What Is a Credit Card Chip and How Does It Work?

What Is a Credit Card Chip and How Does It Work?

If you’re asked to insert or tap rather than swipe your credit card when you go to pay, you’re using a chip credit card. A credit card chip is a small gold or silver microprocessor that’s embedded in the card and intended to offer greater security for your transactions.

Credit card chips are growing dominant in the plastic payment market. These chips — sometimes known as Europay, MasterCard, and Visa (EMV) chips — comprised about 93% of global credit card transactions in the most recent year studied, though US usage was slightly lower at 87.2%. Overall, there are almost 13 billion cards with these chips in circulation. Read on to learn more about how the credit card chip works.

What Is a Credit Card Chip?

Credit card chips are small microchips embedded in the card that collect, store, and transmit credit card data between merchants, their customers, and participating financial institutions. Each time you use a credit card, these chips generate a unique code that can only be used for that transaction.

Chip credit cards date back to the mid-1990’s, when the three titans of card payment technology — Europay, MasterCard, and Visa — collectively rolled out the first chip-based credit card to the masses. Also known as EMV chips, credit card chips were introduced as a way to enhance payment security over the existing magnetic-strip credit cards.

Today, chip credit cards continue to grow in popularity. Contactless credit cards are another advancement underway.

Magnetic Strip vs Chip Credit Cards

Magnetic-strip cards hold data on the magnetic strip that appears on the back of payment cards. Because these strips hold all of a cardholder’s information needed to make a purchase, this type of card is an easy target for thieves.

With industry-wide concerns over data fraud linked to magnetic stripe cards, credit card companies turned to advanced computer microchips as a solution to credit card data security problems, using EMV technology.

Chip-based payment cards have a big advantage over magnetic-strip cards, as each card payment transaction generates a unique data code. Because the chip’s code is a “one and done” feature that disappears after the transaction is completed, even if data fraud criminals uncover the code, they can’t use it for future transactions.

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

How Does a Chip Credit Card Work?

Chip credit cards don’t work on a standalone basis. Merchants who want to conduct card payment transactions need payment processing tools, like card terminals and mobile scanners, that are compliant with EMV chip industry standards.

•   When a consumer inserts a chip credit card into a payment terminal (unlike with a contactless payment), and follows the on-screen prompts to complete the transaction, the chip and the terminal exchange the needed data in an encrypted code.

•   That code is then used to transmit the transaction details to the acquiring bank, which quickly reviews the transaction.

•   After the cardholder’s financial data is authenticated and it’s determined the consumer has the funds to cover the purchase, the payment software may run fraud filters to further authenticate the user and the transaction.

•   Then, the transaction is approved by the acquiring bank (or declined if the consumer doesn’t have the funds to cover the purchase or if fraudulent activity is suspected). The appropriate transaction confirmation codes are relayed back to the EMV payment device in real time, thus concluding the transaction.

•   Assuming the transaction is approved, the embedded card chip transmits the approval to the cardholder’s bank, which releases funds to pay for the transaction and sends it to the acquiring bank.

•   The transaction is then settled by the merchant’s payment provider and deposited into the merchant’s bank account.

Types of EMV Cards: Chip-and-Signature vs Chip-and-PIN

If you are using an EMV chip card these days, you probably know that many retailers don’t require a signature or PIN. You just tap, wave, or insert the card, and you’re all done. Many of the major card companies did away with the signature requirement.

However, you may still have another step when you use your credit card, depending on which of the two main types of chip-based cards you have:

1.    Chip-and-signature cards: The most widely used form of EMV card in the U.S. is the chip-and-signature card. With these, the cardholder simply inserts the card into the point-of-sale terminal and then provides their signature to verify the transaction.

2.    Chip-and-PIN cards: With a chip-and-PIN card, the cardholder is asked to enter a four-digit PIN, or personal identification number, at the point of sale. That process authenticates the user and allows for the card transaction process to be completed.

While each type of chip-based payment card model serves the same function — the safe and efficient completion of a transaction — chip-and-pin cards may be the safer alternative.

That’s because with a chip-and-signature card, the cashier or front of the store service provider may not ask to see the back of the card to manually authenticate the signature. That gives fraudsters a leg up, since their signatures may not be checked. With a chip-and-pin card, on the other hand, the thief would need to know the credit card PIN to complete a transaction.

Protecting Yourself From Credit Card Fraud

While chip-based credit and debit cards have been a game-changer in improving payment security, card thieves still have ways to either steal your card or lift sensitive personal data from a payment card.

Here are some ways you can protect yourself against credit card fraud:

•   Review your card statements. One of the important credit card rules to follow is checking your card statements regularly for potential security issues. If something looks suspicious, immediately contact your credit card issuer. In the case of unauthorized charges, report the fraudulent activity and follow the steps recommended by the card company, which could include freezing the card temporarily or getting a new card.

•   Keep physical possession of the card at all times. A cardholder’s best defense against physical card theft is to always know where their card is and only carry it when needed. It’s also a good idea to avoid storing your card account number on a digital device — particularly sensitive information like the credit card CVV number — that could be stolen by a savvy cyber thief.

