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Focus Questions 1. How does a checking account work? 2. What is the difference between a bank and a credit union? 3. Why might a bank want its customers to use ACH transactions rather than checks? 4. What are some different types of checking accounts? 5. What factors should be considered when selecting a checking account? 6. What are some alternatives to writing traditional checks? Key Terms savings account interest checking account check debi de bit t ca card rd commercial banks savings and loan associations (S&Ls) credit unions payday lenders financial transaction deposit withdrawal debit credit transfer loan Auto Au toma mate ted d Cl Clea eari ring ng Hou House se (AC (ACH) H)

Basic Banking Concepts

savings account a bank account in which money is deposited for safekeeping interest the costs of using moneypaid by banks to their depositors, and paid by borrowers to the institutions that provide their loans checking account a bank account that allows the account holder to withdraw money, pay a bill, or make a purchase by writing checks check a preprinted form ordering a bank to withdraw money from an account and pay it to someone else debit card a plastic card used to withdraw cash from a checking account or make payments electronically without having to write a check

anks and other financial institutions offer a variety of services. Your first experience with a bank was probably a small savings account that your parents helped you open when you were a child. A sav ings account allows you to deposit money at the bank for safekeeping. The bank uses your money to make loans to other people. It charges them a fee for the loan, and in turn pays you for the use of yo our rm mon one ey. Th Thes ese e co cost sts s of usi sing ng m mon one ey are called interest. You can withdraw money from a basic savings account, but it may not always be easy to get your money. There might be a limit on how many withdrawals you can make in a month, or you may have to pay a penalty when you withdraw it. If you are going to deposit and withdraw money from your account on a regular basis, a checking account might be a good idea. You might have heard of checking accounts but are not sure how they work. With a checking account, you can withdraw money, pay a bill, or make a purchase easily, using checks.

A check k is basically a written request to your bank to take money from your account and pay it to someone elsethe payee, or person to whom you wrote the check. With most checking accounts you also get a debit card, which allows you to withdraw cash from your account or make payments electronically without having to write a check. check In addition, addition you can have your paycheck electronically deposited into the account, and you can also make online payments from your account.

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Jasons early money memories is his first trip to a local bank in his hometown of Cleveland, Ohio, when he was just 8 years old. His parents took him to the bank just after the Christmas holiday so he could open his own savings account. Jason was not sure about giving a stranger his entire life savings of $225money he had earned doing odd jobs around the house, as well as birthday and holiday money he received from his grandparents. He wondered: What are all these people in this big building going to do with my y money? Would the money still be there when he wanted to use it for something lik buying like b i a bicycle bi l or going i to camp?

How It Works
Jasons parents, along with a very helpful banker, reassured him. Yes, not only was his money safe, but it would grow w. The bank would lend his money to other people who needed it for things like buying a car or a house, or starting a new business. When the people paid back their loans, they would also

pay interestand so Jasons money would be earning g money. Jason still was not totally convinced that his money would be there when he needed it, but he trusted his parents. With their help he opened a savings account. As the months passed, he deposited his gift money and the d e money he earned from odd jobs. m In turn, the bank paid interest on his money. The interest earnings h were added to his savings w account balance. By age 10, his a savings had grown to more than s $500 a combination of money $ he deposited and interest he h earned from the bank. e

services. When he got his first part-time job at age 16, he opened a checking account. He even learned to successfully use and manage his debit card for some purchases. These practical lessons will serve Jason well as he graduates from college and gets a fulltime job. Learning to take advantage of the services at a local bank is an important foundation for developing healthy money habits. And to thinkfor Jason, it all started with a little savings account when he was just 8 years old.

What Would You Do?

1. How old were you when you opened your first bank account? What have you learned about banking since then? 2. How does having a checking account and a savings account help you achieve your financial goals? 3. What would you still like to know about the way banks operate? What would help you become a better banking consumer?

Advanced Banking
As time went on, Jason le earned more about the banks

Types of Financial Institutions

Several types of financial institutions offer checking accounts. Financial institutions do not differ from one

another very much, as far as consumers are concernedbut it is worth understanding the differences. That way, you will be better equipped to decide which type of institution you want to do your banking.

