SoFi

A credit limit is basically what the term suggests: A financial cap on a credit card account that limits how much money the cardholder can borrow from the card issuer. By including a maximum spending amount, the card issuer buys itself some protection against the cardholder borrowing more than they can pay back on an ongoing basis.

There’s more to the story, however, when it comes to credit card limits and how they’re determined. Here’s a closer look at what a credit limit is and what happens if you go over your credit limit.

What Is a Credit Limit?

As mentioned, a credit limit is the maximum amount that you can charge with your credit card, which represents a line of credit. The amount is determined based on information provided in a credit card application, such as the applicant’s credit score, income, and existing debts. Usually, the higher the credit, the higher above the average credit card limit someone will receive.

It’s also important to note that credit card limits aren’t set in stone. A cardholder may receive a higher credit card limit if they make their payments on time and stay well within their credit limit. Conversely, if card payments are late (or worse, not made at all) or if there are other signs of risk, such as nearing or exceeding their credit card spending limit, then the card issuer may decrease someone’s credit limit.

Recommended: What is a Charge Card

Credit Limit and Available Credit

Each purchase made with a credit card is deducted from your total credit limit, resulting in your available credit. For example, let’s say someone has a credit limit of $10,000. If they spend $2,000 at a store that accepts credit card payments, their available credit falls to $8,000. If they were then to make a $1,000 payment, their available credit would increase to $9,000.

Thus, your available credit will fluctuate over time depending on purchases and other transactions you’ve made, as well as any payments, including credit card minimum payments, made on the account. Your credit limit, on the other hand, remains constant regardless of account activity.

Credit Limit and Credit Scores

There’s another good reason to keep your credit card spending in check, and significantly below your card limit — it affects your credit score.

When FICO calculates its benchmark credit scores, it places a significant weight (30% of its total credit score calculations) on credit utilization. Credit utilization ratio compares the amount of credit a cardholder is using to the total available credit they have.

For instance, a card owner may have $10,000 in total available credit, but owe a total of $9,000 on the card. That represents a 90% card utilization, which is considered high and may raise a red flag for lenders as it suggests overspending and potentially an inability to pay. As such, a high credit utilization ratio could result in a lower credit limit for the cardholder, whether that’s a decrease on their existing limit or lower limits offered on new accounts.

It’s usually recommended that cardholders keep their card utilization rate below 30% to avoid negative effects on their credit score. In the above example, that means the cardholder with a $10,000 credit card limit shouldn’t owe more than $3,000 on the card.

How Much of Your Credit Limit Can You Use?

Technically, you can spend up to your credit limit. However, using too much of your total credit can adversely affect your credit utilization ratio, a key factor in determining your credit score.

It’s suggested to keep your credit utilization below 30% — which means using no more than 30% of your overall credit limit. This is why it’s always important to make payments, even if you’re in the process of requesting a credit card chargeback or other dispute.

How Is Your Credit Limit Determined?

The formula for determining a credit card limit depends on which scoring model the card provider uses. Generally, one of three distinct credit limit models is used: credit-based limits, predetermined credit limits, or customized limits.

The Credit-Based Limits

With credit-based limits, card providers leverage your credit score to determine credit limits. In doing so, card companies rely on the same financial formula that credit scoring agencies use to create a credit score — a cardholder’s payment history, credit utilization rate, total length of credit history, credit mix, and any new credit inquiries. Card companies may also take a close look at the card owner’s total annual income, total household expenses, and type of employment.

Basically, the better you are at making on-time credit card payments, curbing household debt, and handling consumer credit, the more likely you are to get a higher credit card limit under the credit-based limits model.

Recommended: When Are Credit Card Payments Due

The Predetermined Credit Limits

This credit limit calculation model relies on a “ladder approach” to determine credit limits. In this scenario, credit card issuers assign a credit limit based on the type of card. In other words, every card in a certain tier — such as an entry-level card or a premium rewards card — would come with the same credit limit rather than the credit limit being determined based on the individual consumer.

The more features and amenities a credit card has, the higher the credit limit typically is under this model. For example, a premium credit card with robust benefits and generous cash-back rewards may have a credit limit of $10,000. Meanwhile, a more bare bones credit card for entry-level cardholders may have a credit limit of $500.

The Customized Credit Limits

With customized credit limits, card providers tailor the credit limit to the individual credit card consumer. They may do so in different ways based on different criteria.

For example, one credit card issuer may base its decision on a cardholder’s annual household income, while another may prioritize the number of credit cards an individual already owns, along with their existing credit limits.

In that way, card companies are drilling down into an individual’s financial history and basing their credit limit decision on myriad factors. Once again, the stronger a card candidate’s financial resume, the more likely that individual is to receive a higher credit card limit.

Recommended: Tips for Using a Credit Card Responsibly

Can You Spend Over Your Credit Limit?

In general, credit card companies prevent spending over the credit card limit.

When a cardholder has reached their limit and attempts to use their credit card, the transaction may be declined.

