Basics of Banking. What Are Banks, Anyway? Types of Financial Institutions. Table of Contents

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1 Basics of Banking This information is provided to you as a courtesy and does not constitute financial, tax or legal advice. Information provided in the financial modules may not be current and/or up to date and your use of any information in the financial modules is at your risk. Consult with a professional for matters relating to finances, tax or other legal matters. Last Updated: 3/18/05 Table of Contents What are Banks, Anyway? Bank Accounts vs. Check-Cashing Services Savings Account Basics Other Bank Services Glossary of Banking Terms Frequently Asked Questions Quick Quiz Every person is at a different stage of their financial life. Some may just be starting out with their first job and may not have established a bank account. Others may be familiar with some services that banks offer, but are unaware of other services that could be helpful or useful to them. The information that follows is an introduction to the banking system and outlines the basics of opening and maintaining a checking and/or savings deposit account. What Are Banks, Anyway? Banks are businesses. Banks make money by providing financial services to individuals and businesses. While smaller banks may have only one office, national banks have branches all over the country. The size of a bank, however, is not as important as how well the bank can provide the services you need. Banks make money by using the money their customers deposit. Banks use this money to make loans to individuals and businesses. Banks charge a fee, or interest, on the loans they make. Individuals and businesses must pay back the money they borrow, plus interest. So what do banks do with the interest they collect? Banks divide the interest they receive two ways. Some of the interest earned is paid to depositors for the use of their money. The remainder of the interest is kept by the bank as income. Banks never lend out all of the money that customers deposit. Most of the money is kept on hand to use when customers write checks, or when customers want to take cash from his or her account(s), or need a loan. Banks also earn money by investing their cash reserves in short-term, low-risk investments. Types of Financial Institutions Not all banks are the same. Many financial institutions look like banks without actually being banks. For example, savings and loan associations (S & L s) and mutual savings banks are really thrifts. A credit union is another example of an institution that looks like a bank. All of these institutions offer individual accounts, take deposits, and make loans. However, there may be restrictions to the types of customers they have and the types of loans they offer. Commercial banks do business with a wide range of customers - individuals, companies, and governments. Commercial banks offer checking and savings accounts. Many commercial banks also

2 offer mortgage loans, car loans, personal loans and credit cards. Businesses also have deposit accounts and borrow money from commercial banks. Thrifts originally concentrated on serving individuals. Today, however, many thrift institutions have business customers and provide virtually the same services as commercial banks. Credit unions are nonprofit cooperatives that are member controlled. Only members are eligible to open accounts and borrow money. By law, the members of a credit union must have something in common. For example, they must all work for the same employer or be members of the same group. Today, many credit unions have very broad membership qualifications. Choosing a Bank and a Bank Account How do you find the right bank? What type of bank account should you open? You will learn a lot by shopping around. Consider banks that are conveniently located in an area where you work, live, or shop. Talk to your friends to see if they are happy with their banks. Visit several banks and ask for information about the accounts in which you are interested. Pick up fact sheets or brochures that explain those accounts and compare them to one another. It may be a good idea to speak with the bank s customer service representative. Customer service representatives can help you understand how your account will work before opening it. When choosing a bank, the following checklists may be helpful: Choosing a Bank Use this checklist to compare banks. Bank s name Does it offer the services I need? Is it close to work/home/where I shop? Are the hours convenient for me? Will I be able to use ATMs? Are the ATMs near home/work/where I shop? Is it a credit union? Am I eligible to join? Do the employees speak my language? Are there fees? Are deposits FDIC-insured? Choosing an Account Use this checklist to compare different accounts Type of account How much will I have to deposit to open the account? Will I need a minimum balance to avoid fees? How many checks can I write without fees? What s the fee for a bounced (returned) check? How many withdrawals can I make a month without a fee? Will I earn interest on this account? Can I get an ATM card? Can I get a debit card?

