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While it’s unlikely, a certificate of deposit (CD) could lose money if you withdraw funds before you’ve earned enough interest to cover the penalty charged. Typically, CDs are safe time deposits that guarantee an interest rate for the term that you agree to keep money at a financial institution. In fact, CDs are considered one of the lowest-risk savings vehicles available. But, if you pull your money out before the maturity date, you might take a loss.

Here’s a closer look at this topic, so you can decide if a CD is the right way to grow your money. You’ll learn:

•   What is a CD? How do CDs work?

•   Can you lose money in a CD?

•   What are the pros and cons of CDs?

•   When do CDs work best?

What Is a Certificate of Deposit (CD)?

A certificate of deposit is a savings account offered by banks or credit unions that holds a certain amount of money for a fixed period of time. Some specifics:

•   This time frame can typically range from six months to five years, but you might find even shorter- or longer-term products.

•   There may be a minimum deposit amount, too, of possibly $1,000 or a similar sum.

•   The bank pays you interest over the term of the CD. At the end of your CD’s term (you may hear this referred to as when your CD matures), you receive the money you originally put in along with the interest earned from having your money locked away.

•   CDs can be a more attractive savings vehicle than an ordinary savings account because they may offer higher annual percentage yields (APYs).

•   Typically, the longer your money is in the CD, the higher the rates offered.

•   If you get a CD from a bank that is insured by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration), you are typically covered up to $250,000 per account holder, per account ownership category, per insured institution in the very rare event of a bank failure.

How Standard Certificate of Deposits Work

A CD is similar to a standard bank account, but the difference is CDs have a “lock-in” period where you cannot access the money during that time (the CD’s term). In exchange, you earn interest on the account.

When you open a certificate of deposit, you have to determine how long you are able to keep your money stowed away. This term length generally ranges from six months to several years.
If you need to access the money before the term ends, you will usually pay a penalty for withdrawing the money before the account’s maturity. There are CDs that allow early withdrawal without penalties; these are typically called no-penalty CDs, and the trade-off for this flexibility may offer a lower APY.

Can You Lose Money on a CD?

The risk of having a CD is very low. Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD.

There is actually no risk the account owner incurs unless you withdraw money before the account reaches maturity. In this case, the early-withdrawal penalty kicks in and typically may eat up some or all of the interest earned. (Read your account’s terms or check a bank’s website for the specifics.)

But to answer “Can CDs lose money?”: In rare cases, an early withdrawal fee might take a bite out of your principal, too. If, say, you deposit $1,000 in an IRA and earn $15 in interest and then decide to withdraw the funds, hypothetically you could be assessed a $25 fee. In this case, you would wind up with $990 vs. the $1,000 you deposited.

Pros of Investing in a CD

Investing in CDs can be a convenient way to grow your money. High-yield checking and savings accounts can be as well, though. Or perhaps you’re tempted by other investments and wonder how CDs vs. bonds perform. Here, consider some of the benefits specific to certificates of deposit, so you can decide what will work best for you.

•   Security. You can count on a CD for its safety. Make sure to open a CD from a federally insured bank or credit union so your money is secure up to the limits of the insurance ($250,000).

•   Dependability. Instead of having your money sit in a bank and not be sure what returns you will receive as interest rates fluctuate, you can expect to get fixed returns from your CD deposit over a specific period of time.

•   Flexible terms. When opening a CD, account holders get to select from a wide range of term lengths. If you prefer a CD with a shorter maturity date, you can choose a term of a couple of months. Looking for a longer duration? Some CDs may be offered with a 10-year term.

Recommended: CDs vs. Bonds: What’s Smart for Your Money?

Cons of Investing in a CD

As with most financial products (and things in life), there are pluses and minuses to certificates of deposit. Here’s a look at the potential downsides of putting your money in a CD.

•   Lack of access. Once you add money to a CD, you won’t be able to access it until the term is over. During this time, you are not able to add money either.

•   Possible penalties. When you open a CD, you are making a commitment with a financial institution that you will not access that money until the CD matures. (Unless you opt for a no-penalty CD, that is.) If you break that commitment and withdraw money from your CD prior to its maturity date, you will incur early CD withdrawal penalties. This could mean the financial institution withholds an amount of interest on the money you withdraw or could even take some of your principal.

