Test Your Banking Smarts
Throughout our lives we will receive money from various sources, including employment, the sale of items we own, or gifts or loans. We have the option to keep the money in a jar, under our mattress, or in a secret hiding place, but that wouldn’t be safe or allow it to work for us.
A better place to keep your money is in a financial institution such as a bank or a credit union. Both organizations offer similar services, but there are differences. A bank generally has more branches than a credit union, which are for the most part regionally based. Credit unions, unlike banks, are nonprofits that are owned by the members who deposit money in them. When considering the safety of your money, be aware that the Federal Deposit Insurance Corporation (FDIC) insures your bank deposits against loss up to a certain amount. Federal and state credit unions have alternate forms of insurance.
When opening a bank account you need various forms of identification, including government-issued documents such as a driver’s license and a social security card, to prove who you are and where you live. A parent may open an account for you, but banks will set it up as a joint account.
There are different types of bank accounts: A checking account is for day-to-day banking; a savings account lets you put money aside for longer periods of time with the bonus of earning interest; and a money-market account allows you to invest money in the stock market.
Your checking account is where you would first deposit the money you receive and pay your bills from. At times, you may have to spend more than you have. If that’s the case, you can always arrange for an overdraft, which allows you to use the bank’s money for a short period of time. It does cost you, though, and if you don’t set this up with the bank early on, you may have to pay extra costs or your account may be closed.
With a savings account, it’s always worth looking at the annual percentage yield rate (APY) so that you can compare saving schemes and how much return you should get on your money.
Banks will give you a debit card that allows you to deposit money in and withdraw funds from your checking account. You may also be eligible for a credit card, but because using it will be like taking out short-term loans, it could be a problem if you charge on it injudiciously or don’t pay off your balance regularly. A good introduction to smart banking is to use a prepaid card, with which you can spend only the money that is on the card. But watch out — if you lose a prepaid card, you may have effectively lost your money, depending on the issuer. If you do spend more than you actually have in your bank account or on your card, you may receive a warning of non-sufficient funds (NSF), which means you’ll need to put more cash in your account and think about making smarter decisions with your money.
The days of cash and checks are nearly over, now that credit cards, debit cards, and electronic transfers are most commonly used. Before these were available, cashier checks were used, and in some cases they’re still used today. To prevent fraud, a bank manager’s signature is always required on a cashier’s check to validate what is essentially an expensive piece of paper. The signature basically signifies that money has been taken out of the customer’s account, placed on the check, and can be cashed by the designated party.
These days, there are quite a few online banks that offer electronic transfers, 24-hour banking, and generally higher interest rates because of their lower overhead. They don’t have to put branches all around town and therefore do not have to pay all that rent or employ as many people, which means their costs are lower and that they can pass those savings to the account holder. The disadvantage to online banking is that you generally don’t speak to a person and it is more difficult to deposit money.
To put your mind at ease when you deposit money into banks, there is the Federal Deposit Insurance Corporation (FDIC), which is a U.S. government guarantee of your money in case the bank has to close.
When you apply for a bank account or a loan, banks like to know a little more about you in terms of how you use your money, how much money you have, how timely you are in paying your bills, and so on. They use ChexSystems and Early Warning Services — software that is a form of credit reporting — to find out this information.