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According to the Federal Trade Commission (FTC), consumers reported losing close to $8.8 billion to fraud in 2022, a 30% jump over the previous year. Many of people’s losses were the result of various types of bank account fraud.

Crooks are getting ever more sophisticated in the ways they steal money from financial institutions or their account holders. There are few things as upsetting as seeing your bank account emptied or your credit card used for thousands of dollars in purchases by a scammer.

So if you have a financial life, you’ll want to be on alert and do what you can to protect yourself and your hard-earned money. Here, we’ll help you by sharing:

•   What bank fraud is

•   Types of bank fraud

•   How banks respond to fraud

•   Penalties for bank fraud

•   How to avoid bank fraud

What Is Bank Fraud?

Bank fraud is the use of deceptive, often illegal means to steal money, assets, or other property owned or held by a financial institution. It also entails stealing money from people just like you, who keep money on deposit or use other financial products at banks.

Bank fraud also includes being defrauded of money by criminals who pose as employees of a financial institution.

Bank fraud is different from bank robbery; with fraud, thieves use schemes or deception to snag funds illegally, versus perpetrating outright theft.

Types of Bank Fraud

Unfortunately, bank fraud comes in many varieties, all the better to fool financial institutions and consumers. The law provides a broad definition of bank fraud, and several of these actions can be considered for federal prosecution.

Let’s take a look at the six most common types of fraud in banks. Money scams are all too common today; knowledge can help protect you and your funds.

1. Forgery

Forgery includes all forms of using a false signature or other details on financial documents. This includes when a person changes the name, signature, or other information on a check, including the amount (think adding a zero — or two or three). Forgery is also the term used for filling out a blank check or printing fraudulent checks with another person’s account number or a number for a non-existent account.

2. Fraudulent Loans

It is a crime when someone uses a false identity to obtain a loan. This can happen when, say, identity thieves take out loans using victims’ personal and financial information. Another type of fraudulent loan: When a person takes out a loan with the intention of filing for bankruptcy soon thereafter. This can happen when a dishonest business person works with a complicit bank officer to get a loan. The borrower then declares bankruptcy, often leaving the bank on the hook for the money borrowed.

Fraudulent loans also occur when someone falsifies answers on a personal or business loan application, usually in an effort to improve their chances of qualifying for the loan. An individual may try to hide a blemished credit history, for example, or a business may use accounting fraud to paint a more positive financial picture. As you might guess, this is criminal activity and can leave the lending bank in a bad situation.

3. Bank Impersonation and Internet Bank Fraud

When a person or group of people set up a fake financial institution, that’s known as bank impersonation. When such thieves hack into your account and steal money, whether by impersonation or otherwise, that’s internet bank fraud. Typically, this kind of crime is usually committed by creating a website designed to lure people into depositing funds.

Fake websites like this can also trick you into downloading computer viruses that can steal your personal information. These details are then used to rob you of your hard-earned money

Many phishing schemes also come under the umbrella of bank impersonation or internet bank fraud. In these crimes, consumers receive forged emails impersonating an online bank; they then direct the unwitting recipient to a forged website that looks like a legitimate bank site. From there, the bogus site will ask the user to update personal information. That information can be used for identity theft and other crimes.

4. Stolen Checks

Stealing checks is a crime that plays out just as it sounds. Someone at, say, the post office, a company’s payroll department, or anybody else with access to checks may steal those checks. From there, they can open a false bank account, write checks (depleting the account holder’s cash), and deposit them. The cash is then available for them to use as they desire.

5. Money Laundering

This term is used to describe the process criminals use to hide an illegal (or “dirty”) source of income — say from illegal drug smuggling or gambling operations — through a complex series of transfers. These transactions are designed to make the “dirty” money look legitimate, or “clean,” hence the term money laundering. A bit of trivia: Many people believe the term money laundering comes from gangster Al Capone’s habit of using his chain of laundromats to “launder” his illegal cash. This tale however probably isn’t true.