•   Low returns. Yields on a CD can be competitive, but when comparing their returns to those historically earned in the stock market, they’re relatively low. That said, remember that risk plays a role in the market. If you are wondering, “Can you lose money with an index fund or other investment?” keep in mind that the answer may well be “yes.”

When you are investing in stocks and exchange-traded funds, investors take on additional risk and are compensated for that risk. But when putting money in a CD, you aren’t taking any risk, which means the returns are lower.

Recommended: What Does Private Banking Offer?

When CDs Work Best

CDs work best when you are able to put away money for a period of time and accumulate interest over the term. There are different scenarios in which a CD can be a great option, such as the following:

Saving for a Purchase in the Near Future

If you are saving up for a big future purchase, such as a home or a car, you can put your money in a CD to help protect it against inflation until you are ready to access those funds.

Building Short-Term Wealth Before You Invest

If you are new to investing and want to build up your funds to have a more consistent strategy, a CD can help. You can often use a short-term CD to steadily grow your cash position before you invest it in the stock market.

Ensuring Returns Without Stock Market Risk

Opening a CD can be a way to grow your wealth, slowly and steadily with low risk. You might consider building a CD ladder to have funds come available regularly in case you need access. This can be a good balance if you are also investing in the market.

The Takeaway

A certificate of deposit is an account you can open at a bank or credit union to lock away your cash for a certain amount of time while earning a predetermined annual percentage yield. CDs are usually considered very safe. If, however, you withdraw your funds before the maturity date, in rare cases, the penalty for doing so could possibly eat into your principal, meaning you’d lose money.

Another way to grow your funds without this kind of potential access issue could be with a high-yield checking and savings account.

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

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

FAQ

Are CDs safe if the market crashes?

Putting your money in a CD doesn’t involve putting your money in the stock market. Instead, it’s in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

Is a CD guaranteed to make money?

In return for allowing the bank or credit union to hold your money for a fixed period of time, the bank pays you interest. These payments are guaranteed.

What determines CD rates?

CD rates are determined by a combination of a few factors, such as the CD’s maturity (or term) and what the current interest rate environment is (banks will likely use an index rate, typically that of the federal funds rate). Search online to review the best options.

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Photo credit: iStock/MicroStockHub

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.

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Managing a checking account can be a simple process, thanks to all the tools at your disposal today. You can set alerts to let you know if your balance is dipping too low and use your financial institution’s app to see where your funds are flowing, among other conveniences. Doing so can set you up to avoid fees and charges while maximizing rewards and interest you may earn.

Here, you’ll learn seven simple steps to help you manage your checking account with ease.

Why Is It Important to Manage Your Checking Account?

Knowing how to manage a checking account effectively will help you with many aspects of your financial life such as meeting your savings goals and protecting your money. If you don’t know where your money goes, how effective will you be when it comes to creating a budget or assessing whether you can take that last-minute weekend getaway with a friend?

Plus, having good account-management skills will protect you against fraud. For instance, let’s say someone stole your debit card and used it to make purchases. You’d want to detect that ASAP before a bad situation got any worse. If you report any losses within two business days, you’re only on the hook for a maximum of $50 according to Federal laws.

Otherwise, you could lose up to $500 if you report it after two business days but within 60. If you don’t notice the fraudulent charges until after the 60 business-day limit, you’re on the hook for all fraudulent transactions unfortunately.

To recap, good checking account management will help you:

•   Keep tabs on your bank account balance and activity

•   Allow you to better fund savings goals

•   Avoid fraudulent activity and potential money loss.

Now, here are the seven steps that answer the question, “How do you manage a checking account?”

1. Know Your Account Balance

Keeping track of your account balance gives you a clearer picture of where you stand financially. Doing so can help you with tasks such as planning for occasional and unexpected expenses, paying off your student loans on time, as well as simply sticking to your budget.

Plus, monitoring your account can help you avoid overdraft fees by preventing your balance from dipping into negative territory. It’s easy to make an online payment or swipe that debit card and forget about it, so figuring out how often to check your balance is a wise idea. (A couple times a week works well for many people.)

You can log into your account online or through the bank’s mobile app, but other ways to check your balance include:

•   Receiving automated text alerts

•   Speaking to a teller at a branch

•   Calling your bank’s customer service hotline

•   Requesting your checking account balance at an ATM.

