this type of payment plan. But if yours does, it can work with you to create a custom monthly payment amount and due date that’s manageable for your finances.

Personal Loans

Compared to a dental credit card, personal loans might offer lower interest rates for qualified borrowers. A low-interest personal loan achieves the same result as a credit card for dental work in that you can chip away at your outstanding balance in small increments, plus interest.

Among the main differences: You’ll receive a lump-sum loan disbursement from your lender that can be used to pay your dental office upfront. Also, you may find that a personal loan has a lower interest rate than what a credit card would charge you.

Recommended: How to Avoid Interest On a Credit Card

Help From Relatives

Seeking financial assistance from a close relative can help you avoid dental care debt. When asking for help, clarify whether any available funds are a gift or need to be repaid.

If it’s the latter, discuss the repayment window and additional interest (if any). Also talk about expectations if you’re suddenly unable to make payments due to, say, an injury or job loss.

The Takeaway

Getting a credit card designed to pay for dental work can be useful if you’re faced with an urgent oral treatment or procedure and need fast financing. However, the high interest rates of credit cards for dental work compared to other financing options can make it a financially risky option.

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

What credit score do I need to get a dental credit card?

Credit score requirements vary by credit card issuer, but generally, you’ll need at least fair credit. However, a higher score can help you qualify for more competitive interest rates.

Is a dental care credit card hard to get?

Dental care credit cards are commonly offered online or at your provider’s dental office, so applying for a card is typically straightforward. However, being approved for a dental credit card involves many factors, like your credit history, income, debt-to-income ratio, and other factors.

Should I pay for dental care with a credit card?

If you don’t have the cash flow to pay for your dental costs upfront, using a dental credit card helps you cover costs in small, monthly payments. That being said, doing so might cause you to incur high interest charges, so evaluate your financial situation and your options.

Can I get a dental loan with bad credit?

Dental loans for patients with bad credit are available, though they might come with high interest rates, low limits, or other restrictive factors.

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Photo credit: iStock/zadveri

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

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

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Whether you’re interested in switching credit cards because you found one with better rewards or one with no annual fee, it can make sense to do so. Also called a credit card product change, some banks allow you to make a switch without much consequence.

But before doing so, it’s best to understand how changing credit cards works and how to switch credit cards properly.

What Is a Credit Card Product Change?

A credit card product change is where a cardholder switches from one credit card to another credit card offered by the same bank or issuer. Because each credit card offered by an issuer is referred to as a different product, a product change is simply switching credit cards.

In theory, switching credit cards within the same bank won’t affect your credit as you’re not applying for a new credit card. Typically, your credit limit will stay the same for your new card as it was for your previous card.

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

How Does a Credit Card Product Change Work?

When you make a product change, you’re not canceling a credit card. Rather, you’re either switching to an equivalent credit card, upgrading to a card with more benefits, or downgrading to a card with fewer benefits. In many cases, your bank may send you targeted offers for different credit cards, and you may be able to switch to one of these credit cards.

Once you switch credit cards, you’ll no longer be able to use the credit card you previously had. You can start using the new credit card instead. Features and benefits will most likely differ, and in some cases, so too may your credit limit.

Recommended: What Is the Average Credit Card Limit

Rules for Credit Card Product Changes

When it comes to following the credit card rules, each credit card issuer will have its own guidelines regarding product changes. For instance, some won’t allow you to change to certain credit cards, while others may allow a product change only if you’re switching to a similar type of card.

In general, though, there are some rules that are usually the same across the board.

•   For one, cardholders can’t switch from a business credit card to a personal one and vice versa, since these are considered different classes of cards and may have different credit limits.

•   Additionally, issuers typically only let you change credit cards as long as they’re within the same family of cards, as this can impact how credit cards work. However, each issuer has a different definition of what that means.

For instance, if you have a travel rewards credit card and the bank offers two other cards that use the same travel portal to redeem points, all of those cards could be considered in the same family. Or, if you have a co-branded card with an airline, other co-branded cards with that airline may also count as within the same family of cards.

Unfortunately, it’s often not easy to find information about whether you can switch your specific credit card to another. Your best bet is to call your credit card issuer and ask them directly.

