Banking

WHAT IS A BANK OR CREDIT UNION ACCOUNT?

A bank or credit union account houses money that a customer deposits into the account and from which the customer can make withdrawals. The bank/credit union provides the customer with a periodic (usually monthly) summary of the deposits and withdrawals made to or from the account so that the customer can keep track of his or her income and expenses.

Banks and credit unions both offer similar services and products. When making the choice between a bank or credit union one should consider such things as; interest rates, fees, locations, and other services offered such as mobile banking.

How do banks make money?

Banks are just like any other for-profit business: they exist to make money. A bank makes money through Deposits. Lending at an interest rate that is higher than the rate which it pays on depositors‘ accounts. The interest rate a bank charges for loaned funds depends on how many people want to borrow money and how much money the bank has available for lending. The less money that is available, the more it costs to borrow it. Fees charged for service. Banks can‘t loan out all of their money because they are required by law to keep a small percentage on hand. The amount they must keep on hand is set by the Federal Reserve.

What are the differences between a bank and a credit union account?

A bank is a for-profit company that makes money from charging fees and lending money to its customers. Banks also pay taxes back into the community in which they do business.

A credit union is a not-for-profit cooperative financial institution owned and controlled by its members. Credit unions generally serve groups that share something in common, such as their profession, place of worship, or neighborhood.

CHOOSING A BANK OR CREDIT UNION

As with choosing anything else, to find the best deal on an account you must shop around. Begin your search by visiting local branches and asking questions about the services and products they offer. Or you may choose to initially compare financial institutions on the Internet, and narrow down the top alternatives before you visit a local branch.

When comparing information on various institutions, keep the following in mind:

• What benefits can the financial institution offer?

Benefits can include having lower minimum balance requirements, ability to waive monthly maintenance fees, higher rates on savings accounts and lower rates on loans and credit cards.

• What are the financial institution‘s fees and policies?

What is the cost of overdrawing your account? How much are the monthly maintenance fees – is the bank willing to waive them? How much will the bank charge you if you fall below the minimum balance requirement?

• What kind of accessibility do they offer?

Where in town are they located and how many locations do they have? What are their hours – are they open on weekends?

Do they offer online banking? Do they have nearby ATM locations?

• What is important to you?

Some things you might consider in terms of what is important to you are account types offered (does the financial institution offer student accounts?), locations and hours, fees, etc.

WHY IS IT IMPORTANT TO HAVE A BANK OR CREDIT UNION ACCOUNT?

It keeps your money safe

Keeping your money in a bank account ensures that your money will be safe. Not only does having a bank account help to avoid theft or loss of your money, but it also assures that if your bank or credit union is mismanaged and loses your money, you are protected against your losses by insurance. All money deposited in an insured bank is currently protected up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). The FDIC is an independent agency of the United States government. 

Credit union deposits are insured very much like bank deposits but are insured through the National Credit Union Share Insurance Fund (NCUSIF), which is also backed by the federal government. NCUSIF provides insurance up to $250,000 per individual and $250,000 for retirement accounts. More information can be found at: www.ncua.gov/

It can provide proof that you paid your bills

Each month, banks and credit unions provide summaries (called bank statements) of all the activity in an account so that the owners of those accounts can confirm that bills were properly paid and deposits were added. If there are any questions about whether an individual bill was paid or a deposit made, the bank statement will provide written evidence as to what really hap­pened. Bank statements can be mailed to the account owner (often there is a fee for mailing) or they can be accessed online or printed out at a bank branch location.

It makes it easier to track and manage your money

Having a bank account and account statements are also advantageous in tracking and managing your money, and thus, creating a better personal budget. Each account statement can be reviewed to identify unnecessary or excessive spending in particular areas. You can use this information to better manage money the following month.

Many banks and credit unions offer online budgeting features to help you to better manage your money. Transactions can be categorized and even compare to a budget. This can help to identify budget-busters such as eating out or clothing.

It builds a relationship with the financial institution

Some banks require that you have an account with them for a certain period of time prior to approving you for a loan. Maintai­ning a good relationship with your bank (e.g., keeping a positive account balance, few or no overdrafts, etc.) will make it easier if you need a loan to buy your first car or pay for college expenses or tuition. This is because your account activity will offer the financial institution insight as to how responsible you may or may not be in repaying a loan if they choose to provide you with one.

Opening an account is a quick, simple process and allows you to explore products and services to benefit your financial life. Financial institutions provide a variety of products and services depending on your financial needs or wants.

