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A Certificate of Deposit (CD) is similar to a savings account, but it comes with a twist: You have to deposit a lump sum in and agree to not touch the money for a specific period of time: e.g. a few months to a few years. The shorter the time period (or term) of the CD, the lower the interest rate it will pay; the longer the term, the more interest you may earn on your money.

These days, though, the difference in the amount of interest you can earn from a long- vs. a short-term CD isn’t always significant. Nonetheless, it’s one of a few factors to consider when deciding which type of CD is right for you.

Certificate of Deposit Overview

A Certificate of Deposit is a type of account offered by most financial institutions, like banks or credit unions. With a CD you make one initial deposit to fund the account, and then your money remains in the account until the end of the term of the CD.

How long does a certificate of deposit last? One big difference between savings accounts and certificates of deposit is that with a savings account, you can deposit or withdraw money at any time. However with a CD you can’t deposit any additional money, and if you withdraw money before the end of the term, you will likely face early withdrawal penalties.

There are some no-penalty CDs on the market that don’t charge a penalty for pulling money out early, but be sure you understand the terms and potential tradeoffs in terms of lower rates or fees.

Recommended: What is a Certificate of Deposit and How Does it Work?

Are CDs Insured?

CDs are typically insured by the FDIC for up to $250,000, which makes them a relatively safe investment. Any money you deposit, up to $250,000, would be covered in the event of fraud or a bank collapse.

If the CD is issued by a credit union, it would be insured for the same amount, by the National Credit Union Administration (NCUA).

There are some CDs that are not federally insured, however, like a Yankee CD (which is a CD offered by the U.S. branch of a foreign bank). Be sure to understand the terms before you open the account.

How Long Are CD Terms?

Back to the question: How long does a certificate of deposit last, generally speaking? All CDs come with a term, and different banks might offer CD investing with different terms. As noted, the longer the term of the CD, generally the higher the interest rate paid out. While there aren’t definitive rules that differentiate between a short-term CD, medium-term CD, and long-term CD, the following is a general guideline:

•   Short-term CDs — 1 year or less

•   Medium-term CDs — 2 to 3 years

•   Long-term CDs — 4 years or more

What Is a Short-Term CD?

A short-term CD is a CD whose term is lower than average, generally 1 year or less. Different banks offer CDs with different terms, but 3-month and 6-month CDs are common.

A short-term CD gives you greater flexibility as you’ll have access to your money sooner than with a longer-term CD. But typically a short-term CD also offers lower interest rates than CDs with longer maturity dates. (Remember that the annual percentage rate or APY is different from the interest rate.)

Why Should I Consider a Short-Term CD?

The biggest advantage of a short-term CD is that it typically pays more than a standard savings account, and you have more flexibility than with longer-term CDs. This can be helpful if you need to save money for a large purchase, when you’d like to earn a steady rate, but you know you’ll need access to the money relatively soon.

Also, with a short-term CD your money is only tied up for a relatively brief period of time, so if interest rates rise and you want to invest elsewhere — or you decide you need your money for some other purpose — you would only need to wait a few months before you could withdraw your money without a penalty.

Advantages of Short-Term Certificates of Deposit

•   Higher interest rate than savings or money market accounts.

•   A relatively safe place to park savings for a big purchase, while earning a steady rate.

•   If rates change or your needs shift, you won’t have to wait long to access your money.

Disadvantages of Short-Term Certificates of Deposit

•   Lower interest rates than medium-term and long-term CDs.

•   You may be able to find higher rates with other financial products (e.g. a high-yield savings account).

Recommended: How Do High Yield Savings Accounts Work?

What Is a Medium-Term Certificate of Deposit?

A medium-term certificate of deposit is a CD whose maturity date is 2 to 3 years. That means that once you invest your money in the CD, you won’t be able to withdraw that money without penalty until the end of the 2- or 3-year period.

Generally medium-term CDs offer higher interest rates than short-term CDs but lower rates than long-term CDs.

Why Should I Consider a Medium-Term CD?

A medium-term CD can make sense if you are saving money for something that won’t happen until a few years down the road.

You’ll want to make sure that you also have an account to store short term savings like an emergency fund. That way, you are less likely to feel the need to withdraw your money before the term of the CD is up.

Advantages of Medium-Term Certificates of Deposit

•   Higher interest rates than short-term CDs.

•   Predictable rate of return with low risk.

Disadvantages of Medium-Term Certificates of Deposit

•   Lower interest rates than long-term CDs.

•   Risk of inflation or interest rates going up while your money is tied up in the CD.

What Is a Long-Term Certificate of Deposit?

Generally speaking, a long-term certificate of deposit is a CD that has a term of 4 years or more. Long-term CDs offer the highest rates of any type of CD, but the rates you’ll earn even with a long-term CD are lower than historical stock market averages. That said, the beauty of CDs is that they offer a predictable rate of return, in a vehicle that’s relatively low risk.