2. Download Your Bank’s Mobile Banking App

Here’s another idea for how to manage your checking account: If your bank offers a mobile app, it can be a smart idea to download it. Yes, mobile banking is very secure most of the time. By adopting mobile banking, you can easily keep an eye on your checking account. What’s more, you can conduct an array of transactions with just a few clicks, such as paying bills, depositing checks, setting up automated alerts, and transferring money between accounts.

Depending on the mobile app’s features, you may be able to link your debit and credit cards to your account, which makes it easier to purchase and pay for things. There may be other features such as a budgeting section, money management tools, insights into your credit score, and even access to discounts at your favorite retailer.

3. Avoid Paying Extra Fees

Many checking accounts charge monthly maintenance fees, but you may be able to have them waived if you can meet certain requirements. Most commonly, you can skip the monthly fees if you set up direct deposits or maintain a certain account balance.

Perhaps you want to drill down on one kind of fee in particular: those overdraft fees. Those charges can really add up, and if they are left unpaid, they can harm your credit score. Take a bit of time to understand how your bank handles overdraft fees — will it waive it if your account is in good standing, will it charge you a fee and process the payment, or will it reject the transaction totally and assess you a fee?

Plenty of banks also offer options such as overdraft protection. Typically, this means if you’re at risk of having a negative bank balance, they will transfer the overdrawn amount from a linked savings account to your checking account automatically, without any charges. Still, you’ll probably want to set an alert so you’re notified when your checking account reaches a certain balance or hits zero. That way, you can quickly remedy the situation.

4. Automate Deposits and Payments

Automation can make your life so much easier. Letting technology assist you with your banking can help you keep on top of tasks such as depositing your paycheck, paying bills, or meeting savings goals.

•   In terms of how to manage a bank account, direct deposit is a great way for your employer to deposit paychecks automatically. In some cases, banks will even give you early paycheck access.

•   Your bank may have automatic bill payment or transfer tools as well. Consider using these for recurring payments to be made automatically, such as ones for subscription services, auto loans, or your mortgage payments. Doing so can prevent missed payments and may be able to help build your credit score.

•   Also, automatically transferring a certain amount each month into a separate account can help you reach your short- and long-term savings goals.

5. Embrace Potential Earnings

Sure, having a nice big cushion of cash in your checking account can make you feel flush. However, keeping excess cash in your checking account could mean you’re losing out on the opportunity to get more out of your funds. Specifically, that money could be earning you more money. As you balance your bank account, you may find there are better ways to make your money work for you.

For instance, there are plenty of ways to earn interest even if you want your cash to remain more liquid. For instance, high-yield savings accounts linked to your checking account can earn you a bit of extra cash while still being very accessible.

6. Take Advantage of Checking Account Perks

To remain competitive, many banks are starting to offer additional perks with their checking account such as:

•   Identity theft protection and assistance

•   Discounts at shopping and dining retailers

•   Extended warranties on purchases

•   Buyer’s protection

•   Health savings cards

•   Cash back on qualifying debit card purchases.

When shopping around for a checking account, consider your financial habits. If you shop frequently at certain retailers, it may be worth taking advantage of an account that offers discounts. Or if you use the ATM frequently, looking for a checking account that reimburses you for third-party ATM fees may be a smart choice.

7. Consider Consolidating

Do you have multiple checking accounts? It’s not uncommon for people to have, say, their main checking account, one that they opened to get some reward or perk, and the one that their parents opened with them in high school. If you can relate, you might benefit from simplifying your finances and consolidating all of them into one main checking account.

That way, all you have to do is log into a single checking account and monitor your finances. Why overwhelm yourself with many accounts to check on and keep track of?

The Takeaway

Managing your checking account is an important path to staying on top of your finances. It will help you keep on your budget, avoid unnecessary fees, and reach your financial goals. Plus, with all the tech tools and alerts available today and the rewards being offered, it can be faster and more profitable than ever.

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

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

FAQ

Why is it important to manage your checking account?

It’s important to manage your checking account so that you can see where your money is coming from and going to. It can help you understand how you can budget better, reach your savings goals, and even detect fraud.

How often should you manage your checking account?