3 Will I have to pay fees to use these cards? Are there other fees? Who s Who at the Bank? When entering a bank, it is helpful to know what function each bank employee serves. Customer Service Representatives. Customer Service Representatives are the people who explain the bank's various accounts and services. They open and close accounts, answer questions, and resolve problems. Tellers. Tellers are the people behind the counter or at the drive-up window who handle your deposits and withdrawals. Usually, tellers do not open accounts, take loan applications, or approve loans. Loan officers. Bank loan officers explain the different loans that are available and help borrowers decide which type of loan is their best option. Loan officers process loan applications and may also approve loans. Investment officers. Investment officers are the people who help customers choose and purchase investments. Branch manager. The branch manager is the person in charge of the bank s branch, or office. Some banks have a single branch, while others have hundreds of branches. Why Keep Your Money in a Bank? There are several advantages to keeping your money in a bank. Establishing a financial history. You work hard for your money. And, if you are like most people, it has to cover a lot needs and wants. Using a checking account can help you keep track of your cash and manage your money. Opening a checking account at a bank or credit union is an important step. It is a sign of financial responsibility that can help you if you need to apply for credit. When you pay your bills on time and use your checking account responsibly, you are establishing a solid financial history. It is safe. If you keep your cash in a glass jar or under your mattress, you are taking some big risks. If you cash is destroyed or stolen, it is gone for good. When your money is in a bank, it is protected against theft by the bank's insurance policy. If the bank is a member of the Federal Deposit Insurance Corporation (FDIC), your accounts are protected (generally up to $100,000) if the bank fails. It is convenient. You cannot get cash at the mall on a Friday night if your money is in a box at home. If it is in the bank, however, you may be able to use an automated teller machine (ATM) to receive cash from your account. You may also pay for your purchases with a debit card or check. Additionally, with a bank account you may be able to arrange direct deposit for your paycheck and even pay bills online. It is low cost. Banks often compete for business by giving away, or offering discounts on their services. As a result, free and low-fee checking accounts are not hard to find. Often, you can avoid fees entirely by keeping a minimum balance in your account. It can help you in emergencies. When you have money in the bank, you can build a cushion for financial emergencies. Financial planners often recommend building an emergency fund of three to

4 six months of income. It may be easier to save money if you set the money aside in a separate bank account. It can help you get credit cards and loans. Borrowing money is easier if you have a good financial history. Good management of a bank account, especially a checking account, sends a positive message to lenders that you are responsible when managing your money. Back to Top Bank Accounts vs. Check-cashing Services Some people prefer not to put their money in a bank. They use cash for everything. But, there are drawbacks to a cash-only lifestyle. People without a checking or savings account may use a check-cashing service to cash their paychecks and buy money orders to pay their bills. Opening a checking and/or savings account may be a better choice. Check Cashing Services Are Expensive. Check-cashing services can be a costly way to manage your finances. While Wal-Mart and SAM S CLUB Associates can cash their paychecks for free at any Wal-Mart store, the fees to cash checks and issue money orders at other businesses are often high. Since most banks offer a free or low-cost checking account, you may be able to save a substantial amount of money. For example, if you ve been paying 2% of your paycheck in check-cashing fees and your bi-weekly paycheck is $400, you will save $8 every payday ($208 a year) with a free checking account. In addition, writing checks instead of buying money orders or cashier s checks can save you even more. Checking Accounts Can Help You with a Budget. Any time you write a check, make a deposit, remove money from your account at an automated teller machine (ATM), or use a debit card to buy something, you should record it in your check register. A check register is small booklet that you get with your checks. Using a register allows you to easily keep track of how much money you are spending and what you are spending it on. For example, if want to save a certain amount of money each month, your check register will help you keep track of how much you are spending. Using your register will help you understand where you can cut back on things that aren t necessary and find some money to put away. Tip: Put the money you want to save from each paycheck in a savings account as soon as you get paid. It may be difficult at first, but you will be surprised at how well you will be able to manage without it, and how fast your savings will grow! These advantages may not be helpful for everyone. If you don t think you would write many checks or if keeping a minimum balance in your account would be difficult, then a checking account may not be for you. If you don t believe that a checking account is the best option for you, think about opening a savings account and depositing money in it when you can. Doing this will allow you to build a positive financial history, and earn interest on your deposited money at the same time. Opening a Bank Account To open a bank account, you will need identification and money for your first deposit. You will not need an appointment. After locating the bank of your choice, go to the bank and tell a customer service representative that you would like to open an account. You will need identification. Usually, the bank representative will ask you for two forms of identification. One form must include your picture. Acceptable forms of ID include a birth certificate, driver s license, employer ID, school or military ID card, or a health insurance card. You may also be asked to provide your Social Security number.