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commercial banks the most common type of financial institutionprivately owned, offering a wide range of services, and run to make a profit savings and loan associations (S&Ls) financial institutions that originally provided home loans but now offer most of the same services as a bank credit unions nonprofit financial institutions that are owned by their members and organized for the members benefit

Banks, S&Ls, and Credit Unions

are the most common type of financial institution. They accept deposits, make loans, and offer a wide range of services to their customers. Many of them are nationally known, such as Citibank, Bank of America, U.S. Bank, and Wells Fargo. They have locationsor branchesall over the country. Others are smaller, often independently owned community banks that have only one or a few branches around town. Commercial banks are privately owned and run to make a profit. The successful economic activity of the country relies heavily upon the large commercial banks. As a result, these institutions are closely regulated by a number of government agencies, including the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and state and federal banking agencies. Your money is extremely safe in a commercial bankinsured up to $100,000 per account. Savings and loan associations (S&Ls) comprise another type of financial institution. Savings and loans were

You have many options when it comes to financial institutions. Do your research and find out what works best for you.

originally set up to accept savings and provide home loans to consumers. Today, S&Ls typically offer the same services that banks do. The government regulates them and insures the money deposited in them, just as it does for banks. Credit unions are nonprofit financial institutions, owned and operated by the people who use them. If you have an account at a credit union, you are a member of the credit unionactually a part owner. Credit unions do not seek profits as banks do. Instead, they distribute any profits they earn to their members, either as higher dividends or in the form of lower interest rates on loans. Credit unions restrict membershipyou must be eligible to join one. The members usually share something in common, such as where they work or where they went to college. Like banks and S&Ls, credit unions are regulated by the government, and their customers money is insured up to $100,000. If you do a lot of traveling or are planning to go away to college, it might be a good idea to open a checking account at a bank that has a lot of branch locations around the country. Then, if you need to make a withdrawal or deposit, or talk to a

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ost b banks k h have company Web sites where they provide detailed information about the accounts they offer. You can research checking accounts and compare them without even leaving home. Look on the Web sites of the banks listed here. See what you can learn about their checking accounts. Then print out the information you find and compare the results. Wells Fargo (http://fin.emcp.net/wellsfargo) Bank of America (http://fin.emcp.net/ bankofamerica) Citibank (http://fin.emcp.net/citibank) U.S. Bank (http://fin.emcp.net/usbank) Wachovia (http://fin.emcp.net/wachovia)

are eligible to ar be become a member of a credit union. Visit the Web site of the Credit Union N National Asso(http //fin emcp net/creditu for more ciation (http://fin.emcp.net/creditunions) information and to find a credit union in your community.

Remember also to look into a credit union for your banking needs. Many offer competitive rates and a variety of account services. Find out if you

Your Assignment 1. Do any of the banks offer attractive checking account features that others do not? Do any have negative aspects you would want to avoid? 2. Did you find that the banks and credit unions in your community had checking account services that were more or less similar, or that varied significantly? How would this influence your decision if you were going to open a new account?

banker, you have a better chance of finding a branch nearby, wherever you are. If you want to support a local community bank, you can choose a smaller institution close to home. If you have access to a credit union, you will likely want to take advantage of the lower costs and other benefits that credit unions offer.

Payday Lenders and Check Cashing Companies

According to the Center for Responsible Lending (http://fin.emcp.net/ responsible), payday lenders and check cashing companies are some of the most expensive financial institutions in the country. Check cashing companies charge a fee to cash checks, primarily for people who do not have a bank account. Keep in mind, however, that if

the person has proper identification the bank that issued the check would cash it for free. Payday lenders make short-term, usually small loans to tide a person over until payday. They target low-income working people including welfare-towork women, members of the military, and others who have little or no savings, who live paycheck to paycheck. Most borrowers who get payday loans are not able to repay the entire loan within the standard two-week time frame. They end up having to renew the loan, paying multiple renewal fees. They become trapped in a never-ending cycle of debt even paying much more in fees than the amount they originally borrowed.

