Keep the Information Flowing

Small contributions go a long way. Your donation to Consumer Action, a 501 (c)(3) nonprofit, nonpartisan organization, can help us cover the cost of research, writing, and translation of our materials. To keep our services free for those who need them. Select an amount to give.

---

---

---

---

Published: April 01, 2000

Questions & Answers About Financial Services

A Guide to Help You Educate Your Clients About the Value of Having a Bank Account

A guide to help community-based organization staff educate their clients about the value of having a bank account. Includes detailed information on banks, checking accounts, electronic transfer accounts (ETAs), credit unions, secured credit cards, loans to avoid and more.

Introduction

The U.S. government estimates that 10 million Americans do not have a bank account. Some people choose not to use a bank. They prefer to patronize a check-cashing establishment to cash their paycheck, and to keep their money at home and use cash to pay bills and make purchases.

Others have been locked out of the banking system because of past banking mistakes. When these people try to open an account, they find their name included in one of the large databases used by banks to screen applicants, such as ChexSystems or TeleBank, and their application is rejected.

But people who don't use a bank run the risk of losing their money or having it stolen. Cash is not replaceable. "Questions and Answers About Financial Services" explains the value of having a bank account. You can pay bills, make withdrawals and save and invest money through a bank or other financial institution such as a credit union or brokerage firm. Now banking is easier than ever, with 24-hour access by ATM, phone and computer. You can use your ATM card to buy groceries, gasoline and other essentials.

This manual was funded by the Bank of America Consumer Education Fund (BACEF). It was written by Consumer Action as a companion to several educational brochures funded by BACEF. These publications, available for free and in bulk to California non-profit organizations, in several languages, include:

• "Banking Basics." Outlines the many good reasons to have a bank account, explains how to open an account and discusses electronic banking issues, including direct deposit and ATMs, as well as the new government-sponsored "electronic transfer accounts" (ETAs). (Available in Chinese, English, Korean, Spanish and Vietnamese.)
• "Successful Savings and Investment." Contains information about building a nest egg and helping it grow, through the use of savings accounts and other interest-bearing accounts and investments. (Available in Chinese, English, Korean, Spanish and Vietnamese.)
• "Where Can I Get Credit?" Discusses the many sources of credit, including some that are less than desirable, such as pawnshops, rent-to-own stores, payday loans and car title pawn companies. (Available in Chinese, English, Korean, Spanish and Vietnamese.)
• "Mas Vale Prevenir...Que Lamentar" (Better Safe than Sorry). Offers the argument via a comic book format that it is safer and easier to keep your money in a bank account than to carry cash. (Spanish only.)

Banks and Banking

Why should I have a bank or credit union account?

• Accounts in banks and credit unions are insured by the Federal Deposit Insurance Corporation (FDIC), a U.S. government agency.
• You can use checks to pay bills, and avoid the hassle and expense of buying money orders, or the danger of losing cash.
• Bank accounts can serve as references for landlords, phone companies and electric and gas utilities.
• You earn interest on the money in your savings account.
• You do not have to pay for cashing or depositing checks.
• Federal regulations protect you against loss when you use an automated teller machine (ATM) or debit card. (These are cards that allow you to withdraw cash and make purchases by accessing funds in your checking or savings account.)

I like to keep my cash at home, where it's always available. Why should I use a bank?

Keeping your money in a bank means that you do not need to have large amounts of cash in your home, where it can be stolen. When you pay for items with cash, there is no paper trail such as a canceled check or bank statement to show where the money went. In a savings account, your money will earn interest. Cash is not safe to send in the mail because it is untraceable if stolen.

Checking Accounts

How does a checking account work?

When you open a checking account at a bank or credit union, you will be given an account number. This allows you to deposit cash or checks into your account. To access your money, you can write a check, go to an automated teller machine (ATM) or get cash back at a store that has a "point of sale" (POS) machine. Your check can be made out to a person or a business, or you can take your check to the bank and cash it. To withdraw cash from an ATM, use your ATM card and personal identification number (PIN). Make a note of each withdrawal so you won't forget it. Each time you write a check or withdraw cash from an ATM, the amount you have in your checking account (your balance) is reduced. Each month, the bank sends you a statement showing your deposits and withdrawals.

How can checking accounts help you manage your money?

Checks can be cashed only by the person they are made out to. Checks make it easy to pay bills by mail. They save you the cost of money orders and the time it takes to buy them.

Shopping, saving money, paying bills and check cashing are easier with a checking account instead of money orders and check cashers. However, good record-keeping is important. When you enter checks and deposits in your checkbook, don't forget to subtract any fees, such as the amount the bank charges you each month for having an account.