In some instances, however, the card issuer may allow the transaction to go through and instead impose a financial penalty for spending over the credit card limit. According to the Credit Card Act of 2009 (CCA), the card company can’t assess a fee that’s more than the amount spent over the credit limit. So, for instance, if you overspent by $30, your fee couldn’t be more than $30.

Typically, the card owner must opt in to allow for purchases over the credit limit to be approved. The CCA legislation mandates that credit card companies can’t arbitrarily charge an over-the-limit fee without the cardholder’s signed consent. For that reason, most card providers have eliminated over-the-limit fees and simply deny the transaction instead.

Check with your card company to see if it still charges over-the-limit fees. If so, and you object, ask to opt out and focus on keeping your credit card balance well below your card spending limit.

Is It Possible to Increase Your Credit Card Limit?

Credit card limits aren’t static. They can go up — especially if a card customer asks for a credit limit increase — and they can also go down.

Perhaps the easiest way to increase your credit limit is to contact your card provider and ask for a credit limit boost. You can usually make this request over the phone or on the card issuer’s website or mobile app.

Before you make any request for a credit card limit increase, check your credit report to see that your financial health is in good standing, as your card provider will likely treat your request for a credit limit hike like any request for credit. That means a thorough credit check to ensure your credit card payment history is strong, your credit score is good, and your job situation or annual household income hasn’t deteriorated.

The credit card company will review those financial factors and let you know whether or not your request for a credit increase is approved. If you’re denied a higher credit limit, your best recourse is to take some time to improve your credit score and build a stronger credit profile.

In some cases, you can apply for a new credit card with a higher credit limit. However, expect any new card issuer to conduct the same rigorous credit vetting your original card company conducted given how credit cards work.

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

The Takeaway

Credit card companies assign credit card limits to consumers based on one of three typical models. Often, your ability to handle credit and pay it back on a timely basis comes into play when determining how high your credit limit is. If you’d like a higher credit card limit, you can ask your current card issuer if your financial status has improved, or you could consider applying for a new credit card.

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

Can lenders change credit limits?

Yes, lenders can change credit limits — particularly if a credit card holder asks them to do so. But credit limits are unlikely to change for the better unless the cardholder has a solid credit history and financial situation.

What is a normal credit card limit?

That depends on the individual and credit card companies, but the average credit limit for U.S. cardholders was $30,365 in 2020, according to a recent report by Experian . That said, individual credit card limits can vary depending on a variety of factors, and can be as low as $300.

How do I get a high credit card limit?

The best way to get a high credit limit is to display habits that show creditors that you’re a low credit risk. That means paying your bills on time, keeping debt low, and having a robust credit history.

---

¹See Rewards Details at SoFi.com/card/rewards.

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

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 .

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.

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.

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.

The SoFi Credit Card 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.

¹Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

Photo credit: iStock/RgStudio
SOCC0422014

Read more

When you piggyback on someone else’s credit card, you become an authorized user on their account. Usually, this is in service of establishing credit for the first time or boosting your credit score.

While piggybacking credit can serve as an important tool as you establish firm financial footing, there are also situations in which it can be risky. Because of this, it’s important to understand how piggyback credit works before using this strategy.

What Is Credit Card Piggybacking?

When piggybacking credit, you become an authorized user, or a secondary account holder. As a secondary cardholder, you may receive your own card and account number. You’ll be allowed to make purchases on the account, but you aren’t necessarily responsible for payment. This differs from joint accounts or for loans that are cosigned, where all parties are responsible for payment.

The primary account holder will be able to view all of the purchases and will ultimately be responsible for making all payments. You’ll likely enter into some sort of agreement with the primary account holder to pay them back for any purchases that you make. You may also agree not to use the account at all.

Piggybacking can refer to other types of debt as well, such as a piggyback mortgage loan. Here, the term is used slightly differently and usually refers to a second mortgage, a home equity loan, or a home equity line of credit (HELOC).

How Does Credit Card Piggybacking Work?

Before we get into how piggybacking works, it’s worth considering why your credit score is important. Your credit score is a three-digit number that provides a visual indicator of your creditworthiness. Credit card companies, banks, and other lenders will look at your score to determine how risky it is to extend credit to you.

Borrowers with the highest scores are seen as the lowest risk. In other words, they are the most likely to pay their bills on time, and the least likely to default on their debt. Lenders are often willing to extend the most favorable credit card terms and conditions, including interest rates, to these borrowers.

Individuals with lower scores are seen as presenting higher potential risk. Their low scores indicate that they’ve likely had trouble paying their bills on time in the past. As a result, lenders may be less willing to extend credit, and if they do, it may come with higher interest rates to compensate the lender for the increased risk they’re taking on.

If you don’t have a credit history or are looking to give yours a boost, credit card piggybacking can help. That’s because when you become an authorized user on someone else’s card, their credit history for that account has an impact on yours.

When you become an authorized user, that account pops up in your credit report. If the primary account holder has a long history of paying their bills on time, or they keep their balance low, this might have a positive effect on your credit. If the account has been open for a long time, say 15 years, it will read on your credit report as a 15-year account. As length of credit history has an effect on your credit score, this can prove helpful in boosting your score.