Now, here’s how the crime of money laundering can work: Often the “dirty” money is first deposited into a bank through a restaurant or other legitimate business. Let’s say that business actually did $1,000 worth of sales in a single day but they say they did $2,000. They then deposit the “real” $1,000 they earned plus the same amount of “dirty” money.

Next, to avoid taxes and detection, the money is distributed to other legitimate businesses or complicit companies, or is otherwise subjected to bookkeeping trickery. Multiple transactions can make the money hard to trace, and so it becomes “clean” enough to be used as the fraudster likes.

Banks may unwittingly or possibly complicitly play a role in many stages of money laundering, which is a severe form of fraud.

6. Credit Card Fraud

This term covers a slew of crimes; it refers to all fraudulent payments made with a credit or debit card. The bogus payments may be used to purchase goods and services, to withdraw funds from the account, or to make payments to another account controlled by a criminal. Fraud may happen by stealing the actual credit or debit card or by illegally obtaining the cardholder’s account and personal information.

The latter has become more common as online shopping and bill paying has soared, since there is no longer a need to have a physical card to make purchases. This is why you can still be in possession of your plastic, but be having all sorts of false charges turn up on your statement. As long as criminals can obtain enough personal information about an individual, they can use that information to open new credit card accounts or tamper with existing accounts.

Fortunately, thanks to the Fair Credit Billing Act, your liability should be capped at $50.

How Do Banks Recover Money That Was Fraudulently Taken?

When bank security personnel notice unusual transactions or a customer reports suspicious account activity, banks will typically conduct an investigation. Their goal: To confirm whether fraud exists and, if so, to uncover its details and take legal action against the perpetrators. Once a bank has determined fraud has taken place, most banks will refund stolen funds to customers. This happens as long as it is clear the customer is not an accessory to the crime or was not negligent with account security. In addition, you may want to report the crime to the authorities so they can work on finding and prosecuting those who stole your money. Some banks may require this, in fact, as a step towards catching the criminals.

What to do if you, the consumer, is defrauded of funds? Contact your financial institution’s fraud department and share what has happened. The representative will walk you through the steps required. Remember, the more quickly you alert your bank to any issues or report identity theft, the more likely you are not to lose any money.

Prosecuting fraud is complicated, time-consuming, and unfortunately sometimes impossible. As a result, many banks put extensive efforts into technological security solutions. These card fraud protection measures can help identify fraud quickly to avoid large losses as well as ward off many types of criminal activity in the first place.

Penalties for Bank Fraud

Bank fraud is a serious crime with serious penalties. How serious depends on how much money was stolen and what type of illegal activity was used to steal the money. It must also be proven that a person charged with bank fraud willfully and knowingly committed the crime. A money laundering conviction could result in:

•   A fine of up to $500,000 or twice the value of the property involved in the transaction, whichever amount is greater.

•   A sentence of up to 20 years in prison.

When bank fraud of other sorts is involved, the penalties can be worse still, according to the FDIC :

•   A fine up to one million dollars

•   A prison sentence of as long as 30 years

How to Avoid Bank Fraud

There are several steps you can take to avoid having money stolen from your accounts in a bank fraud scheme. Here are some of the most important.

•   Check your account activity regularly. With online banking, this is easy to do. It’s a good idea to log in at least once a week so you evaluate your bank accounts and your debit card and credit card histories. Report any unexpected or suspicious transactions. While you’re at it, why not make sure your bank offers debit card fraud protection, too? It’s important to secure that aspect of your banking.

•   Keep your PIN and passwords secret. Do not give them to anyone and never write them down in an email or text message that could be easily intercepted. Avoid using public wifi networks for any banking, from checking your balance to paying bills. You could be leaving yourself vulnerable.

•   Use a strong password for online banking. And everything else for that matter. Remember to use numbers, capital letters and symbols. Change passwords regularly, and please: Don’t reuse passwords.

