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An Examination of the Different Types of Credit

The concept of extending credit and the charging of interest to a borrower is as old as humanity itself. The debate about the issuing of credit has long been worn out. There are those who say that responsible use of credit is a good thing. Others disagree because of the oft troubles that the offer of credit poses to those who lack the ability or responsibility to repay.

Secured or Unsecured. Credit is extended to the borrower in one of two ways: unsecured manner or secured. The unsecured is the most popular (as in credit cards). No money is required to obtain the credit other than the borrowers promise to repay. However, a “secured credit card” exists which is often used by financial institutions to obtain a balance of cash in an account to cover the credit limit. These are not as common.
Whether secured or unsecured, the acceptance of credit requires forethought and planning on the part of the borrower in order to meet monthly expenses and fees that are incurred in the use of the credit line.

Charges and Fees. The lending institution attaches charges to the accounts of the borrowers that rise and fall with the account balance. Also, they may include an annual fee of a fixed amount. While this amount may not seem like much, when multiplied by the number of accounts, it can represent a large return for the creditor and improve their profit and loss.

There are many ways for the financial institution to make money on unsuspecting borrowers. It is imperative then for users of credit to read the fine print on any credit application to determine what the charges are and how they will be figured.

Interest Rates. The interest rates charged are based on market rates. However, variations between institutions should be investigated in order to make sure that one is getting the best rate possible. Creditors are notorious for offering to move balances from one company to theirs in order to obtain the balance owed and get them on their roll as a borrower.

Being a wise user of credit means that the borrower will pay off their balance on or before the due date each month. Also, using credit as a means to “float” between income flows (paychecks, etc) is wise as long as the above principle is not violated.

One can enjoy a successful relationship with a creditor providing that all rules and standards are followed in the use of credit.

Certificate of Deposit and Savings Accounts

What is a Certificate of Deposit, and what is the difference between it and a simple savings account?

These accounts are more commonly known as “CD” accounts. They are insured and virtually risk-free and are similar to a savings account. But, they differ from a savings account in that they are assigned a specific ‘term.’ These terms are often three month, six month or one to five years. There is also an rate of interest assigned to the account. The idea being that the one who deposits the money into a CD account leaves it there until it matures or reaches the end of the term and therefore earns the accrued interest.

The bank offers a higher interest rate in return for being able to keep the money for a specific time period. It gives them more flexibility in their own investing to help them make more money as well. But, they share in that increase by the higher rates of interest. Fixed rates of interest are the most common, but there are some institutions that offer a variable rate. The best rates can be found on deposits of $95,000.00.

You might find these features being offered: a higher interest rate on a higher balance. A longer term offers a higher interest rate. Smaller financial institutions offer higher rates than do the larger ones. Personal CD accounts offer better rates that do business accounts. Higher interest rates can be found at banks and credit unions that are not insured by the FDIC or the NCUA.

Payout of Interest. The CD owner can choose to have the interest mailed in the form of a check or deposited to a checking or savings account. Sometimes you are required to make this choice at the time that the account is opened.

Close Out Penalty. If you close the CD or make withdrawals before the maturity date, there are substantial penalties. Also, you are notified shortly before the CD matures and are given a window in which you can take the desired action of pulling out the money and interest that it earned, or leaving it to roll over into another CD account.

Callable CDs. Some banks may state in their terms that they can close the CD account before the term ends.
CDs are a great way to realize a higher interest rate. But the caveat here is to make sure that you only deposit money that you are certain will not be needed immediately or you will pay dearly for early withdrawal. While not every life situation can be anticipated, it does make sense to only open this type of account after you have already fully funded standard savings and money market accounts that give you a buffer.

What Should I Look For in a Bank?

Selecting a bank is not a difficult process, and armed with information, you can make a good choice as opposed to a mediocre choice in your banking institution. However, making the choice more complicated is the fact that there are a number of ‘online only banks’ that are competing for your business. This is actually good, because anytime there is competition among consumer based businesses; the entities vying for your business are more inclined to improve their service and offerings.

What Are the Basics? Here is a list of banking basics that you should know before looking for a bank. If an institution does not have one of these, you should find out why.

Free interest bearing checking (most provide completely free checking accounts, but some have a minimum monthly amount to which you must keep your balance at or above or there will be a charge).

• Free savings
• Free ATM / Debit cards
• Credit Card offerings
• Lending options (auto, mortgage, personal)
• Money Market Accounts
• Certificate of Deposit accounts

National vs. Local. In the past few years, the banking industry has undergone a consolidation phase where the small banks have bought out by the medium banks which in turn have been swallowed up by the large banks. Chances are high that you have had this experience with one or more of your accounts. Other large national banking entities who are vying for your money are the ‘Internet only’ banks. More about these later.

A bank with a real building into which you can walk and speak to a real live employee might suit your tastes better. These types of banks tend to be more personal and helpful, but that’s not always the case. Locally owned banks pride themselves on being grounded in the community in which they serve. Not only will you see their buildings in your area, but you will also see their advertisements in your local paper, or radio station, as well as sponsoring local events. Some national chains have offices in your community.

Bank vs. Credit Union. One institution that you should locate and check out in your area is a Credit Union. Much like a bank, they have a few ‘selling points’ that they like to push. They are locally owned by members who join ranks in order to place their money into an institution that is governed by them indirectly. Membership sometimes is limited to certain groups, like teachers or firemen, etc, but that is becoming quickly a thing of the past. Now Credit Unions offer membership to those who live in a specific county or location.

Their big selling point is their personal “hands-on” approach to your finances. They appear to be more “tuned in” to you as a customer because, since client is a member, they are accountable to each one. Not bad. They feature great interest rates on their products as well. They have caught up to the Internet banking trend as well, so you can take advantage of that too.