OPENING AN ACCOUNT

When you go to open a new account, bring:

• Photo identification, such as a driver‘s license, state ID card or passport.
• Proof of your address, such as a piece of mail.
• Your Social Security number for tax purposes.

What questions should you ask?

• What is the minimum to open an account?
• What is the interest rate on the account?
• Is there a monthly fee?
• Is there any way to avoid monthly fees?
• Is there a minimum balance requirement?
• What happens if my balance falls below the minimum requirement?
• Is there a maximum number of checks I can write each month?
• Is there a fee for using your ATMs?

CHECKING AND SAVINGS ACCOUNTS

Most checking accounts come with the following features:

• Direct deposit allows your employer or others to make deposits directly into your account.
• Online banking and bill payment allows you to pay your bills electronically using the Internet and view these transactions as they post.
• Low cost accounts for seniors or students.
• ATM/Debit cards allow you to get cash at ATM machines and to make purchases at point-of-sale terminals (such as at the supermarket).
• Checks. Keeping a record of your checks, through a check register, can help avoid bouncing checks. It can also keep track of how much money you have in your account and help you stick to a budget.

How is a savings account different from a checking account?

Savings accounts differ from checking accounts in that you earn interest on your money. In many cases, there is a limited number of withdrawals allowed. Interest rates on savings accounts will vary depending on the type of savings account you open. Usually, the higher the interest rate on the account, the higher the required minimum balance. When opening a savings account, inquire about the various account options and determine what will work best for you. Many savings accounts have minimum balance requirements. Be sure that you can maintain the minimum balance because if you cannot, the penalty fee for falling below the minimum balance will end up being much more than the interest you earn. Several financial institutions offer savings accounts for students that do not require a minimum balance.

OTHER TYPES OF ACCOUNTS AND SERVICES

Using your ATM/debit cards

In most cases, your debit card can be used to make purchases where credit cards are accepted. This means you are able to use it at stores and restaurants that accept credit cards without providing your PIN. However, make sure you have your ID available, as you may be asked to show it and also to sign a receipt.

If your debit card is lost or stolen, alert your bank as soon as possible. A thief will likely try to use your card immediately. The longer you wait, the more money you might be responsible for if a thief uses your card for unauthorized transactions.

Overdraft protection

Customers must opt-in to receive overdraft protection, a line of credit offered to customers when they spend more than what is in their account. Overdraft fees can add up and customers should carefully consider if this is a service they would like to opt in to. Each time you overdraw your account, you will be charged a fee, typically about $35. Even if the overdraft amount is only a few dollars, the fee will still be the same. When opening an account, ask the banker about these fees and what can be done to avoid them. Often, a checking account can be linked to your savings account, so that if you overdraw in your checking account your savings account can automatically fund it. This may eliminate or lower the overdraft fee.

Certificates of deposit (CDs)

A CD is a kind of savings account in which you leave your money on deposit for a set period of time in order to earn a higher amount of interest. The longer the term and the higher the deposit of your CD, the higher the interest rate will be.

But there’s a catch! If you withdraw your money before the term ends, you will lose the interest and might have to pay a penalty fee.

Safe deposit boxes

A safe deposit box is a small drawer in a secure, fireproof vault at the bank or credit union. The box itself requires two keys to open (one kept by you and the other by the bank or credit union). To access the safe deposit box, you must go to the bank or credit union with your key. and usually present a form of identification. Once inside the vault, an employee will use both your key and their key to open the small door to your box and hand you the inner box so that you can add or remove important documents and various items. Once your business has been completed, the box is reinserted into its space, and the door is double-locked. Typical things stored in a safe-deposit box include copies of mortgages, insurance policies, jewelry, stock certificates, birth certificates, etc.

Online banking

Advantages of online banking:

• Ability to view account balances and transfer money between accounts 24 hours a day.
• Online bill pay services.
• The ability to transfer money to other account holders.
• Mobile banking.
• Remote deposit.

Interest is the fee to borrow money. If you borrow money, you pay interest. If you have a savings account, you earn interest.

WHAT IS INTEREST?

Interest is the cost of using someone else’s money. When a bank or credit union gives you a loan, you pay interest on the amount borrowed. When you keep money in your savings account, you earn interest because the bank turns around and uses your deposit to make loans to others.

