Banking Basics: How To Get Started

Put your money to work for you with some banking basics

Woman depositing check to bank remotely using mobile phone
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Before you open a bank account, it's important to understand some basics so you can take full advantage of bank services and steer clear of costly mistakes. That includes familiarizing yourself with where and how you can open an account; the range of services banks offer; the types of accounts available to you; fees and interest rates; what to look for; and what to avoid.

Types of Banking Services

Banking services include everything from savings accounts to loans and more. It's wise to decide which banking services are most important to you (and whether or not you’re willing to pay for some of them).

Storing and Saving 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 and credit unions are protected by the U. .government, so your insured funds won’t completely evaporate if a bank fails.

Making Payments and Moving Money

Accessing and using your money needs to be easy. Checking accounts allow you to write checks against your money in the bank, and there are several ways to make electronic payments; many of them use the Automated Clearing House (ACH) network or electronic funds transfer (EFT) system.

  • Pay with your debit card at retailers or online merchants.
  • Pay bills online if your bank offers that feature (many do—usually for free).
  • Provide your account information to companies so that they pull funds from your account through automatic payments.
  • Move money from one account to another using the bank's app or online banking service.
  • Use third-party apps and online services to send money to friends and businesses that you buy from. (Your bank doesn’t necessarily provide these services, but they use your bank account for funding.)

Earning Interest

Some bank accounts help you grow your money by paying interest. Over extended periods of time, compounding interest can help grow your original deposit into a larger sum of money. However, most banks don't pay as high of rates as many investments do.

Borrowing Money

Banks are in the business of lending. They provide auto and home loans, credit cards, and lines of credit for starting a business. There are also additional options for borrowing, including non-bank lenders, peer-to-peer loans, and other alternative lenders.

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. Big banks are generally the most well-known option, but credit unions and local banks are often an excellent choice for your first account. Online banks are also beginning to become more popular.

Big Banks

Large national or global banks usually advertise aggressively and have numerous branch locations. They're often household names, and they offer a full range of products and services. They have a global reach, plenty of ATMs to choose from, and they usually make customer service available 24/7 via phone. However, you may be just one of millions of customers, and you might find them harder to navigate. You may also pay more and higher fees at big banks compared to smaller banks and credit unions.

Regional and Community Banks

These 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. However, they don't usually offer as many services as big banks do.

Credit Unions

These are similar to regional and community banks, but they have a different name because the ownership structure is different: They're not-for-profit organizations 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.

Many credit unions have eligibility requirements, such as belonging to geographic areas, employee groups, or associations. But if you meet the requirements, you'll likely enjoy superior customer service, lower fees, and access to a shared network of ATMs.

Online Banks

Many banks offer customers digital access, but some banks operate entirely online, with no brick-and-mortar branches. Because of this, they're usually best for tech-savvy consumers. But they do tend to pay higher interest rates on savings accounts (and even checking) than traditional banks.

Types of Accounts

Most banks offer a variety of account types to suit different customer needs.

Savings Accounts

These are the most basic type of bank accounts: 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 and transfers.

Checking Accounts

There are not usually withdrawal limits on checking accounts. To use the money in them, you can:

  • Write checks
  • Swipe your debit card
  • Enter 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 don’t need to keep a large balance in checking anyway—just enough to cover your bills. That said, interest-bearing checking accounts do exist, but they usually don't pay more than a savings account would.

Using a checking account is fairly simple: You can have your wages directly deposited in your account and use the money to pay expenses or transfer money out to other accounts.

Money Market Accounts

Money market accounts are like a blend of savings and checking accounts. They pay interest—often more than savings accounts—but it’s easier to spend your money from them because you can use a debit card or write checks. The only catch is that the government limits the number of withdrawals or transfers you can make with the account to six per statement cycle. These are typically good accounts for emergency savings or infrequent expenses.

Certificate of Deposit (CD)

Another option for earning more interest than your savings account is the certificate of deposit (CD). Banks require that you commit to leaving your CD 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 usually vary from six months to five years, and longer maturities usually pay more.

You can find CD terms as long as 10 years, but there isn't much demand for those accounts and they generally pay less interest than three-, four-, or five-year CDs.

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 online or at a branch.

You'll be asked to provide information about yourself, including:

  • Personal details: You'll need to provide your name, date of birth, and Social Security number or similar.
  • Identification: You'll need to provide at least one, and sometimes two, identifying documents, 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: Even 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 by law to ask for the information above.

You usually need at least $25 to $100 to open a checking or savings account. 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 electronically.

What To Look for in a Bank Account

Think about how you want to interact with your bank. Are you happy doing everything 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).

Aside from making sure your individual needs are met, you can look out for the following when choosing your bank:

Good Interest Rates

Aim for high rates on your savings and low rates on loans. You don’t necessarily need the absolute best rate in the nation, but interest rates can get more important as the dollar amounts get larger.

Minimal 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.

Special Features

Any bank or credit union can provide savings accounts, basic checking, and a debit card. But 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 the bank offers mobile deposits.
  • If you frequently use the ATM for withdrawals, check out the ATM network or get an account that refunds ATM fees.

What To Avoid

Just as important as looking for what you want in a bank account is looking out for what you don't want. Here are a few things to avoid when choosing an account:

Unnecessary 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.

Limited 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 you’re free to spend that money. Unfortunately, banks have varying rules on how long they can hold your deposits, and you might have to wait a week or so to use your money. However, the federal government does set some limits on how long institutions can hold your deposits. Learn your bank’s rules, and check your “available balance” frequently.

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.

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—and do it wisely. Use the right loan for the job, avoid credit card debt and payday loans, and never borrow the “maximum” amount available.