•   Beware phishing schemes. Do not give out your account information over the phone or through email. Anyone legitimate would not be asking for account information by either means. Don’t click links embedded in emails either; they could lead to a fraudulent website posing as your bank. If you receive an email that looks as if it is legitimately from your bank, it’s still better to visit your bank’s website and proceed from any message you receive there.

•   Keep your computer protected. Use anti-virus protection software, firewalls, and spyware blockers to protect your electronic information. Make sure you keep your computer updated with the most recent security upgrades.

The Takeaway

Bank fraud is a criminal activity that can leave you with a big mess to clean up: It can put you at risk for losing money and facing identity theft. Understanding the different types of bank fraud is one important step; knowing how to secure your personal financial information is another one. These moves can help protect you from being a victim.

When you open a bank account with SoFi, we work overtime to protect your money. Sign up for our Checking and Savings account with direct deposit, and you’ll earn a competitive APY. What’s more, you won’t pay any of the usual charges like account, monthly, and minimum balance fees.

Bank better and smarter with SoFi.

FAQ

How does bank fraud happen?

Bank fraud happens when criminals use deceptive means to steal money, assets, or property owned or held by a financial institution, including banks. It is also considered bank fraud when thieves steal money from customer accounts by posing as a bank or other financial institution or by using personal financial information obtained through identity theft.

How do banks recover money from a scammer?

It is challenging for banks to recover money from a scammer. They can seek to unravel who committed the crime and, with the help of law enforcement, prosecute those individuals. Because this is often so difficult, though, banks also are implementing new, technologically advanced ways of preventing and detecting fraud. This allows them to better protect their account holders.

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Photo credit: iStock/Damir Khabirov

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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.

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

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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When you apply for a credit card, there are a few things that can happen. You may be instantly denied, or you may receive a notice that the card issuer needs more time to evaluate your application. Another possibility is that you’re instantly approved for the credit card.

When you receive an instant approval for a credit card, you can rest easy knowing that you’ll get the credit card and any applicable welcome bonus. In some cases, credit card issuers will allow you to have instant access to your credit card number. That can be useful if you want to make an immediate and time-sensitive purchase.

What Is an Instant Approval Credit Card?

An instant approval credit card is a credit card that guarantees a decision about your application within a matter of minutes. Once you submit your application, the credit card issuer will instantly let you know if you’ve been approved or denied for the card.

Not all credit card issuers do instant approvals, and it’s possible to not receive an instant approval even if you have excellent credit and income. For some issuers and certain credit cards, when you’re instantly approved, you also receive your credit card number and everything else you need to make a purchase with the card right away.

How Instant Approval Credit Cards Work

When you apply for a new credit card, the card issuer will conduct a hard pull of your credit report and review your credit history, income, and other financial information. They will use this information to decide whether or not to approve you for a card.

If they have enough information on your credit report to approve you automatically, you may be instantly approved. In other cases, a credit analyst may need to review your application before making a decision. This will impact how long it takes to get a credit card.

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

Instant Approval vs Pre-qualified Offers

Many credit card issuers also allow you to pre-qualify for a credit card. When a lender pre-qualifies you for a credit card, they usually take your basic information and do a soft pull on your credit report, as opposed to the hard inquiry done for formal approval of your application. This soft pull allows them to see a limited amount of information about you, which may be enough for them to pre-qualify you.

Being pre-qualified does not mean that you’ll necessarily be approved when you fill out the complete application. In contrast, when you receive an instant approval, that means that you’ve actually been approved for the card.

Recommended: What is the Average Credit Card Limit

Pros and Cons of Instant Approval Credit Cards

Fast credit cards approval has some obvious upsides, but there are also some possible downsides to take into consideration as well:

Pros	Cons
You know right away when you are approved	You may not be instantly approved, even with good credit and income
You may be able to access your card information instantly	Instant access to your credit card number may tempt you to spend more

When to Consider an Instant Approval Credit Card

The only time it may be worth it to go out of your way to go for an instant approval card is if you have a large purchase that you need to make within the next day or two. In that case, being able to secure a big signup bonus on a new card or get a card with an introductory 0% APR offer may be worthwhile, given how credit cards work.

