Stay Updated:

Banking

A bank or credit union can provide a safe place to store your extra cash and credit. These institutions offer several services like savings accounts, certificates of deposit, and checking accounts. They use money deposited in them to fund lending services like home mortgages, business loans, and car loans.

Banking is very good business if you don't do anything dumb.Warren Buffet
Major Banks

What is a Bank?

A bank provides a safe place to store your cash and offer credit. The banking industry handles cash, credit, and other financial transactions. They also offer savings accounts, certificates of deposit, checking accounts, and other ways to lend money.

Banking is a key driver of the U.S. economy and it provides the liquidity many people and families need to make larger purchases and investments, like buying a home for the first time.

How does a bank work?

A bank has many types of accounts you can take advantage of. Primarily people use banks for their checking accounts and savings accounts.

 

The FDIC, or the Federal Deposit Insurance Corporation, insures all banks in the USA for a set amount. This means your money is safe if anything were to happen to the bank. Typically this amount is capped at $250,000.

 

The banks typically don’t keep large amounts of money in their building. Instead they take advantage of the Federal Reserve. The Federal Reserve houses the money and requires the bank to hang onto a certain amount of cash, which is called the reserve requirement.

 

A bank makes money in a few ways but most of the time they make money on banking fees, like late payment fees, and interest payments on money they lend.

Types of Banks

There are several types of banks, but there are three primary types: Commercial, Community and Investment Banks.

 

A commercial bank provides services to individuals and businesses and typically operates in a much larger geographic area.  These types of banks also back other financial services, like retailers. There is a good chance if you open a retail credit card you’ll be opening an account with a larger bank or credit provider.

 

A community bank, or credit union, is much smaller than a commercial bank. These are typically targeted towards a certain market, demographic or geographic area. For example, a community bank would be one that was created by a regional company to help their employees buy cars, houses, open savings accounts and more. Not all, but many of these are funded and run by their community members. In some cases they have stricture requirements but they usually have more favorable rates, terms and acceptance criteria once you’re a member.

 

An investment bank is strictly focused on investments in the stock market, bonds, mutual funds and other means of long and short-term investment plans. These types of banks not only manage a person’s money for them, they also help businesses with mergers and acquisitions. You most likely will never hear someone call them investment banks anymore as they are usually referred to as commercial banks.

 

The 10 largest banks in the United States:

  • JP Morgan Chase
  • Bank of America
  • Citigroup
  • Wells Fargo
  • Goldman Sachs
  • Morgan Stanley
  • U.S. Bancorp
  • TD Bank, N.A.
  • PNC Financial Services
  • Capital One

What is a central bank?

A central bank is the backbone of the modern banking system. It’s an independent authority that polices money and regulates banks. It also provides resources into financial research and education. The primary goal of a central bank is to regulate and stabilize the nation’s currency.

 

In the United States, we call this the Federal Reserve.

 

The Federal Reserve has four primary tools to stabilizing and regulating the US currency:

  • They buy and sell securities from banks. If the Federal Reserve buys securities from banks it is adding money back into the economy. If it sells securities to the banks it is pulling money out of the economy. Typically we see interest increase and decrease as the Federal Reserve adds and removes money.
  • They set a reserve requirement that lets a bank lend a certain amount compared to its deposits. This is something many don’t know or realize – banks are heavily regulated in how much money they can give out.
  • The Federal Reserve sets a prime interest rate for banks and lenders that they must follow. This is the rate for their best candidates and not all candidates, they are able to increase the interest rate based on creditworthiness.
  • They manage a discount window which allows the banks to borrow funds to support liquidity and transactions (like a business buying another business).

What is a Credit Union?

A credit union is very similar to a bank but there is a major difference, it’s not run for a profit like a bank is. A credit union isn’t taxed which means they can offer higher interest rates on things like a savings account and lower interest rates on things like an auto loan.

 

Another term for a credit union is a “financial cooperative” which means the members share a percentage of the bank. This means that each member essentially owns a piece of the business with their cash.

 

A credit union typically has higher requirements to join and they vary quite a bit.

How does a credit union work?

A credit union is owned and operated by its members who have to meet specific qualifications. Essentially the members pool their money together and create a source for loans and other financial products. To join a credit union you usually need a higher credit score and a one-time payment to join. If you haven’t yet, you should get a free credit report to make sure your credit history isn’t in jeopardy.

 

Historically credit unions would look at your employer, work history, place of worship, school or even geographic location. They were pretty restrictive but have opened up quite a bit in the recent years.

 

The primary reason they were so restrictive is because they offered some of the best rates you could get since it was all member funded. A good way to view a credit union is that it’s a small community of, usually, like-minded people.

 

Each member of the credit union can vote for, or run to be on, the board of directors and they each have a say in how the credit union is run.