For many people, checking their bank account once or twice a week works well. You can also take actions like establishing alerts when your account balance falls below a certain threshold or setting up automatic transfers for recurring payments to help save you time.

How should you keep track of what’s in your checking account?

The usual ways to keep track of what’s in your checking account are to use your bank’s app, check your balance online, call customer service, or use an ATM to see how your money is tracking.

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Photo credit: iStock/jroballo

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.

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If you’re wondering whether a bank checks your credit when you open a checking account, the answer is typically no…but there’s more to the story than that one little word.

When it comes to starting a new checking account, banks don’t usually check your three-digit FICO® score — the most common score used by lenders — in order to determine your eligibility to open a checking account. They do, however, often look into your banking history via an agency known as ChexSystems.

Here’s a closer look at credit checks when opening an account and what could prevent you from getting that approval you’re after.

Whether or Not Banks Run Credit Checks for Checking Accounts

First, know that when most entities check your credit, they’re looking at that three-digit FICO score mentioned above — the one that ranges from 300 (poor) to 850 (exceptional). They will likely also receive your entire credit report, which is a detailed document listing all your open accounts, their statuses, and several years of your credit behavior, among other items.

When your credit is checked, it can be either a soft or hard credit inquiry. The former are inquiries that don’t impact your precious credit score. But the latter can wind up lowering your score because these “hard pulls,” as they are sometimes known, can indicate that you are shopping around for more credit, which can make you look like a risky prospect.

But back to our question about whether a bank will initiate a credit check…the answer is: not exactly. They typically use their own kind of financial background check system called ChexSystems. It’s a reporting agency that focuses on consumers’ banking behavior.

What Is ChexSystems?

ChexSystems is a reporting agency that focuses on your behavior around banking. Some details to note:

•   Your ChexSystems report will include your history of overdrafts, negative balances, and bounced checks, as well as any instances of fraud, security freezes, and other items specifically to do with your banking history. So while it’s not a credit check, per se, it is like a credit check, and your report could lead to your being rejected for a bank account.

•   Like any other reporting agency, ChexSystems is required by the Fair Credit Reporting Act (FCRA) to issue consumers a free report once a year, so you can regularly check your history.

•   If any of the negative items on your report are fraudulent, you can dispute that information with the agency to get it removed — and if they’re legitimate, you can work toward improving the behavior that caused them. (Most information on your ChexSystems report falls off after five years.)

•   There are also deposit accounts that don’t pull ChexSystems reports. So even if you’ve got some negative history, it’s possible to turn over a new leaf and work toward a more positive relationship with banking.

Recommended: How to Avoid ATM Fees

Why Do Banks Run Credit Checks When You Open a Bank Account?

Now that you know how credit checks work, you may wonder, Why do banks run credit checks when you want to open an account? Isn’t that their whole reason for being, to give people checking and savings accounts?

While there’s truth to that, banks do rely on their customers to keep their accounts in good order — and to pay fees, ensure checks don’t bounce, and generally be responsible bankers.

Using ChexSystems gives banks an idea of how you might behave as a banking customer in the future based on your recorded behavior. The intel in ChexSystems can also help a bank disqualify you from obtaining an account if they don’t think you pass muster.

Does It Hurt Your Credit Score When Trying to Open a Bank Account?

One exciting corollary to the fact that banks don’t pull your credit score when opening an account: Opening a bank account won’t hurt your credit score, since there’s no hard credit inquiry involved. That’s comforting news to anyone opening a new bank account. It also means you can even open a few different checking and savings accounts (perhaps you want a regular checking account, plus one for your side hustle income, as well as a savings account for your emergency fund), and you won’t negatively impact your rating.

Stressed about your credit score and not loving where it’s lingering? Building your credit score is definitely an important step toward plenty of financial goals, and the behaviors you cultivate to do so may also improve your ChexSystems report. Moves like lowering the amount of debt you carry, paying bills on time all the time, and not opening too many lines of credit can really pay off.

Reasons Why You Might Be Denied a Checking Account

Unfortunately, every now and then, people do get rejected when they apply for a bank account. For banks that use ChexSystems, these are some of the reasons for a denial.