When possible, however, it’s better to manage your credit cards and credit card applications so that you don’t have to depend on instant credit card approval.

When to Skip an Instant Approval Credit Card

In most non-emergency cases, it doesn’t make sense to go out of your way to find an instant approval credit card. Instead, review the different credit cards that are out there and find the best card for you — regardless of whether you might be instantly approved.

Choosing a credit card that’s right for you might earn you hundreds of dollars or more in rewards. In the end, it may be worth more than getting the card information a few days earlier.

Choosing an Instant Approval Credit Card

It’s not always possible to determine whether any particular card will give you instant approval. Some card issuers (including American Express) publicly state that they offer instant credit card numbers to eligible cardholders.

That being said, receiving instant approval (and an instant credit card number) is contingent on the information on your credit report and the credit card requirements of the card issuer itself. In other words, instant credit card approval and use is not something that can be guaranteed.

Increasing Your Chances of Approval

While there isn’t always a guarantee of getting instant credit card approval, there are a few things you can do to help increase your chances of getting approved immediately.

Provide Information About Your Income

Most credit card applications ask about your total household income. Providing accurate income information can help the credit card issuer understand your financial situation and possibly approve you instantly.

Remember, one of the key credit card rules is that you should be truthful. If an issuer finds out that you were dishonest on your application, they may close your account.

Recommended: How to Avoid Interest On a Credit Card

Check Your Credit Reports

Another great idea if you’re hoping to secure instant approval on a credit card is to check your credit report. Keep your eye out for any incorrect or inconsistent information. If there’s incorrect negative information on your credit report, it may prevent you from being instantly approved for a credit card.

In general, it’s a wise financial move to regularly review the information on your credit report at least on a yearly basis.

Apply for the Right Instant Approval Credit Card

You’ll also want to be realistic about your approval odds for the credit card you’re looking at. If your credit isn’t that great, you might not want to try applying for an instant approval credit card that requires excellent credit (meaning a score of 800+). It’s more important to try to apply for a card that you’re likely to get approved for than one that might offer instant approval.

Alternatives to Instant Approval Credit Cards

One alternative to an instant approval credit card is to just apply for the best credit card for you, regardless of whether you might be instantly approved. You might also look at virtual credit cards, where you can get a temporary, randomly generated credit card number that’s linked back to your actual credit card account.

If you are in need of fast funding, there are other options to explore there, too. Some online lenders offer funding the same day you apply and get approved for a loan. You might also consider tapping into your emergency fund, which you then can replenish once you’ve addressed your need for fast cash.

The Takeaway

When you apply for a credit card, it’s possible the credit card issuer may instantly approve you. In other cases, they may need more time to decide whether or not to approve your application. If you are instantly approved, you may also be able to have immediate access to your card number and other credit card details. Instant approval credit cards with instant use can be useful if you have an immediate need to make a large purchase and want to do it on a new credit card.

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

FAQ

What credit score do I need for an instant approval credit card?

There isn’t a single credit score you’ll need to be approved for an instant approval credit card. Instead, each credit card has its own criteria for approval. When choosing a credit card, it’s important to select a credit card that matches your credit profile. If you have fair or worse credit, you shouldn’t apply for a credit card that requires excellent credit — you’ll likely be denied.

What is the difference between instant approval and instant use of credit cards?

When you apply for a credit card, you may be instantly approved if the card issuer has enough information to make an automatic decision. If you’re instantly approved, some issuers allow you to have instant access to your credit card number and account.

Does an instant approval credit card guarantee you’ll be approved?