•   Shred any documents that contain sensitive information. To further protect your account information, shred physical payment card files that include your credit card or account number once you’ve paid your monthly bill. Better yet, sign up for paperless billing, so there’s no paper trail at all.

•   Watch out for email scams. Steer clear of “phishing” scams, i.e., fraudulent emails or texts pretending to be from trusted retailers and financial institutions. If you receive an email requesting sensitive information, reach out to the company directly using the contact information listed on their website or on the back of your card.

Recommended: What Is the Average Credit Card Limit

The Takeaway

The introduction of credit card chips has greatly increased the security of credit card transactions. Credit card chips generate a unique code for each transaction, and that code cannot be used for future transactions. This makes it harder for thieves to intercept your personal data — though that doesn’t mean credit card fraud isn’t still possible.

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

FAQ

What is the chip on credit cards?

A credit card chip is a microchip embedded into a credit or debit card that securely stores transaction data. This helps to facilitate safe and efficient payment card transactions.

Are chip-and-signature cards as safe as chip-and-PIN cards?

Not necessarily. That’s because the merchant may not require a signature or verify it against the one on the back of the card. This means it may be easier for thieves to get away with signing on behalf of the actual cardholder. It’s likely more difficult for a thief to get hold of a cardholder’s PIN.

Do all retailers accept EMV cards?

A high percentage of global retailers accept chip-based credit and debit cards. Industry figures show that EMV chip cards comprised over 90% of the global credit card transactions in the most recent year reviewed.

Is tapping or contactless credit cards safer?

Both are secure ways to make transactions. That’s because both contactless and chip credit card transactions generate a new transaction code for each purchase.


Photo credit: iStock/Georgii Boronin

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

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

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What Is a Wrap-Around Mortgage and How Does It Work?

What Is a Wrap-Around Mortgage and How Does It Work?

A wrap-around mortgage is a form of seller financing that benefits the seller financially and helps buyers who can’t qualify for a traditional mortgage.

There are risks associated with this kind of creative financing, and alternatives to consider.

What Is a Wrap-Around Mortgage?

Traditionally, a buyer weighs the different mortgage types and obtains a mortgage loan to pay the seller for the home. The seller’s existing mortgage gets paid off, with any extra money going to the seller.

With a wrap-around mortgage, a form of owner financing, the original mortgage is kept intact, and the funds a buyer needs to purchase the home are “wrapped around” the current balance.

How Does a Wrap-Around Mortgage Work?

First, the seller must have an assumable mortgage and lender permission to wrap the mortgage. The seller and buyer agree on a price and down payment.

The buyer signs a promissory note, vowing to make agreed-upon payments to the seller. The seller might transfer the home title to the buyer at that time or when the loan is repaid.

The seller continues to make regular mortgage payments to their lender, keeping any monetary overage.

To make this feasible and worthwhile to the seller, the buyer typically pays a higher interest rate than what’s being charged on the original loan (on which the seller is still making payments).

Let’s say you want to sell your home for $200,000, and you still owe $75,000 on your mortgage at 5%. You find a buyer who is willing to pay your price but who can’t get a conventional mortgage approved.

Your buyer can give you $20,000 for a down payment. The two of you will then sign a promissory note for $180,000, at, say, 7%. You’ll make a profit on the spread between the two interest rates and the difference between the sale price and original mortgage balance.

If you’re crunching numbers, a mortgage payment calculator can help.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.


What Are the Advantages of a Wrap-Around Mortgage?

Here are ways that a wrap-around mortgage can benefit the buyer as well as the seller.

Benefits for the buyer:

•   A carry-back loan allows you to buy a house that you might not otherwise qualify for, perhaps because of low credit scores.

•   As long as a seller is willing to sell to you under this arrangement, your financing is essentially approved without your needing to do anything else.

•   You’ll pay no closing costs on the loan.

•   If you are self-employed, you likely won’t need to provide statements from past income as you would with a traditional mortgage lender. The seller may only be interested in your ability to pay now.

Benefits for the seller:

•   You don’t need to wait for a buyer to be approved for financing.

•   You can charge a higher interest rate than what you’re paying, allowing you the opportunity to create steady cash flow and make a profit.

•   In a buyer’s market, where the supply of homes for sale is greater than demand, your willingness to offer a wrap-around mortgage can make you stand out.

Are There Risks With Wrap-Around Mortgages?

Yes. Wrap-around mortgages come with risks for both buyers and sellers.

Risks for the buyer:

•   You’ll likely want to pay an attorney to review the agreement. If you don’t, then you’re assuming more of the risks as described in the next two bullet points.

•   You are putting your trust in the seller. If they don’t keep up the mortgage payments on the original loan, the home could go into foreclosure. (You could ask to make payments directly to the lender, which the seller may or may not agree to.)

•   If the seller has not told their lender about the arrangement, this could lead to problems. If the original mortgage has a due-on-sale clause, the financial institution could demand payment in full from the seller.