If you don't write down every deposit and every withdrawal, you could lose track of your balance and overdraw your account, causing a check to "bounce." This means that the check will not be paid. There is a charge for bouncing a check—depending on the bank or credit union, this charge can range from $5 to $30 for each bounced check.

Is there any way to get a free checking account that does not charge a monthly fee?

Free accounts are available at many banks if you agree to use direct deposit of your paycheck or benefits check. This means you will not receive a paper check, but the money will go automatically into your account. Some banks also offer free accounts if you agree to use the ATM machine for all deposits and withdrawals. With this kind of account, you may be charged a fee if you go to a teller's window. Some banks have fewer restrictions on their free accounts.

Are interest-bearing checking accounts a good deal?

With the possible exception of online-only banks, interest-bearing checking accounts are a pretty bad deal overall. Interest rates at traditional banks often pay less than 1% and have high fees unless you have thousands of dollars on deposit. According to a BankRate.com survey in March 2000, the average balance required to avoid fees on an interest-bearing account is $2,394 and the average monthly fee is $10.23. Conversely, an online banking study done by Consumer Action in early 2000 found that interest paid by Internet banks on checking accounts was as high as 5%-6% and fees were much lower or nonexistent.

Electronic Transfer Accounts

What is an Electronic Transfer Account (ETA)?

Federal payment recipients are encouraged to use direct deposit for Social Security, Supplemental Security Income, veterans benefits, and federal salary and retirement payments. To help federal benefits recipients who have past problems that keep them from opening an account, the government designed a special account called an electronic transfer account (ETA). It is available to anyone who receives a federal benefit, wage, salary or retirement payment. The maximum monthly fee for an ETA is $3. It must provide a minimum of four free cash withdrawals per month and require no minimum balance. For more information, call 888-382-3311 (TTY: 877-326-5833).

As a federal payment recipient, am I required to open an ETA?

No. If receiving your benefits via electronic payments would be difficult or impossible because you have a physical or mental disability or a geographic, language, or literacy barrier, the government allows you to continue to receive a paper check. Federal agencies are prohibited from withholding or delaying your payments if you decide not to sign up for direct deposit.

I already have a bank account. Can I get an ETA?

Yes. ETAs are available to all recipients of federal benefit, wage, salary or retirement payments.

What consumer protections are available to ETA account holders?

You have the same consumer protections available to other account holders at the same financial institution. For example, ETAs are federally insured and subject to the Truth in Savings Act and the electronic funds access protections found in Regulation E.

Where can I withdraw money from my ETA account?

Your ETA debit card works at many ATMs as well as point-of-sale (POS) terminals in grocery stores, gas stations and post offices. Some financial institutions may offer over-the-counter cash withdrawals. You can also make purchases with your debit card.

Is there a limit on overdraft fees on ETA accounts?

The maximum amount that may be charged for an overdraft in an ETA account is $10. This fee covers all the overdrafts that occur within a 24-hour period.

How can I access my ETA balance information?

You can check your ETA balance at an ATM or at your bank. Some banks may allow you to access balance information over the telephone or through your personal computer. Whatever method you use, account holders must be allowed at least four balance inquiries per month without additional charge.

Whom do I contact to ask about direct deposit of my federal benefits check?

Recipients can contact the Federal agency responsible for their payments:

• Social Security Administration 1-800-772-1213
• Department of Veterans Affairs 1-877-838-2778 or 1-800-827-1000
• Office of Personnel Management 1-888-767-6738
• Railroad Retirement Board 1-800-808-0772

Savings & Investments

What is a savings account?

Savings accounts are designed to keep your money safe and help it grow. Banks pay you interest on the money you have in a savings account. You can make deposits into your account, just as you can with a checking account. When you withdraw funds, you use a withdrawal form that you fill out and give to the teller, or you can use your ATM card to withdraw cash at an ATM machine. The machine will ask you if you want to withdraw the cash from your checking or savings account before the transaction is carried out.

What is interest?

Interest is the cost of using money. When you deposit money in a savings account, the bank pays you interest. When you carry a balance on your credit card, you pay the credit card company interest. Interest is usually expressed as an annual percentage rate (APR)—the amount your money would earn if left on deposit for one year. Currently most banks pay 1%-3% interest on savings accounts. If you have $1,000 on deposit for a year, it would earn $10-$30.

What is an investment?

An investment is the use of money to create more money. Investments include stocks, bonds, mutual funds and annuities, a form of investment sold by insurance companies. The money you have to invest is sometimes called "capital."

My savings account earns 2% interest annually—isn't there a better way to make my money grow?

