Somewhere between when we’re collecting money from the tooth fairy and our first job, we’re expected to somehow learn everything we need to know about banking. Like magic! Many of us never receive this charmed knowledge, which lets us become adults without knowing the fundamentals about bank accounts. Others of us may have forgotten as much as we knew and need a refresher. From debit cards to basic checking to money market accounts, we’re breaking down all the essential information you need to make empowered decisions about your finances.
What’s the difference between a bank and a credit union?
Banks and credit unions offer many of the same services, from checking accounts to personal loans; however, their structures are different. Private shareholders own banks. Members own credit unions, so by depositing funds in a credit union you become a part-owner. The Federal Deposit Insurance Corporation (FDIC) insures deposits in banks up to $250,000. The Federal Reserve System regulates the FDIC. The National Credit Union Share Insurance Fund (NCUSIF) insures credit union deposits up to $250,000. The National Credit Union Administration regulates the NCUSIF. These regulatory agencies protect, or “insure,” your deposit in the event the bank fails or theft occurs.
What’s a checking account?
A financial institution holds your money safely in a checking account, which allows you to withdraw and deposit money. It’s safer than storing money as cash since your financial institution can help protect your account from unauthorized activity. Checking accounts are developed for personal or business use. Each variety has features and benefits developed for that entity. Within personal accounts, you may also opt to open a joint account, which can be shared with another person, such as a spouse or a parent/child. Checking accounts allow for numerous transactions, whereas sometimes savings accounts limit them. Checking accounts also allow other parties, such as your employer, to make direct deposits. It comes with checks and a debit card that allow you to spend your available funds.
What’s a direct deposit?
A direct deposit is an electronic transfer of funds into your financial institution. It’s often faster than receiving a paper check. It’s also safer since a check can be lost or stolen.
What’s a debit card? Is a debit card the same as a credit card?
A debit card looks like a credit card (more on that in a minute), and it may even be backed by a financial services company such as Visa. It doubles as an ATM card, allowing you to make cash withdrawals, and a check, allowing you to spend funds. Like a credit card, your debit card allows you to make in-person purchases by swiping it or inserting the chip in a point-of-sale machine. It also allows you to shop online by entering the card number and other details. The crucial difference is that a debit card draws on the funds in your bank account, so you must have the funds available to cover your purchase. If you don’t have sufficient funds, you may risk overdraft fees.
What’s a pre-paid debit card?
With a pre-paid debit card, you can load the card with a certain amount of money. Your spending limit is the amount of money on the card. These are handy for parents who want to provide a set amount of funds for a child to spend with flexibility on what it’s spent on. Some people also use them to help themselves stick to a budget.
What’s a bank account overdraft?
An overdraft occurs if you’ve spent more money than is available in your account via withdrawals, checks, ATM, or debit transactions. Depending on the institution, one of several things may happen in the event of an overdraft. First, your financial institution may choose not to cover the transactions. In this case, your debit card transactions won’t be completed. Second, your institution may allow the transaction to be completed, but it will charge you a non-sufficient funds fee. These fees can add up quickly. If overdrafts happen frequently, your institution may choose to close your account or, in the most extreme cases, pursue legal action. In the best case, you’ll have overdraft protection, with a savings or alternate account to draw upon in the event you accidentally overdraw your main account.
What’s balancing your checkbook? And how do you do it?
Balancing your checkbook means reconciling all the money that’s gone out of your account with all the money that’s come in. You can’t just trust your current bank balance because you may have written checks or made debit card purchases that haven’t yet cleared your bank. So, your current balance may or may not reflect your current obligations. Balancing your checkbook simply means you have kept track of all the transactions you’ve made, including upcoming automatic payments, and compare that list against what’s already cleared your account. If you know you have a $100 dollar payment coming out in three days, but you only have $110 in your account, you know you shouldn’t spend $20 at the grocery store without making a deposit first. Taking time to balance your checkbook, either using paper or a financial app, can help you prevent overdrafts, monitor your budget, and work toward savings goals.
What’s a savings account?
A savings account is another variety of account held at a financial institution. Savings accounts earn a small amount of interest over time, so there are benefits to depositing funds and leaving them there. The amount of interest depends on federal rates and those of your bank or credit union. Because financial institutions want to incentivize you to leave funds in these accounts, they often limit the number of withdrawals — and sometimes even deposits — you can make.
What’s a Certificate of Deposit?
A Certificate of Deposit (CD) is similar to a savings account. It’s a safe and insured savings tool. CDs typically earn a better interest rate than a traditional savings account; however, there’s a tradeoff. You have to commit to leaving your money in the CD for an agreed-upon period of time. These lengths of time may range from six months to several years. Longer periods of time generally result in a higher return. If an emergency comes up, and you have to withdraw your funds before the term, you’ll likely face a fee. Bonus fact: CDs issued by credit unions are called share certificates.
What’s a money market account?
A money market account is an interest-bearing account, similar to a savings account. Money market accounts may also have some check writing and debit card functions similar to a checking account. They pay higher interest rates than other savings accounts; however, they also come with more restrictions. For example, the bank or credit union may require a deposit amount above a certain level, and it will likely charge fees if the balance falls below this minimum.
What’s a credit card?
Banks or financial services companies issue credit cards to allow cardholders to borrow funds to pay for goods or services. Of course, these funds must be paid back in full. Companies that issue credit cards charge interest for any funds not paid back by the billing date. They also may charge additional fees, such as annual fees, for the privilege of holding the card. The key thing to remember with credit cards is that unlike a debit card, using a credit card is a form of borrowing and as such, comes with interest charges.
What’s a secured credit card?
A secured credit card works like a traditional credit card, with one key difference. Secured credit cards require you to provide a cash deposit in advance of several hundred dollars. The deposit amount is equal to your credit limit, in other words how much you can spend on the card. However, unlike a prepaid debit card that uses your funds to pay for your purchases, the secured credit card doesn’t use your funds to cover transactions. You still have to pay for your expenses when the statement comes. The deposit simply serves as backup if you don’t or you’re unable to pay for your purchases. If this happens repeatedly, your financial institution may close the card. People who must build their credit history to qualify for a traditional credit card often use this type of card as a starting point.
We hope this knowledge will help you make better informed financial decisions — now and in the future. Remember our staff here at State ECU is always here to answer your financial questions, choose the best accounts and solutions for you, and help you build your financial future.