Risks for the seller:

•   The buyer may not make payments on time — or could stop making them altogether. If this happens, you still owe mortgage payments to your lender.

•   Any lag in making your payments can have a significant negative impact on your credit scores, making it more challenging to get good interest rates on loans.

•   Suing the buyer for past-due funds can get expensive, and if the buyer doesn’t have the money to pay you, this may not provide you with any real mortgage relief.

If you’re shopping for a mortgage, it can make sense to explore alternatives. A home loan help center is a good place to start.

Alternatives to Wrap-Around Mortgages

Alternatives can include the following:

•   FHA loans

•   VA loans

•   USDA loans

Here’s an overview of each.

FHA Loans

With loans insured by the Federal Housing Administration, FHA-approved lenders can offer low down payments while easing up on credit scores required to qualify.

VA Loans

The U.S. Department of Veterans Affairs offers low-interest-rate VA loans directly to qualifying borrowers (based on service history and duty status) and backs loans made by participating lenders.

USDA Loans

The U.S. Department of Agriculture guarantees USDA loans for qualifying rural Americans who have low to moderate levels of income. The USDA also offers funding to improve homes to safe and sanitary standards.

The Takeaway

A wrap-around mortgage could sound enticing, but buyer beware. Taking time to repair damaged credit or looking into other types of loans might make more sense. If you do enter into this transaction, you’ll probably want to involve a lawyer to make sure your interests are protected.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.


SoFi Mortgages: simple, smart, and so affordable.

FAQ

Is a wrap-around mortgage a good idea?

This type of mortgage has benefits and risks for both the buyer and the seller.

What is an example of a wrap-around mortgage?

Let’s say a buyer can’t get traditional financing but agrees to purchase a $250,000 house from the seller, with some down payment. The seller still owes $50,000. The buyer agrees to make payments to the seller on the purchase price, and the seller uses a portion of that money to make the usual mortgage payments. The seller profits from charging a higher interest rate than that of the original mortgage.

Who is responsible for a wrap-around loan?

The buyer will be responsible for making payments to the seller according to the agreement signed by the two parties. The seller will be responsible for continuing to make payments on the original mortgage until it is paid off. So both parties have responsibilities to fulfill.

Can wrap-around loans help a buyer purchase a home?

Yes. The key benefit for buyers is that seller financing helps them purchase a home that they otherwise may not have been able to own.


Photo credit: iStock/Tatiana Buzmakova

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.


*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

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

¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

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Brokered Certificates of Deposit (CDs): What Are They and How They Work

Brokered Certificates of Deposit (CDs): What They Are and How They Work

A brokered CD is a CD that’s sold by a brokerage firm or a deposit broker (an individual that can place financial deposits in an institution on behalf of a third party), rather than a bank. Brokered CDs may offer higher rates than traditional CDs sold at a bank, but they may also entail greater risk for investors.

Before investing in brokered CDs, it’s important to understand how they work, how they differ from traditional CDs, and the potential pros and cons of these accounts.

What Is a Brokered Certificate of Deposit?

A certificate of deposit is a type of savings account that allows you to deposit money and earn interest over a set time period called the term, which is usually a few months to five years. When a traditional CD reaches maturity, you can withdraw the principal plus interest, or roll it over to another CD. Traditional CDs are generally FDIC insured.

A brokered CD is a CD that’s offered by a broker or brokerage firm that’s authorized to act as a deposit broker on behalf of an issuing bank. These CDs often function more like bonds and they may be sold on the secondary market. Brokered CDs tend to be FDIC insured — as long as the CD was bought by the broker from a federally-insured bank.

What is a brokered CD in simpler terms? It’s a CD you buy from a brokerage. A deposit broker buys the CDs from a bank, then resells them to investors. Brokered CDs are held in a brokerage account. They can earn interest, but instead of only being static investments that you hold until maturity like traditional CDs, you can trade brokered CDs like bonds or other securities on the secondary market.

Compared to a standard CD, a brokered CD may require a higher minimum deposit than for a traditional bank CD. The trade-off, however, is that brokered CDs may potentially offer higher returns than you could get with a regular CD.

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

How Brokered CDs Work

To buy a brokered certificate of deposit, you first need to find a deposit broker that offers them. Banks can issue CDs specifically for the customers of brokerage firms. These CDs may be issued in large denominations, say several million dollars. The brokerage would then break that large CD into smaller CDs to offer to its customers.

You could buy a brokered CD, depositing the minimum amount required or more. The brokered CD then earns interest, with the APY typically corresponding to the length of the maturity term. While longer terms typically earn higher interest rates, currently, short term CDs are offering higher rates because banks believe the Federal Reserve may cut the interest rate in the future. For example, you might be offered a 12-month brokered CD earning 5.40% or a 24-month brokered CD that yields 5.25%.

Ordinarily, you’d have to keep the money in your CD until the CD matures (if you withdraw the funds before the CD matures, you could face an early-withdrawal penalty). You could then roll the original deposit and interest into a new CD or withdraw the total amount.

With brokered CDs, on the other hand, you have the option to sell the CD on the secondary market before it matures.