Beware, however, that the impact on your credit score doesn’t always move in the positive direction. If the primary account holder misses payments, for example, the account could have a negative effect on your credit.

Recommended: When Are Credit Card Payments Due

Does Piggybacking Credit Actually Work?

Piggybacking on a credit card does actually work, but not all of the time. For one, not all credit card companies will report a secondary account holder to the credit reporting bureaus, which include Equifax, Experian, and TransUnion.

What’s more, when you become an authorized user, you’re not necessarily learning to use credit cards responsibly — especially if you’re not using the account or making purchases and having to pay them off on time. For more on building healthy credit card habits, check out these credit card rules.

Is Piggybacking Illegal?

Piggybacking is not illegal. In fact, under the Equal Credit Opportunity Act, Congress determined that authorized users cannot be denied on existing credit accounts. This rule applies even if the person being authorized is a stranger.

That said, there are situations in which becoming an authorized user is a deceptive practice and may entice you into some fraudulent situations. (More on this below.)

What Is Person-to-Person Piggybacking?

Person-to-person piggybacking involves becoming an authorized user on the account of a significant other, family member, or friend. For example, young adults often become an authorized user on their parent’s credit card as they seek to build credit for themselves.

Eventually, that young adult will have built enough credit to get a credit card of their own and will be financially stable enough to be able to pay it off on time. At this point, they can decide to drop from their parents’ account.

What Is For-Profit Piggybacking?

Here’s where things get tricky. If you don’t have a friend or family member who’s willing to make you an authorized user on their account, you can seek out the help of a tradeline service. A tradeline is another word for a revolving credit account or installment loan on your credit report.

The tradeline service can match you with a stranger who has good credit, and for a fee, they’ll add you to their account. The cardholder receives a portion of that money, and you won’t receive a physical card or access to the account.

Tradeline services first appeared in 2007, and since then they haven’t been without controversy. For one thing, the practice of purchasing a tradeline can be seen as a method of deceiving lenders into thinking you have better credit than you do. If perceived as fraud, this could have some legal ramifications. To discourage this type of piggybacking, FICO even tweaked its scoring formulas to make it less effective.

Engaging a tradeline service can also be pricey. Depending on what type of credit you’re looking for, it may cost you as much as $4,000.

It’s also important to understand that you’re only authorized on the cardholder’s account for a short period of time. While your credit may receive a boost in the short-term, when you’re dropped from the account, your credit score may fall as well.

Recommended: What is a Charge Card

Risks of Credit Card Piggybacking

In addition to the considerations above, there are other risks to be aware of when piggybacking, especially when doing so through a third party. Here are some further risks of piggybacking credit to consider if you’re thinking about doing it:

•   You have to give out your private information. This includes your name, address, and Social Security number. The service and cardholder may not have your best interests at heart, and providing them with your data may put you at risk for fraud and identity theft.

•   It’s not looked on favorably by lenders. Lenders look to your credit score to learn how well you’re able to manage your debts. If they learn that you’ve used a tradeline service, they may lose trust in you and be less likely to extend credit to you.

•   There’s the potential for fraud. Be on the lookout for shady tradeline companies with fraudulent practices. Beware any company that tells you that you can hide bad credit or a bankruptcy using a credit privacy number. The number they’re trying to provide might actually be someone else’s Social Security number, which would put you at the heart of an identity theft scam.

•   It could hurt your credit. You might also be duped into buying an account that’s gone into default, which could hurt your credit.

•   There’s the potential for address merging, which is fraudulent. Sketchy companies may also try to use a process called address merging, by claiming that the authorized user lives at the same address as the account holder. This is fraudulent, and indicates that you are not working with a reliable company.

•   You may not give yourself the chance to build healthy financial habits. The best way to keep your credit score up is to not take on more debt than you can afford and to make payments on time. If you don’t give yourself experience with doing that, you may not learn healthy financial behaviors.

•   It could get you in over your head down the road. Boosting your credit to a point that doesn’t reflect your actual credit activities can land you in a bit of hot water if you qualify for a loan only to realize later you can’t actually afford it. You don’t want to end up in a place where you’re wondering if you can pay a credit card with a credit card.

Is Credit Card Piggybacking Right for You?

Credit card piggybacking may be right for you if you’re building credit for the first time and need a way to get your foot in the door.

If you do decide to try piggybacking credit, it may be best to piggyback on the credit of someone close to you. Only turn to tradeline services if there are no other options available, and make sure to carefully vet any options and consider the costs involved.

Alternatives to Credit Card Piggybacking

Piggybacking isn’t the only way to build your credit.

There are many different types of credit cards. Secured cards, for instance, require you to make a security deposit to receive a line of credit, which makes them easier for people with no credit history to qualify for. The credit limit on the card is often equal to the security deposit amount.

You can also look for tools that allow you to get credit for paying off bills and utilities on time. For example, Experian, one of the major credit reporting bureaus, offers Experian Boost as a free service.