5 Before you can open an account, the representative may check your banking history through a screening company. If you have a positive banking history, you should not have difficulty opening an account. If you are turned down because of something in your financial history, you have the right to view the information and correct any mistakes. The requirements for opening an account may differ from bank to bank. If a bank turns you down, you may try a different bank or a different type of account. You will need money for a deposit. How much money needed for your first deposit depends on the type of account you want to open and the bank s policies. You may be able to start an account with as little as $1. Besides requiring a minimum amount to open an account, banks may require you to keep a minimum balance in the account. If the balance of your account is lower than the minimum balance required, you may have to pay a fee. If you must meet this requirement, try opening your account with enough money to avoid fees. You can use a check or cash for your first deposit. Checking Account Basics A checking account lets you pay for things without using cash. When you open your checking account, the bank usually gives you a small number of checks to get you started. These checks are called starter checks. Once you have used all of your starter checks, you must purchase more checks from the bank or other supplier. These checks are often referred to as personalized checks. Unless your bank offers personalized checks for free, you can expect to pay anywhere from $6 to $25 per box. Wal-Mart and SAM S CLUB Associates can order personalized checks by calling Wal-Mart Check Printing at There are 8 different styles to choose from. Prices start at $5.96 per box of 240, and Associates receive a 10% discount on their order. To view check styles available, log onto Important note: At this time, Associate orders cannot be discounted online. Associates wishing to take advantage of the 10% discount must place their orders by phone at the number noted above. Personalized checks are preprinted with certain information. Yours will have your name and address, the check number, and the name of your bank. Your checks will also have three sets of numbers across the bottom. The first set is called a routing number. The routing number identifies your bank. The next set of numbers is account number. The account number identifies the account as belonging to you. The next set of numbers is the check number. The check number number also appears in the upper right corner of the check. Deposit slips also contain your routing number and account number. On the back of a check, there is an area for a signature or endorsement. Checks must be endorsed before they can be cashed or deposited. You should not write anywhere else on the back of a check. It is a good idea to wait until you are ready to cash or deposit a check before endorsing it. This ensures that if the check is lost or stolen it does not contain your signature, and cannot be as easily cashed by someone else. Writing Checks Today, more and more checks are being processed electronically. Stores are scanning checks and turning them into electronic payments, similar to debit card purchases. As a result, the money comes out of your account much faster sometimes in a matter of hours. Many banks convert paper checks to electronic images that can be processed more quickly through the banking system. This type of processing means that your checks may clear almost immediately. When a check clears, the money is taken out of your account. Money from the checks you deposit to your account, however, may not be available on the same day you make a deposit. To avoid possible overdrafts, you should never write a check unless you have the money in your account.

6 Writing a check is easy; all you have to do is fill in the blank spaces on the check: 1. Date - Write the month, day, and year you are filling out the check. 2. Pay to the order of - Write the name of the person or company you are paying with the check (the payee). 3. Amount box - Write the amount of the check in numbers. Example: $ Amount in words - Write the amount of the check in words. Example: Nineteen and 99/100. Note: The word dollars will be preprinted on the check. 5. Signature - Sign your name as it is printed on your checks. Remember to sign your checks the same way you signed the signature card at the bank when you opened your account. 6. Memo or For line - You are not required to complete this line. However, doing so can be helpful if you are tracking or budgeting how you spend your money. Beware of Check Fraud. Check fraud is a growing threat and check processing errors are always a possibility. Here are some check writing tips to help you avoid both: Always use a pen and write clearly. Never use a pencil since it could be erased and changed. Never write out a check to Cash because anyone could cash it. Do not sign personal checks ahead of time. You could be giving someone a blank check. Do not leave spaces that would allow someone to tamper with the amount of the check. Start writing at the far left of the dollar box and the amount line. If there is a blank space after you ve written the amount, draw a line to fill it. Draw a line after the name of the payee to prevent tampering. If you make a mistake when writing a check, write the word Void across the entire check.. Tear the check up, discard it, and record the void in your check register. Maintaining the Check Register Your check register is where you keep track of all your checking account transactions. There is a column for debits and a column for credits. A debit is any transaction that subtracts money from your account and a credit is any transaction that adds money to your account. Keeping your check register up to date is very important. You must always be sure that you have enough money in your account to cover your expenses. If you write a check for $100, for instance, but you have only $10 in your account, that check will bounce. In other words, the check will be returned without payment. When a check bounces, you may have to pay fees to the bank, as well as, to the merchant who received the returned check. If you bounce checks often, your credit rating could suffer. Here s the story of Forgetful Fred. He forgot to record an ATM withdrawal in his check register. The next day, he bought two DVDs and paid for his purchase by writing a check for $40. Unfortunately, when the bank got the check Fred wrote for the DVDs, only had $30 in his account. His bank returned the check to the store unpaid. The store charged Fred a $25 returned check fee and his bank charged him a $30 overdraft fee. Fred ended up paying $95 for two DVDs. Here are the types of transactions that should be recorded in your register: Debits (Withdrawals) ATM withdrawals Debit card transactions Checks you write Electronic bill payments Pay-by-phone transactions Checking account fees Credits (Deposits) Check deposits Direct deposits Cash deposits ATM deposits Interest earnings