Examples of Brokered CDs

Many online brokerages offer brokered CDs, including Fidelity, Vanguard and Charles Schwab, to name just a few. Here are the rates on some brokered CDs, as of late May 2024.

Vanguard: Up to 5.50% APY for a 10- to 12-month brokered CD

Fidelity: Up to 5.40% APY for a 6-month brokered CD

Charles Schawb: Up to 5.51% APY for a 3-month brokered CD

Advantages of a Brokered CD

Brokered CDs can offer several advantages, though they may not be the best option for every investor. Here are some of the potential benefits of a brokered certificate of deposit.

More Flexibility Than Traditional CDs

Brokered CDs can offer more flexibility than investing in bank CDs in the sense that they can have a variety of maturity terms, so you can choose ones that fit your needs and goals. You might select a 90-day brokered CD, for example, if you’re looking for a short-term investment or choose one with a 2-year maturity if you’d prefer something with a longer term. It’s also possible to purchase multiple brokered CDs issued by different banks and hold them all in the same brokerage account for added convenience.

Easier to Get Money Out Early on the Secondary Market

With a standard CD, you’re more or less locked in to the account until it matures. (While you could take money out early if your bank allows it, it’s likely you’ll pay an early withdrawal penalty to do so. This penalty can reduce the amount of interest earned.) Brokered CDs don’t have those restrictions; if you need to get money fast then you could sell them on the secondary market, effectively cashing out your principal and interest gains — without a penalty.

Higher Yields Than Standard Bank CDs

Deposit brokers that offer brokered certificates of deposit can use the promise of higher interest rates to attract investors. Rather than earning 1.00% on a CD as you might at a bank, you could potentially earn 5.00% or more with a brokered CD. If you’re seeking higher returns in your portfolio with investments that offer greater liquidity, brokered CDs could hit the mark.

You may also get a higher yield from a brokered CD versus a bond, with greater liquidity to boot.

Potential to Make Profit Once It Reaches Maturity Even If Interest Rates Fall

Interest rates for brokered CDs are locked until maturity. So even if rates fall during the maturity period, you could still profit when you sell the brokered CD later. As a general rule, shorter-term brokered CDs are less susceptible to interest rate risk than ones with longer terms.

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Disadvantages of a Brokered CD

Brokered CDs can have some drawbacks that investors need to know about.

Long-Term Brokered CDs Expose Investors to Interest Rate Risk

As mentioned, the longer the CD term the more exposure you have to interest rate risk. Brokered CD prices are subject to fluctuations on the secondary market. If interest rates rise, this usually has an inverse effect on the market price of existing brokered CDs. That means if you were to sell those CDs before maturity, you run the risk of getting less than what you paid for them.

Different Risk When Interest Rates Fall

You can also run into a different type of risk when rates are dropping if your brokered CDs are callable. A callable CD means the issuing bank can terminate or call the CD prior to maturity, similar to a callable bond. Callable brokered CDs can be problematic when rates drop because you’re forced to cash in your investment. In doing so, you’ll miss out on the full amount of interest you could have earned if you’d been able to hold the CD to maturity.

Temptation to Sell May Be Costly

The early withdrawal penalty associated with bank CDs actually serves an important purpose: It keeps you from taking money out of your CD early. Since brokered CDs don’t have this penalty, there’s nothing stopping you from selling your CDs on the secondary market whenever you like. That means it’s easier to cash out your investment, rather than sticking with it, which could cost you interest earnings.

Comparing Brokered CDs to Other CDs

When deciding whether or not to invest in a brokered CD, it can be helpful to compare them to other types of CDs to see how they stack up.

Brokered CD vs Bank CD

Bank CDs are typically purchased from a bank. They are purchased for a set period of time and must be held until maturity. If you want to cash out the CD early you will generally have to pay an early withdrawal penalty.

Brokered CDs are purchased from a deposit broker or brokerage house. They don’t have early withdrawal penalties so you can sell them on the secondary market if you choose to do so.

Brokered CD vs Bull CD

A bull CD is a CD that offers investors an interest rate that’s tied to an index or benchmark like the S&P 500 Index. Investors are also guaranteed a minimum rate of return. Bull CDs can also be referred to as equity-linked or market-linked CDs.

Brokered CDs earn interest but the rate is not tied to a market index. Instead, the rate is fixed for the maturity term.

Brokered CD vs Bear CD

Bear CDs are the opposite of bull CDs. With this type of CD, interest is earned based on declines in the underlying market index. So in other words, you make money when the market falls.

Again, brokered CDs don’t work this way. There is no index correlation; returns are based on the interest rate assigned at the time the CD is issued.

Brokered CD vs Yankee CD

Yankee CDs are CDs issued by foreign banks in the U.S. market. For example, a Canadian bank that has a branch in New York might offer Yankee CDs to its U.S. customers. Yankee CDs are typically suited to higher net worth investors, as they may require $100,000 or more to open. Unlike brokered CDs, which have fixed rates, a Yankee CD may offer a fixed or floating rate.

