WHY ARE THERE SO MANY
DIFFERENT TYPES OF BANKS?
Not all banks are exactly the same. There are commercial banks, savings banks, savings and loan associations (S&Ls), cooperative banks, and credit unions. Today they offer many of the same services, but at one time, they were very different from one another.
Commercial banks originally concentrated on meeting the needs of businesses. They served as places where a business could safely deposit its funds or borrow money when neces-sary. Many commercial banks also made loans and offered accounts to individuals, but they put most of their effort into serving business (commercial) customers.
Savings banks, S&Ls, cooperative banks, and credit unions are classified as thrift institutions or “thrifts,” rather than banks. Originally, they concentrated on serving people whose banking needs were ignored or unmet by commercial banks.
The first savings banks were founded in the early 1800s to give blue-collar workers, clerks, and domestic workers a secure place to save for a “rainy day.” They were started by public-spirited citizens who wanted to encourage efforts at saving among people who did not earn much money.
Savings and loan associations and cooperative banks were established during the 1800s to help factory workers and other wage earners become homeowners. S&Ls accepted savings deposits and used the money to make loans to home buyers. Most of the loans went to people who did not make enough money to be welcome at traditional banks.
Credit unions began as a 19th-century solution to the emergency needs of people who were unable to borrow money from traditional lenders. Before the opening of credit unions, ordinary citizens had no place to turn when they faced unexpected home repairs, medical expenses, or other emergencies. Credit unions were started by people who shared a common bond such as working in the same factory, belonging to the same house of worship, or farm-ing in the same community. Members pooled their savings and used the money to make small loans to one another.
Although there are still differences between banks and thrifts, they now offer many of the same banking services to their customers. Most commercial banks now compete to make car loans. Many thrift institutions have begun to make commercial loans, and some credit unions make loans to home buyers.
HOW DO I CHOOSE A BANK?
Back in the 1950s, banks often gave away toasters to new depositors, and that made choosing a bank simpler. You went to the one that gave away the best toaster.
Today banks rarely give away toasters, and choosing a bank is a little more complicated. For starters, you should shop around to find out which banks offer the best services and the lowest fees. Some banks charge a monthly fee if your account falls below a certain level, and that fee can be higher than the interest your account earns. Other banks may charge fees for many types of transactions. You don’t want that.
In certain states, such as Massachusetts, the law prohibits banks from charging fees on savings accounts held by people under the age of 18 or over the age of 65. Find out if your state has such a law.
Other things you might want to consider:
1. Does your bank pay depositors a competitive interest rate?
2. Is the bank in a convenient location and are its business hours convenient for you?
3. Is your deposit insured by the FDIC (Federal Deposit Insurance Corporation)?
4. Is the bank a good corporate citizen? Does it invest in your neighborhood?
5. And last, but certainly not least, does your bank provide courteous and efficient service?
Before you open an account, ask a few people if they are happy with their bank. And do some comparison shopping because all banks are not the same.
WHAT TYPES OF ACCOUNTS DO BANKS OFFER?
People use banks for different purposes. Some have extra money to save; others need to borrow. Some need to manage their household finances; others need to manage a business. Banks help their customers meet those needs by offering a variety of accounts.
Savings accounts are for people who want to keep their money in a safe place and earn interest at the same time. You don’t need a lot of money to open a savings account, and you can withdraw your money easily.
Certificates of deposit (CDs) are savings deposits that require you to keep a certain amount of money in the bank for a fixed period of time (example: $1,000 for two years). As a rule, you earn a higher rate of interest if you agree to keep your money on deposit longer, and there is usually a penalty if you withdraw your money early.
Individual retirement accounts (IRAs) are savings deposits that offer an excellent way to save for your later years. You don’t have to pay tax on the money you deposit in your IRA until you withdraw it. But there is often a significant penalty if you withdraw your funds before you reach a specified age (usually 59 or older).
Checking accounts offer safety and convenience. You keep your money in the account and write a check when you want to pay a bill or transfer some of your money to someone else. If your checkbook is lost or stolen, all you need to do is close your account and open a new one so that nobody can use your old checks. (When cash is lost or stolen, you rarely see it again.) Another attractive feature of a checking account is that your bank sends you a monthly record of the checks you have written, and you can use that record if ever need to prove that you’ve made a payment. Banks sometimes charge a fee for checking accounts, because check processing is costly. Many banks also offer no-fee checking and checking accounts that earn interest if you agree to keep a certain amount of money — a minimum balance — in the account. But these accounts are limited to non-business customers. Banking laws almost always require businesses to use regular checking accounts that do not pay interest.
Money market deposit accounts are similar to checking accounts that earn interest, ex-cept that they usually pay a higher rate of interest and require a higher minimum balance (often $2,500 or more). They also limit the number of checks you can write per month.
Finally, banks do not always call their accounts by the same names. Often, they choose distinc-tive names in hopes of attracting customers. But there can be a real difference between one bank’s accounts and another’s, so shop around.
IS IT DIFFICULT TO OPEN A BANK ACCOUNT?
You’ve finally decided to take the plunge. With your cash tucked deep in your pocket, you walk into the bank and ask to open a savings account.
The bank’s receptionist directs you to a desk where a customer service representative will help you with the paperwork. To your surprise, the only form you need to fill out is a signature card, which requires you to sign your name and then print your name, address, telephone number, date of birth, social security number, and your mother’s maiden name (as a means of further identification). After you complete the signature card, you receive a bank book (sometimes called a passbook) that lists your account balance (the total amount of money in your account).
Whenever you make a deposit (put money in) or a withdrawal (take money out), the transaction is recorded in your bank book. It is very important for you to keep track of the activity in your account.
You don’t need lots of money to start a savings account. Some banks let you open one with as little as $20. Nor do you need to wait until you are 18 years old. In most cases, you can open a savings account as soon as you are old enough to sign your name, or even earlier than that if you open the account with a parent or guardian.