Recommended: Can You Buy Crypto With a Credit Card

Pros and Cons to Switching Credit Cards

There are certainly upsides to converting credit cards rather than closing out your account and starting over. However, there are downsides to take into account as well.

Pros of Switching Credit Cards	Cons of Switching Credit Cards
Generally won’t affect your credit score if the bank doesn’t conduct a hard credit inquiry	Not easy to find definitive information online about product change rules
Possible to get more benefits with the new card you switch to	May not be able to switch to your preferred card, depending on issuer’s rules
Won’t need to submit a new credit application	May lose existing credit card rewards or points

Guide to Switching Credit Cards

Switching credit cards can be a relative straightforward process, but it does involve contacting your bank or credit card issuer. Here are some best practices to keep in mind before making the switch.

Decide Which Card You Want

You want to make sure your new card will be a good fit for you. Before making moves to change your credit card, check your bank’s website to see what other products are currently on offer. In some cases, you may find that you’ll get upgrade offers in the mail or after logging into your bank account online.

Contact Your Bank or Credit Card Issuer

You’ll also want to contact your bank to ask whether you can switch to the card you’ve decided on. If you can get the credit card you want, ask the bank what else you’ll need to do before you can officially make the switch.

You’ll also want to ask about certain features and benefits you’ll receive if you do decide to change credit cards. Specifically, make sure to ask about the following:

•   Whether your credit limit will remain the same after switching cards

•   If you need to pay off the balance before switching

•   Whether you’ll be subject to a hard credit inquiry

•   Whether you can keep existing rewards you’ve earned with your current credit card

•   What your new APR will be

•   If you’re eligible for credit card bonuses with the new card

Learning these answers will help you to make an informed decision and avoid getting caught off guard after making the switch. You may even be able to negotiate for things like bonuses or perks that you may not have gotten otherwise.

Effects of a Product Change on Your Credit Score

It’s important to determine whether switching credit cards will have an adverse effect on your credit score. When it comes to your credit utilization, as long as you’ll have the same credit limit with your new card, you should be able to maintain it. This is unlike closing a credit card, where you’ll lose that credit limit, which could result in an increased credit utilization ratio and a negative impact to your credit score.

In some cases, your card issuer may require a hard credit pull before allowing you to switch credit cards, which could temporarily ding your credit score. Your issuer may make this request for a variety of reasons, including to ensure your credit profile is still good and to determine whether to continue offering you the same amount of credit (especially if you tend to max out your card). You’ll be asked permission before the hard inquiry is conducted, so you’ll know it’s coming.

Effects of a Product Change on Your Credit Card Rewards

Depending on what card you want to switch to, you may be able to keep your existing credit card rewards. For instance, if you’re switching to a credit card that has the same rewards structure or program, you’ll probably be able to keep the points or miles you’ve earned.

However, if you’re going from a travel rewards card to a cash back program, for instance, your bank may not allow you to keep your existing rewards. That means you’ll have to use up your rewards or forfeit them, though it may still be worth speaking with a customer representative to see what they can do.

If you want to get sign-up bonuses on a credit card that you plan on switching to, check with your bank to see whether you’re eligible. Some cards don’t allow bonuses for existing customers.

The Takeaway

Requesting a credit card product change can be an easy way to switch to a new credit card without going through the full application process. Before you make any moves, however, take the time to confirm whether or not converting credit cards will impact your credit and whether you’ll be able to keep the rewards you previously earned. After all, valuable credit card rewards probably aren’t something you want to lose out on.

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

Does a product change reduce your credit score?

A credit card product change may affect your credit score if your issuer requires a hard credit inquiry to make the switch. This should only impact your score temporarily though.

How do I request a product change?

To switch credit cards, you’ll need to contact your bank or credit card issuer to determine whether you can switch the card you want. From there, it will inform you of the other steps you need to take.

What are the downsides of a credit card product change?

You may lose the rewards you’ve earned on your current card if you decide to switch credit cards. Your credit score could also be temporarily affected if your issuer conducts a hard credit check when you switch cards.