Internet Banks. These have their presence only on the Internet or by phone. There are no ‘brick and mortar’ buildings in your community into which you can walk and talk to someone about your financial concerns. They generally have a wide appeal to those who are very savvy in personal banking and seek out the best place to put their money. Because these banks have no buildings and fewer employees, they claim to offer higher interest rates and lower fees. They also offer the ability to call any time toll-free to talk to an agent. That is a bonus except that you often are speaking with someone who might live across the nation and may not be sympathetic with your situation. Also, you might find that you are speaking with a ‘message taker’ instead of someone who can really help you. If they always say ‘I will have to get back with you on that,’ or ‘I will have someone return your call in 24 hours,’ you probably have one of their hired companies who answer the phones for them and perform rudimentary functions along with basic dissemination of information (which might include the tactic of trying to send you to the website to get more information). This can be frustrating.

Online Banking. Whichever institution becomes your choice, you will almost certainly acquire the ability to manage your accounts online or via an Internet connection. The main benefit of online banking is instant “access” to your money and accounts. When the institution is closed for the day, weekend or holiday, you can log on and manage your money, check your balance, and see if an item has cleared, etc. You can also transfer money between accounts and make payments on loans or to other creditors outside of the institution. All of these are very compelling reasons for signing up for this feature.

What to Watch Out For. Be wary of these items that might catch you unawares:

• Fees. Banks are required to disclose their fees, but they might be in small print on a document that you sign without reading. Be sure to read everything placed in front of you when it comes to your financial transactions so that you do not get caught in a fee that you did not know about.
• Posting Times. Sometimes your money might not be readily available for access to you as soon as you think. That’s because banking institutions have certain times that they update the financial transactions that affect your accounts which come from outside sources. Be sure you ask about this and know what those times are. This might be of concern to you if you automatically deposit your paycheck to your account from your employer. However, generally, if you make a transaction within the bank itself, the balance will be updated immediately.
• Minimum Balance Requirements. Some banks require a minimum balance in order to avoid fees or obtain other preferred customer benefits. Make sure you know what these requirements are.
  If you are very careful and do your homework, you can find a great bank with which to do business. The solid relationships fostered in such an institution can provide you years of satisfaction.

If you are very careful and do your homework, you can find a great bank with which to do business. The solid relationships fostered in such an institution can provide you years of satisfaction.

Comparing Checking Account Features

Along with the savings account, the checking account is the most basic of financial account available to a consumer. This is the account that places you in control of your own finances. You manage the money coming in and going out of this account on almost a daily basis.

If you are new to personal banking, you might need a primer to help you make the right selection to fit your needs because there are differences between accounts. Here are the basics you need to know about a checking account.

Initial Deposit Amount. How much does the financial institution require as an initial deposit to get your account opened? Some have differing minimums.

Free From Fees. Find out if the account is free from monthly service fees and charges. Most banks have free checking, but you might find an asterisk after the word ‘free.’ This is because they might charge you a monthly fee if your balance goes below a certain dollar amount. Others might take the aggregate amount of all of your accounts and keep your checking truly free as long as you have balances opened in other accounts. If the bank you are interested in has these fees, find out how much they are.

Interest Bearing Account. Does the checking account have an interesting bearing feature? In other words, will they pay you to keep your money in that account? If so, how much.

Online Banking Access. Do they offer access to your account via the Internet? Can you make payments from this Internet access? Most banks provide for this type of activity, because it reduces the amount of in person handling of your money and thereby keeps their expenses lower.

Statements by Email. Do they offer sending of your monthly statements via email as opposed to postal service? Again very important to them as they try to reduce the costs of sending out paper statements. The benefit here is convenience to you.

Customer Service. What is there customer service like? You most likely will not find this out by contacting the bank. You will get better answers to this from customers. Find out who some of their customers are by asking around. Their answers may surprise you. Keep in mind that sometimes when a customer has a bad experience, it stays with them a lot longer than good ones. Get two or three good recommendations to help balance out any overly negative opinions that you hear.

Armed with this information, you should be able to make a wise choice about where to place your money into a checking account.

How to Choose a Savings Account

Second to the personal checking account, the savings account is the most basic of financial accounts that there is available to you.

The reason banks came into being was to have a safe place to secure your cash. Then, the concept of earning interest on your balance was born, and hence the savings account was born.

A savings account should be a part of your overall financial plan. You can have a savings account for several purposes, but it does not affect how to choose a savings account. You basically only need to heed this advice:

What is the Purpose? Answer this question first by using these criteria: is it for long-term or short-term savings? The reason that this is important is more for your benefit than anything. You need to attach a purpose to your savings account, that way you will not be as tempted to use the money for things that it is not intended.

Long-term savings is money that you do not touch unless it falls into one of these categories. A major purchase such as a house, car or luxury item that costs a significant amount of money. A major unexpected expense like medical or other emergencies or semi-emergencies. This account is established so that the money is there an available when needed.

Short-term savings is money that you use for small expenses like a major appliance, tires for the car, house repairs, or other such items. While many of these items are unexpected, they would not be in the dollar amount of the larger expenses.

Compare to Other Accounts. It is true that you can earn a better rate on an account like a Certificate of Deposit or Money Market account, but those two accounts have their purposes also, and might have penalties for early withdrawal of funds.

You will want to consider opening a savings account at a banking institution in which you already have a checking account. That way, it is easy to move money between accounts. The short-term account is very good for this purpose. The long-term, not so much, but it still gives you the accessibility if needed.
The interest rates between banks will be competitive. If you shop around, you will find rates that are pleasing, but they might be dependent on you having another account with the same institution.
Keep your money secure and organized with a few savings accounts, and use them wisely.