The tradeoff to the higher interest rates that come with long-term CDs is that you won’t have access to your money for several years without paying a penalty.

Why Should I Consider a Long-Term CD?

A long-term CD can be an option if you have money that is set aside for a specific purpose that won’t happen for several years. You might not want to put money that you know you’ll need in the stock market for growth.

Be careful though — if inflation or interest rates rise during the term of your CD, you might find the interest rate on your CD to be not as great as you thought it was.

Advantages of Long-Term Certificates of Deposit

•   Highest interest rates of any type of CD.

•   The predictable rate of return can help balance more volatile investments in your portfolio.

Disadvantages of Long-Term Certificates of Deposit

•   Your money is tied up in the CD for several years.

•   Risk of inflation or interest rates going up while your money is tied up in the CD.

•   You lose out on potential market growth while your money is tied up.

The Takeaway

Investing in certificates of deposit can be a smart way to earn a higher interest rate than you’d typically get from savings or money market accounts. The tradeoff is that most CDs will charge an early withdrawal penalty if you remove your money before the end of the CD’s term, so you have to be willing to lock up your funds for the specific term of the CD you choose (i.e. a few months to a few years).

Generally, CDs with longer terms offer higher interest rates than shorter-term CDs, so make sure to shop around for different rates before opening a CD. You may also be able to find competitive rates with other accounts, like high-yield savings.

Speaking of, if you’re looking for great interest rates while keeping flexible access to your money, consider SoFi’s all-in-one mobile banking app. Eligible account holders can earn a competitive APY when you sign up for direct deposit. That rate can compare favorably to the rates on CDs offered by some banks, and you maintain easy access to your money — without an early withdrawal penalty.

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

Which makes more money: a short-term CD or long-term CD?

CD rates vary widely, so if you’re wondering what is a good return on investment for a CD, it can pay to shop around to find the best rates. Most times, you will make more money with a long-term CD compared to a short-term CD.

What happens if you need to withdraw your money from a CD prior to its maturity date?

You’ll get the best returns from your CD if you keep the money in the account until it reaches maturity. But if you do need to withdraw your money before the CD matures, you generally can. You’ll just need to pay an early withdrawal fee — often losing a couple of months’ worth of interest. Check the terms when you open the CD.

How old do you have to be to open a CD account?

To open a CD, you have to be a legal adult, which is usually 18 or 21 years old, depending on the state. Parents can still invest in CDs for their children or other minors, through use of a custodial account.

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

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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

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

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

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

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

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.

Photo credit: iStock/AndreyPopov
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Everyone likes to win big. So what if saving money could make it possible to win more money? That actually is possible, thanks to prize-linked savings accounts that combine a normal savings account with a lottery-esque opportunity to win prize money.

Keep reading to learn:

•   How prize-linked savings accounts work.

•   The pros and cons of prize-linked savings accounts.

•   How to open a prize-linked savings account.

•   Alternatives to prize-linked savings accounts.

What Is a Prize-Linked Savings Account?

A prized-linked savings account is essentially a standard account, but it gives account holders the opportunity to win prizes. In addition to their presence in the U.S., they’re more common in other countries, including Germany, Argentina, and Japan.

The way that prize-linked savings accounts work is they allow account holders to enter raffles to earn cash prizes. If you have one of these prize accounts, how would you enter? By making deposits into a savings account, CD, or savings bond. Currently, these types of accounts are offered by financial institutions such as credit unions in 34 different states.

These savings accounts earn a nominal amount of interest and aren’t a solid replacement for a traditional savings account in the long run. However, they can be good for short-term savings. They’re designed to encourage people with low- or moderate-income levels to save more, which is a great thing.

Recommended: Checking Accounts vs. Savings Accounts: Key Differences to Know

Types of Prize-Linked Savings Accounts

To make it easier to understand how prize-linked savings accounts work, let’s look at a few real-life examples of these savings accounts that are available domestically.

Save to Win

The Save to Win pilot project allows credit unions to hold savings promotion raffles. (Banks or other financial institutions weren’t allowed to operate lotteries under this program.) Since 2009, Save to Win has awarded more than $1.4 million in prizes to more than 14,000 members in four states.

Lucky Savers

Since 2015, Lucky Savers has motivated New Yorkers to save by rewarding smart savings habits. This program was exclusive to credit unions and was formatted as a 12-month share certificate with unlimited deposit capabilities. Opening this account only required a $25 initial deposit. Then, for every $25 in month-over-month balance increase, account holders earned one entry into monthly and quarterly prize drawings.

WINcentive

WINcentive® Savings is another credit union-exclusive program. This program in Minnesota offers prize drawing entries for every $25 an account holder saves for up to four entries each month. Prize drawings occur monthly, quarterly, and annually. In 2012 alone, $100,000 in cash prizes were awarded to account holders.

Are Prize-Linked Savings Accounts (PLSAs) Legal?