What Is a Payday Loan? A payday

loan is a small cash advance, usually $500

payday lenders companies that make small short-term, high-interest loans to tide a person over until payday

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or less. The borrower gives the payday lender a postdated d personal check (a check written with a date in the future, in this case usually two weeks in the future) or an authorization to withdraw funds from the borrowers bank account. In return, the borrower receives cash, minus the lenders fees. As an example, with a $300 payday loan, the borrower would give the payday lender a check for $300. About $45 might go to the lender in fees, and the borrower would get $255 in cash. After about two weeks (usually the borrowers next payday), the borrower must either repay the loan or renew it if he or she cannot repay it. This renewal is called rolling over r the loan. Another form of renewing the loan is a back-toback transactionwriting a check for a new loan, and then using the new funds to repay the previous loan.

loans often end up paying more in fees than they borrowed in the first place. Some borrowers will have five, ten, or sometimes even twenty repeat loans a year. For them, payday lending does not relieve their debtand in fact creates more. The Center for Responsible Lending estimates that payday loans cost 5 million Americans as much as $3.4 billion annually. A payday loan might be convenient at the moment, but you are better off steering clear of this financial option. Likewise, think about the costs before you use a check cashing store. You can avoid the high fees of payday lenders and check cashing companies by opening and using a basic checking or savings account at a bank, an S&L, or a credit union.

What Are the Costs of a Payday Loan? For a two-week payday advance,
financial transaction any exchange of money between two or more businesses or individuals

Types of Banking Transactions

A financial transaction is any exchange of money between two or more businesses or individuals. Deposits, withdrawals, debits, credits, purchases, transfers, loans, electronic transfers, payments, and written checks

a borrower will pay at least $15 for every $100 borrowed. But do not be deceived this is not t an annual interest rate of 15 percent. These two-week loan fees translate to about 400 percent t a year! As Figure 5.1 shows, those who renew their

Figure 5.1

PAYDAY LOAN FEES VERSUS CREDIT EXTENDED

According to the Center for Responsible Lending, the fees on a payday loan can double the original loan amount. Try to avoid taking out this type of loan. $600 $500 $400 $300 $200 $100 $0 1 2 3 4 5 6 7 8 9 10 11 Number of transactions used to pay back the original loan Loan amount 12

Total fees paid

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are all different types of transactions but the meanings sometimes overlap. Here are brief descriptions of some common financial transactions:

Did You Know?

A deposit is any addition of funds to your account balance. Any time you put a paycheck, cash, or other money into your checking account you are making a deposit. A withdrawal is the opposite of a deposit. Any time you take cash out of your bank accounteither in person at the bank itself or with a debit card at an ATMyou are making a withdrawal. A debit is any transaction that removes funds from your account. Besides withdrawals, debits also include checks written on the account and fees the bank charges to your accountsuch as monthly maintenance fees or check overdraft fees. A credit is any positive addition to your account. Credits include deposits, but other transactions too. If you return an item that you paid for with a debit card, for example, the store will credit your account for the amount of that purchase. A purchase is any payment made in exchange for a good or service. A transfer is a movement of funds from one account to another. You might deposit your paycheck into your checking account and then transfer a portion of it into your savings account. A loan is a temporary transfer of money from one person or institution to another. The loan must be repaid over time, with additional money paid as interest. Interest t in this case is the money the bank charges the borrower in exchange for providing the loan.

ccording to the National Postsecondary Student Aid Study, more than 65 percent of four-year undergrads borrow money for their college education. Costs for college tuition, books, and room and board add up, and many students turn to the bank for help. Student loans can get complicated, so do a little research before you take one out. As with any other loan, you will have to pay interest on the money you borrow. Shop around and find out which banks have the lowest interest rates.

Automated Clearing House (ACH) network. The Automated Clearing House is an electronic system for transferring money between banks. In other words, an ACH transaction is an electronic funds transfer r (EFT). ACH payments include the following:

Payroll direct deposits Social Security and other government deposits Consumer payments such as mortgage payments, loan payments, and insurance premiums Business-to-business payments E-checks E-commerce payments Federal, state, and local tax payments

deposit an addition of funds to an account balance withdrawal the removal of cash from an account, either at the bank or at an ATM debit any transaction that removes funds from an account, including cash withdrawals, checks written on the account, and fees charged by the bank credit any positive addition to an account balance transfer a movement of funds from one account to another loan a temporary transfer of funds from one person or company to another, to be repaid over time with additional money paid as interest Automated Clearing House (ACH) an electronic system for transferring money between banks

Most of your financial transactions can be processed through the

ACH transactions have increased in recent years as more and more people take advantage of direct deposit for their paychecks and other income. In addition, more than 50 percent of all consumer transactions are now done with plasticcredit and debit cards. The paper check is becoming a less common form of paymentalthough a checking account is still called a checking account. The difference between the checking account of decades ago and today is simply that money is now commonly transferred electronically by computer. These electronic monetary transfers are much more efficient and

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occur much faster than the old clearing process for a paper check. Instead of a week or ten days, for instance, ACH transactions can clear in 72 hours or lessand often almost immediately.