This chart offers an at-a-glance comparison of the CDs mentioned above and how they work.

Brokered CD

Bank CD

Bull CD

Bear CD

Yankee CD

Issued by a bank, sold by a brokerageIssued and sold by a bankIssued by a bank, sold by a brokerageIssued by a bank, sold by a brokerageIssued by a foreign bank and sold in the U.S.
Earns a fixed interest rateEarns a fixed interest rateEarns an interest rate that correlates to an underlying indexReturns are tied to an underlying market indexMay offer a fixed or floating rate
Maturity terms are fixed; however, brokered CDs can be sold on the secondary market before maturityMaturity terms are fixedInvestors are guaranteed a minimum rate of returnInterest is earned based on declines in the marketMaturity rates can be fixed or variable
May be FDIC-insured when issued by a qualifying bankFDIC-insuredNot FDIC-insuredNot FDIC-insuredNot FDIC-insured

How to Buy a Brokered CD

If you’d like to buy a brokered CD, you’ll first need to find a brokerage that offers them. You can then open a brokerage account, which typically requires filling out some paperwork and verifying your ID. Most brokerages let you do this online to save time.

Once your account is open, you should be able to review the selection of brokered CDs available to decide which ones you want to purchase. When comparing brokered CDs, pay attention to:

•   Minimum deposit requirements

•   Maturity terms

•   Interest rates

•   Fees

Also, consider whether the CD is callable or non-callable as that could potentially affect your returns.

Are Brokered CDs FDIC Insured?

Brokered CDs are generally FDIC-insured if the bank issuing them is an FDIC member. The standard FDIC coverage limits apply. Currently, the FDIC insures banking customers up to $250,000 per depositor, per account ownership type, per financial institution. You have to be listed as the CD’s owner in order for the FDIC protection to kick in.

There is an exception if brokered CDs function more like an investment account. In that case, you would have no FDIC protection. The FDIC does not consider money held in securities to be deposits and encourages consumers to understand where they’re putting their money so they know if they’re covered or not.

However, it’s possible that you may be covered by the Securities Investor Protection Corporation (SIPC) if a member brokerage or bank brokerage subsidiary you have accounts with fails.

Are Brokered CDs Better Than Bank CDs?

Brokered CDs do offer some advantages over bank CDs, in terms of flexibility, liquidity, and returns. You’re also free from withdrawal penalties with brokered certificates of deposit. You could, however, avoid this with a no-penalty CD.

What is a no-penalty CD? Simply put, it’s a CD that allows you to withdraw money before maturity without an early withdrawal fee. Some banks offer no-penalty CDs, along with Raise Your Rate CDs and Add-On CDs to savers who want more than just a standard certificate of deposit account.

Here’s something else to keep in mind. You’ll typically need more money to invest in brokered CDs vs. bank CDs. And you’re taking more risk with your money, since brokered CDs are more susceptible to market risk and interest rate risk.

Bank CDs, by comparison, are generally lower-risk investments.

When to Consider Brokered CDs Over Bank CDs

You might choose a brokered CD over bank CDs if brokered certificates of deposit are offering competitive rates and you plan to hold the CD until maturity. Even if rates were to rise during the maturity period, you could still realize a gain when it’s time to cash the CD out.

Paying attention to interest rates can help you decide on the right time to invest in a brokered certificate of deposit. Also, consider the minimum investment and any fees you might pay to purchase the CD.

When to Consider Bank CDs Over Brokered CDs

You might consider bank CDs over brokered CDs if you’d prefer to take less risk with your money. CDs are designed so that you get back the money you put into them, along with the interest earned. Typically, the only time you might lose money from a bank CD is if you cash it out early and have to pay an early withdrawal penalty.

Bank CDs may also be more attractive if you don’t want to tie up your money in a single brokered CD. For example, instead of putting $10,000 into a single brokered certificate of deposit you might spread that out across five or six bank CDs with different maturity dates instead.

This is called CD laddering. Creating a CD ladder can provide some flexibility, since it may be easier to avoid early withdrawal fees if a maturity date is always on the horizon. You could also use a CD ladder to capitalize on rising rates by rolling CDs over once they mature.

Finally, keep in mind that buying CDs is not the only way to save money and potentially help it grow. For instance, if you’re committed to saving, and you want to earn more interest than you’d get with the standard savings account, you might also want to consider opening a high-yield savings account. Taking some time to explore your options can help you determine the best savings vehicles for your needs.

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

Can you lose money on a brokered CD?

It’s possible to lose money on a brokered CD if you sell it prior to maturity after interest rates have risen. Higher rates can cause the market price of brokered CDs to decline, meaning you could end up selling them for less than what you paid.

Are brokered CDs a good idea?

While it depends on your specific situation, a brokered CD might be a good idea if you understand the risks involved. Brokered certificates of deposit can offer the potential to earn higher interest rates than regular CDs. But it’s also possible to lose money with this type of CD. Be sure to weigh the pros and cons.

What is the difference between a brokered CD and a bank CD?