There’s no guarantee you’ll get approved when you apply for a credit card, and the same goes for instant approval credit cards. Whether you’re approved will depend on your financial specifics and the credit card requirements. Even if you’re pre-qualified or pre-approved, that does not guarantee that you’ll be approved when you go through the formal application process.

What if my application for an instant approval credit card gets declined?

If your instant approval credit card application is denied, you may still eventually be approved for the card. It may just mean that the issuer needs additional information or more time to determine if they can extend credit to you.

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Photo credit: iStock/PeopleImages

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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A usury rate is an interest rate that denotes the boundary between what is considered an acceptable rate and what is excessive. It’s important that consumers understand usury rates so they can protect themselves against predatory lending practices.

You definitely don’t want to be paying interest rates that are so high, you could wind up with a mountain of debt that endangers your financial future. So read on for a better understanding of what usury rates are, what the law says about usury, and how you can avoid paying too high interest rates.

What Are Usury Interest Rates?

What is a usury rate? Technically, a usury rate is the maximum interest rate that can be charged. Typically, these rates are determined by state law, not federal law. The practice of usury is charging an illegally high interest rate.

Let’s consider why states put these usury protections in place. By capping interest rates, the government is helping people avoid financial difficulties. Excessive interest rates can mean that consumers can’t pay off their debt, and sadly, it can snowball. Usury laws are particularly designed with predatory lending in mind, which typically occurs with payday and auto-title products. However, the laws also prohibit lenders from charging too high interest rates on lending products like personal loans.

Is There a Maximum Interest Rate for Credit Cards?

Have you ever wondered, “Is there a maximum interest rate that credit card issuers can charge?” The answer is yes. This is one way that governments try to prevent usury. As we mentioned, this interest rate cap is usually determined by state law. If, however, a credit card issuer or bank has branches nationwide, the state where its headquarters are designated will determine the state law that applies.

This means that scenarios are possible where you will pay more than the maximum rate mandated in your state. Here’s an example: if you live in a state where the maximum interest rate is 10%, but your lender is headquartered in a state that allows 15%, guess what? You can be assessed that 15% rate.

This is why it’s so important to carefully read a credit card or bank account agreement to make sure it’s crystal clear what interest rate you will be charged.

Real World Example of Usury Rates

How exactly does a usury rate work, you ask? Let’s take a look at a real world example of usury interest rates in action.

Every month in North Dakota, the North Dakota Department of Financial Institutions publishes what the usury rate for the upcoming month will be. Again, this usury rate is the maximum amount of interest that can be charged. This usury rate is 5.5% higher than the current cost of money. The current cost of money is represented by the average rate of interest payable in the U.S. Treasury Bills maturing within six months. However, the maximum allowable interest rate ceiling can’t surpass 7%, no matter what the current cost of money is. The North Dakota usury rate for the month of April 2022 was 7%.

Now, let’s say that someone named Ned in North Dakota is seeking a personal loan. Ned has a very low credit score and isn’t having much luck at local banks. A private lender could step forward and offer a loan at 17%, saying Ned is lucky to have access to funds at all given his credit score and what a poor risk he appears to be. That is over the usury rate, and would be an example of usury if Ned took the loan at that steep cost.

What Is Usury Law?

Usury laws are in place to stop lenders from charging too high of interest rates on lending products such as auto loans or personal loans. States have different laws and regulations that set usury interest rates on a state level. To whom usury laws apply can also vary on a state level.

For example, certain states have usury rate caps on how much finance companies (aka not banks) can charge consumers for small-value loans. Examples of these include payday and auto-title products.

How Do Usury Laws Vary From State to State?

As previously noted, usury rates are state-specific. The details of an interest rate cap and to whom these laws apply may vary. If you live in Massachusetts and your best friend is in Minnesota, it’s quite possible that you will have different usury rates and other legal guidelines.

What Is the Penalty for Violating Usury Laws?