Unpaid Negative Balance on a Previous Bank Account

As mentioned, banks aren’t officially loaning money to checking account holders — but if you maintain a negative balance on an account and never pay that money back, the financial institution is on the hook for that loss. For this reason, negative balances on existing or previous accounts can spell rejection for a new one.

Abusing Overdraft Privileges

On a similar note, overdrafting again and again hinders a bank’s ability to stay in the black on your account. That goes double if you’ve avoided paying overdraft fees or other charges associated with your behavior.

Fraudulent Activity on Previous Accounts

ChexSystems records suspected fraudulent activity — which, obviously, is not something a bank wants to have to deal with in the future.

Having a Joint Account With Someone Who Has Negative Unpaid Balances on Their Accounts

When you have a joint bank account, your partner’s behaviors can affect your standing as much as your own. So even if it’s not you who’s wreaking havoc on your bank account, the other person’s negative balances, overdraft abuses, and fraudulent activity could negatively impact your ChexSystems report.

The Takeaway

If you’re sweating whether opening a bank account can involve a credit check that deflates your credit score, don’t worry. Most banks don’t pull a hard credit check to qualify you for a checking account. However, they might look into your ChexSystems report, a banking industry way of peering into an applicant’s history. Certain negative items can disqualify you from opening a bank account.

That said, there are banks out there that don’t use ChexSystems to qualify their customers, and SoFi is one of them.

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

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

FAQ

Do banks check your credit score when opening a checking account?

While banks don’t check your FICO score to qualify you for a checking account, they may check your ChexSystems report. This is similar to your credit report but focused specifically on your banking history.

Can you be denied a checking account because of bad credit?

You likely won’t be denied a checking account because of bad credit directly. However, if you have bad credit, you may also have negative items on your ChexSystems report that could disqualify you from some (but not all) bank accounts.

Why would a bank deny a checking account?

A bank might deny your request for an account if you have negative items on your ChexSystems report, such as fraudulent activity, negative balances, or unpaid overdraft charges.

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Photo credit: iStock/MicroStockHub

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.

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 .

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 health savings account (HSA) and a Health Maintenance Organization (HMO) are both meant to help with medical costs, but there are vast differences between the two. An HSA acts as a personal saving account, where you can set aside tax-free dollars to be used toward out-of-pocket health care expenses. An HMO is typically a low-cost health insurance plan.

It’s tough to directly compare an HSA vs. HMO, as they serve different functions. But understanding how each works, and their pros and cons, can help lower medical costs and keep more money in your wallet. Here, you will learn:

•   How an HSA works

•   How to set up an HSA

•   The pros and cons of an HSA

•   How an HMO works

•   How to set up an HMO

•   The pros and cons of an HMO

•   The key differences of an HSA vs. HMO

•   How to fund healthcare costs.

What is a Health Savings Account (HSA)?

A health savings account (HSA) allows individuals to put away pre-tax dollars to be used for future medical purposes. These funds can be used for copays, dental and eye care, and a host of other expenses not covered by a healthcare plan.

Here’s the catch: You have to be enrolled in a high-deductible health plan (HDHP). An HDHP is geared to offer you lower monthly health-insurance payments. The downside, however, is that you could get hit with a lot of out-of-pocket expenses before meeting the plan’s high deductible.

That’s where a Health Savings Account (HSA) comes in. The money in your HSA can help bridge the gap between your high deductible and your pocketbook.

💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.

How Does a Health Savings Account Work?

A Health Savings Account works similarly to other kinds of saving accounts. You can transfer funds and pay bills online. You are free to withdraw HSA funds at any time to pay for health costs not covered by your HDHP.

Employers can contribute to your HSA, with direct deposits made straight from payroll. HSA funds can be used for you or any family member covered by your HDHP.

The money in your HSA can remain in the account and roll over every year, accumulating tax-free interest. You can even use your HSA for retirement. After the age of 65, you can start withdrawing from your HSA with no penalty.

There are rules and limits to an HSA. For tax year 2023, the IRS limits contributions to no more than $3,850 for individuals and $7,750 for families with HDHP coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. For 2024, HSA contribution limits are $4,150 for individuals and $8,300 for families. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.

How to Set Up an HSA

Setting up a tax-advantaged HSA is pretty straightforward. If you are self-employed, take the time to compare different HSAs online. Many of them have reasonable fees (or none) and minimal requirements.