A brokered CD is issued by a bank and sold by a brokerage. Bank CDs are issued by banks and offered directly to their customers. Brokered CDs may have higher minimum deposit requirements and offer higher interest rates. They are also typically more flexible than bank CDs because you can sell them on the secondary market, while you are required to hold onto bank CDs for the full term or risk paying an early withdrawal penalty.


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

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

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

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

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

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


*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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Budgeting With a Credit Card: Guide to Spending Smarter With Your Credit Card

Budgeting With a Credit Card: Guide to Spending Smarter With Your Credit Card

While you may think of your credit card as what tends to break a budget, it’s actually possible to budget with a credit card to spend smarter. In fact, there are a number of advantages of budgeting with a credit card. If you spend only what you can afford to pay off each month, you can enjoy earning rewards, building your credit score, and accessing other perks without accruing interest.

It isn’t always easy to set — and then stick to — a budget though, and a credit card budget is no different. Read on for tips on budgeting with a credit card.

Why Use Credit Cards?

Although credit cards can have downsides — especially when someone tends to overspend — they also offer benefits that you can’t get when you pay with other methods. This includes:

•   Fraud protection: It can be easier to dispute charges and fraudulent activity on a credit card as opposed to a debit card or cash.

•   Opportunity to improve your credit score: When a credit card is used responsibly, it can build a person’s credit score.

•   Credit card rewards: Credit cards often come with perks like travel points or cash back.

•   Travel insurance: Some credit cards offer specialty protection benefits like travel insurance.

While you may think of your credit card as what tends to break a budget, it’s actually possible to budget with a credit card to spend smarter. In fact, there are a number of advantages of budgeting with a credit card. If you spend only what you can afford to pay off each month, you can enjoy earning rewards, building your credit score, and accessing other perks without accruing interest.

It isn’t always easy to set — and then stick to — a budget though, and a credit card budget is no different. Read on for tips on budgeting with a credit card.

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

Why Is Budgeting Important?

Whether using a bank account or credit card, a monthly budget is an essential part of financial wellness. Budgeting can:

•   Help to reach financial goals, such as establishing an emergency fund or saving for a downpayment for a home.

•   Alleviate financial anxiety that can come from uncertainties around finance.

•   Improve credit history through a record of on-time payments and responsible spending.

At first glance, budgeting may seem like a limiting factor, but it actually allows you to spend guilt-free. When budgeters know how much they can spend on certain categories each month and adhere to those guidelines, they don’t have to worry about overspending.

Specific Budgeting Methods You Can Work With

There’s no one-size-fits-all budgeting method. However, here are some popular methods that you might consider trying if you’re interested in creating a personal budget.

The Zero-Sum Budget

In a zero-sum budget, every dollar has a job. However, that doesn’t mean an account should be $0 at the end of the month. Instead, it means that every dollar earned should be allocated to a specific category, with no money left unassigned by the end of the month.

Each time an after-tax paycheck comes in, a zero-dollar budget will assign it to a category, starting with necessities like rent, food, student loan payments, and insurance. The rest goes toward discretionary spending or saving.

Zero-sum budgeting means taking a critical look at each dollar entering a bank account, which can feel frustrating for some but helpful for others. Depending on your preferences, this could be the right type of budget for you.

The Spreadsheet Budget

A spreadsheet or line-item budget groups spending and purchases into categories balanced against monthly post-tax income. In its most basic form, the spreadsheet budget is a list of expenses, shown line by line and grouped by type. Income covers expenses, with surpluses going toward additional savings or debt payoff.

The Online Budget

Apps and other digital tools make budgeting as easy as creating a log-in and connecting existing accounts to track spending. You can also set up budgets for upcoming purchases.

An online tool can be helpful for those who feel intimidated by budgeting prep or prefer a more passive look at spending.

11 Tips for Budgeting With a Credit Card

Using a credit card to budget isn’t so different from a traditional budget. Keep these 11 tips in mind when building a credit card budget.

1. Determine Your Monthly Income

To figure out take-home pay each month, budgeters can consult their bank account or look at paystubs from their employer (typically through an online portal). If your income varies each month, take the average income over the past year to get a rough ballpark figure.

2. Pick a Budgeting Method

A person can’t budget with a credit card if they don’t have a budgeting method in mind. Consider one of the aforementioned methods or an alternative like the 50/30/20 budget, where you allocate 50% of your budget to needs, 30% to wants, and the remaining 20% to savings.

3. Track Your Spending

Some budgeting methods are specific about how spending should be tracked. However, you can easily track your spending with pen and paper, a spreadsheet, or a spending app. No matter the method, it’s important to track each purchase.

4. Categorize Your Spending

When it comes to how to budget credit card payments, it helps to look back at your spending first. Gather financial statements from credit cards and bank accounts for the past month. Break each transaction into a category, such as needs, wants, savings, or something more specific.

With an idea of historical spending, now’s time to put a plan into place moving forward.