7 Check printing charges Electronic transfers between accounts The following is an example of how a check register should look. Check # Date Description of Payment/Debit (-) Deposit/Credit Balance Transaction (+) 12/01 Opening Deposit $100 $ /03 ABC Music & Movies $22.59 $ /04 Paycheck Deposit $ $ /10 John Doe (Car Repair) $89.80 $ /11 ATM Withdrawal $80 $ /15 Checks (Printing Charge) $14.00 $ Reconciling the Account Statement Each month, you will receive an account statement from your bank. The statement will recap the activity in your checking account for the past month, including: A list of all your transactions, including deposits, withdrawals, fees, and interest earned A list of all the checks you wrote that have cleared (been paid out of your account) A summary of your account for the month A beginning and an ending balance When Your Statement Arrives. When you get your checking account statement, it is time to reconcile, or balance your checkbook. Most bank statements have a section to help you reconcile your account. Compare the statement the bank sends with your check register to make sure they match. To balance your account: Start by writing down the ending account balance from your statement. Look at the deposits listed on your statement and check them off in your check register. If you ve made recent deposits that are not included on the statement, add them to the ending account balance. Subtract any recent withdrawals (including debit card purchases) that are not listed on your statement. In your check register, check off all the checks that your bank statement lists as paid. List the checks that are still outstanding (those that haven t cleared yet) and add them up. Subtract the total of the outstanding checks from the total of your running balance. Once you are done, the total should match the balance in your check register. If it doesn t, check to see if there is a monthly fee or interest credit that you haven t entered in your register. If the numbers still do not agree, go through the process again to see if you have made a mistake. If your balance still does not match the bank s balance, contact your bank to inquire about the discrepancy. Understanding Checking Account Interest and Account Fees Some types of checking accounts pay the account holder interest on the balance. If you have this type of account, the bank can provide you with information about interest rates and how they calculate interest. It is important that you ask for information about fees. Some types of checking accounts may require you to pay a monthly service charge or a per-check charge. Other checking accounts have no fees, provided you maintain a set minimum balance.

8 Depositing Money Into Your Checking Account You can deposit checks and/or cash into your checking account in a variety of ways. You can go to your bank and see a teller, or use an automated teller machine (ATM). You can also mail a deposit to your bank. Most deposits must be accompanied by a completed deposit form and the cash and/or check you wish to deposit. You must also sign the back of, or endorse, any checks you are depositing. Many people do not know that banks often place a temporary hold on a check deposit until it clears. A check clears when the money is received from the paying bank. During this hold period, you cannot use the deposited money. The length of a hold period varies and may depend on your bank s policy, the amount of the check, where you live, and sometimes the time of day you make your deposit. If you plan to use the money from a deposited check shortly after you make it, ask your bank about the collection time. You can arrange to have certain checks automatically deposited. Direct deposits can prevent you from making trips to the bank, and the money from the deposited funds is immediately available for use. The government offers direct deposit for many types of payments, such as tax refunds and Social Security benefits. Overdrafts If you write a check, but do not have enough money in your account to pay it, your account will become overdrawn. Being overdrawn will cause the check to bounce. Typically, your bank will not pay a check if you do not have enough money in your account. The check is returned to the payee. If you used the check to purchase something or pay a bill, the payee might charge you a returned check fee. The bank may also charge you an overdraft fee. You may be able to get overdraft protection for your checking account. With overdraft protection, the bank will temporarily lend you money (up to a certain amount) to cover overdrafts. You will have to pay for the protection, but it can help prevent returned check fees. Banks are now processing most checks electronically instead of moving paper checks around the country. As a result, when you write a check, you can expect it to be presented to your bank for payment very quickly. For example, your account may go overdrawn if you mail checks to pay your bills before payday. Never write a check before you have enough money in your account to cover it. Although the checks you write will clear very fast, this is not always true for checks you deposit. It may take days before a deposit you make is available for use. Ask a customer service representative at your bank about collection times of deposited funds. Other Ways to Access Your Money How do you withdraw money from your checking account? One way to make a withdrawal is to write a check to yourself, and then take the check to your bank and cash it. You may not be able to complete this type of transaction at a retail store, or at banks other than the one in which you hold an account. Automated Teller Machines (ATMs). Most banks offer customers an ATM card for automatic teller transactions. You can also use an ATM to make a withdrawal. An ATM lets you take cash from your account at any time. An ATM card can sometimes be used as a debit card for store purchases. You may have to pay extra fees for the convenience of using your ATM card at other banks. A bank usually charges a fee each time you use an ATM that it doesn t own. Additionally, you may have to pay a fee to use an ATM your bank owns. Be sure to record all ATM fees in your check register.