If your HSA is offered directly through your employer, that makes the decision easy.

The steps to enroll in an HSA are not unlike opening a bank account. You’ll need proof of a government-issued ID, your Social Security number, and proof of your enrollment in a HDHP.

Once you have set up an HSA, you may be able to opt for regular, automatic deposits straight from your paycheck or your bank account, and start reaping the benefits of using a health savings plan.

Pros of an HSA

A health savings plan provides a range of advantages, including:

•   Covering out-of-pocket medical expenses, including dental costs, copays, new eye glasses, and hearing aids. The IRS has a lengthy list of all the goodies you can buy with your tax-free dollars.

•   Lowering taxable income. HSA contributions go into your account before taxes, so you could pay less taxes down the line.

•   Investing for the future. You can opt to have your HSA money invested in chosen mutual funds once you reach a minimum requirement balance.

•   Covering health expenses for your family. HSA benefits anyone who is currently covered by your high-deductible savings plan.

•   Rollover contributions. Unused contributions don’t vanish. They roll over into the next year, growing and accumulating tax-free interest.

•   Retirement savings. Any unused funds can be used to boost retirement savings. They can be withdrawn after the age of 65, and spent as you please. You can put the money toward a beach vacation or any other purpose.

•   Portability. If you move or change jobs, the money is still yours. You don’t have to surrender it.

Cons of an HSA

There are some potential disadvantages to having an HSA, including:

•   Penalties for non-qualified expenses. Before the age of 65, the IRS can impose a substantial 20% penalty on monetary amounts spent on unapproved purchases. This money will also be viewed as taxable income.

•   Monthly/annual fees. Some health savings accounts may charge a low monthly service fee. Service fees tend to be no more than $5 per month. Some HSAs allow you to invest in mutual funds after your balance reaches a certain amount. If you choose this option, you will probably be charged an annual account management fee.

•   Unable to contribute. Budgets can get tight. There are times when you might not be able to regularly contribute money to your HSA.

•   Tracking for your taxes. HSA expenditures and contributions must be reported on your tax return. Keeping tabs on those transactions can be tedious.

•   Monetary losses. As with an IRA or 401(k), if you choose to invest your HSA money in mutual funds, your balance can experience gains and losses as the market fluctuates. These investments are not FDIC-insured like bank accounts are.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

What is a Health Maintenance Organization (HMO)?

A Health Maintenance Organization (HMO) is a type of health insurance plan. An HMO tends to offer lower monthly or annual premiums and a specific pool of doctors. If you stay within their network of healthcare providers, you may have lower out-of-pocket costs and, unlike with a HDHP, a lower deductible or even no deductible at all.

How Does a Health Maintenance Organization Work?

A health maintenance organization (HMO) plan consists of a group of insurance providers who have contracted certain doctors and hospitals to work with them. These medical professionals and facilities agree on a payment rate for their services, which can translate into reduced costs for you.

As long as you use the doctors in the HMO network, you are eligible for medical services that cost less. HMOs typically require a referral from an in-network primary care physician in order to receive low-cost services from specialists, such as an oncologist or gynecologist.

Many health insurance companies offer HMO plans as a coverage option. An individual can choose the HMO plan and go through the steps of enrollment, either on paper or via an online form. The process includes selecting your primary care physician.

Pros of an HMO

The advantages of enrolling in an HMO plan can include:

•   Lower monthly premiums versus other insurance plans.

•   Lower out-of-pocket expenses when you see your GP or specialists, have tests done, and access other kinds of medical care.

•   Lower prescription costs for your medications.

•   Fewer medical claims, as the paperwork is filed in-network.

•   Appointing a primary care doctor, whose office may coordinate and advocate for your various medical services.

Cons of an HMO

There are disadvantages of having an HMO, including:

•   Limited access to doctors and facilities. You must stay within their network of providers or risk paying out-of-pocket, except in the case of certain emergencies.

•   A new primary care doctor. If your current doctor isn’t in the HMO’s network, you’ll have to find a new primary care physician. For some people, this may be a difficult switch to make.

•   Referral requirements. To see a specialist and have your HMO pay for those services, you’ll need referrals; you can’t just look up a specialist and see them.