Now, let’s look at what happens if someone extends credit at a too high rate. Remember our Ned in North Dakota example; what if he did borrow money at a rate 10% above the guideline? His lender could be in quite a bit of legal trouble. If a lender willfully receives interest in violation of the usury laws, they will be considered guilty of loan sharking. This charge is punishable by a fine (which could be returning interest plus a fee, for example) and/or imprisonment.

How Can I Tell if the Interest Rate on My Credit Card Is Illegal?

Maybe you’re shocked by how high your credit card’s interest rate is and wonder if it’s legal or not. Because the usury rate varies by state, it’s important for consumers to do some research on what the current usury rate is in their state. But, let’s remember that hitch we mentioned above: Your credit card issuer may be headquartered in a different state. You’ll need to see where that is, and check that location’s rate as well. Then, you can compare the interest rate listed in the account agreement to the current usury rate in the state where they are based. That will reveal if your rate is legal or not so much. Should you discover you’re paying too much, legal action is a possibility.

Is There Anything I Can Do About High Interest Rates?

Even if an interest rate is legal, it can still feel painfully high and make it a challenge to repay a loan. To help secure lower interest rates in the future, consumers can take steps to improve their credit score. The higher someone’s credit score is, the more likely they are to receive a lower interest rate. This can save them a considerable amount of money over the life of their loan (like a student loan). Having a good credit score in the 700s can make it easier to qualify for the best interest rates.

To improve a credit score, consumers can take the following steps:

•   Make on-time payments. Making loan and credit card payments on time every single month improves a credit score over time. You might try using automatic payments from your checking account and electronic reminders to make sure a payment isn’t accidentally missed.

•   Keep credit utilization rate low. Keeping their credit utilization rate (aka how much of your available credit they’re using) low can help boost a credit score. Aim for a balance that’s no more than 30% of your credit limit; 10% is even better. Paying off revolving balances each month can help keep this rate low.

•   Double check credit report for errors. Mistakes happen! And an error on a credit report can be an expensive one; it can damage your score. It’s a good idea to review credit reports carefully from time to time to look for mistakes. It’s possible to dispute these errors and have them removed from the credit report, thereby improving your score.

It takes time to see the results from these efforts. But it’s wise to stay the course: Raising a credit score can make it easier to qualify for better lending products at more favorable interest rates.

The Takeaway

An usury rate is the maximum interest rate a lender is legally allowed to charge a borrower. Usury itself is the practice of charging excessively high interest rates, and this can have legal consequences. Because usury rates are state specific, it’s important to become familiar with what the usury rate in your state is, as well as the state where your lender is headquartered. By understanding interest rates and avoiding sky-high ones, you can take better control of your money and improve your financial health.

Here’s another way to boost your financial wellness: by partnering with a bank that doesn’t charge you fees and pays you an excellent interest rate. That’s what you’ll enjoy when you bank with SoFi. Sign up for a new bank account with direct deposit, and earn a fantastic APY while paying zero account fees.

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

FAQ

What is the highest legal interest rate?

The highest legal interest rate a lender can charge varies state by state. This interest rate cap is known as an usury rate, and each state sets their own limits.

Is charging a high interest rate legal?

That depends on someone’s definition of a “high” interest rate. There are limits in place on how much interest lenders can charge (known as usury rates). These guidelines are designed to help consumers avoid predatory interest amounts.

What interest rate is predatory lending?

An interest rate that surpasses the usury rate (aka the highest interest rate a lender can legally charge) in the state the borrower or lender resides in is considered to be predatory lending.

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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 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.

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

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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A letter of credit is a business-to-business document guaranteeing that the provider of goods or services to a buyer will receive payment. As part of a sales agreement, a seller may require the buyer to deliver a letter of credit before a deal takes place.

More specifically, letters of credit are often vital in international trade where the two parties involved are not yet familiar with one another. Letters of credit facilitate new trade and prompt payments.

Read on to learn more, including:

•   What a letter of credit is

•   How a letter of credit works

•   What the different types of letters of credit are

•   The pros and cons of letters of credit

•   How to get a letter of credit.