9 Debit Cards. What is a debit card, anyway? You use a debit card like a credit card to make purchases. When you use a debit card, the money is immediately withdrawn from your checking or savings account. If you do not have enough money in your account, you will not be able to make your purchase. Check with your bank as not all banks offer debit cards. Back to Top Savings Account Basics If you are more interested in saving money and earning interest than being able to write checks, you should consider opening a savings account. A savings account may allow you to save money for buying a house, paying for your children s education, furnishing your family room, taking a vacation, or for emergencies. Like checking accounts, savings accounts have many different features. All savings accounts pay interest. The interest rate you earn depends on many factors, such as competition between local banks, the economy, current interest rates, and the type of account you choose. Interest rates on savings accounts are generally higher than interest rates on interest bearing checking accounts. You may need a minimum deposit to open a savings account. You may also have to keep a minimum balance in the account to avoid service charges. Before opening a savings account, ask the bank for information and review it carefully to avoid unexpected fees. Basic Savings Accounts If you are interested in a basic savings account, you should consider a passbook or statement account. When opening a passbook savings account, you receive a booklet called a passbook. The bank records all your deposits, withdrawals, and interest payments in your passbook. When using a statement savings account, the bank mails you periodic statements. These statements are similar to checking account statements. You are responsible for recording your own transactions and for ensuring your records match the bank s statements. Depositing Money in Your Savings Account You can deposit checks and cash into your savings account by going to your bank in person. If you have an ATM card for your savings account, you may also be able to deposit funds at an automated teller machine (ATM). Additionally, you may be able to arrange to have your paycheck and other checks automatically deposited into your savings account. You can also mail a deposit to your bank. Withdrawing Cash To take money out of your savings account, you can go to the bank and fill out a withdrawal slip. If you have a passbook account, remember to bring your passbook with you. You may also be able to use an ATM card to access the money in your account. You may have to pay a fee to use ATM s that do not belong to your bank. Occasionally, you have to pay a fee to use your own bank s ATMs. Bank Fees Your bank may charge fees to maintain your savings account, especially if your balance is very low. The amount of the fees you are charged depends on the bank and kind of account you have. When opening an account, be sure to compare the bank s interest rate, fees, and other terms with those of other banks.

10 Restricted Withdrawal Savings Accounts Most basic savings accounts let you withdraw money anytime you choose. Other accounts, money market accounts and certificates of deposit or CDs, restrict withdrawals. Money market accounts generally: Earn higher interest rates than basic savings accounts Have higher minimum deposits Have higher minimum balances to avoid fees Restrict the number of withdrawals allowed each month May let depositors withdraw money by writing a limited number of checks Certificates of deposit generally: Pay higher interest than basic savings accounts and money market accounts Require you to keep your money on deposit for a specific time period (referred to as the term ) Require a minimum deposit Renew automatically at the end of the term Each bank decides what interest rates and terms to offer on its CDs. The terms may range from less to a month to several years. Choosing a longer term usually results in a higher interest rate. However, choosing a longer term also means that you will not have full access to your money until the CD matures. It is possible to withdraw money before the end of the term, but the bank will likely charge you an interest penalty on the amount you withdraw. Back to Top Other Bank Services Online Banking The Internet has expanded the services banks can offer and the different options you as a bank customer have for managing your money. Usually, you can access your deposit accounts online to view transactions and move money from one account to another. You may also be able to pay bills online. There may be a fee for online banking and not all banks offer online services. If you are interested in online banking, add it to your checklist as you compare banks. Non-deposit Accounts As a general rule, the larger the bank the more types of accounts and services it offers. Beyond checking and savings accounts, many banks also offer loan and investment services. Electronic Bill Payments In some instances you may authorize your bank to automatically withdraw money from your checking account. Authorizing the bank to pay your bills automatically will help ensure that your bills are paid on time. This will also save you from writing checks and paying for postage. Be sure to keep enough money in your account to cover the bills if you decide to use this service. Additionally, do not forget to record each payment in your check register. There are usually fees for this service. Be sure to record these fees in your check register. Electronic bill payments can also be made directly at some merchants websites.