•   Strict definitions. There are times when you must very specifically meet requirements to have medical services paid for. This can be important to know during emergencies and other medical situations.

Can You Have Both an HMO and HSA?

Yes. There is no real rivalry happening with HMOs vs. HSAs, as they are so different. But if you are wondering if you can have an HSA with an HMO, here’s what you need to know. You can use an HSA with an HMO, as long as the HMO qualifies as a high-deductible health plan (HDHP). Since HMOs are often low cost healthcare plans, an HMO may not qualify as an HDHP. Check with your particular plan to see.

Key Differences Between an HMO vs HSA

•   An HSA acts like a savings account, an HMO is a health plan offering savings through lower-cost healthcare options.

•   An HSA does not offer a network of doctors, but can offer investment opportunities and help you save for retirement.

Recommended: How to Save for Retirement

Ways to Fund Healthcare Costs

Besides enrolling in a low-cost HMO, or opening an HSA, there are other ways to save money and pay for medical expenses.

Flexible Spending Account

A flexible spending account (FSA) acts very much like an HSA. It is similar to a savings account, and can be used for medical expenses and saving for retirement.

An FSA, however, can only be obtained through an employer. Self-employed people cannot have an FSA.

Money Market Account

A money market account works like a traditional checking or savings account. You could use the money for healthcare costs, or any other purchases. Money market accounts can offer a higher interest rate than other saving accounts, but there may be a higher minimum account balance required and more costly fees.

Savings Account

A traditional savings account can be set up with a bank or a credit union. Funds in a savings account can be spent on anything. But savings accounts may offer lower interest rates than other types of saving options. However, high-yield savings accounts may help close that gap somewhat.

The Takeaway

Enrolling in a health savings plan (HSA) or a health maintenance organization plan (HMO) provides different advantages, with the same goal in mind: saving you money on healthcare costs. Enrolling in one (or both) can bring a sense of security for you and your family and help you hold onto more of your hard-earned cash.

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

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

FAQ

Is an HSA better than an HMO?

An HSA isn’t better; it’s just different. An HSA is a kind of savings account for people enrolled in a high-deductible healthcare plan and is used to pay for medical costs. An HMO is a low-cost health insurance plan that gives you access to a specific network of healthcare professionals.

What happens to an HSA if you switch to an HMO?

You can keep and use an HSA with any type of health plan, as long as it qualifies as a high-deductible health plan (HDHP). If not, you can keep and access the money in the HSA, but you can no longer contribute to it.

What happens to my HSA if I cancel my insurance?

You can continue to use the money in the HSA account, but can no longer contribute to it until you’re enrolled in another HDHP.

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

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

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

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

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

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

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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.

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/Halfpoint
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If you’re wondering, “Can I open a bank account in another country?” the answer is typically yes. Whether you are pursuing life as a digital nomad, studying abroad for a semester or two, or traveling with friends or your significant other for a few months, you’re going to need access to funds.

If you keep your American bank account, you’re likely to face a slew of foreign transaction fees, which can really take their toll on your finances.

Fortunately, opening a bank account in a foreign country is totally possible — and totally legal, as long as you’re not doing so for tax evasion purposes. However, it may take a few more steps than opening a domestic account would. Read on to learn the details.

What is Banking Abroad?

Banking abroad is pretty much exactly what it sounds like: It involves opening a bank account in a country that is not your primary or official country of residence or citizenship.

If you’re an American, this means opening a bank account in any other country, whether it’s Canada or Cambodia. Of course, some countries — such as, famously, Switzerland or the Cayman Islands — are specifically known for what are called offshore bank accounts, thanks to incentives such as high levels of financial privacy and serious deposit protections. These features can and have attracted the attention of high-net-worth individuals over the years.

But opening a foreign bank account isn’t reserved only for the ultra-rich. Regular, everyday individuals may benefit from banking abroad in certain circumstances. If you are wondering if you can open a bank account overseas because you’ll be spending the bulk of your time there, you probably can.

Is Banking Abroad Legal?

Banking abroad is legal if you’re doing so for the right reasons.

Most of us associate banking abroad with nefarious activities like money laundering or tax evasion, which are, of course, illegal — and could result in large fines or even imprisonment.