Prize-linked savings accounts are legal in some states that have enacted legislation to allow these types of accounts. In response to concerns surrounding prize-linked savings programs, Congress passed the American Savings Promotion Act which authorizes banks and thrifts (a financial institution specializing in savings accounts and mortgages) to conduct savings promotion raffles. It also excludes these raffles from the prohibition against financial institutions dealing in lotteries.

Pros of Opening a Prize-Linked Savings Account

Depending on your circumstances and financial goals, a prize account can offer a number of advantages. The pros of these savings accounts are:

•   Prize-linked savings accounts can incentivize individuals to save more money. Programs have found the amount of savers and savings amounts increase when there is a prize incentive.

•   It’s possible to win money that can help offset monthly expenses or can be large enough to be the equivalent of a small lottery prize.

•   It’s possible to win prize money without any of the normal risks that come with gambling or buying lottery tickets. The account holder gets to keep their savings whether they win a prize or not.

Cons of Opening a Prize-Linked Savings Account

Along with the benefits, there are disadvantages to prize-linked savings accounts. These include:

•   Prize-linked savings accounts earn little to no interest. The chance of winning money may not be worth forgoing a better interest rate with traditional or high-interest savings accounts.

•   Winning any prize money at all is not guaranteed and not predictable, like a steady stream of interest earnings is.

•   These prize-linked savings accounts are often cheaper for financial institutions to offer than traditional savings accounts with higher interest rates. For this reason, they might not promote what better savings options an account holder might have.

Opening a Prize-Linked Savings Account

If you want to open a prize-linked savings account, these are the steps you’ll generally take.

1.    Find a bank or credit union that offers prize-linked savings accounts. These accounts aren’t available in all states and are more commonly found at credit unions.

2.    Apply to open a prize-linked savings account. The applicant will usually need to provide two forms of identification during the application process.

3.    Make a deposit. Most prize-linked savings accounts have small initial minimum-deposit requirements.

Are There Taxes on PLSAs?

There are tax requirements surrounding prize-linked savings account winnings. Sure, you can go and spend money from your savings account that’s been plumped up thanks to a cash prize. However, anyone who wins money from one of these accounts should be prepared to pay taxes on their winnings according to state and federal laws.

Alternatives to a Prize-Linked Savings Account

Because there’s no guarantee that you will win any money with a prize-linked savings account, you may want to consider these other savings options that can offer a more guaranteed return.

•   High-yield savings accounts. High-yield savings accounts are simply normal savings accounts with high interest rates. Usually, high-yield savings accounts are found at online banks. Because online banks don’t have to spend a ton of money on brick-and-mortar banking locations, they are able to offer higher interest rates, lower fees, or other bank account bonuses. High-yield savings accounts allow consumers to take advantage of compound interest.

•   Money market account. Money market accounts tend to have a higher APY that normal savings accounts do, but they may have similar withdrawal limits to savings accounts. Check with your financial institution to see if there is a cap on the number of withdrawals you can make per month.

•   Certificate of deposit. A certificate of deposit (CD) has a minimum deposit requirement. It also has a set timeframe during which you can’t withdraw your money from the CD without having to pay a penalty fee. Usually, CDs have higher interest rates than both savings accounts and money market accounts.

The Takeaway

The potential to win prize money through a prize-linked savings account can make saving more appealing for some consumers. That being said, these accounts tend to have much lower interest rates than normal savings accounts, and there is no guarantee the account holder will ever win any money. Before opening one, carefully consider if a prize-linked savings account can meet your needs or if you would be better off with a different financial vehicle.

Want to find a way to earn more on savings? Bank smarter with SoFi, and watch your money grow. Our high-yield bank account offers a competitive APY when you open an account with direct deposit. Other great perks: No account or overdraft fees, plus access to your paycheck up to two days early.

Watch your money make more money with SoFi.

FAQ

Are prize-linked savings accounts legal?

Yes, prize-linked savings accounts are legal in 34 states. Congress passed the American Savings Promotion Act in 2014, which authorizes banks and thrift banks to conduct savings promotion raffles.

Is a lottery account safe?

Lottery accounts are a safe way to save money. There is no actual gambling involved with a prize-linked savings account. Account holders get to keep all of their savings whether or not they win prize money.

How do I open a lottery account?

The process of opening a prize-linked savings account is the same as opening a normal savings account. Once someone finds a bank or credit union that offers this type of savings account, they will apply and provide all of the information and identifying documentation required during the application process. Then they will make an initial deposit.

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

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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

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

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

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

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

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

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

Photo credit: iStock/Tevarak
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An Individual Development Account (or IDA) is a special type of matched savings account that’s designed to help lower-income individuals and households achieve their financial goals. IDA accounts were first introduced in the 1990s as part of a federal initiative to encourage wealth-building among financially-challenged populations.

The IDA account program is specifically designed to encourage saving toward one of four goals, including home ownership. There are certain requirements that must be met to qualify for an Individual Development Account.