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

Tips for Managing Your Credit History

As you build your credit history, there are important steps that you can take to help ensure your credit score is as high as possible:

•   First and foremost, always pay all or your bills on time.

•   Next, you’ll want to have a diverse mix of credit, such as credit cards, student loans, auto loans, or a mortgage.

•   Keep your credit utilization below 30%. For revolving credit, credit utilization measures how much of your credit limit you are currently using. You can calculate it by dividing your credit card balance by your loan limit.

•   Work to keep hard inquiries at a minimum. When you apply for credit, you trigger what is known as a “hard inquiry.” These can temporarily lower your credit score, especially if there are many in a short period of time.

You’ll also want to be diligent about monitoring your credit report. You can request a free credit report from each of the three credit reporting bureaus once a year. That means, you could be checking your credit report every four months. Look for mistakes on the report and alert the reporting bureaus immediately if you spot anything that’s amiss. Learning to ready your credit report can also clue you into areas of your credit that need your attention and may be dragging down your score.

Recommended: Tips for Using a Credit Card Responsibly

The Takeaway

Piggybacking credit — becoming an authorized user on another person’s credit account — can be an important tool for building credit. Yet, you only get a benefit with credit card piggybacking if the person’s account is in good standing. If they miss a payment, it could have a negative impact. And if you use a third-party tradeline service, you could be putting your personal information at risk.

Weigh these factors carefully before choosing to build credit using this strategy, and be sure to consider other options. When you’re ready to strike out on your own, consider a credit card from SoFi, which offers up to 2% unlimited cash back rewards and no annual fee. If you’re interested, you can learn how to apply for a credit card with SoFi today.¹

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.¹

Take advantage of this offer by applying for a SoFi credit card today.

FAQ

Is piggybacking credit illegal?

Piggybacking credit is not illegal. In fact, Congress has said, under the Equal Credit Opportunity Act, that no authorized users can be denied on existing credit accounts, even if that credit account belongs to a stranger.

How much can piggybacking raise your credit score?

According to one recent study, individuals with poor credit could see a jump of nearly 12% after three months when becoming an authorized user. Those with better credit saw a smaller bump. Individuals with excellent credit only saw a 1% change in their credit score after three months.

Does piggybacking credit still work in 2022?

Piggybacking still works in 2022, though credit reporting bureaus credit scoring companies may frown on it. FICO, for one, has adjusted its scoring to limit the effect of becoming an authorized user.

---

¹See Rewards Details at SoFi.com/card/rewards.

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.

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.

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

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 .

The SoFi Credit Card 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.

¹Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

Photo credit: iStock/Morsa Images
SOCC0422001

Read more

A jumbo certificate of deposit (CD) is a type of savings account that has a higher minimum required initial deposit amount than a regular CD. Jumbo CDs generally require a deposit of $100,000, and they pay a higher interest rate to account owners in return for this higher initial deposit.

Certificates of deposit are savings accounts where the account owner gives up access to their funds for a specified period of time, and earns interest in return for locking up their money. The interest rate may be fixed or variable depending on the particular CD. At the end of the term, known as the maturity date, the account owner receives their initial deposit plus the earned interest.

Is a jumbo CD right for you? Here’s what you need to know about how jumbo certificates of deposit work, and the pros and cons of this type of account.

What Is a Jumbo Certificate of Deposit?

You’re probably familiar with the traditional certificate of deposit, or CD. These accounts are similar to savings accounts, but they pay higher interest rates in exchange for certain restrictions. Generally, most CDs have a maturity date between three months and five years. Since CDs require that funds are unavailable to the account owner during the term, they pay higher rates than other types of savings and interest-bearing checking accounts.

Unlike a regular CD, jumbo CDs generally require investors to deposit at least $100,000 when they first open their account. There are some jumbo CDs that have lower entry requirements of, say, $50,000; these are typically offered by credit unions and smaller banks.

Investors looking to open a smaller CD account are generally better off opening a regular CD. The rates can be just as good as a jumbo CD, but without the steep initial deposit requirements.

Regular vs Jumbo CD

Here’s what you need to know about the similarities and differences between investing in ordinary CDs and jumbo CDs.

Similarities

•   What is a certificate of deposit vs. a savings account? Regular and jumbo CDs are savings-like accounts that require investors to lock up their funds for a specified period of time in exchange for a higher rate of interest than a traditional savings account.

•   Both types of accounts can be set up for shorter and longer terms, typically from three months to five years.

•   If an investor needs their money before the CD’s term is complete, they will likely pay a penalty on the early withdrawal.

Differences

•   Jumbo CDs have higher entry requirements than regular CDs. Regular CDs typically have an initial minimum deposit requirement of less than $5,000, and some have no requirement at all. Jumbo CDs typically require a $100,000 deposit.

•   Jumbo CDs typically have somewhat higher interest rates than regular CDs. However, some regular CDs have equal or better rates than jumbo CDs. Usually large banks have some of the best CD interest rates.