Calculating Interest

In the past, interest rates were quoted to borrowers in a variety of confusing ways. As a result, the financial industry is now required to use a standard method to quote interest rates. This standardized method is called annual percentage rate (APR), and it allows consumers to compare alternatives on an “apples-to-apples” basis. Although the interest rate is quoted on an annual basis, borrowers typically pay, and depositors typically earn, interest on a monthly basis. For ease of calculation, consumers simply divide the APR, an annual rate, by 12 to get the monthly interest rate.

For example, if you left $100 on deposit in a savings account for one year at 2% APR, you would earn $2 in interest at the end of the year. Since interest is normally paid monthly you would earn about $0.17 each month ($2/12).

There are two types of interest:

• Simple interest
• Compound interest

The difference between simple and compound is the way in which it is calculated.

Simple interest is the interest you earn on your initial

deposit. The formula to calculate simple interest is: I = P x r x t/100

Where:

I = Total simple interest paid

P= Principal (the amount borrowed)

r = Annual Interest Rate (APR)

t = Number of years before the loan is repaid (time)

Compound interest is interest earned (or paid, depending on whether you are the borrower or the lender) on the current balance (as opposed to the original balance). Therefore interest paid for the current month is calculated on a balance which in­cludes all of the interest paid during the prior months. Although compound interest is a more effective way to pay or earn inte­rest than simple interest, compound interest rate calculations are a bit more difficult to determine without a calculator. The formula to calculate compound interest is: I = P x (1 + i) n

Where:

I = Total compound interest paid

P= Principal (the amount borrowed)

i = Annual interest rate (APR)

n= Number of years before the loan is repaid

*Note that interest can be earned (if you are an investor or a lender) as well as paid out (if you are a borrower). The same formulas above would apply in both cases.

Managing your accounts can help identify bank errors, unauthorized charges and/or identity theft. If your bank or credit union makes a mistake such as a mixed-up deposit, no-show bill payment or double debit, you have the right to have the mistake corrected. It can also help you save money by avoiding fees.

How to solve a bank problem if one occurs:

• Report the issue as soon as you can.
• Always write down the name of the person who helped you.
• Offer a solution and ask the bank or credit union to correct the problem.
• Don’t lose your temper.
• If you aren’t satisfied with the bank’s proposed solution to your problem, send a summary letter (registered mail receipt requested) to prove you took timely action.

How to avoid bank fees:

• Combine checking and saving balances to avoid monthly fees.
• Save on ATM fees by using an authorized machine.
• If you can’t avoid an ATM fee, take out larger sums less frequently.
• Keep track of your spending!
• Set up direct deposit–many banks or credit unions waive minimum balance requirements with direct deposit.
• Ask for a reversal of the occasional late fee or bounced check fee.

EXAMPLE OF BANK FEES AND COSTS

• A monthly maintenance fee without a minimum balance can average anywhere between $5 and $15 per month; this is $60 to $180 a year!
• Many banks or credit unions charge $2 to $3 for using ATMs other than their own. Plus there may be a fee from the ATM you use. A withdrawal for $20 may end up costing you $26!
• Overdraft fees can cost you between $20 and $35 per transaction. That means if you overdraw your account by just $10 with 5 transactions of $2, bank overdraft fees can be as much as $175!

Unfortunately, there are many ways people can steal your identity. Protecting yourself is important; By protecting your personal information, you may be able to help protect yourself. 

What is identity theft?

According to the Federal Trade Commission’s (FTC) identity theft website, “Identity theft occurs when someone uses your personal identification information, like your name, Social Security number, or credit card number, without your permission, to commit fraud or other crimes.” In recent years, millions of Americans have had their identity used fraudulently (about 1 in 20 people). Annual losses associated with identity theft are more than $50 billion dollars in the U.S., making it a serious and growing problem for all Americans.

Methods used by identity thieves to get your personal information:

• Dumpster diving—They rummage through trash looking for bills or other paper with your personal information on it.
• Skimming—They steal credit/debit card numbers by using a special storage device that reads and saves personal information acquired during a legitimate tran­saction by you.
• Phishing—They pretend to be financial institutions or companies and send spam, pop-up messages, or even call you to get you to reveal personal information.
• Changing your address—They divert your billing statements to another location by completing a change of address form.
• Old-fashioned stealing—They steal wallets, purses, mail, including bank and credit card statements, preapproved credit offers, new checks, and tax information. They steal personnel records or bribe employees who have access.
• Pretexting—They use false pretenses to obtain your personal information from financial institutions, telephone companies, and other sources.

*More information on identity theft and what you should do if it happens to you can be found at:

www.ftc.gov/bcp/edu/microsites/idtheft/