Here, take a closer look at this topic, including:

•   What is an Individual Development Account (IDA)?

•   Who is eligible for an IDA?

•   How to open an IDA.

•   The pros and cons of an IDA.

What Is an Individual Development Account (IDA)?

An Individual Development Account is a bank account that allows lower-income Americans to set aside money to fund specific goals. Generally, money in an IDA account can be used for one of four purposes:

•   Buying a car

•   Purchasing a home

•   Starting a business or supporting an existing business

•   Paying for post-secondary education or training

Some programs may allow you to use the money for other things, like home repairs and improvements or retirement.

IDA accounts are matched savings accounts that are funded partially with grant money. The IDA program can also provide other benefits to participating savers, including financial literacy training and homebuyer education.

How Does an Individual Development Account Work?

Individual Development Accounts work by encouraging participants to save and then matching a percentage of those savings to fund specific financial goals. A sponsoring organization, which may be a non-profit or state government agency, partners with banks and other financial institutions to offer IDA accounts to underserved populations.

In terms of the matching component, IDA accounts are similar to 401(k) plans in that savers can essentially get free money for participating. The match is designed to act as an incentive to encourage account owners to save. The IDA savings match varies by program.

For example, you may be eligible for a 1:1 match, meaning you get $1 for every $1 you save. Other programs may offer a 5:1 match instead, so you get five times the matching contributions for every dollar you save (that means $5 to every dollar you tuck away). IDA programs can also cap the total maximum match allowed to a set dollar amount. In some cases, the cap will be in the $5,000 range, though higher and lower amounts are possible as well. These Individual Development Account programs typically last five years.

Once you reach your target savings amount, you can then use that money to fund your goals. So if you save $25,000, including your contributions and the match, you could then use that money to put a down payment on a home or start a business under the guidelines of the IDA program. Account minimum balance requirements and fees may be waived for IDA savers.

One word of caution: If you stop saving before you reach the goal amount or if you use the funds for a purpose other than described by the IDA, you may risk forfeiting the matching money.

History of Individual Development Accounts (IDAs)

The idea for IDA accounts was first proposed in 1991 by author Michael Sherraden. In his book, “Assets and the Poor: A New American Welfare Policy,” Sherraden proposed IDA accounts as a means of introducing real assets into the lives of poorer populations that might otherwise lack them. Specifically, the Individual Development Account was meant to be a tool for encouraging personal responsibility in building wealth.

In 1996, the Personal Responsibility and Work Opportunity Reconciliation Act reformed welfare programs and included IDAs as an eligible use for federal funds. The Assets for Independent Act of 1998 authorized the U.S. Department of Health and Human Services to provide nonprofits with grants to fund IDA programs in partnership with financial institutions and state, local, and tribal governments.

There are more than 600 Individual Development Account programs active in the U.S. today.

How to Open an Individual Development Account

If you’d like to open an Individual Development Account, the first step is locating programs in your area. The Administration for Children and Families offers an online mapping tool to help you locate IDA programs in each state.

Once you find an IDA program provider near you, you can contact them to find out the specific steps you need to take to open an account and which banks they partner with. Keep in mind that you’ll also need to meet the following eligibility requirements to have an Individual Development Account.

Earn Less Than 200% of Federal Poverty Level

Income is a key eligibility requirement for IDA accounts. Your income has to be below 200% of the federal poverty level for your household size. These levels are set by the federal government and are also used to determine eligibility for other benefits, like Medicaid. You can use an online federal poverty calculator to determine whether your income falls within the guidelines.

Have a Paying Job

A paying job is another requirement for opening an Individual Development Account. If you’re planning to buy a home, for instance, the government wants reassurance that you’ll be able to save money now and make your payments later. There are, however, no specifications on what kind of job you need to have.

Cannot Have More Than $10,000 Worth of Assets, Excluding One Home and One Car

The IDA program assumes that participants aren’t starting out with significant wealth. So another condition for eligibility is a $10,000 cap on assets. You can, however, exclude the value of one home and one car from this total.

Must Take Free Financial Literacy Courses

Financial literacy and education courses are typically provided and required by IDA programs. These courses are designed to educate participants about financial basics, such as budgeting, saving, and debt. A participant might learn financial hacks, such as how a parent can set up a kids’ savings account for a child, even though the minimum age to open a bank account in one’s own name is 18. This can give a kid a head start on accumulating money. Or perhaps the class would illuminate the value of creating an emergency-fund savings account to achieve greater financial stability.

Programs can also offer additional topic-specific classes on concepts like home buying and business planning. The idea here is that an IDA isn’t just helping you build wealth, it’s also teaching you how to manage it wisely.