What Is a Letter of Credit in Banking?

Here’s what a letter of credit in banking is: It’s a document that a bank issues to a seller that guarantees payment from their customer for an order or service. The bank where the buyer’s business account is held usually assumes responsibility for the payment for the goods. However, the conditions laid out in the letter of credit must be fulfilled. The bank or financial institution charges the buyer a fee for guaranteeing the payment and issuing the letter.

Letters of credit are common in international trade situations because various factors can affect cross-border transactions. It’s not necessarily a matter of the buyer having a bad credit score. Rather, the deal may involve different legal frameworks, a lack of familiarity between the parties involved, and geographic distance.

How a Letter of Credit Works

When used properly, letters of credit can work to minimize credit risk and smooth international trade. A vendor selling products or services overseas may want assurance that a buyer of their products or services will pay. Perhaps the buyer is new to them or just a new business, period.

So how does a letter of credit work? It serves as a guarantee from a bank that it will pay the vendor once the requirements are met. The letter lays out the conditions of payment, such as the amount, the timing of the payment, and the delivery specifications. The letter can help the business placing the order build their credit, too.

The bank charges the buyer a fee for issuing a letter of credit (often around 0.75% to 1.5% of the amount of the deal), but it also does the due diligence to assure creditworthiness. The bank requires collateral or security from the buyer for the payment guarantee. In essence, the bank acts as a third party facilitating the deal.

Recommended: Why is Having a Good Credit Score Important?

Types of Letters of Credit

The following are four types of letters of credit.

•   Commercial Letter of Credit: The issuing bank pays the seller directly. For a stand-by letter of credit, the bank only pays the seller if the buyer cannot transfer funds.

•   Revolving Letter of Credit: The bank guarantees payment for a number of transactions within a set period.

•   Traveler’s Letter of Credit: Travelers can make withdrawals in a foreign country. The issuing bank guarantees to honor any withdrawals.

•   Confirmed Letter of Credit: A seller using a confirmed letter of credit involves a secondary bank, typically the seller’s bank. They guarantee payment if the first bank fails to pay.

You may also hear an irrevocable letter of credit mentioned; this is a letter of credit that can’t be changed or canceled unless all parties agree.

There is also a stand-by letter of credit which may be used when deal requirements are not initially met; see below for more details.

Letter of Credit Example

Here’s an example of a letter of credit: Wells Fargo provides commercial letters of credit and stand-by letters of credit within two weeks. The funds are secured through deposits at Wells Fargo, and the terms are renewable. These documents can help reassure parties doing business internationally, with new-to-them businesses or clients who have recently started a business.

The Money Behind a Letter of Credit

When it comes to letters of credit, you may wonder, Where do the payment funds for a letter of credit originate? The party paying for the goods or services typically deposits funds in advance to the bank that issues the letter of credit to cover the payment. Alternatively, the amount might be frozen in the payer’s account or the payer might borrow from the bank using a line of credit.

When Does Payment Happen?

Payment usually occurs when the seller has completed all the stipulations in the letter of credit. For example, the seller might have to deliver the goods to a specific address or onto a ship for transportation in the case of international trade. In the latter case, shipping documents would serve as proof that the requirements for payment have been fulfilled. They might trigger the payment transaction.

What to Watch Out for

Here are some common mistakes sellers may make when relying on a letter of credit for payment.

•   Failing to check all of the requirements in the letter of credit.

•   Failing to understand the documents required for the deal.

•   Failing to confirm whether the time limits for delivery and payment are reasonable.

•   Failing to meet the time limits.

•   Failing to get the necessary proof of delivery documents to the bank.

Letters of Credit Terminology

Here are some terms and phrases to know if you may be using letters of credit.

•   Advising bank: This is the bank that informs the seller that the letter of credit has been completed. The advising bank is also called the notifying bank.

