Banking Chapters 5

Types of ServicesTypes of Services

• Banking– safe storage of funds– known as time deposits– includes savings accounts and certificates of deposit

• Payment Services– transfer money from your account to businesses or

individuals– known as demand deposits– most common service is the checking account

• Borrowing– credit cards, loans, and mortgages

Electronic Banking Services

• Direct Deposit – paycheck goes directly to the bank

• Automatic Payments – banks will withdraw a certain amount from your account to pay bills

• ATMs– use for withdrawals, transfers, deposits– need a debit card or cash card and your PIN– watch out for fees!– call bank immediately if your debit card is stolen!

• w/in 2 days: $50 liability; after 2 days: $500+ liability

Plastic Payments

• Point-of-Sales Transactions– use your debit card– if system is online, you will use your PIN and

money is deducted right away– if system is offline, you will not use your PIN;

money is deducted w/in 2 days

• Stored-Value Card: – prepaid cards for things like gas, school

lunches, public transportation– can be disposable or reloadable

Financial Institutions

• Federal Deposit Insurance Corp. (FDIC) – insures each bank account up to $100,000

• Deposit-Type Institutions– Commercial Bank: for-profit bank offering a full range

of services; must be chartered by the government– Savings and Loan (S&L): have evolved to be much

like a commercial bank– Mutual Savings Bank: specialize in savings accounts

and mortgage loan; often have more favorable interest rates for consumers

– Credit Union: non-profit institution that is owned by its members who usually have a common bond; offers a full range of services; often have more favorable interest rates for consumers

Financial Institutions (con’t.)

• Nondeposit-Type Institutions– Life Insurance Companies: primarily protect

against the risk of early death; some policies contain savings and investment features

– Investment Companies: combine your money with other investors and use this money to purchase stocks and bonds

– Finance Companies: provide loans to people who have a hard time getting a loan elsewhere; interest rates are usually higher than most other lenders

Bank Selection Process

1. Stop by the bank and pick up brochures and speak to a service rep about bank’s services

2. Study the bank brochures and discuss features with your parents

3. Do on-line research about banks benefits, fees, and charges

4. Open your account and start managing money

Savings Plans

• Regular Savings Accounts

• Certificates of Deposit (CD)– Require you to leave your money with the

bank for a specified time period– If you withdrawal the money before the

maturity date, you will pay a penalty– Require a minimum deposit amount– Beware the automatic rollover

Savings Plans (con’t.)

• Money Market Accounts– interest rate varies from month to month– generally has higher interest than a regular savings

account, but usually requires a minimum balance– may write a limited number of checks

• U.S. Savings Bonds– purchase for half the maturity value of the bond– maturity dates vary based on the interest rate– exempt from state and local taxes

Evaluating Savings Plans

• Rate of Return– percentage increase in the value of an

investment– divide the interest by the original investment– compounding usually makes your actual

return greater than the stated interest rate; look for the annual percentage yield for your compounded rate of return

– ALWAYS use APY or APR to compare your investment rate of return

More on Evaluating Savings Plans

• Inflation – general rise in prices

• Taxes – tax exempt plans have better returns than taxable plans

• Liquidity – ability to turn investment into cash

• Restrictions and Fees

Checking Accounts

• Types– regular: usually need a minimum balance or a fee is

charged– activity: no minimum balance but fees are charged

each time you make a deposit or write a check– interest earning account: earn a small amount of

interest as long as a minimum balance is maintained

• Overdrawing your account (Bouncing a check) will result in a bank fee of as much as $30

• Overdraft Protection: avoids “bounce” fee by taking out a loan instead

Using a Checking Account

• When you open the account, you will be required to fill out a signature card.

• Checks you are depositing must be endorsed with your signature and account number.

• When you write a check, you must sign it using the signature you wrote on the card.

• There is usually a gap from the day your write the check to the day the bank receives the check– checks that you have written but the bank has not received are

called outstanding checks– checks the bank has received are called cancelled checks

• If a check is lost or stolen, request a stop payment order. You will be charged a fee, but the check cannot be cashed.