OR
Student
Lesson 10
Use Banks
Which one are you?
The benefits of being banked include:
Protection from theft, misplacement, and fire.
Pay bills online and purchase items with a debit/credit card.
Transfer money to each other via Venmo or other apps/bank services.
Earn interest.
Distrust of Banks
Stu
I opened up his first checking account at 18 with my life savings of $950. I was excited about my new debit card and financial freedom. I signed up for overdraft protection since, “why not?” After a few months, I checked my balance and noticed a ton of fees. I couldn’t quite understand what was going on. I tried to be careful, but the fees just kept coming. My savings were gone now, and so much of it went to fees! I then decided to not use a bank anymore and keep my earnings hidden in my room.
AVOID OVERDRAFT PROTECTION
According to the Center for Responsible Lending, U.S. consumers paid $17 billion in overdraft and NSF fees in 2015, which amounts to $53 for every American.
Overdraft means you try to pay for something and don’t have enough money in your account to cover the cost of that purchase.
Surprisingly, signing up for overdraft protection actually means two things:
- You will not know when you overdraft since your card will not be denied.
- You will be charged a large fee every time you overdraft your account.
Do not choose overdraft protection
Gloria
After moving to the U.S., I opened up a checking account. They told me it was free, but I kept seeing random fees. At first I didn’t really pay attention, but my balance started to really go down. I began to pay attention and noticed so many different fees, including a service fee, paper statement fee, and foreign transaction fee. This is not a free checking account!
AVOID CHECKING FEES
The average American with a checking account pays about $8 per month in fees, but younger customers are paying a lot more. 18-25 year olds are paying $19 in fees per month in fees while 58-76 year olds are paying $2 per month, on average in checking account fees.
76% of surveyed Americans do not pay any checking fees.
- Ensure you have a free checking account. In order to get a free checking account you may have to maintain a minimum balance or sign up for direct deposit. Ask your bank, or change banks if they are charging you a fee you can’t avoid.
- Only use ATMS in your bank’s network. Do not settle for ATM fees.
- Ensure that automatic payments are scheduled after your paycheck is automatically deposited in your checking account.
TOP MISCONCEPTIONS ABOUT BANK
Banks charge fees every time you use your debit card.
- Not true in almost all cases.
Going to the bank takes up a lot of time.
- Use phone/computer for most services.
Banks exist to make a profit.
- Not credit unions…but, having profit, within reason, simply ensures sustainability of business.
Banks charge $40 every time you overdraw your account.
- Mostly true, but banks will almost always credit the fee back if the first or second time.
If a bank is robbed, you will lose money.
- All banks are insured up to $250,000.
Banks will take your house away
- Only if you stop paying a mortgage with them.
Emergency Fund
Having an emergency fund at a bank is MOST important foundational financial behavior. It is crucial to avoiding future debt or relational hardship.
4 bad alternatives to emergency fund
Payday Loans
- Payday loans are advertised as short-term credit lines, typically extended for two weeks to help consumers get through to their next paycheck.
- Typical payday loan: Borrow $200 for 14 days. Pay between $23 and $76 in interest. This equates to almost a 1,000% annual interest rate (APR).
Credit Cards
- Better than payday loans, but still a very expensive way to pay for things.
Loan from family or friend
- Low/No interest.
- Potential to strain/harm relationships.
- Sometimes more stress than borrowing from institutions.
Pawn loan
- Bring in something valuable to you.
- If you can’t pay the lender back, they simply keep the pawned item and you owe nothing further,
Case Study: unexpected car repair of $350
Choose Online Savings
Perks of choosing online savings bank
- Much higher interest rate (sometimes 30-60 times higher).
- A greater barrier between checking and savings boots will-power.
A few considerations
- Make sure FDIC insured (government will pay you up to $250,000 if bank fails).
- Transfers between savings and your checking account are free, but take 1-2 days to process.
- Regulation D limits you to 6 withdrawals or transfers from savings during a calendar month.
Banking Video
Open Bank Account
- Need:
- Any form of ID
- Individual Tax Identification Number (ITIN) or SSN (if you don’t have an ITIN, apply).
- Initial Deposit
If denied:
- Order a ChexSystems, or Early Warning, or TeleCheck Service report.
- Pay any outstanding balances
- Fill out ChexSystems Dispute Form if there are mistakes.
Consider credit unions:
- Often have better customer service, less fees, and cheaper products.
- Must have a common bond to apply (e.g., location, vocation, membership).
- Search credit unions in your area.
If no checking account available, use prepaid debit cards:
- Load money onto these cards and use them to pay bills, receive paychecks.
- Does not improve or build credit.
- May include monthly fees.
- Shop for prepaid debit cards
Open Online Savings
- Find an online savings account, link this account with your checking account, and deposit money into this account.
- WARNING: Usually the online bank with the highest interest rate is only offering this rate for a few months (i.e., it is a teaser rate).
Consider Community Savings Vehicle:
Build Emergency Fund
- Start with a $300-$500 short-term emergency fund.
- Pay off debt to increase income.
- Work towards having at least 3 months of emergency fund savings.
Monthly Income $___________ x 3 = $______________
Transition