5. Create a Plan

Armed with a structure and an understanding of your past spending, now comes the time to plan for the future. When creating a plan, consider:

•   Recurring expenses

•   Savings goals

•   Debt repayment goals

•   Annual subscription costs

•   Emergency savings needs

6. Pay Yourself First

A top priority when budgeting with a credit card should be paying yourself first. That means that when money hits a bank account, it should go toward personal savings goals, an emergency fund, or an accelerated debt repayment plan.

It’s important to prioritize paying yourself first, as many try to budget with the reverse in mind, only setting aside what’s left over at the end of the month. This approach can lead to falling short on savings goals.

7. Calculate Your Expenses

After setting aside money for savings, it’s time to break down the remaining income into monthly expenses. This includes necessities like rent or mortgage payments and wants like dining out or entertainment.

If monthly income can’t cover all of the anticipated expenses, it may be time to cut back on spending. Is there slack in the budget from underused subscriptions? Or can grocery spending go down?

Figuring this out before you swipe can help you to avoid overspending on credit cards.

8. Plan for Debts

The difference between credit card budgeting and traditional budgeting comes when the credit card bill is due. If someone has been primarily spending on a credit card, it’s unlikely they’ll see their bank account change most of the month. However, that changes when the bill comes due.

With each transaction on the card, the budgeter should have enough money in their check or savings to cover the cost. Planning for this debt means avoiding the scramble that sometimes comes with a credit card due date.

9. Simplify Your Billing Schedule

Missing a credit card bill can harm a credit score and add financial stress to a person’s budget. Mark credit card due dates on the calendar each month, and consider paying the bill early or breaking it into multiple payments throughout the month.

10. Use Rewards as a Bonus

The benefit of budgeting with a credit card comes from the various credit card rewards you can earn. Remember to cash in on cash back perks every few months for a discounted bill or redeem the travel miles you’ve earned for an upcoming trip.

11. Avoid Carrying a Balance

Carrying a balance on a credit card could indicate an imbalanced budget due to how credit cards work. When a credit card bill isn’t paid in full, the remaining balance can accrue interest, leading to a ballooning balance that becomes harder to pay.

That’s why upfront planning is essential to budgeting with a credit card. Without a plan in place, there’s a bigger risk of overspending, which can snowball into credit card debt. If you’re using a credit card, it’s important to stick to one of the most important credit card rules of always trying to pay off your balance in full.

Recommended: How to Avoid Interest On a Credit Card

Pros and Cons of Budgeting With a Credit Card

There are benefits and drawbacks to credit card budgeting, including:

Pros

Cons

Opportunity to earn credit card rewards and cash back from spending Possible to more easily go over budget with a higher credit limit
Improved credit score with responsible spending Exceeding budget could mean incurring interest charges and additional debt
Option to set up account alerts to better stay on top of account spending Potential to harm credit score with missed or late payments

The Takeaway

There are advantages of budgeting with a credit card, such as earning rewards, gaining access to credit card perks like travel insurance, and building your credit score if you use your card responsibly. By setting up a credit card budget, you can better prevent yourself from spending more than you can afford and ending up owing interest when you can’t pay off your statement balance in full.

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

FAQ

How can I manage my budget with credit cards?

Budgeting with a credit card isn’t different from budgeting without one. The key to budgeting credit cards is not to spend more on a credit card than you can afford to pay off at the end of the month.

Should I budget with a credit card?

If someone can stick to a traditional budget, then budgeting with a credit card might make sense. The difference is remembering to stay up to date with payments, as missing a credit card payment can negatively impact a credit score.

How much of a hold does the budget put on your credit card?

Budget should have a pretty serious hold on a credit card. When people can’t pay their credit card bill in full, they’ll incur interest charges, which can cause them to fall into debt over time and potentially drag down their credit score.

How do credit cards affect my personal budget?

If a budgeter isn’t paying attention when using a credit card, it’s easy to overspend. This can result in putting more on a credit card than you have available in cash to pay it off. As a result, you may end up paying more than the sticker price for your purchases due to interest, leaving you less money leftover for your other needs and savings goals.


Photo credit: iStock/Mirel Kipioro

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

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

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Guide to Credit Card Costs

Guide to Credit Card Costs

No matter what you do, it generally costs you money to borrow money. In the case of credit cards, you’ll pay interest on any balance remaining after your statement due date, and you may also be subject to numerous other fees.

Understanding how much a credit card costs is important, as it can help you compare cards and choose one that’s right for you at the right price. Read on to learn more about the potential costs of a credit card.

How Much Does It Cost to Get a Credit Card?

The application process for a credit card is free. The process starts by choosing a card that offers the right terms, interest rates, and rewards, if applicable. For example, you may want a card that offers cash back on certain purchases, or if you travel frequently, you may want to choose a credit that offers airline miles.

Once you’ve decided on a card, the application will typically ask you for the following:

•   Name: Credit card companies will need your full legal name.

•   Address: Most credit card companies will require you to have a U.S. address.

•   Social Security number: The credit card company will use this to make a “hard pull” inquiry on your credit report, which will help them determine how risky it is to extend credit to you.

•   Employment status and income: This will help the credit card company determine how big a line of credit you can afford.