Pros and Cons of an Individual Development Account (IDA)

Individual Development Accounts are designed to help people who participate in them to build wealth and get ahead financially. Those are among the upsides of these accounts. There are, however, some disadvantages to weigh against the potential benefits. Here’s a closer look:

Pros	Cons
•   Matched savings can help you fund your goals more quickly •   The money you receive in matching contributions isn’t taxable to you •   Financial literacy courses can help to make you more knowledgeable about money	•   IDA accounts have limited flexibility since they can only be used to fund specific goals •   Not everyone is eligible to open and contribute to an IDA account •   Saving money in an IDA isn’t guaranteed to improve your financial outlook •   You may risk forfeiting the matching money if you can’t meet your goal or if you use the funds for something other than approved expenditures

Alternatives to an Individual Development Account (IDA)

An IDA account isn’t the only way to save money toward your financial goals. Some of the other possibilities for saving money include:

•   Establishing a money market account

•   Opening a brokerage account

•   Setting up one or more high-yield savings accounts

•   Contributing to a 401(k) or IRA

•   Building a CD ladder with multiple certificates of deposit

Each savings option has pros and cons, and you may need to spend a little time learning about each one. If you don’t know how a money market account works, for example, that could make it more difficult to choose the best account for your savings.

And in terms of whether an IRA vs. 401(k) is better for retirement saving, the answer depends on your goals and tax situation. In addition, not everyone has access to a 401(k) account and may need to find other ways (like an IRA) to save for their future.

Another important bit of advice: If you choose to open a savings account, keep in mind that you have options. Your decision may determine the interest rate you earn and the fees you pay. For example, a college student bank account (if you are eligible for one) might charge fewer fees than a traditional savings account.

You may also be debating whether to open a joint vs. separate bank account if you’re married and want to save for a goal like a down payment on a house. Having a joint account for shared savings goals or expenses and separate accounts for individual goals could help you to strike the right balance. But again, do your research to find the option that best suits your financial style and goals.

The Takeaway

An Individual Development Account was created to help lower-income individuals secure financial stability. Thanks to matching funds, it can accelerate a person’s saving towards such expenses as buying a home. However, not everyone is eligible for these accounts, and the funds, once saved, can only be used on certain expenses. Still, it’s an opportunity to possibly snag some free money and definitely worth consideration for many people who qualify.

Another way to boost your financial wellness is by partnering with a top-notch financial institution like SoFi for your bank account. We offer Checking and Savings in one convenient place. When you join with direct deposit, you can earn a competitive APY, avoid bank fees, and get paid 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

How do I get an IDA account?

To open an Individual Development Account, you’ll need to meet the eligibility requirements. Assuming that you’re eligible, you can then contact an IDA program near you to learn what steps are necessary to open an account.

What is a federal IDA?

The federal IDA program is a savings match program that’s designed to help underserved populations build wealth. Money in an IDA account can be used to buy a home, pay for higher education expenses, start a business, or even buy a car.

Can I take money out of my IDA?

Money in an IDA can be withdrawn to fund a specific goal. For example, if you’re ready to buy a home, you can take money from your account to pay for the down payment or closing costs. Or if you’re starting a business, you can withdraw IDA money to cover operating costs. However, if you take out the money for other purposes, you may forfeit the matching funds.

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Photo credit: iStock/HAKINMHAN

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

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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

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

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

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

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

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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ChexSystems is a nationwide credit reporting system that collects information about closed bank accounts and why they were closed. If you’ve ever had a checking or savings account in your name, it’s possible that you may have a ChexSystems report.

ChexSystems is authorized to operate under the Fair Credit Reporting Act (FCRA). Although it’s different from traditional consumer credit reporting, like the kind done by Equifax, Experian, and TransUnion, they’re both part of having a clean banking and credit record.

If you have a bank account or plan to open one, it’s helpful to understand what goes into a ChexSystems report and why it might matter to you.

How Does a ChexSystems Report Work?

A ChexSystems report is essentially a risk-management tool for any entity that’s checking any individual’s banking and credit history. The information in the report that ChexSystems compiles helps companies gauge whether a customer is creditworthy before granting them an account. It’s based only on closed accounts, not current ones.

For example, say you want to open a new bank account: The bank may request your ChexSystems report to see if you’ve ever had previous bank accounts closed in the past for things like excessive overdrafts, bounced checks, or suspected fraud.

Companies that have a permissible purpose under the FCRA, i.e., banks, credit unions, and other financial institutions, can then request a copy of a consumer’s ChexSystems report.

If the bank sees any kind of negative activity on your ChexSystems report, you may be denied a checking and savings account.

The information in your ChexSystems report can also be used to generate a ChexSystems consumer credit score. This is separate from consumer credit scores generated using the FICO or VantageScore models to help lenders decide who may qualify for a loan.

Recommended: Why is Having a Good Credit Score Important?

What Is In a ChexSystems Report?

Your report will include basic identifying information, such as your name, address, phone number, and date of birth. If you’ve ever had a security freeze in place, that will show up on your ChexSystems report, as will identity theft alerts.

More importantly, your ChexSystems report includes details about your banking history. So what does ChexSystems check for, exactly?