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Photo credit: iStock/RgStudio

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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Writing a check to yourself is one way to withdraw money from your bank account or transfer funds from one account to another. While there are other, more high-tech methods for making these transactions, writing a check to yourself is an easy option.

But it’s not the best choice for every situation. Sometimes, it’s more efficient to move funds electronically or visit an ATM to make a withdrawal. Here’s when writing a check to yourself makes sense, and how to do it.

How to Write a Check

If you don’t often use your checkbook, you may be wondering how to write a check. First, be sure to use a pen (that way, the information can’t be erased) and choose blue or black ink. Then, for every check you write, fill in each of the following details:

•  The date

•  Pay to the order of (the person or company the check is for)

•  The amount the check is for in numbers

•  The amount written out

•  Memo (this is optional—you can use it to note what the check is for—or leave it blank)

•  Your signature

Recommended: Ordering Checks – A Complete Guide

How to Write a Check to Yourself

The only difference when you write a check to yourself, versus a check to someone else, is that you put your own name on the “Pay to the order of” line. Then, just like you do for every other check you write, you’ll add the date, the dollar amount written in numbers, the dollar amount written in words, an optional memo, and finally, your signature.

Be sure to record the amount the check is for in the check register that comes with your checks when you order them (you should keep this in your checkbook along with the checks themselves). In the register, write down the date, the check number, the name of the person the check is for and/or what it’s for, and the amount. This will help you balance your checkbook so you know how much money is in your account.

Why Would You Write a Check to Yourself?

Writing a check to yourself is the low-tech way of transferring money from one bank account to another, or withdrawing money from your bank account. Here is when it can make sense to write a check to yourself.

•  Making a transfer. If you’re closing one bank account and opening another, you can move funds by writing a check to yourself. You can also write yourself a check to deposit funds from one account into another at the same bank. Or, if you have accounts at different banks, you can transfer money by writing yourself a check from one bank and depositing it in the other.

•  Getting cash from your bank account. If you want to withdraw money from the bank, you can simply write yourself a check, take it to the teller at the bank, and cash it. Just be sure to endorse the check by signing it on the back.

Examples of When You Would Write a Check to Yourself

If you have money in different bank accounts and need to consolidate your funds in order to make a large purchase, you could write a check to yourself. For example, if you’re remodeling and need to transfer $20,000 from your home equity line of credit (in one institution) to your bank account (in a different institution), you can write a check to yourself to transfer the money.

Recommended: Does Net Worth Include Home Equity

When Writing a Check to Yourself Doesn’t Make Sense

Writing a check to yourself isn’t always the best, most efficient option for transferring funds or obtaining cash. Online banking, electronic transfers, and ATMs are typically faster and easier ways to get transactions done.

Transferring Money Within the Same Bank

If you have two accounts at the same bank and you want to move money from one account to the other, it’s much quicker and more convenient to transfer your money through online banking. Writing yourself a check to do this is a hassle.

Recommended: How Many Bank Accounts Should I Have?

Getting cash out of your account

If you need to withdraw cash from your account, using an ATM can be faster and easier. If you write a check to yourself, you will need to visit the bank and go through a teller in order to cash the check and get your money. Just make sure to use an ATM within your bank’s network to help avoid ATM fees.

Risks and Concerns of Writing a Check to Yourself

When writing a check to yourself, never make the check out to “Cash.” Instead, always put your own name on the “Pay to the order of” line. This helps protect you. Otherwise, if a check is made out to “Cash,” and the check is lost or stolen, anyone can cash it.

Recommended: What Is the Difference Between Transunion and Equifax

Other Ways to Move Your Money

There are several other ways to move money that are more convenient than writing a check to yourself. This includes wire transfers, ACH transfers, electronic funds transfers, and electronic banking.

Wire Transfer

Often, when people use the term “wire transfer,” they’re referring to any electronic transfer of funds, but the technical definition involves an electronic transfer from one bank or credit union to another. To make a wire transfer, you’ll pay a fee, usually between $5 and $50, and need to provide the recipient’s bank account information.