•   Ordinary CDs are insured by the FDIC up to $250,000, as are jumbo CDs — but any amount in a jumbo CD above $250,000 is not FDIC-insured and subject to risk of loss.

•   Regular CDs tend to be more attractive to retail investors; jumbo CDs are geared toward large institutional investors.

Ordinary CDs vs Jumbo CDs

Similarities	Differences
Investors deposit funds for a fixed period in exchange for a higher interest rate than a traditional savings account.	Jumbo CDs require a $100,000 minimum deposit vs. $5,000 or less for a CD.
CD terms are typically three months to five years, but can vary.	Jumbo CDs generally have somewhat higher interest rates.
Early withdrawals from any CD typically trigger a penalty.	Both types of CD are FDIC-insured up to $250,000, but amounts in a jumbo CD above that aren’t covered.
	Regular CDs are geared toward retail investors; jumbo CDs to institutional investors.

Advantages of Jumbo CDs

Jumbo CDs offer several advantages for investors looking to buy into a safe savings account with a fixed rate of return.

Steady Rate of Interest

Because jumbo CDs earn a steady interest rate over a fixed period of time and are fairly safe investments (i.e. your money is FDIC-insured up to $250,000), they can be a good way to save up for a longer-term financial goal, such as buying a home or saving for a wedding.

Higher Interest Rate Than Traditional CDs

Jumbo CDs tend to pay higher interest rates than regular CDs and savings accounts. National averages show that annual percentage yields for jumbo CDs tend to be about one-hundredth of a percentage point larger than regular CD yields, which isn’t much — but can add up over time.

Steady Interest Can Partly Offset Market Risk

By holding some funds in a jumbo CD that earns a steady rate, it’s possible to offset the potential volatility in other parts of your investment portfolio. Also, although interest rates may not be super high, the compound interest on the large amounts invested in a jumbo CD can add significantly to investors’ earnings (see example below).

Insured up to $250,000 per Account

The FDIC or the NCUA insure CD accounts for up to $250,000, making jumbo CDs one of the safest types of investments.

Those who want to deposit more than $250,000 might consider opening a joint CD account that allows $250,000 per account owner, or they can open different CD accounts with multiple banks. Jumbo CDs are popular with retirees who don’t want to put all their money into the stock market. On the downside, jumbo CDs tend to earn lower returns over time than stocks.

Disadvantages of Jumbo CDs

Although there are several reasons jumbo CDs can be good investments, they also come with some downsides. The biggest buyers of jumbo CDs are institutional investors looking for safe investments with fixed returns. Sometimes these institutional investors put money into a CD that they plan to invest somewhere else but they want to earn interest on it while they wait for that next investment. Retail investors typically look for CDs with lower entry requirements.

Lower Return Than Many Other Fixed-Rate Investments

Jumbo CDs are safe fixed-rate investments, but they have high minimum balance requirements and pay out lower interest rates than other types of fixed-rate investments like bonds.

Interest Rate Risk

Investors face the potential risk of interest rates going up after they buy a CD. If this happens they may miss out on the opportunity to earn those higher rates.

May Not Keep Up With Inflation

Jumbo CDs pay higher interest rates than traditional savings accounts, but the rate of these CDs may not be that high and therefore they may not keep up with the pace of inflation. The cost of living may rise more quickly than the return provided by the CD.

It may help investors to buy into jumbo CDs with longer terms, since those pay out higher interest rates — but the tradeoff there is that your money is locked up for an even longer period.

Recommended: How to Protect Money Against Inflation

Early Withdrawals Will Trigger a Penalty

When an investor puts money into a jumbo CD, they cannot access those funds until the maturity date. If they do want to access the funds they will have to pay an early withdrawal penalty. Each bank has different penalties for early withdrawal, but there are also no-penalty CDs available, so it’s important for investors to consider their individual situation and look into their options to avoid paying fees.

Reinvestment Rate Risk

If interest rates go down during the term of the jumbo CD, then the investor might struggle to find a new investment that provides a similar rate when their jumbo CD reaches its maturity date.

Jumbo CD Example

Interest rates for jumbo CDs are always changing and they can be different in different regions, but below are two examples of how a jumbo CD might be structured:

•   An investor buys a $100,000 jumbo CD from Bank A. It has a nine-month term and pays 1.5% interest. When the investor withdraws the funds at the maturity date, they’ll receive $101,122.90.

•   Another investor buys a $200,000 jumbo CD from Bank B, with an 18-month term and 2.00% interest. At the maturity date, the investor will get $206,029.90.

The Takeaway

Jumbo CDs are savings accounts with high minimum deposit requirements — typically $100,000 — that pay higher interest rates than regular CDs. These are popular with large institutional investors such as banks and corporations. While they are similar to regular CDs in some ways — your money is unavailable until the maturity date; early withdrawals can trigger a penalty — jumbo CDs may come with more risks. For example, only the first $250,000 of your money is insured. And by locking up your money at one fixed rate, you may lose out if interest rates rise.