•   Applicant: The party or the acquirer of products or services who applies for the letter of credit from the bank.

•   Beneficiary: The party, or seller, who will receive payment. The seller usually requests a letter of credit to guarantee payment.

•   Confirming bank: The bank that guarantees the payment of the required funds to the seller. If a third party is involved, the confirming bank is the bank most familiar to the seller.

•   Freight forwarder: A shipping company that provides the transportation documents to the seller.

•   Intermediary: These are companies that link buyers and sellers and may use letters of credit to ensure transactions are executed.

•   Issuing bank: The bank that issues the letter of credit.

•   Negotiating bank: If a third party is involved, the negotiating bank works with the beneficiary and the other banks involved. They likely determine the letter of credit requirements to complete the transaction.

•   Shipper: The transportation company that ships goods.

•   Stand-by letter of credit: A subsequent letter of credit that’s used when a deal requirement has not been met. For example, if payment does not occur within the specified timeframe, a stand-by letter of credit would then be used to help guarantee that the deal goes through.

Pros and Cons of Letters of Credit

A letter of credit provides security for both parties involved in a trade, but it can also add costs and time to business transactions.

Pros	Cons
•   Reduces the risk that payment will not be made for goods or services, thereby providing security •   Allows for additional requirements to be built into a letter of credit, such as quality control and delivery stipulations •   Provides transaction security for both the buyer and the seller •   Forges new trade relationships	•   Incurs bank fees for the letter of credit, which increases the cost of doing business •   Adds time by preparing a letter of credit; transactions can be delayed •   May require a separate letter of credit for each transaction •   Demands that the buyer usually provide collateral to the bank

How to Get a Letter of Credit

Getting a letter of credit typically requires a few steps. It’s wise to get the necessary paperwork together first. Various documents will usually be listed as requirements for a trade, such as a shipping bill of lading, a commercial invoice, insurance documents, a certificate of origin, and a certificate of inspection.

Here are the steps typically taken to obtain a letter of credit.

1.    The buyer and seller come to agreement on the sale terms and the use of a letter of credit.

2.    The buyer contacts their bank where they have a checking account and requests a letter of credit and provides necessary documents.

3.    The issuing bank prepares the letter based on the terms of the sales agreement and sends it to the confirming bank or advising bank, which is typically in the seller’s home country.

4.    The confirming bank verifies the terms and forwards the letter to the seller.

5.    The goods can then be shipped, and the exporter sends documentation to the advising or confirming bank.

6.    Document verification and settlement of payment can then occur.

When to Use a Letter of Credit

A letter of credit is beneficial for sellers entering into a new trade relationship or an international trade relationship. It can provide assurance that the seller will receive payment because the issuing bank guarantees payment once the requirements have been met. Sellers may also use the guarantee of payment to borrow capital to fulfill the buyer’s order.

The Takeaway

A letter of credit is usually requested by an exporter or seller to minimize credit risk. The buyer of the goods or services applies to a bank and requests a letter of credit based on the sales agreement. This document helps guarantee that payment will be made. It can provide priceless peace of mind when conducting international trade or doing business with a new customer.

Here’s another path to financial peace of mind: Banking with SoFi. Your money is FDIC-insured and secure, and it grows faster. Open a new bank account with direct deposit to earn a competitive APY and pay zero account fees.

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 much does a letter of credit cost?

A typical fee for a letter of credit is typically 0.75% percent to 1.5% of the amount of the deal, but the rate will vary depending on the country and other variables.

How do you apply for a letter of credit?

Once the terms of a trade are agreed upon between the buyer and the seller, a buyer contacts their bank to request a letter of credit. They then gather the required documentation and fill out an application with that bank.

Why do you need a letter of credit?

The parties involved in a trade typically use a letter of credit to minimize risk. For the seller, a letter of credit can guarantee payment for goods once certain requirements have been met and the buyer confirms their creditworthiness as a trade partner.

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

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

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

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

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

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

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

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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