Recommended: What Credit Score is Needed to Buy a Car

ACH or Electronic Fund Transfer

An ACH is an electronic funds transfer across banks and credit unions. If you have direct deposit for your paychecks, for instance, that money is transferred to your bank account through ACH (which stands for Automated Clearing House). You can use ACH to transfer money from an account at one bank to an account at another. The transaction is often free, but check with your bank to make sure.

Electronic Banking

Online banking will allow you to move your money from one account to another within the same bank. All you need to do is log into your online account and use the “transfer” feature.

The Takeaway

Writing a check to yourself is one way to transfer money or obtain cash, but there are many methods for doing these things that are often more convenient, such as online banking or electronic transfers. Exploring all the options can help you decide what makes the most sense for you.

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

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

FAQ

Can you legally write a check to yourself?

Yes, it is legal to write a check to yourself, as long as you’re not writing the check for more money than you have in the bank. It would be illegal to write a check for more funds than you have and then try to cash it.

Can I write a large check to myself?

Yes, you can write a large check to yourself if you have enough funds in your account to cover the amount. Never write checks for more money than you have in your bank account.

Can you write your own check and cash it?

Yes, you can write your own check and cash it at your bank or at any other location that offers this service.

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

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

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

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

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Banking can be a complex thing, but understanding what’s known as the simple deposit multiplier doesn’t have to be. The simple deposit multiplier is the multiple by which a bank can lend out funds based on the reserve requirements. It ensures the bank maintains the minimum amount of money on hand to keep bank operations up and running. It also gives the bank the opportunity to boost the economy.

What Is a Deposit Multiplier?

Also called the deposit expansion multiplier or simple deposit multiplier, a deposit multiplier is the maximum amount of money banks can create based on reserved units. To put it another way, it’s the multiple that banks use to know how much they can lend out vs. money kept on hand (say, in checking accounts) according to the existing reserve requirement. The deposit multiplier is typically a percentage of the amount deposited at a bank.

Why does the deposit multiplier concept matter? It plays a key role in the fractional reserve banking system, or FRB. This system involves the stipulation that banks must keep a certain amount of money on hand in reserves to conduct their day-to-day business. More specifically, the U.S. central bank, the Federal Reserve, mandates that banks hold a certain amount of money, known as required reserves, to make sure there is enough month for withdrawals from depositors. Any excess money that remains after the bank fulfills its daily operations can be loaned to borrowers (say, for mortgages). The amount that can be used for loans is determined by the deposit multiplier.

By accepting deposits and then making loans, banks have the ability to increase and decrease the money supply. When a financial institution lends out money in excess of its required reserves to businesses and consumers, it can amplify the money supply. That’s why the deposit multiplier metric matters; it’s a key way that the Federal Reserve and central banks can control the money supply as part of an overall monetary policy.

Recommended: How Long Does It Take For a Direct Deposit to Go Through?

How Does a Deposit Multiplier Work?

Here’s how a deposit multiplier works: When the account holder puts money in any of the different kinds of deposit accounts offered, the bank holds a percentage of it. This percentage is called the reserve requirement, which is set by the Federal Reserve. It helps ensure that the bank keeps an adequate amount of cash reserves available to meet the needs of withdrawal requests.

Keeping money accessible on demand can be critical. This protects against people trying to withdraw cash in keeping with fund availability rules and finding that their money is unavailable, which could be a deeply problematic and distressing experience.

A deposit multiplier is the multiple that allows banks to lend out money that’s deposited in the bank. This is the maximum amount of money the bank can lend out according to the value of its reserves. It is typically expressed as a percentage. You’ll learn more about that in a moment.

Real Life Examples of a Deposit Multiplier

To understand a deposit multiplier, it’s wise to understand a few basic banking concepts.

•   For banks, deposits are liabilities, because it is money owned by the account holder, and loans are assets for banks, because that money belongs to the financial institution and must be repaid.

•   Banks also have reserves, which are deposits in the bank or in the Federal Reserve. Reserves are cash available to the bank.

◦   There is also an amount the bank must keep on hand, known as required reserves.

◦   Excess reserves is the term used to describe when the bank has more reserves than is required; these funds can in turn be lent out.