 

A credit union usually offers the same services that a bank does but at a much smaller scale. In some cases, depending on the size of the credit union, they can only lend out specific amounts.

Advantages of a Credit Union

  • More-Personalized Experience
  • Higher Interest Rates on Investment Accounts & Savings Accounts
  • Lower Interest Rates on Personal Loans, Auto Loans, Mortgages and Credit Cards
  • Lower Banking Fees
  • Community Focused & Usually Participates in Community Events

Disadvantages of a Credit Union

  • Stricter Membership Requirements
  • Limited Funds to Lend
  • Delayed Technology Advances (Apps, Online Banking, etc.)
  • Limited Locations & ATMs

Bank vs Credit Union: Which to Choose?

As stated, the biggest difference between a credit union and a bank is that one is for profit and one is not-for-profit.

 

A bank’s job is to be as profitable as possible to its shareholders. A credit union’s job is to serve the customer(s) with the best services possible.

 

A bank will offer lower interest rates on things like savings accounts and higher interest rates on things like auto loans. This is to drive up their profit margin.

 

A bank, usually, is more lenient on lending and will be much quicker to offer you a credit card, auto loan or even a mortgage with no restrictions on credit or income. There is no right or wrong way to go about where you should bank or store your money but if you’re able to, a credit union is typically the best way to go.

 

In many cases it is best to have accounts with a bank and a credit union to take advantage of services offered at both.

How to Choose a Bank or Credit Union

There are so many options when it comes to choosing a bank and it’s very easy to become overwhelmed with all of the “fine print” that comes with them.

 

How do you choose between national banks, local credit unions, community banks or online only banks?

 

You’ll have to review all of their services and features that provide value to you and your financial goals. Here are some important areas to review before deciding on which bank to bank with:

  • Types of Accounts – A national bank is going to offer more of a “one size fits all” approach to banking.
  • Banking Fees & Rates – Check out your bank or credit union’s website before applying for an account to make sure you’re getting the base rates for your money. You’ll want to understand what fees some banks charge as there are usually some hidden requirements to avoid these fees (like using your card 5 times per month).
  • ATMs & Branch Locations – Most banks or credit unions nowadays offer nationwide ATMs but it is good to double check. ATM fees can add up drastically if you’re not paying attention.
  • Technology – The best banks for technology are national or online-only banks. You won’t get the latest tech with some credit unions or smaller banks.
  • Security – You’ll want to make sure your bank has FDIC coverage which protects up to $250,000 of your money. You can always check FDIC or NCUA to see if your bank is covered.

Banking Fees

A bank fee is a nominal fee that is charged to a consumer for a variety of reasons related to account set-up, maintenance and other transactional services. A bank, and in some cases credit unions, will use these fees to help pay for services and push profits higher. Fees from a bank can be the result of a variety of activities from late payments, yearly account fees and others.

Most Common Bank Fees

The three most common bank fees are:

  • ATM Withdrawal Fees
  • Overdraft Fees
  • Maintenance Fees

ATM withdrawal fees are one of the most common bank fees and one of the fastest-growing fees out there. You’re usually charged an immediate $2.50 to use an ATM that doesn’t belong to your bank. In many cases your own bank will charge you another $1.50. You can be charged up to $4 per ATM withdrawal.

 

The best way to avoid ATM fees is to stick to using your own bank and ATMs or by getting cash back from stores as you’re not charged the withdrawal fees.

 

Overdraft fees happen when you spend more than you have in your account. For example, let’s say you have a bill that is $50 but you only have $40 in your account then you’ll be charged the $50 and a $35 overdraft fee. In some cases, you can have multiple payments not clear and you can be charged a few overdraft fees by the bank.

 

The best way to avoid overdraft fees is to watch your balance and set up a savings account that your checking account can pull from if you overdraft. The easiest way to stop overdrafting is to remove overdraft protection which will auto deny any purchase that will force your account to go negative.

 

Maintenance fees are a fee that get charged to you to maintain your account. Usually these fees range from a few dollars per month to $12 per month based on the bank.

 

The best way to avoid account maintenance fees is to meet the terms the banks outline, such as carrying a larger balance or direct deposit.

How to Avoid Banking Fees

Most bank fees are avoidable, but not all of them are. There are some that just come with normal financial transactions, like buying a house, and others that are more avoidable because they relate to your financial habits.

 

A majority of Americans pay little or no monthly bank fees and in most cases it comes down to making the right decision as it relates to your bank usage. For example, try to stick to only ATMs that belong to your bank.

 

Here are some proven tips to avoid banking fees:

  • Utilize free checking and savings accounts.
  • Sign up for direct deposit whenever you can.
  • Always keep a minimum balance.
  • Have more than one account at a single bank.
  • Use only the ATMs provided by your bank.
  • Don’t spend more money than you have.
  • Sign up for email, text and phone alerts for your account usage.