If you’re ready to open a savings account, one easy way is through SoFi’s online banking app. You can sign up for an account right from your phone and pay zero account fees — and if you qualify and use direct deposit, you can earn a competitive APY. Open your Checking and Savings today.

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 range of jumbo CD rates?

Jumbo CD rates are between 0.40% and 2.1% as of April 25, 2022. The highest rates often depend on the length of the term.

How much money is in a jumbo CD?

Jumbo CDs typically require a minimum deposit of $100,000.

Are jumbo CDs negotiable?

Jumbo CDs are usually negotiable, meaning they can be sold on a secondary market.

---

Photo credit: iStock/Andrii Yalanskyi

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.

SOBK0322032

Read more

A foreign currency certificate of deposit (CD) is similar to an ordinary CD in that an investor can lock up funds for a period of time and earn a set interest rate. But with a foreign CD, the money is converted into another currency for the duration of the term; the funds earn interest in that currency, and the money is converted back to dollars at the maturity date.

Foreign currency CDs sometimes offer much higher returns than other types of CDs. However, they do come with some potential downsides and these CDs can be affected by volatility in the currency markets.

Here’s what you need to know about how foreign currency CDs work, their pros and cons, and how to start investing in them.

How Foreign Currency CDs Work

There are a number of ways to invest in foreign currency. How does a foreign currency CD work? An investor deposits their U.S. dollars in the CD account for a specified period of time known as the term (typically three months to five years). The dollars are then exchanged for a foreign currency or basket of currencies, and the money earns interest in that currency.

At the end of the term the total is converted back to U.S. dollars, and the investor receives their principal plus the interest — similar to an ordinary certificate of deposit.

Typically CD interest rates are somewhat higher than traditional interest-bearing savings or checking accounts, to compensate for the fact that the investor’s money is inaccessible for the term — and foreign currency CDs tend to have higher rates owing to the higher risk.

The longer the term of a foreign currency CD, the higher interest rate the investor earns.

Foreign currency CDs can be a way for investors to hedge against the risk of the U.S. dollar depreciating in value.

How You Can Make Money With Foreign Currency CDs

Returns earned on foreign currency CDs depend on the current interest rates in the country of the chosen currency. Every country has different interest rates, some of which are much higher than the U.S. rates. By investing in another country one may be able to earn those higher rates.

If the currency exchange rates work in the investor’s favor, the value of the CD could also increase – and they could see a higher return in addition to the interest gained.

How You Can Lose Money With Foreign Currency CDs

Although there is an opportunity to earn high interest rates on foreign currency CDs, this type of CD is risky. Other types of CDs are known to be safe investments, so it’s important to understand the difference.

Currency markets have high volatility and are unpredictable, so the exchange rate between the U.S. dollar and the chosen currency may fluctuate a lot between the beginning and end of the CD term. If a foreign currency loses value compared to the U.S. dollar, an investor will lose money at the end of the term, and the interest gained may not be more than the loss. However, if a foreign currency rises in value compared to the U.S. dollar, investors will earn an even higher return than the interest alone.

The intricacies of currency markets are one reason why foreign currency CDs aren’t recommended for retail investors who don’t have the tools or experience to anticipate what might happen to any particular currency.

One catch to be aware of is that the countries that have the highest interest rates tend to have the most volatile currencies. So it can be tempting to invest to earn those higher rates, but there is a higher risk of loss as well.

How Risky Are Foreign Currency CDs?

Foreign currency CDs are fairly risky investments because currency markets can be quite volatile. For this reason, these CDs tend to be used by institutional investors more so than retail investors.

Investing in currencies requires an in-depth understanding of many different factors that can affect their values. Institutional investors often buy into foreign currency CDs if they know they have an upcoming payment to make in that currency. They can exchange the money and earn interest on it until it becomes time to make the payment.

How to Protect Your Investment

There are a few key ways to protect investments in foreign currency CDs.

Temper Currency Risk

One of the greatest risks in investing in foreign currency CDs is that global currencies can fluctuate a lot in a short amount of time. It can be tempting to buy into currencies that have the highest interest rates, but those are the most volatile and risky.

Instead, it’s better to choose stable currencies with lower interest rates, or invest in a basket of foreign currencies. It’s also recommended to only put a small amount of money into foreign currency CDs for portfolio diversification and exposure to foreign markets.

Look for FDIC Protection

The FDIC insures CDs up to $250,000, but this only applies to CDs opened with U.S. banks. Although an investor can buy into a CD from a foreign bank, it won’t be insured and will come with higher risk, so it’s best to look for foreign currency CDs backed by U.S. banks.

Another important fact to keep in mind is that FDIC won’t protect against currency fluctuations for foreign currency CDs.

Be Aware of Fees and Charges

All types of CDs tend to have early withdrawal fees, although there are some no penalty CDs. Foreign currency CDs also have conversion fees that are sometimes included in the price of the CD. Be sure to inquire about the cost of any foreign currency CD.

