Unless you are Chuck Norris, you probably do need a bank account. A bank account is essentially a requirement in this day and age. It is important to understand some basics of how banks and credit unions operate and what services they provide so you can utilize them to your benefit. In this post we will go over the following topics:
- Banks versus credit unions
- Interest – what it is and how it works
- Common services offered by banks
- What to look for in a bank/credit union
Banks vs. Credit Unions
First, what is the difference between a bank and credit union? Well, banks are profit focused while credit unions are non-profit. Does that matter much to you? Probably not; I have used both credit unions and banks and for the most part the capabilities and services are the same. With credit unions being non-profit in theory they can have slightly better rates and yearly bonuses for members, but that is not always the case.
As an interesting side note, and since USAA is very popular among military members, do you know if USAA is a bank or credit union? They are actually a bank, but when I was looking to become a member it was not easy to tell. Part of this is because USAA does not operate like a traditional bank in that they are not a corporation and are not publicly traded.
The good news is that both banks and credit unions are covered under the Federal Deposit Insurance Corporation (FDIC). During the Great Depression of the late 1920s and early 1930s many people went to their banks to withdraw money only to be turned down because the banks literally had no cash to give. This obviously made a lot of folks upset and many lost faith in banks in general, so the FDIC was created. The bottom line is that the government is insuring that your money is safe and available at any time up to $250k. Below is their mission, taken from the FDIC website.
The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.
Interest
Now let’s talk about interest for a second. Interest is a fee paid by someone who borrows money, and interest can cost you money or earn you money depending on the situation. Banks charge you interest on loans, but can pay you interest on savings accounts, CDs, etc. Interest rates change constantly and are different depending on many factors (state of the economy, amount borrowed, type of loan, time-frame of loan, etc.).
Paying interest on loans is straightforward; you borrow money and the bank is charging you a fee for borrowing. However, you may be wondering why the bank will pay you interest on some of your accounts. Let’s use a savings account as an example. The reason you earn interest when you deposit money into a savings account is that the bank is actually using that money for its operations. That is one way banks get money to loan out to members. Since the bank is “borrowing” money from you they pay you interest. Sounds good right? It is, but unfortunately in today’s market the interest rates banks are paying are very low. However, there is nothing you or I can do about that. The flip side to the low interest paid by banks is that the interest charged on loans today is low also.
Bank Services
Most banks and credit unions offer several different services, which are listed below along with brief descriptions of each:
- Savings account
- Very basic account used to store your money
- Can deposit/withdraw money easily but cannot write checks from this account
- Normally earns very little interest (less than 1% at most banks currently)
- Checking account
- Account used to store frequently accessed funds
- Can deposit/withdraw money easily, use debit card, and write checks from this account
- May or may not earn interest (if yes then normally earns less than 1%)
- Certificate of Deposit (CD)
- You are loaning the bank a fixed amount of money for a fixed amount of time
- Normally earns slightly more interest than a savings account
- Subject to restrictions (minimum amounts, penalties for early withdrawal)
- Money Markets
- Type of savings that earns higher interest than normal savings but has restrictions
- Normally requires a minimum account balance of $2,000 or more and has a limited number of withdrawals each month
- Debit Cards
- Transaction option instead of paying cash
- Debit cards are instant transactions with funds coming directly from your bank account
- Consumer protection from debit card fraud may not be as good as protection from credit card fraud
- Credit cards
- Allows consumers to buy goods/services with the promise that the cardholder will pay for them in the future
- Credit card use is an instant loan (all the way up to your credit limit)
- Credit cards can be useful or they can be trouble depending on how they are used
- Loans (car, home, personal)
- Types of loans include home (mortgages), cars, personal, and possibly consolidation
- Loans are a large topic so I split it off to it’s own post that you can find here
Ok, so what does all that mean for you? At a minimum most adults have a checking and savings account, and usually a credit card and/or debit card. The primary use of a savings account is to store cash, where a checking account is normally used for paycheck deposits and paying bills. A majority of banks will require you to have a savings account open at all times if you are a customer. Amy and I currently use USAA as our primary bank, but we also have accounts open at three other institutions. Our second account is with our old credit union that we used before I joined the Navy. We still have one loan through that credit union, so for now the account will stay open. I also opened an account at Navy Federal Credit Union because I wanted to take part in a special CD that they had at the time and I was curious how they compared to USAA. Finally, we have a Discover online savings account where our emergency fund is kept. The reason for using the Discover account is that USAA pays very little interest on savings accounts (0.05% in our case), but Discover pays 1.15% for its online savings account. As you probably guessed we have a USAA checking account where my pay goes and bills are paid from, and we keep a USAA savings account open with the minimum amount of money in it.
CDs are normally a great way to make a little money with no risk. Many people use them in a CD ladder to store their emergency fund money. However, the current CD rates are low and I would not recommend using them unless you find an outstanding interest rate on one. Money markets have a similar problem as CDs currently. At one time Amy and I were fans of both CDs and money markets, but with today’s interest rates most are just not worth it in my opinion.
Debit cards are a useful tool that many people have and use regularly. A debit card is an option instead of paying with cash; when you purchase with a debit card the money is instantly removed from your checking account. The good thing about a debit card is that if you run out of money the transaction will be declined. I would never recommend running your checking account empty, but at least if you do a debit card won’t let you purchase anything else. The other downside to debit cards is that fraud protection is not as good as credit cards. With a credit card the issuing bank fights fraudulent charges, with a debit card you must fight to get your money back. Amy and I don’t use a debit card because of the sub-par fraud protection and because most debit cards have little or no rewards program.
Now we get to credit cards. This can be a controversial topic because some people see credit cards as awesome while others see them as evil devices that destroy financial well-being. I view credit cards as a convenient and useful tool that requires discipline and respect. In simple terms a credit card lets you buy things with the promise to pay the issuer back; an instant loan if you will. The main problem people run into with credit cards is overspending. A credit card will allow you to charge all the way up to the credit limit, regardless of whether or not you have the money to pay for the purchases. Credit cards are a large enough topic to have a separate post, and we will get into them in the very near future.
Loans is the last of the basic bank services, but since loans are a large topic I moved in to a dedicated post that you can FIND HERE.
What to Look for in a Bank/Credit Union
If you are shopping for a bank you may wonder what makes a good bank or credit union? Well, the answer depends on you. One of the main criteria is does the bank/credit union have the services you want. Other things to look for might include:
- No monthly fee for a checking account
- Free ATM use or reimbursement of ATM fees
- Low or no minimum balances
- Good online website capability and a good mobile app
- Competitive interest rates
- Good customer service
Create your own criteria when shopping around for a bank. As I mentioned Amy and I use USAA as our primary bank and we have been overall happy with them. My only minor gripe is that they don’t really have any branches anymore (except the main facility in San Antonio, TX). You may be thinking I am being paid by USAA, but that is not the case. We actually went to USAA for car insurance initially, and to get insurance you had to have at least a savings account open. Once we were members for a few months we decided to switch all of our banking to them.
With that said I encourage you to shop around and find a bank that suits you and your family. You can do a search on the web for “best banks” or “bank reviews” and get tons of hits. If you want quality information it’s hard to go wrong with the Money Magazine best banks articles or the Kiplinger best banks list.
That is about it for today’s post. As you shop around you will see that many banks offer more services above and beyond what we discussed today, such as insurance and investments. Those topics are what I consider beyond the basics but don’t worry; we will be discussing them in several posts a little later on. If you have any questions or comments please let me know.
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