11 Telephone Teller Many banks allow customers to check account balances and transfer money from one account to another by telephone. Many merchants also allow customers to make check payments by phone. For example, you may be able to pay your mortgage, utility company, and credit card payments by providing your checking account information over the phone. Paying by phone can come in handy when you suddenly realize that a bill is almost due. Always make sure you verify the date your payment will be credited and keep in mind that merchants often charge for this service. Be careful about giving your checking account information over the phone. And, never give it to a company or person you do not know. Remember to record any pay-by-phone payments, and associated fees, in your check register. Loans Banks make a portion of their money by charging interest on loans. You will find a wide range of loans available as you compare banks; mortgages, home equity loans, auto loans, and personal loans are a few examples. These types of loans are called installment loans. When you obtain an installment loan, you agree to pay the loan back, with interest, in periodic payments over a specific period of time. You also agree to pay interest on the loan. Interest rates on installment loans may vary from bank to bank, but otherwise the loans are very similar. Gathering the facts. Considering the interest rate of a loan is important when you are thinking about borrowing money, as well as the loan s annual percentage rate (APR). The APR is the total cost of a loan (interest plus fees) expressed as a yearly rate. Banks are required to calculate APRs so you can easily compare the rates that competing banks are charging. Other things to consider are: What will happen if you are late with a payment? Is there a penalty if you decide to pay off the loan early? Will you get a break on interest if you have payments automatically withdrawn from your checking account? Can you get a better deal if you have other accounts with the lender? Will the interest rate be lower if you choose a short-term loan? Choosing a term. When choosing a term, you must decide how much money you want to borrow, as well as, how long you need to pay the loan back. Generally, the longer the repayment period or term, the lower your monthly payment will be. However, a longer term also means you will have to pay more interest before the loan is paid off. The best strategy is to choose the shortest term available that also allows you to maintain a payment amount you can afford. Applying for a loan. You will need to be approved before you can borrow money. Typically, to be approved you need a good credit history and a steady income. When applying for a loan you must provide basic financial and personal information. When applying for a mortgage or home equity loan, the loan amounts are higher, and the application requires more information. Getting your loan approved. The process varies from bank to bank. Some banks approve loans in the office where you apply. Others have a central credit department that evaluates applications. Usually, approval depends on your credit score. Your credit score is calculated using a formula which assigns points to the information contained on your credit report and on your application. Usually, when applying for an installment loan, you will have the bank s decision within a few days. The process may take longer with mortgage and home equity loans.

12 Choosing a mortgage. Mortgage loans come in many different forms. Interest rates on mortgage loans can be fixed or variable. Some mortgages start with a fixed rate and, after a number of years, switch to a variable rate for the remainder of the loan term. Other mortgages require you to pay interest for several years before you start to repay principal, or the amount you borrowed. Before you apply for a mortgage, talk to a bank loan officer or mortgage professional about the type of loan that will work best for your income and financial situation. Tapping your home s equity. With a home equity loan or line of credit, you are borrowing against the equity in your home. Equity refers to the difference between what you still owe on your mortgage and the current market value of your home. For example, if you owe $50,000 on your mortgage and the market value of your house is $85,000, you have $35,000 of equity in your home. The application for a home equity loan is similar to a mortgage application. If your loan application is approved, you will receive a check for the loan amount. If you apply for a home equity line of credit, rather than receiving a check for the loan amount, you receive an approved credit limit that you can tap into by writing a check. In this instance, you pay interest only on the part of your credit line that you are using. If you do not repay money you have borrowed on a home equity line of credit or a home equity loan, you could lose your house. As a result, you must be careful not to borrow more than you can comfortably afford to repay. Credit Cards Many banks offer credit cards. Credit card deals can vary from bank to bank. You should consider the following things when applying for a credit card: Interest rates Grace periods, or the length of time you have to pay for purchases before you owe interest Cash advance fees How interest is calculated Avoid getting too many credit cards. Having multiple credit card accounts can make it difficult to be approved for other loans, even if you do not use most of your cards. If you make purchases with your credit cards and do not pay your bill in full, the lender will ask for a minimum payment each month. If you pay only the minimum payment, you will pay mostly interest and will not substantially reduce your account balance. It is good practice to avoid charging more than you can afford to pay off in a few months. Investments Banks may also offer investments and a variety of investment services to their customers. There are thousands of different investments, so determining which ones will meet your needs could be a challenge. If you are not an experienced investor, it is a good idea to get the advice of a financial professional before you invest. Back to Top Glossary of Banking Terms Annual percentage rate (APR) - the total cost of a loan (interest plus fees) expressed as a yearly rate. Banks are required to calculate APRs so you can easily compare the rates that competing banks are charging.