Now, if someone makes a $1,000 deposit, the bank’s liabilities and reserves would increase by $1,000. If the required reserve ratio is 10%, that means must keep $100 on hold and available, but the other 90%, or $900, may be lent. This allows the bank to expand the economy and profit.

To see how the simple deposit multiplier works, consider an example in which a deposit of $10,000 was made and the required reserve ratio is 5%, meaning $500 has to stay on hand.

The deposit multiplier formula is: 1 / reserve ratio.

So with a required reserve ratio of 20%, the deposit multiplier is five. That means that for every dollar in the bank’s reserves, the financial institution can boost the money supply by up to $5. If the reserve ratio was 5%, the deposit multiplier would be 20, and the bank could build the money supply by $20 for each dollar held in reserve. As you see, the lower the reserve ratio is, the higher the deposit multiplier is and the more it can lend out.

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How Do You Find the Simple Deposit Multiplier?

The simple deposit multiplier is a ratio between bank reserves and bank deposits. It’s important for maintaining the money supply of the economy and the banking system.

As noted above, this figure is calculated by dividing 1 by the required reserve ratio. For example, if the required reserve ratio is 10%, this means the deposit multiplier is 10. For banks, this means that for every $10 deposited, a total of $1 must be kept in reserves, and the bank can increase the money supply by $10 for each dollar it’s holding.

Deposit Multiplier and the Economy

The Federal Reserve, which is the U.S. central bank, uses the deposit multiplier as one of its monetary tools to control the supply of money in the economy. Usually the money that is deposited in a bank is unlikely to stay in the bank. The money that a consumer deposits in a bank is lent out to another consumer in the form of a loan. The deposit multiplier measures this change in checkable deposits as bank reserves change.

Banks are creating money by expanding the amount of reserves into a larger amount of deposits. If the bank decides to keep a small amount of deposits as reserves that means more money is sent to other banks and more deposits are created at these other banks. If a bank decides to keep a larger sum of deposits as reserves, that means less money or new deposits are made in other banks or circulated among consumers.

When money is loaned out to a consumer, at some point that loan will be repaid and deposited back into the banking system. If there is a required reserve ratio of 10%, then 10% of that new deposit will remain in the bank and the rest can be loaned out into the economy. This cycle fuels economic growth, not to mention profit for the bank.

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Deposit Multiplier vs Money Multiplier

While these two terms sound quite similar and are closely connected, they are not quite interchangeable. Consider the differences between a deposit multiplier vs. money multiplier.

•   The deposit multiplier is the maximum amount of money banks can create by lending funds. Some deposited money must remain on hand according to the required reserve ratio, but the rest can be used to grow the economy as indicated by this figure. The deposit multiplier is calculated as one divided by the reserve ratio.

•   The money multiplier is the increase in the bank’s money supply. It measures the change in money supply created through bank lending and is usually lower than the deposit multiplier since banks don’t lend all of their reserves.

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The Takeaway

The deposit multiplier is a tool used by financial institutions. It expresses the maximum amount of money a bank can create based on its cash held in reserves. The figure is calculated as one divided by the required reserve ratio; the lower the reserve ratio is, the higher the deposit multiplier is and the more a bank can lend out. The deposit multiplier can help to optimize an economy’s money supply, which is why this metric is used by central banks all over the world.

If you are a personal banking client, you probably aren’t too focused on the deposit multiplier. You likely want convenience, high interest rates, and low fees. If so, check out what SoFi offers.

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FAQ

How do you use a deposit multiplier?

The deposit multiplier is used to determine the amount of money that can be created with the funds in a bank’s money supply.

How are deposit levels calculated?

In banking, the loan-to-deposit ratio (LDR) is calculated by dividing the bank’s total amount of loans but the sum of deposits over a specific time period. Loans are considered assets, by the way, since the money is the bank’s, while deposits are deemed liabilities, since they belong to the account holder.

What is the formula for a simple deposit multiplier?

To find the deposit multiplier, you divide one by the required reserve ratio. So if the reserve ratio is 5%, the deposit multiplier is 20. If the reserve ratio is 10%, the deposit multiplier is 10.

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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.

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