diff --git a/backend/build.gradle.kts b/backend/build.gradle.kts
index 04d6745..375b315 100644
--- a/backend/build.gradle.kts
+++ b/backend/build.gradle.kts
@@ -38,6 +38,7 @@ dependencies {
 	annotationProcessor("org.projectlombok:lombok")
 	testImplementation("org.springframework.boot:spring-boot-starter-test")
 	testImplementation("org.springframework.security:spring-security-test")
+	testRuntimeOnly("com.h2database:h2")
 	testRuntimeOnly("org.junit.platform:junit-platform-launcher")
 }
 
diff --git a/backend/src/test/java/com/pennywise/backend/BackendApplicationTests.java b/backend/src/test/java/com/pennywise/backend/BackendApplicationTests.java
index a583525..f5df791 100644
--- a/backend/src/test/java/com/pennywise/backend/BackendApplicationTests.java
+++ b/backend/src/test/java/com/pennywise/backend/BackendApplicationTests.java
@@ -2,8 +2,10 @@
 
 import org.junit.jupiter.api.Test;
 import org.springframework.boot.test.context.SpringBootTest;
+import org.springframework.test.context.ActiveProfiles;
 
 @SpringBootTest
+@ActiveProfiles("test")
 class BackendApplicationTests {
 
 	@Test
diff --git a/backend/src/test/resources/application-test.properties b/backend/src/test/resources/application-test.properties
index b4c8158..bff34c7 100644
--- a/backend/src/test/resources/application-test.properties
+++ b/backend/src/test/resources/application-test.properties
@@ -1,28 +1,21 @@
-# Test configuration
-spring.application.name=pennywise-test
+spring.application.name=pennywise
 
-# Database - Uses environment variables from CI or defaults for local testing
-spring.datasource.url=${SPRING_DATASOURCE_URL:jdbc:postgresql://localhost:5432/pennywise_test}
-spring.datasource.username=${SPRING_DATASOURCE_USERNAME:pennywise}
-spring.datasource.password=${SPRING_DATASOURCE_PASSWORD:pennywise}
-spring.datasource.driver-class-name=org.postgresql.Driver
+# ===============================
+# DATABASE (tests)
+# ===============================
+spring.datasource.url=jdbc:h2:mem:pennywise_test;MODE=PostgreSQL;DB_CLOSE_DELAY=-1;DB_CLOSE_ON_EXIT=FALSE
+spring.datasource.username=sa
+spring.datasource.password=
+spring.datasource.driver-class-name=org.h2.Driver
 
-# JPA
-spring.jpa.hibernate.ddl-auto=none
+# ===============================
+# JPA / HIBERNATE (tests)
+# ===============================
+spring.jpa.hibernate.ddl-auto=create-drop
 spring.jpa.show-sql=false
 
-# Flyway
-spring.flyway.enabled=true
-spring.flyway.locations=classpath:db/migration
-spring.flyway.baseline-on-migrate=true
-spring.flyway.clean-disabled=false
-
-# Logging - reduce noise in tests
-logging.level.root=WARN
-logging.level.com.pennywise=INFO
-logging.level.org.springframework.security=WARN
-
-# Security - disable for tests
-spring.security.user.name=test
-spring.security.user.password=test
+# ===============================
+# FLYWAY (tests)
+# ===============================
+spring.flyway.enabled=false