Types of Checking Accounts

If you go to a bank and request information about checking accounts, you will likely get some pamphlets or materials that describe several options. For basic or low-activity checking accounts, banks will likely charge you a small monthly fee and may limit the number of checks you can write each month without paying an additional fee. They may also require a minimum balance and may charge other fees for different types of transactions.

Many banks advertise free checking accounts, and who wouldnt t want a free account? According to the law, a free checking account cannot require a minimum balance and cannot charge a maintenance fee or any activity fees. On the other hand, free checking accounts usually do not pay interest. Some banks charge higher penalties on a free checking account. They might also have a maximum number of checks or ATM transactions per month. They may charge fees for certain services, such as use of a debit card or printing your checks. They can charge penalties if you have insufficient funds to cover a transaction and overdraw your account. Make sure you read the fine print before deciding that a banks free checking account is the right one for you.

ent wants to open a checking account in one of the banks in the small t wn w to where he lives. His choices in i ncl clud ude e the local branches of two b g national banks and a smaller bi lo ocall lly y ow o ned bank. He goes to each ea ch b ban a k for information on thei th eir r checking accounts. He find fi n s th that they have similar ty t type ypes pes of accounts accounts, but some offe of fer t fe tea e sers or incentives to get him get ge m to sign up. More specifically, for a lim li mited ti t me one large institution is off ffe ering a free iPod to anyone w o op wh opens an account and depo de posits $1,000 for at least six mo ths mont mo hs. Kent has always wanted an i an iPo Pod. d But though it sounds tempting te temp n , Kent decides to do

his homework on each banks services before he jum u ps s at the iPod offer. What Kent discovers rs is that the local local, independently owned bank offers a unique ben nef efit to its checking account custom mers. The checking account ha as a free link to the account holders h s savings account. Kent will be able to make free money y transfers between his checkin ng and savings accountsso he e can deposit his paycheck into o the checking account and the en easily

move a portion of it into the linked savings account. Kent also learns that the e bank offering the iPod does no ot offer free money transfers and nd has fees for other services as well we l . Because he has several import rtan a t savings goals, Ken nt wonders if the locally owned bank might be a better choic ce than the one off fer ering the iPod. .

Should he
1. open an account at th he locally owned bank, or at th the bigger national bank? Ex Explain your answer. 2. consider the cost of the iP Pod before making his decisi sio on? ? How might this make a difference?

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 Joint checking accounts allow two or more people to share responsibility for managing their money. These accounts are often used by married couples. Opening a joint checking account with a parent or guardian is a great way to start learning about money management.

Interest-earning checking accounts require substantial minimum balances usually $1,000 or morebut they pay interest on that money. Unfortunately, these accounts generally pay much lower interest rates than do other savings plans, so you are probably better off putting your extra money in a savings account (see Chapter 6). Joint checking accounts are shared between two people. Both their names are listed on the account, and either person can write a check on the account. Correspondence from the bank is sent with both names on it. Some banks prefer that young people open a joint checking account with a parent or guardian to make sure an adult is supervising the money coming in and going out. If you open a joint account with a parent or guardian, you will be able to make your own deposits and withdrawals and write

SECTION

Factual Recall What is the difference between a checking account and a savings account? 2. Wh When en d dea eali ling ng w wit ith h a ch chec eck k, who is the payee?

your own checksbut your parent or guardian will assume responsibility in case of a mistake or problem. Opening a joint account now can help you learn money management skills and will make it easier to assume the responsibility of a regular checking account later on. A person who is self-employed or who runs a small business may wish to open a business checking account in addition to a personal checking account. That way, he or she can keep business income and expenses separate from personal finances. Each week or twowhatever time frame the entrepreneur prefershe or she can transfer funds from the business account to a personal account, to use for food, clothing, entertainment, and other personal expenses. The remaining money in the business account would pay for business expenses.

AS A SS SE ESS S SME ME N T

3. What is the e difference between a deb bit and d a withdrawal? 4. What is the difference between a debit and a credit? 5. Wh What at i is s a tr tran ansf sfer er? ?

Critical Thinking 1. Check cashing companies charge high fees. Banks charge less, or nothing, to cash checks for their account holders. How can you be sure to avoid check cashing companies?

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