Some of your savings should always be available for emergencies. It's better to keep this money "liquid." This means you can get your money quickly and easily when you need it. Savings accounts are insured by the federal government, and are considered a very safe way to increase your money. Other liquid investments include money market funds—but these are not insured by the government. Although they are considered quite safe, there is always the chance you could lose some or all of your original investment. Many money market funds pay more than double the interest paid on savings accounts.

Like savings accounts, certificates of deposit (CDs) are government-insured investments that often pay double the interest of savings accounts. But you may have to agree to leave your money for six months or a year or longer to get the best CD rates. If you take your money out early, you may have to pay a penalty as well as lose interest income.

You also can invest in mutual funds, stocks or bonds. The value of these investments fluctuates (goes up and down) but they often make money in the long term (a few years or more). But if you have to sell investments in a hurry because of an emergency or an unforeseen expense, you could get less than you paid for them and lose money.

I am interested in investing in a mutual fund, but the minimum opening deposit is $1,000—more than I have available to invest. Is there any way around the minimum deposit?

Yes. Many mutual fund companies waive the minimum deposit requirement if you agree to have a monthly amount (as little as $50) automatically transferred from your checking account each month. You can use this method to buy shares in a mutual fund or an Individual Retirement Account (IRA), which can help your retirement savings grow faster because no tax is paid on the earnings until you are allowed to withdraw it at age 59 1/2.

Opening an Account

How do I open a bank account?

Most banks require two pieces of ID, one with a picture on it. In addition, you will need a Social Security number. If one bank is not satisfied with your items of identification, try another bank—different banks have different requirements.

You must have some money to open an account. Some banks require only $1 to open an account—others ask for $50, $100 or $500. You may use cash or a check to open an account.

I was told I can't open a checking account because I bounced a check when I closed my account at another bank—how can they do this?

Many banks screen potential customers through large databases that keep track of negative information about how customers have handled checking and savings accounts in the past. If you have bounced checks or overdrawn your account, your name may be in one or more of these databases. The largest such companies are ChexSystems and TeleCheck.

Banks don't have to deny new customers who are listed in these databases, but they almost always do. Many people do not know they are in one of the databases until they try to open an account and are denied.

These companies are covered by the Fair Credit Reporting Act because they are consumer reporting agencies. If you are denied a bank account, you have the legal right to receive a copy of your file. If you are denied by a bank, ask which company the bank used. Contact the company directly, stating that you have been denied an account because of its information and request a free copy of your file. ChexSystems keeps items on file for five years from the date the bank first gave them the information.

Following outcry from low income community advocates in 2000, some banks have become more receptive to hearing your side of the story. Try to find a bank officer at the new bank who will help you to remove your name from the database. Sometimes this is possible if you contact the bank that originally reported the problem and offer to pay any outstanding debt. When the debt is paid, ask the bank to clear your record. If one banker is not sympathetic, visit several banks—you may find a banker willing to help you open an account. If you are eligible to join a credit union (see "Credit Unions") you may find that some of these institutions do not participate in database screening programs.

Credit Unions

What is a credit union?

A credit union is a type of financial institution that is like a bank, but is owned by its members and run solely for their benefit. (Banks are profit-making companies owned by their stockholders.) Credit unions are non-profit financial cooperatives that are often run by volunteers and/or a small paid staff. Credit unions bring together people who have a common bond, such as the area they live in, the place they work, their profession or a social organization that they belong to. In order to join a credit union, you must meet its membership requirements.

What kinds of accounts do credit unions offer?

Like banks, credit unions offer checking accounts that let you keep your money in the institution and write checks when you need to pay for something or get cash. Most credit unions have ATMs where you can put in or take out money using the ATM card that goes with your savings or checking account. Many offer safe deposit boxes, which can be used to keep jewelry, paperwork and small valuable items safe.

If I join a credit union, will it be easier to get a loan, even though I have a history of late payments and an automobile repossession on my credit report?

Credit unions in some cases are more willing to take character and personal references into account when making loans—but this is by no means universal among credit unions. Most credit unions rely on credit reports when deciding whether or not to grant credit.

Electronic Banking

What is direct deposit?

Direct deposit is a service of employers, payroll companies, brokerages and government benefits programs that will deposit money due to you directly into your bank account using electronic transfer of funds. Direct deposit is a safer, faster and less expensive alternative to issuing paper checks. When you have direct deposit, many banks will waive or lower monthly checking fees.

What is a check card?