•   Country of citizenship and residence: Not all companies will offer cards to noncitizens.

•   Financial assets and liabilities: The credit card company will want to know what other debts you are currently paying off.

Though applying for credit doesn’t cost anything, that doesn’t mean that credit cards are free. Once approved, you do have to pay for having a credit card in certain circumstances.

Recommended: Does Applying for a Credit Card Hurt Your Credit Score?

Cost of a Credit Card: What to Consider When Choosing a Credit Card

The costs associated with maintaining a credit card are some of the most important points of comparison when choosing between different cards. Here’s how they can stack up:

Interest Rates

Credit cards work by charging you an interest rate, also known as annual percentage rate (APR) on credit cards. Interest applies when you carry a balance from month to month. If you pay off your balance each month, you won’t owe interest.

The average commercial bank interest rate on credit card plans for all accounts is currently 21.59%, according to data released by the St. Louis Federal Reserve. However, interest rates tend to vary from applicant to applicant, largely depending on their credit score.

The better your credit score, the lower the interest rate you may be offered. Banks tend to see individuals with lower scores as at greater risk of defaulting on their loans, so they tend to offer the applicants higher interest rates to offset some of that risk.

Balance Transfer Fees

A balance transfer credit card allows you to transfer the balance on your existing card to another card with a lower interest rate or no interest for a period of time. Most balance transfer cards will charge a fee from as low as 3% to as much as 5% in order to do so.

If you’re transferring a large balance, this fee can quickly add up to a hefty sum, so be sure to carefully compare the cost of the balance transfer to the amount you’d be saving on interest by switching to the new card.

Recommended: What Is the Average Credit Card Limit

Extra Charges When Spending Overseas

Foreign transactions fees are a surcharge that credit card companies tack on to purchases you make overseas that require the processing of foreign currencies or that are routed through foreign banks. These fees are typically around 3%, and if you’re a frequent traveler, they can start to add up.

Check the fine print in the terms and conditions before signing up for a card to see how much you’ll be charged. In some cases, your card may not charge anything.

Late Payment and Credit Limit Fees

Though you can carry a balance on your credit card, there is still a monthly credit card minimum payment that you’ll have to make. Do everything you can to make this payment on time. Not only can missed payments hurt your credit score, but your credit card company may also charge a fee. Miss another payment and that fee could go up. For example, while the late payment charge on your first missed payment could be $28, the second could jump up to $39. Typically, the late fee cannot be more than the minimum amount due on the account.

Another potentially painful side effect of missing a payment: Your credit card company could increase your interest rate, increasing the cost of your unpaid balance and making future borrowing more expensive.

Annual Fees

Annual fees help credit card companies cover the costs of whatever perks and rewards they offer their customers. The more perks a card comes with, the higher the annual fee may be. This fee is typically charged as a lump sum once per year, usually in the same month in which you opened your card, and you’ll pay it off as part of your regular credit card bill.

Convenience Fees

Sometimes you’re charged fees for using your credit by businesses that are not your credit card company. For example, a credit card convenience fee is a fee that’s charged by a merchant and added to the cost of a transaction.

Recommended: How Do Credit Card Payments Work?

Tips for Using Your Credit Card Responsibly

Credit cards are what’s known as revolving credit. They allow you to carry a balance from month to month, making only the minimum payment, and that balance can increase as interest gets added. The bigger your balance, the more money you’ll owe in interest, and your debt can quickly grow out of control. That’s why it is important to use your credit card responsibly.

Here are a couple credit card rules to consider in order to do so:

•   Always aim to pay off your credit card balance in full each month. For most cards, you will not owe any interest on purchases if you do, eliminating one of the biggest costs of having a credit card.

•   Avoid making purchases you won’t be able to pay off each month. Sometimes these expenses are unavoidable, especially in an emergency. If you can’t pay off your debt within a month, aim to do so as quickly as possible.

•   Make a point to review your credit card statement. While it might seem like a slog, reviewing your credit card statement can offer helpful insight into your spending habits. It can also ensure you notice any unauthorized credit card usage or a billing error, in which case you may be able to request a credit card chargeback.

The Takeaway

Maintaining a credit card typically comes with a variety of costs. In some cases, you can avoid credit card fees and interest, such as by paying off your balance in full and on time each month. Also be aware that interest rates and fees are often negotiable. If you’re a longstanding customer or have a particularly good credit, you may have a chance at having a few fees waived or at least lowered.

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

FAQ

Do you have to pay for a credit card?

Credit card companies may charge a variety of fees including annual fees and late payment fees. You will also have to pay interest on whatever balance you carry from month to month.

How much are credit card fees monthly?

Credit card fees are typically not charged on a monthly basis. For example, the annual fee is usually charged as a lump sum once each year. You may incur other fees, like late payment fees, only when you miss a payment.

Can I use a credit card for free?

If you pay off your balance each month, you may not owe any interest to your credit card company. However, you may still be on the hook for whatever fees your card may charge, such as an annual fee.


Photo credit: iStock/Meranna

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

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

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