How to Open a Foreign Currency CD

Most U.S. banks don’t offer foreign currency CDs, so investors interested in buying into them will need to do some research to find them. Banks that do offer foreign currency CDs tend to offer multiple foreign currency choices. Some also offer CDs that have a group of foreign currencies in them to provide investors with broader exposure.

Investors can open foreign currency CDs with overseas banks, but they are not FDIC insured so they come with greater risks.

Banks offering foreign currency CDs sometimes require a certain minimum deposit amount, and there may be fees associated with currency exchange.

Other Ways to Invest in Foreign Currency

In additional foreign currency CDs, there are other ways investors can gain exposure to foreign currencies:

•   Mutual funds

•   Exchange-traded funds (ETFs) and leveraged ETFs

Investing in mutual funds and ETFs is just as easy as investing in stocks, and more CDs are becoming available to retail investors, so these are simple ways to buy into foreign currency markets. Forex trading is more complicated.

The Takeaway

Foreign currency certificates of deposit are one way investors can gain exposure to foreign markets. Although this type of CD can earn a higher interest rate than traditional CDs, they also come with a higher degree of risk. Global currency markets are complex and difficult to predict — often volatile — with the potential for higher returns but also steep losses for foreign currency CD holders. This type of savings option is recommended only for more experienced investors.

If you’re looking to open a checking or savings account, you might want to consider SoFi’s online banking app: an easy all-in-one account. You can open a Checking and Savings on your laptop or phone. There are no account fees, and if you use direct deposit you can earn a competitive APY. The online platform lets you set personal savings goals, and you can see all your financial information in one simple dashboard.

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 foreign CDs FDIC insured?

If a foreign CD is purchased through a U.S. bank it will be FDIC insured, but if it is purchased through a foreign bank it is not.

Which US banks offer foreign currency accounts?

The most well known bank offering foreign currency CDs is TIAA bank, formerly known as Everbank.

Can US banks hold foreign currency?

Yes, U.S. banks can hold foreign currency.

---

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

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

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

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

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

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

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

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

Photo credit: iStock/Drazen_
SOBK0322033

Read more

Opening a business checking account isn’t much different from opening a personal account, but it’s an important step when it comes to running your business. A business account can help you keep your personal finances separate from your professional transactions. This, in turn, can make growing your credibility and completing your taxes easier, among other benefits.

The requirements to open a business checking account tend to vary, depending on the financial institution and other factors like your location and business entity. But, in most cases, it’s generally a straightforward process to start one.

Let’s take a closer look at:

•   What a business checking account is

•   How it works

•   How to open a business checking account.

What Is a Business Checking Account?

If you have a personal checking account, you may wonder, “What is a business checking account anyway? Do I really need a separate account?” Let’s get those questions answered. A business checking account is similar to a personal checking account in that you have flexibility in your day-to-day banking. Depending on the type of account, you may be offered features such as unlimited transactions, a debit or ATM card, and check-writing capabilities.

In some cases, you may even be able to earn interest. But, and this is important, business checking accounts are meant to house a company’s funds. Therefore, there may be different features and requirements to maintain the account. Check with a few banks to get acquainted with the details.

Now, for that second question — “Do I need a separate business account?” — the answer is probably “yes” if you own a business. Even a brand new, currently part-time endeavor may need a small business account. In terms of a business vs. personal checking account, you want to keep that biz income separate for tax purposes and to gain legitimacy for your enterprise. Also, if you need to be paying employees or vendors, a business account is the way to go, so as not to get those kinds of transactions mixed up with, say, your home-loan payments and other personal expenses.

How Does a Business Checking Account Work?

Business checking accounts are quite similar to personal checking, but they typically have different limitations, fees, and balance requirements. For instance, business checking accounts may come with higher bank fees, especially if your business deals with a large amount of transactions. In that same vein, there may also be higher minimum balance requirements to waive monthly fees or to earn interest.

That’s not to say they aren’t budget-friendly options. Many online business checking accounts are being offered to smaller businesses or sole proprietors, though they may not offer interest earnings.

You can use a business checking account to conduct transactions such as bill paying, receiving funds, and writing checks. In many cases, you may even be able to order debit cards for you and your employees to withdraw money and make purchases. The primary account holder (such as the business owner) can set ATM withdrawal limits and spending limits for employee cards.

Can Anyone Open a Business Checking Account?

Almost anyone can open an bank account as long as they have the right type of documentation. In general, you’ll need to prove that you own a business. Now, what if you’re a sole proprietor or an independent contractor (say, a gig worker)? Even if you don’t have the usual kind of paperwork, you may still be able to open a business checking account. However, you’ll probably need to speak with the bank to see how you can do so.

What You Need to Open a Business Checking Account

The types of documentation you’ll need to provide depends on the bank at which you’re opening a business bank account and also on your legal business entity. Typically, sole proprietors will only need to provide their personal information, whereas LLCs and corporations will need documentation about the company and details from each of the majority owners.