A typical ChexSystems report may include information about:

•   Suspected fraudulent activity

•   Non-sufficient funds (NSF) activity

•   Inquiries (when someone has viewed your ChexSystems report)

•   Check cashing inquiries

•   Returned checks reported by retailers

•   History of checks ordered

•   Checking account closures

ChexSystems only collects negative information for closed accounts. So any open bank accounts you have wouldn’t show up on a ChexSystems report.

How Do I Know If I Have a ChexSystems File?

The easiest way to find out if you have a ChexSystems file is to request a copy of your report. You can get a copy of your ChexSystems report for free once every 12 months under the Fair and Accurate Credit Transaction Act (FACTA), similar to the way you can request a free copy of your credit reports once a year from the three main credit bureaus.

Being denied a bank account could be a tipoff that you have a ChexSystems report with negative information. If you’ve been denied a bank account, you can request a copy of your ChexSystems report to understand the factors behind the bank’s decision. The bank is required to specify the reason for the denial.

How to Get a Copy of Your ChexSystems Report

You can request your report online, by phone, by mail, or by fax. Here are four ways to get in touch with ChexSystems to request your report:

•   You can complete and submit the Consumer Request for Disclosure Form online.

•   You can call 1-800-428-9623 Monday through Friday, 8:00 am to 7:00 pm CST.

•   You can mail a Consumer Request for Disclosure Form to ChexSystems, Inc., Attn: Consumer Relations, PO Box 583399, Minneapolis, MN 55458.

•   Or you can fax a completed Consumer Request for Disclosure Form to 602-659-2197.

ChexSystems also offers options for people with visual or hearing impairments.

You have to be 18 or older to request a ChexSystems report online. If you’re under 18, you have to complete a Score Order Form and request your report by mail, fax, or phone.

If you need to request a ChexSystems report for someone who’s under 18, you’ll have to send the request by mail or fax. You’re required to provide the following documentation:

•   Notarized copy of the minor’s birth certificate

•   Copy of the minor’s Social Security card

•   Copy of your driver’s license or state-issued ID (if you’re the minor’s parent or legal guardian)

•   Proof of address

If you’re not the minor’s parent or your name isn’t on their birth certificate, you’ll also have to provide proof of legal guardianship. That can be a court order or other legal document.

To request a ChexSystems report for anyone else, such as your spouse or an aging parent, you’ll need to provide a notarized Power of Attorney. You’ll also need a notarized written document that’s signed by the person you’re making the request for.

What to Do If You’re Listed in ChexSystems

If you’re listed in ChexSystems, you can request a copy of your report to see what negative information is being reported. You can also look for any information that may be inaccurate or erroneous. If you see information that you believe should not be listed in your ChexSystems file, you can initiate a dispute with ChexSystems. The process is similar to disputing errors on a regular credit report.

However, when the information in your ChexSystems file is correct, there isn’t much you can do to get it removed. Instead, you’ll have to wait for it to fall off your ChexSystems report. ChexSystems can maintain information for up to five years.

Can You Get Yourself Removed From ChexSystems?

It may be possible to get yourself removed from ChexSystems if you’re able to successfully dispute inaccurate information in your file. If you’re denied an account, and ChexSystems determines that the information is correct, then you’ll either have to wait for it to fall off your file, or you can try a different tactic and ask the bank to remove it. Banks are not obligated to do this, however.

If the bank is willing to remove negative information, keep in mind that there may be a financial obligation you need to meet first. For example, if you closed an account with a negative balance, you may need to make a deposit to bring the balance back to zero. If you go this route, be sure to get written confirmation that you’ve paid off anything owed to the bank and that the account is closed to avoid triggering any additional banking fees or charges.

How to Clean Up Your ChexSystems Report

To clean up your ChexSystems report, you’ll first need to get a copy of it if you haven’t done so already. You can then dispute any negative information you find. This may help to improve your ChexSystems profile if you can get the information removed.

As mentioned, you can reach out to the bank and offer to make good on any outstanding obligations. The bank could agree to remove the negative information. Going forward, you can prevent any further negative information from being reported by practicing good banking habits.

You can do that by:

•   Maintaining positive balances across accounts so you don’t land in overdraft

•   Keeping of checks and deposits to avoid bounced checks

•   Protecting your banking information to prevent fraud

•   Reporting any suspected fraud to your bank right away

Those actions won’t erase a negative ChexSystems file. But they can help you to stay on your bank’s good side.

How Does a ChexSystems Report Affect Your Credit Score?

Your ChexSystems report doesn’t affect your consumer credit scores directly. FICO credit scores, for example, are based on how responsibly you manage credit and debt (e.g. how often you pay bills late, how much of your available credit you’re using, and how often a hard credit inquiry shows up on your report).

Those are some of the main factors that affect credit scores.

But financial institutions could take both types of reports into account, when evaluating you for a new loan, checking, or savings account.