But if you’re living in or earning legitimate wages in a foreign country, opening an account there is totally legitimate. It’s also likely your best bet for avoiding excessive foreign transaction fees. It will also reduce or eliminate the hassle of having to deal with a customer service team based in a very different time zone.

Some people also open offshore bank accounts for investment purposes. If this interests you, it’s worth enlisting the help of a financial professional to ensure you’re staying above-board. Foreign investments or offshore banking for tax purposes can be quite complex.

How to Legally Bank Abroad

In order to legally open a checking account in a foreign country, you’ll usually need to verify quite a lot of personal information for the bank. This is so all the parties involved can confirm you’re banking in a foreign country for legal reasons and not engaging in illicit activities, such as tax evasion or money laundering. You will probably have to share some details with US officials, too.

So what does all that mean for you as someone interested in opening a foreign bank account?

Paperwork — potentially lots of paperwork, though it may not be that complex.

Recommended: Can You Have Multiple Checking Accounts with One Bank?

Requirements to Open a Bank Account Abroad

The specific documentation you’ll need to provide to open a foreign bank account will depend on a lot of factors. Among the variables that may impact exactly what you’ll need to provide: The specific bank you choose, the regulations of the target country, how much money you’re planning to deposit or hold in the account, and more.

Generally speaking, though, you can plan to provide the following:

•   Proof of identification, such as a passport or driver’s license

•   Proof of residence, such as a utility bill

•   Up to a year of bank statements from your current bank account in the US

•   Paystubs or a statement from your employer

•   Documentation relevant to investments or business transactions, such as sales contracts

Keep in mind that these documents may need to be notarized by a third party or sent through the local consulate for the target country in order to be deemed official. The bank will give you explicit instructions on all required documentation and may also ask for a written statement of purpose for opening the account.

Don’t overlook the home team either. The US government is likely to have its own questions about your activities. If the value of your account abroad will be more than $10,000, you’ll need to file a Report of Foreign Bank and Financial Accounts (FBAR).

Note: Interest earned on monies held in foreign savings accounts are usually still taxable here at home. Always consult with a professional if you have questions about your tax liability.

Pros and Cons of Offshore Banking

So, what are the benefits and drawbacks of offshore banking? When does opening a foreign bank account make sense? Take a closer look.

Pros

First, the upsides of opening a bank account in another country.

•   An offshore bank account can help you avoid foreign transaction fees if you’re living or doing business in a foreign country.

•   Having a bank account in a foreign country you’re living in can also make it easier to perform basic daily banking tasks without having to navigate overseas phone calls.

•   Offshore banking can have some legitimate tax incentives — though in order to take advantage of these legally, you’ll probably need to consult a tax professional.

Cons

Now, the disadvantages:

•   Opening a foreign bank account can be a relatively arduous process, with a lot of paperwork and verification involved.

•   Foreign banking can have unforeseen taxation consequences — for example, interest earned overseas may still be taxable at home.

•   You may need to file additional paperwork with the IRS if your foreign account will be valued at over $10,000.

Here’s how these pros and cons stack up side by side.

Pros of Opening a Foreign Bank Account	Cons of Opening a Foreign Bank Account
Helps you avoid foreign transaction fees if you’re living or doing business abroad	Complicated process involving a lot of paperwork
Easier to conduct day-to-day banking while abroad	Tax considerations; for instance, interest earned may be taxable in the U.S.
There may be tax benefits to having a foreign account	If your account is worth over $10,000, you likely need to file extra paperwork with the IRS

The Takeaway

The answer to the question, “Can I open a bank account in a foreign country?” is likely to be a big yes. Gathering and submitting the right documentation may take a while, but it can ease your time abroad tremendously. It can help you spend more time reveling in the local culture than wrangling your personal finances.

If you’re looking for an easy-to-use banking alternative here in the US, consider your options to find the right fit.

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

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

FAQ

What countries allow foreigners to open bank accounts?

Most countries will allow foreign nationals to open a bank account on their shores as long as they can provide proof of legal residence in that country (and other necessary documentation). Some countries make it easier than others to open a foreign bank account, however.

Can I open a bank account in another country without being a citizen?

Yes, but you will likely need to provide extra documentation to verify your identity, place of residence, and the legal purpose of the account.

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Photo credit: iStock/MicroStockHub

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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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