13 ATM (automated teller machine) - a machine that lets bank customers withdraw cash from their accounts at almost any time. Many ATMs also accept deposits and payments. Bounced check - a check that the bank refuses to pay because your account balance is less than the check amount. Bounced checks are returned to the payee. Most banks charge bounced check fees. See Insufficient funds. Certificate of deposit (CD) - money you deposit in an account for a fixed period of time (the term) in exchange for earning a stated rate of interest. The interest rate is usually higher than you can get on an ordinary savings account. Check - a document that authorizes your bank to take money from your account to pay the amount you specify to the payee (the individual or company named on the check). Checking account - a bank deposit account that lets you write checks to pay individuals or businesses. Collection time - the time between when you deposit a check in your account and when the money is actually available for your use. Credit card - a card that allows you to make a purchase and pay for it later. When you charge a purchase on a credit card, you borrow money from the credit company. If you do not pay the loan back in full when you get your statement, you must pay interest on the unpaid amount. Customer service representative - a bank employee who is generally responsible for opening accounts. Customer service representatives also answer and resolve customers problems and/or questions. Debit card - a card that allows you to make purchases without cash by having the amount automatically subtracted from your account. Deposit - money that you put into your bank account. Direct deposit - the automatic deposit by an employer of all or part of an employee s paycheck into his or her bank account. Direct deposits are also used by the government and by many corporations to pay Social Security benefits, tax refunds, and stock dividends. Deposit account - another name for a savings or checking account. Electronic banking - banking transactions that take place over the Internet with computers or using phones, ATMs, debit cards, and direct deposit. Endorse - signing the back of a check so it can be deposited or cashed. FDIC (Federal Deposit Insurance Corporation) - the federal agency that guarantees that depositors will get their money, (generally up to $100,000), if the bank fails. Not all banks are FDIC insured. Home equity loan/line of credit - loans that are secured, or guaranteed, by the equity in your home. Home equity is the difference between how much your home could sell for and how much you still owe on your mortgage. Insufficient funds - the term bankers use when there is not enough money in your checking account to pay one or more checks that you have written; sometimes called NSF. See Bounced checks.

14 Interest - the percentage of your account balance that the bank pays periodically in return for the use of your money. Or, the percentage the bank charges you to borrow money from the bank. Mortgage - a loan taken to buy a home. The property secures (guarantees) the loan. If the mortgage is not repaid, the lender can sell the property to avoid losing money. Overdraft - a check that is written for more money than the balance in your checking account. Overdraft protection - a bank service that automatically lends you money to prevent overdrafts. This protection prevents the checks from bouncing. Banks generally charge a fee for overdraft protection. Passbook savings - a savings account that requires you to use a booklet, or passbook, issued by your bank to complete transactions. The bank records deposits, withdrawals, and interest in your passbook. Payee - the individual or entity that is entitled to receive the amount specified on a check. PIN (personal identification number) - a security code that gives you access to your bank account at an ATM machine or store debit terminal. Your ATM or debit card will not work without your PIN. Reconcile - the process of making sure the balance in your check register matches the account balance shown on your bank statement. Returned check fee - the fee a business may charge if your check bounces and is returned. Savings account - a bank account that pays interest on the money you deposit. Statement savings - a type of savings account. Account holders receive periodic statements listing their deposits, withdrawals, interest, and any other transactions. Teller - a bank employee who accepts deposits and loan payments and can give you cash from your accounts. Time Deposit - See CD. Withdrawal - a transaction that involves removing money from your bank account. Back to Top Frequently Asked Questions Q. Why do I have to pay a fee to get money from an ATM? A. When you use an automated teller machine (ATM) that your bank doesn t own, it has to pay the bank that does own the ATM for handling the transaction. Your bank then passes the expense on to you. The bank that owns the ATM may also charge a fee. Some banks charge everyone, including their own customers, a fee to use their ATMs. Q. Why do banks raise and lower their interest rates?