What if I have a low credit score? In that case, you might find it harder to get approved for credit. And if you are approved, you may be looking at much higher interest rates. That’s because lenders may view you as being a riskier borrower. The logic is the same with your ChexSystems report and score: Banks and lenders typically give better terms to those with a clean financial bill of health.

What to Do If You’ve Been Denied a Checking Account

If you’ve been denied a checking account because of a negative ChexSystems report, it helps to know what to do next.

•   Request a copy of your ChexSystems report to understand why you were denied.

•   Review your ChexSystems report for any errors or inaccuracies and dispute any errors you find.

•   Ask the bank to reconsider the denial.

•   If the bank is unwilling to reconsider, ask about second chance bank accounts.

Second chance bank accounts are designed for people who have been denied a checking account previously. These accounts may have higher fees or more restrictions than regular bank accounts. But they can help you reestablish a positive banking history if you have a negative ChexSystems report.

The Takeaway

ChexSystems is a nationwide reporting system for closed bank accounts. Qualified institutions may access ChexSystems reports to evaluate individuals who are applying for new checking or savings accounts. Being listed in ChexSystems means you may hit a snag when applying for a new bank account, typically because you have one or more negative incidents on your closed accounts (e.g. overdrafts, fraud, unpaid negative balances).

The good news is, there are banks that don’t penalize you for having a negative ChexSystems report. Also, you can dispute errors on these reports — or fix old mistakes. For example, it’s possible to be proactive and pay off an old, negative balance, and potentially improve your ChexSystems report. Otherwise, you have to wait five years for old information to drop off the report.

If you’re thinking of opening a new bank account, consider the all-in-one online bank account with SoFi — no ChexSystems report required! You’ll pay no management fees with SoFi, and you can earn a great APY when you qualify by setting up direct deposit.

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

FAQ

Can you get out of ChexSystems?

It may be possible to get out of ChexSystems if your report includes information that’s inaccurate or reported in error. You’ll need to dispute the information through ChexSystems in order to have it corrected or removed from your file.

How long does a person stay in ChexSystems?

Generally, negative information can stay on a ChexSystems report for up to five years. If you have multiple negative items on your ChexSystems report, the five-year reporting time frame applies separately to each one.

Which banks report to ChexSystems?

ChexSystems doesn’t specify which banks use its reporting system. If you’re unsure whether a bank reports to ChexSystems or reviews ChexSystems reports when you apply for a new account, you can call the bank and ask. You can also ask whether second-chance banking is an option, in case you’re denied a traditional bank account.

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Photo credit: iStock/atakan

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

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

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 .

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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

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

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

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

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

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Understanding exactly what it means to be an authorized user on a credit card account is important for both the cardholder and the credit card authorized user. There are some rules and restrictions involved, but in general, becoming an authorized user on a solid cardholder account can help build an authorized user’s credit history and potentially boost their score.

Here’s what you need to know, from what an authorized user on a credit card is exactly to the process of adding an authorized user to a credit card.

Recommended: What is the Average Credit Card Limit

What Is an Authorized User?

An authorized user is someone that the primary cardholder — the individual who owns the credit card account and is responsible for charges to the card — has authorized to use their card.

Unlike a primary cardholder, an authorized user on a credit card is not subject to credit checks and other credit card issuer requirements in order to use the card. However, the individual — who is often a spouse, child, or other family member — must meet the card issuer’s age requirements. The primary cardholder may also have to pay a fee to add the authorized user. The number of authorized users allowed on each card varies depending on the credit card issuer.

An authorized user may get a card with their name and the primary cardholder’s account number on it that they can then use. Or, they can simply use the primary cardholder’s card to make purchases.

Additionally, authorized users may have access to the cardholder’s account information, such as their credit limit, available balance, and fees. They can make payments, report lost or stolen cards, and initiate billing disputes.

That said, any charges made by an authorized user are ultimately the responsibility of the primary cardholder. Authorized users also generally can’t close an account, add another authorized user, or change the card’s PIN, credit limit, or interest rate.

Recommended: Tips for Using a Credit Card Responsibly

Responsibilities of an Authorized User

Even though authorized users are allowed to make monthly payments, they’re not responsible for payments — no matter how much they may have spent on the card. Rather, the responsibility of making on-time monthly minimum payments always falls to the primary cardholder.

In many cases, primary cardholders will work out some type of payment system under which an authorized user can reimburse the primary cardholder for their share of the bill. With this system, the primary cardholder can keep track of credit card charges and more easily spot unusual or potentially fraudulent activity on the card as well as credit card chargebacks. Additionally, a system can ensure payments are made on time and that any spending on the credit card is done responsibly.

In other cases, authorized users may make their payments directly to the credit card issuer. With this arrangement, however, the primary card holder still holds the ultimate responsibility of making the minimum monthly payment on time.

