Banking and Loans

Banking is part of your everyday life, and your bank account is probably involved every time you pay with plastic or send money to friends. Banks and credit unions also play a major role in significant life events (like buying a home or funding other goals). Knowing how your accounts work will help you take advantage of these services while steering clear of costly mistakes.

What You Can Do

Banking services include everything from savings accounts to loans (and more).

Some of the most useful features are described below. You can go through life without using banks or credit unions, but you’ll most likely save time and money if you use free or low-fee banking services.

Decide which banking services are most important to you, and whether or not you’re willing to pay for those services.

Store money: Banks offer a safe place to keep funds. Instead of storing cash under your mattress or carrying it around with you, you can keep money in the bank and get it when you need it. You might never (or rarely) actually touch cash — you can make most payments electronically. Funds in FDIC-insured banks are protected by the US government (credit unions are just as safe), so your insured funds won’t evaporate if a bank fails.

Make payments and move money: It needs to be easy to use your money. Checking accounts allow you to write checks against your money in the bank, and there are several ways to make electronic payments:

• Pay with your debit card at retailers or online merchants.

• Pay bills online if your bank offers that feature (most do — usually for free) and have your bank send money to service providers, utility companies, and others.
• Provide your account information to billers so that they pull funds from your account.
• Use apps and online services to send money to friends and businesses that you buy from. Your bank doesn’t necessarily provide those services, but they use your bank account for funding.
• Wire money to somebody (or yourself) for important transactions.

When personal checks and electronic payments aren’t an option, you can also pay with cashier’s checks and money orders.

Earn interest: Some bank accounts help you grow your money by paying interest. Over extended periods of time, compounding grows your original deposit into a larger sum of money. However, banks are safe places to hold money, so they aren’t supposed to pay high rates that you might potentially earn on other investments. Banks and credit unions are best for your emergency fund and money that you plan to spend within a few years.

Borrow money: Banks are in the business of lending. They provide auto and home loans, credit cards, and lines of credit for starting a business. Traditionally, that’s all banks did (took deposits from customers and used it to fund loans), but banks earn revenue from other sources, and competition has evolved. Now, you have additional options for borrowing, including non-bank lenders or peer-to-peer loans.

Where to Open an Account

The term “bank” is often used generically. In fact, there are several different types of banks, and the bank you choose will affect your experience.

Credit unions and local banks are often an excellent choice for your first account. Online banks allow you to earn a little more at no additional cost, but the benefits are greatest if you have a lot of money in the bank. If you still have unmet needs or you want one-stop-shopping, a big bank may be able to help.

Big banks might be the first thing you think of since they advertise aggressively and they have numerous branch locations. Those banks are household names, and they offer a full range of products and services. They have a global reach, plenty of ATMs to choose from, and customer service is generally available throughout the day and evening. However, you may be just one of millions of customers, and working with big banks can be frustrating. It is possible to bank for free with a big bank, but you’ll generally have to qualify for fee waivers to enjoy free checking.

Regional and community banks typically focus on smaller geographic areas. They might serve customers in several states, or just one or two towns.

Not surprisingly, they’re more involved in communities, and they help individuals and businesses operate locally — they may be an important part of the local economy. Because they have a more personal touch, these banks are more likely than big banks to offer free checking accounts and approve loans, and they usually offer the same products and services (although sometimes services can be limited).

Credit unions are very similar to regional and community banks. But they have a different name because the ownership structure is different: they are not-for-profit organizations that are owned by the customers (as opposed to investor-owned banks). In other words, you become a partial owner when you open an account and deposit money. Especially with small credit unions, you may have an easier time getting approved for a loan — an employee might actually review your application and be willing to look past items that would be dealbreakers for a big bank. Still, you always need sufficient credit scores and income to qualify.

Online banks operate entirely online, so they’re best for tech-savvy consumers. Online banking is often free, and these banks tend to pay higher interest rates on savings (and even checking) accounts than brick-and-mortar banks. Still, it may be worth keeping an account open at a bank or credit union with physical locations nearby. Those branches can allow for quick deposits and withdrawals, and they offer additional services.

Types of Accounts

Savings accounts are the most basic type of bank account: you put money in, the bank pays a little bit of interest, and you can withdraw cash or transfer funds to another account as needed. However, savings accounts aren’t useful for everyday spending because of limits on how often you can make certain types of withdrawals. Fortunately, checking accounts fill the need.

Checking accounts allow you to spend your money easily. To do so, you can:

• Write checks
• Swipe your debit card
• Punch in your card number online
• Set up bill payments online
• Authorize billers to take what you owe from your checking account

These accounts usually don’t pay interest, but you probably don’t need to keep a large balance in checking anyway. That said, some high-yield and rewards checking accounts pay more than a basic savings account. Using a checking account is fairly simple: most people have their wages deposited in checking and use the money to pay expenses or transfer money out to other accounts.