Here’s a list of what kind of identification and documentation you’ll most likely need to provide to start your account. This applies whether you are heading to a bricks-and-mortar branch or opening an online business checking account:

•   Personal information: Financial institutions will require some form of government-issued photo ID such as a driver’s license or passport. If you have multiple business owners, then banks may require personal details of each owner.

•   Employer Identification Number (EIN): Every business should have an EIN, though sole proprietors and single-member LLCs may be able to submit their Social Security number in their application.

•   Business details: You’ll need to provide your business name, address, and, if applicable, your DBA (doing business as) name. In many cases, you’ll also need to disclose the industry your business falls under.

•   Documentation: Depending on your business entity, you’ll have to provide your business name registration certificate, business license, articles of organization, partnership agreement, and operating agreements.

•   Opening deposit: To finalize your business account opening, you may be required to deposit a certain amount of money. Check with your financial institution to determine what that amount would be.

Do I Need Revenue to Open a Business Bank Account?

Most banks don’t require you to be earning revenue in order to open a business checking account. That means if you’re starting a business, you don’t need to wait until you earn a certain income to open that account. So it can be a smart move to put opening your business checking as one of the first items on your to-do list when you start your enterprise. As long as you have the required documentation needed, you should be able to open an account.

Benefits of a Business Checking Account

Opening a business checking account comes with a myriad of benefits, including:

•   Liability protection: If you use a personal checking account for business purposes and have legal issues, it’s more likely that a court will have the right to go after your personal assets. That’s because it doesn’t look like you’re operating a separate business. Opening a business account generally shields you from this potential issue, especially if you’re registered as an LLC or corporation.

•   Tax simplification: Having a business checking account allows you to completely separate your personal and business finances. That way, it can help you include all the transactions you need to file your taxes accurately and efficiently. Plus, it’ll be easier to scrutinize your expenses to see whether you can identify further deductions.

•   Credibility: Your business may be taken more seriously if you used a business checking account. Your clients or vendors may be more likely to trust you if your payments or checks are coming from an account with your business name on it. These types of accounts also help when you decide to apply for small business financing or credit card. In other words, establishing your business could show business credit bureaus you’re serious enough of an entity to create a credit report for your company.

•   Potential future growth: Having a business checking account can help prevent any potential hiccups down the road, such as having to find ways to make payroll for your employees.

Things to Consider When Choosing a Business Checking Account

Many banks offer different business checking accounts suited to a variety of needs, so it’s important to look at the following features when making your decision. There’s probably an account available that fits your needs just about perfectly:

•   Fees: Most business checking accounts charge monthly maintenance fees. You may be able to have them waived, but you’ll need to meet certain requirements such as maintaining a certain balance.

•   Interest rates: In general, interest rates for business checking accounts are lower when compared to savings or money market accounts. However, you may still be able to earn a small return on your deposits. Assuming the fees may be higher for interest-bearing accounts, do some calculations to determine whether the APY makes it worth paying them.

•   Transaction limits: Business checking accounts tend to come with deposit and withdrawal limits per month. If you go over a certain limit, you may be required to pay an additional fee.

•   Bundled services: Some business checking accounts may offer unlimited employee debit cards, dispense free checks, or waive fees if you sign up for a business credit card or merchant services.

Do You Need a Business Checking Account?

Getting a business checking account is a smart move for anyone looking to launch and grow their business. Even if you’re the only employee (and plan to be for a long time), having this type of account still makes sense.

However, if you’re running a side business, are a gig worker, and don’t intend on venturing away from your full-time job, it might not be necessary. As long as you keep meticulous records to ensure you know what your business transactions are, you may be able to get away with only having a personal account. Note the use of the word “may.” If your business grows or just keeps chugging along for a number of years, you may at a later date regret not having gotten a separate business account. It can simplify and clarify your finances.

The Takeaway

If you’ve started or are running your own biz, it’s a smart idea to open a separate account to differentiate your business and your personal transactions. Applying is typically quite straightforward, involving presenting identification and other business documents. In return, you’ll get the flexibility, legitimacy, and services you need to conduct business professionally. Plus, you’ll keep your enterprise separate from your personal finances and avoid confusion.

If you’re looking to rev up your personal banking, however, give SoFi a look. Open linked Checking and Savings with direct deposit, and you’ll have access to your paycheck up to two days early, you won’t pay any account fees (including no overdraft fees) and you’ll earn a competitive APY.

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

FAQ

What is the difference between a personal and business checking account?

Both types of accounts are similar, except business checking accounts are meant for corporations and business owners, and they feature services that cater to professional needs.

What is the purpose of a business checking account?

The purpose of a business checking account is to facilitate banking for businesses with needs like paying vendors and employees and paying for supplies. It also separates personal and business assets for liability purposes. What’s more, a business account provides a company with more legitimacy.

What makes an account a business account?

Business accounts are designed for professional needs, which may mean many more transactions than a personal account typically engages in, as well as ways to pay employees and vendors. They may have merchant services too, which incorporate credit and debit card payments.

---

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

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

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

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

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

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

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

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

Photo credit: iStock/Halfpoint
SOBK0222029

Read more