Banking Fundamentals

How to choose a bank or credit union, open an account, and transfer money.

This is a chapter preview. To read the full chapter, click here. 

TL;DR

1. Banks and credit unions safeguard cash, and those protected by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insure deposits up to $250k
2. Banks and credit unions differ by branch network size, location, online accessibility, specialty banking services, fees, and loan products
3. Checking accounts hold cash for everyday expenses, while savings accounts hold cash that won’t be spent in the next six months
4. Money can be transferred into and out of a checking or savings account via ATM, check, wire transfer, ACH transfer, or by using a peer-to-peer payment app

A bank is a financial institution licensed to receive deposits and make loans. Banks provide a safe place for consumers and businesses to stow their cash. In turn, they use cash deposits to make loans and collect interest. Banks also generate income by offering additional money services such as wealth management, currency exchanges, and transfers. 

 

 

 

View this post on Instagram

A post shared by Cakes! (@cakesmitchell)

I used to work at a bank, but then I lost interest

An alternative to a bank is a credit union. Credit unions are not-for-profit organizations that exist to serve their members. Like banks, credit unions accept deposits, make loans, and provide various other financial services. As member-owned and cooperative institutions, credit unions provide another safe place to save and borrow at reasonable rates.

Benefits of Banking

People choose to keep their money with a bank or credit union because it is safer and more convenient than carrying cash. 

Keeping cash in your home puts you at risk of theft, fire, flood, loss, or damage. However, reputable banks and credit unions insure customer deposits up to $250k through the Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA), respectively. Opening an insured account ensures that your money is protected in the event of a disaster or the unlikely event that the bank or credit union fails. Additionally, federal laws protect you in the event of a debit card error or unauthorized electronic transaction so long as you notify your bank in a timely manner.

Banks and credit unions provide services that make receiving, spending, monitoring, and transferring money more convenient than using cash. For example, other individuals and institutions, including employers, can safely transfer money into your account electronically via direct deposit. Money in a bank account can then be withdrawn as cash, spent using a debit card, or transferred to another person or institution.  All deposits, transfers, and withdrawals are recorded on monthly bank statements. These statements can be referenced when managing spending and creating a budget. 

Additionally, because banks already hold your cash, they can be a convenient provider of debt financing via credit cards, auto loans, and home mortgages. Some banks and credit unions charge less for these services if you already have an account. 

 

 

 

View this post on Instagram

A post shared by Alison Burke Comedy Page (@tired_actor)

How to choose a bank

When deciding where to bank, start by determining which bank features are most important to you, including the types of bank accounts you plan to open. All banks provide checking accounts for everyday spending and savings accounts for longer-term savings, although the features and fees of these accounts can vary. Some banks also offer specialized business accounts, such as joint accounts, retirement accounts, and money management accounts, so consider how important these options are for you. 

Banks can be categorized into six types: national banks, regional and community banks, credit unions, online banks, and neobanks. These institutions vary by size, geography, services, fees, and accessibility. In general, larger banks have greater resources to provide specialty banking services such as loans and budgeting tools. Larger institutions may also offer multiple physical branch locations and ATMs for accessing cash and services, while smaller banks and credit unions may prioritize relationship management and community development. Online banks and neobanks compete on fees and specialized services but don’t always offer the same accessibility or community focus as rival institutions. 

Additionally, some banks provide competitive returns via high-yield savings accounts, which pay higher-than-average interest rates on deposits. While the average return for insured savings accounts is 0.43%, high-yield savings accounts offer returns up to 10 to 12 times higher. Although returns on high-yield savings accounts may not be as high as money held in other investments, these accounts provide a low-risk option for growing cash you planned to save for the medium to long term.

In addition to the banks themselves, take note of their institutional partners you may want to take advantage of. For example, Bank of America’s acquisition of Merrill Lynch provided their banking customers with an integrated brokerage experience, while Chase Bank customers benefit from having easily accessed wealth advisory services via JP Morgan. Of course, most banking services can be mixed and matched across providers, but convenience is important when deciding where to keep your money.  

This chart is for illustrative purposes only as individual institutions vary. Contact the bank(s) you are evaluating in person or online to learn more about their specific offerings and fees. 

Make sure the FDIC insures any bank you consider. Those that are must prominently display this affiliation on their website. If you can’t easily spot the “Member FDIC” on a bank’s website, typically in the footer, the bank may not be federally insured. 

Consider refining your search for a bank using Bank On, a licensed partner of the FDIC. Bank On member institutions are insured, don’t allow overdraft or insufficient fund fees, and have free online tools to help you control your money, deposit your paycheck, and pay your bills.

Lastly, consider differences in fees charged by banks. Ask a representative to list all fees before opening an account. Common types of bank fees to look for are listed below:

Deposit account fees

Banks are required under Federal law to disclose fees charged in connection with a deposit account. Ask your bank, or any bank you are considering opening an account with, for the account opening disclosure and fee schedule. All deposit-related fees your bank can charge must be listed in these documents. Standard fees include monthly maintenance or automated teller machine (ATM) withdrawal fees. 

Overdraft Fees

Overdraft fees occur when you don’t have enough money in your account to cover your transactions. The overdraft fees vary by bank, but they may cost around $35 per transaction. Some banks may also charge continuous overdraft fees or daily overdraft fees. These are charges assessed every day the account remains overdrawn.

Non-Sufficient Fund Fees

While you can opt in or out of overdraft coverage for debit card transactions, banks are not required to obtain your opt-in for Non-Sufficient Fund (NSF) fees. If you write a check for more money than you have in your account without any overdraft coverage, the check will not be paid, but you will still be charged an NSF fee.

Banks typically charge an NSF fee for each transaction, which can be costly as they can have ripple effects similar to overdraft fees. To avoid this, review your bank statements and consider using notifications to help you keep track of your bank account balance.

Monthly maintenance fees

Banks can charge a monthly fee to maintain deposit accounts. These fees may be lower or waived in certain situations, such as when you have direct deposit, maintain a minimum balance, or make a certain number of monthly transactions. Consider a bank that lets you avoid monthly maintenance fees by directly depositing your paycheck. Additionally, signing up for paperless statements and getting multiple products from one bank (instead of several banks) may be a way to eliminate some monthly maintenance fees.

Minimum balance fees

Some accounts may have a minimum balance requirement to avoid a fee. Ask if your bank offers low balance alerts to notify you so that you don’t unknowingly drop below the minimum balance requirement.

ATM fees

Some banks charge for using ATMs not in their network. To avoid charges, use only the ATMs in your bank’s network or those that allow you to use your ATM or debit card for free. Also, ask if your bank reimburses you for using any ATMs outside its network. Some banks will do that for a certain number of transactions per year.

For additional information, refer to the FDIC’s How to Pick a Bank Account Checklist. 

Remember that you don’t need to bank with just one institution. People safekeep their money for different purposes, so choose the best approach for you. If you decide to change banks, opening an account and transferring money is relatively straightforward. 

Opening an account