Money market accounts are like a blend of savings and checking accounts. They pay interest — often more than savings accounts — but it’s easy to spend your money using a debit card or by writing checks. The only catch is that banks limit the number of payments you can make out of the account (three per month is a common limit). These are good accounts for emergency savings or infrequent expenses.

Certificates of deposit (CDs) are another option for earning more interest than your savings account. Also known as time deposits, CDs require that you commit to leaving your funds untouched for a certain amount of time. In exchange, the bank pays you more — but you’ll have to pay a penalty if you cash out early. Terms vary from six months to five years, and longer maturities usually pay more.

How to Open an Account

Opening a bank account is just a matter of providing information and making a deposit. You can complete the process entirely online, but some banks require you to fill out forms. You might even prefer to visit a bank branch in person, but it’s probably not necessary (or convenient).

Choose a bank that will meet your needs at a low cost (more on that below). Once you’ve decided where to bank, it’s time to fill out an application.

Provide information about yourself, including:

• Personal details, such as your name, date of birth, Social Security Number or similar
• Identification, such as a driver’s license, passport, or other government-issued ID (if you’re opening an account online, you’ll need to provide the ID number)
• Address information (if you use a Post Office box or similar for your mailing address, you’ll still need to provide your physical address)

Banks are required to ask for the information above. They might ask for additional details, such as your income, employment situation, and more. If you prefer not to provide that information, you don’t have to — but you might need to find a different bank. The major exception is when you’re applying for a loan: almost anybody is going to ask about your income before approving a loan. If they don’t look into your credit or income, you’re probably getting a very expensive loan.

Fund your account with an initial deposit. You can bring cash if you open the account in person, or write a check to your new account. You can also link existing bank accounts to your new account and move money in electronically. For future additions, you can set up direct deposit with your employer, and most banks allow you to deposit checks by taking a picture with your mobile device.

Get Into a Long-Term Relationship

It’s a pain to switch bank accounts, so choose carefully. With the right accounts, you’ll hardly notice your bank (which is a good thing). With the wrong accounts, you’ll experience constant frustration and spend more than you need to.

Get good rates, meaning high rates on your savings and low rates on loans. You don’t necessarily need the absolute best rate in the nation, but rates get more important as the dollar amounts get larger. When borrowing, toxic rates can also be an issue: if you’re paying 20% on a credit card, problems are inevitable.

Minimize fees: Monthly service charges and low-balance fees can cost hundreds of dollars every year — and other banks might offer the same services for free. Especially if you’re scraping by, take a close look at the fee schedule before you open an account.

Find the right fit: Think about how you want to interact with your bank. Are you happy doing everything yourself online? If so, online banks (or low-cost programs at brick-and-mortar banks) are a good option. Need to visit a branch regularly? Find a bank that’s convenient and works with your schedule (some banks are open on weekends and evenings).

Pick the features you want. Any bank or credit union can provide savings accounts, basic checking, and a debit card. What additional features do you value? Some examples include:

• If you want the ability to transfer funds between multiple bank accounts (for free), find out about the bank’s ACH transfer rules. Some banks offer the service for free, but they limit the number of accounts you can link to.
• If you receive checks and hate going to the bank, make sure mobile deposits (or ATM deposits) are available.
• If you frequently use the ATM for withdrawals, check out the ATM network or get an account that refunds ATM fees.

Banking Gotchas

You’ll be a satisfied customer if you avoid major problems. Again, you don’t need to get the world’s best savings account rate (because that will change constantly) — you just need a good bank account.

1. Fees, fees, fees: Banks are notorious for taking money out of your account. There are monthly maintenance fees, low balance fees, inactivity fees, fees for bouncing checks, and many more. Choose a bank that keeps costs low, and keep track of your account so that you avoid fees that result from your activity. Set up alerts for your account and use the right type of overdraft protection if you need it.
2. Funds availability: One of the hardest lessons to learn is the concept of available funds. When you make deposits into your account, you might assume that you’re free to spend that money. Unfortunately, banks have rules on how long they can hold your deposits, and you might have to wait a week or so to use your money. Learn your bank’s rules, and check your “available balance” frequently.
3. Fraud and errors: Mistakes happen, and they’re usually not in your favor. If somebody steals money from your account or money is removed in error, contact your bank immediately. Federal law protects you from unauthorized use, but you need to act fast to get full protection. If you wait too long, you’ll be responsible for the loss — so keep track of activity in your accounts. You can spot mistakes (and learn a lot about your spending) if you balance your checkbook monthly.
4. Borrowing too much: Banks are eager to lend money if they think you’ll repay. They aren’t concerned with your ability to reach your long-term goals or how much you’re spending on interest. Don’t borrow just because you can. Borrow for things that will truly improve your finances and your life — do it wisely. Use the right loan for the job, avoid credit card debt and payday loans, and never borrow the “maximum” amount available.