Recommended: When Are Credit Card Payments Due

Authorized User vs. Joint Credit Card

It’s easy to confuse authorized users with joint credit card holders. But there are some key differences between the two.

With a joint account, both cardholders are legally responsible for making payments. Joint cardholders also must meet credit card issuer requirements, such as a minimum credit score, and go through the application process in order to get the card.

Joint accounts are commonly used by partners who share their finances. Not all credit card issuers allow joint accounts though, and they are becoming less common.

Benefits of Having an Authorized User on Your Credit Card

There are compelling reasons why you may want to either become an authorized user or add an authorized user to your credit card account. Here are the benefits for both parties involved.

Benefits for the Authorized User

Becoming an authorized user can help someone to establish their credit and boost their credit scores if the primary cardholder has a history of on-time payments and low credit utilization (in other words, not charging cards to the max). This can be especially helpful for teenagers and young adults who may not yet have had the opportunity to establish a credit record.

Most credit card issuers will report authorized user credit activity to the credit bureaus, thus building a credit history for the authorized user. The primary cardholder can check with their credit card issuer to see if authorized user’s activity is being reported and if the card issuer has all of the relevant information necessary to do the reporting. If the issuer does report, all of the details of the card will be included in the authorized user’s credit history, including the credit limit, the amount of credit being used, and payment history.

By the same token, if the primary cardholder misses payments or makes late payments, this could negatively impact the authorized user’s credit score.

Benefits for the Primary Cardholder

Building credit for the authorized user can also benefit the primary cardholder who’s looking to help a child or other family member establish themselves financially. By helping the authorized user establish a good credit record, the authorized user will be more likely to qualify for their own credit card sooner and potentially secure lower interest rates and access to better rewards.

Plus, cardholders have the benefit of knowing that a child or other user has access to a credit card in an emergency or other situation where funds are immediately necessary.

Adding or Becoming an Authorized User on a Credit Card

Only a primary cardholder can add an authorized user to their card. To do so, you’ll generally go through the following steps:

1.    Notify your credit card issuer. Let your card issuer know that you would like to add an authorized user to your card. In most cases, you can do this over the phone or by filling out a form online.

2.    Have the necessary information on hand. You may need the name, Social Security number, date of birth, and contact information for the authorized user you intend to add to the card.

3.    Check what will get reported to the credit bureaus. It’s important to find out if the card company will report credit information about the authorized user to the credit reporting bureaus. This will help the authorized user to establish a credit history.

4.    Determine if you’ll get a card for the authorized user in their name. If so, this second credit card will get sent to you. From there, you can decide if you want to give the card to the authorized user or only have them use your card.

Removing an Authorized User on a Credit Card

A primary cardholder can remove an authorized user from their card at any time. Simply call or go online to request a change.

Keep in mind that the authorized user may see a change in their credit score if they are removed. This is because credit score calculations take into account both the age of credit accounts and the number of open accounts, both of which may decrease when an authorized user drops off the card of someone with a more established credit history.

What Are the Next Steps After Becoming an Authorized User?

As mentioned above, authorized users and primary cardholders will want to come up with a solid plan. Specifically, they’ll want to discuss how the card can be used, how much the authorized user can spend, and when and how the authorized user will make payments (either to the cardholder or directly to the card issuer). Making payments on time is extremely important to help avoid late fees and credit score dings for both the primary cardholder and the authorized user.

How to Monitor Your Credit as an Authorized User

If you’re an authorized user eager to build credit, it can be helpful to monitor your credit report to make sure your activity is being accurately reported. You can retrieve a free copy of your credit report each year from all three credit bureaus — Experian, TransUnion and Equifax — through AnnualCreditReport.com.

It’s also important for both the authorized user and the primary cardholder to be cautious and mindful about how their activity can affect one another’s credit, which is something credit monitoring can help keep in check. Irresponsible credit usage by either party can have implications for the credit of both the primary cardholder and the authorized user.

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

The Takeaway

Authorized users are typically added to an account held by a family member or other responsible adult. held by a family member or other responsible adult. However, it’s important for both parties to keep in mind that while their credit usage has the potential to improve their credit, it can also cause damage if payments are late or credit is maxed out.

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

How many authorized users can I add to a single card account?

Each credit card issuer has different rules concerning the number of authorized users permitted. You’ll find this information in the terms and conditions for your credit card. Some credit card issuers charge a fee for each authorized user added on your account.

Is credit activity reported to the credit bureau for an authorized user?

In most cases, credit card issuers report activity to the credit bureaus for an authorized user as well as the primary card holder. Building or improving credit in this way can be a benefit of becoming an authorized user. Check with your credit card issuer to find out if authorized user credit activity is reported.

Does adding someone as an authorized user help their credit?

Building or improving your credit record can be a big benefit of becoming an authorized user, especially if the primary cardholder has a good credit rating and continues to make on-time payments. In order to boost your credit record, however, the credit card issuer needs to report your activity to the credit bureaus.

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

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

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