15 A. Interest rates change nationwide because of variations in the economy and decisions by the Federal Reserve Board. Local competition and demand for loans also affect the interest rates that banks charge. Loan rates may rise when demand is strong and fall when demand weakens. Local competition and loan rates affect the interest rates banks pay on deposits. Banks may pay higher interest on deposits to meet competition or if their loan income increases. Q. Why is the interest rate higher for CDs with longer terms? A. A CD is a time deposit. Once a CD is opened, you have to leave your money in the CD for the entire term or pay a penalty for early withdrawal. In exchange for leaving your money on deposit for a long period of time, the bank is willing to pay you more interest. You will not be able to invest the money at a higher interest rate until the CD matures (unless you pay a penalty). Q. Why do I sometimes have to show identification when I cash checks at my own bank? A. By asking for identification, the bank is following a policy designed to protect itself, and you, against the rising threat of check theft. Q. Does it matter if a bank statement has pictures of my paid checks instead of the actual paper checks? A. It should not. Under new federal legislation, banks can provide substitute checks that are legal proof of payment if needed. Your bank is not returning checks to you because most banks are no longer exchanging paper checks. Q. What does compound interest mean? A. The bank automatically adds any interest it pays on your deposit account to your balance. So, the next time you earn interest, you earn it on a higher balance. Over time, compounding can help your account grow more quickly. Q. I ve never had a checking account. What are some of the advantages? A. Your money will be safer in a checking account. Another advantage is that you will have a record of the checks you write so you can keep better track of how you are spending your money. Even if the bank charges a monthly fee for your checking account, it will be less expensive than paying a fee every time you cash a check, or buy a money order. Q. What is an overdraft fee? A. Also known as an NSF fee for not sufficient funds, it is the price you pay the bank if you write a check and do not have enough money in your account to cover it. As long as you keep enough money in your checking account to cover your checks, withdrawals, and other bank fees, you will not be charged overdraft fees. Q. What are the numbers at the bottom of my checks? A. The first number is called a routing number and it identifies your bank. The next number, your account number, identifies the account as belonging to you. The last number is the check number. The check number also appears in the upper right-hand corner of the check. Q. What is the quickest way to deposit my paycheck?

16 A. Direct deposit is the quickest way to deposit your paycheck into your checking account. It is also the most secure way to make a deposit. When using direct deposit through your employer, your check is automatically deposited into your account each payday. Q. What is electronic banking? A. Making deposits, withdrawing cash, and paying bills electronically are all forms of electronic banking. Electronic banking helps eliminate more conventional ways of banking, such as using paper checks and making trips to the bank for every transaction. ATM and debit card transactions, electronic bill payments, Internet banking, direct deposit, and pay-by-phone transactions are also forms of electronic banking. Q. What can I do to prevent check fraud? A. By taking a few precautions when you write a check, you can reduce the possibility of fraud. You should always use a pen and write clearly. Never write out a check to cash, or sign a check ahead of time; anyone could cash it. Do not leave blank space after you write the amount of the check and the name of the payee. To help prevent check tampering, draw a line to fill in these spaces. Back to Top Take a Quick Quiz How much have you learned about the Basics of Banking? Take this quick quiz to find out. The answers can be found at the end of this section. 1. What s the best way to pick a local bank? A. Go where they have the biggest building B. Compare the convenience of their locations and interest rates/terms for the accounts you are interested in C. Just use the phone book D. Choose the one with the most ads 2. What does FDIC Insurance do? A. It protects me from overdrawing my account B. It guarantees the bank pays competitive interest rates C. It insures the bank against losses on its loans D. It protects my deposits if the bank fails 3. What kind of an account is a CD? A. A checking account B. A savings account with no limits on withdrawals C. A savings account that doesn t allow withdrawals during a specific time period D. A type of mortgage 4. Which of the following bank employees take deposits and cash checks for customers? A. Loan officers B. Customer service representatives C. Managers D. Tellers

17 5. Anyone can set up an account at a credit union. A. True B. False 6. Where does a bank get the money to pay interest to it's customers? A. From the bank s stockholders B. From the interest the bank earns earn on loans and from the fees it charges C. From the FDIC D. From the Federal Reserve Bank 7. What is a checking account? A. An account that lets you deposit money and write checks to pay bills and buy things B. An account that lets you trade stocks and bonds C. A file or folder where you store your checks D. A form you will need if you are traveling out of the country 8. Opening a checking account can help you A. Manage your money B. Pay your bills on time C. Establish a positive financial history D. All of the above 9. What could happen if you bounce a lot of checks? A. Your account may be closed B. You may damage your credit history C. You may receive a surprise visit from an NSF collector D. Both a and b 10. What is the most important rule to follow when writing a check? A. Fill out the memo line B. Put next week s date on the check C. Make sure you have enough money in your account to cover the check D. Abbreviate the name of the person or business receiving the check Answers: 1-b, 2-d, 3-c, 4-d, 5-b, 6-b, 7-a, 8-d, 9-d, 10-c Back to Top