Check cards are ATM/debit cards that can be used everywhere that credit cards are accepted. When you use the card, the amount of any purchases or cash withdrawals is immediately deducted from your checking account. It can be used with your personal identification number (PIN) at ATMs and stores ("debit" function), and without your PIN at stores and restaurants ("credit" function). Using a check card can be a convenient way to pay. But keep a very careful eye on the card—treat it like cash, because its credit function can easily be used by anyone who copies your signature from the back of the card. Note all transactions in your checkbook register so you won't overdraw your account.

What is a "point of sale" transaction?

You can use your ATM/debit card to make purchases at stores that accept such cards—this is called a point of sale transaction. These businesses usually will allow you to withdraw cash from your account while you are making a purchase with your card. In most cases, there is no extra charge for receiving cash back with a debit card purchase.

I have a computer with Internet access. Can I get a better banking deal using an online bank?

If you are comfortable on the Internet and like the idea of accessing your bank account and paying bills any time, online banking is worth looking into. These banks may save you money in fees and give you a much better interest rate, not only on savings accounts, but on checking and money market accounts and certificates of deposit (CDs).

But remember that you can't go to a local branch to make deposits and withdrawals or to straighten out problems in person. Online banks, which usually don't have ATMs of their own, typically give customers a few monthly credits for fees incurred when using other banks' ATMs. After using up your allotted ATM fee reimbursements, you'll pay an ATM surcharge to withdraw money from another bank's ATM.

Getting Good Value from your Bank Account

How can I get the best value on a bank account?

Compare the cost of accounts or services you might use. You can be charged in different ways for a checking account—by monthly fees, for each check you write, for using a teller instead of an ATM, and/or for transactions at an ATM.

Look for a bank with no monthly service fees on its checking accounts—"free checking"—and a low minimum to open an account. There are several ways to get a free account. Some banks offer free accounts if you have your paycheck or government check deposited directly into the bank. Many banks offer free accounts to seniors. Ask your employer's bank if it offers free accounts to the company's employees.

Or, if you have a high balance and want the bank to provide all your financial needs—such as insurance and brokerage services—you may qualify for "relationship" banking, in which fees are waived.

While there are low cost—or free—checking and savings accounts available, even free accounts have what banks call "unusual activity" fees. These include fees for bounced checks and returned deposits, and services such as stop payment orders and printing checks.

If you are charged a fee you believe is unfair or too high, ask to have it reversed.

How can I reduce or eliminate bank account fees?

• Get free checking.
• Meet minimum balance requirements by having checking, savings and money market accounts and certificates of deposit at the same bank. That way, you can combine the balances of all accounts to meet the minimum balance requirements.
• Get credit line overdraft protection. Bounced check fees are among the highest fees you can pay, and you can get hit with more than one per day. It also helps to balance your checkbook regularly and deduct all automated teller machine (ATM) withdrawals.

I've heard that low cost or free checking accounts often have special conditions. What are some of these conditions?

• Having your paycheck, benefits check or federal payment deposited electronically into your account. This is called "direct deposit."
• Always using the bank's ATM—instead of seeing a teller—or a limit on the number of times you can use a teller each month.
• Not receiving your canceled checks. The bank will send you a list of your canceled checks or small reproductions of your checks ("check imaging"). This is called check "safekeeping" or "truncation." If you need a copy of a check, the bank will send you one. (There is usually a fee for this.)
• Limiting the number of checks you write. If you want to write more checks, you will be charged a small fee for each additional check.
• Meeting an age requirement. Many banks have free or low cost accounts for seniors.

How can I keep my banking costs under control?

• Ask for a list of fees when you open a new account. It will show all the charges you could incur. Read the inserts that come with your monthly statement, because this is how banks notify you of changes in fees or terms.
• If the account requires that you conduct certain transactions at ATMs, make sure you understand in which situations you are allowed to visit a teller without paying a fee.
• Banks usually charge more for printing checks than do other companies. Mail order check printing firms offer lower cost checks—and a wider selection of designs and varieties.
• Look into overdraft protection as a way to avoid the expense—and embarrassment—of bounced checks. While overdraft protection is not free, it can cost you substantially less than bounced check fees.
• When you use ATMs that are not owned by your bank, you could be charged by your own bank and by the bank that owns the ATM you are using.

How can I avoid getting hit twice for ATM surcharges?

• Bank with an institution that has ATMs where you work, live and shop.
• Join a credit union or smaller bank that is part of a "no surcharge alliance."
• Use an online bank that gives you some credits against ATM surcharges.
• Get cash back with your purchase at the grocery, large pharmacy chain or convenience store.

Secured Credit Cards

What is a secured credit card?

A secured credit card is a bank credit card that is backed by money you deposit and keep in a bank account. The money serves as security for the card. If you don't pay off your credit card bill, the money in your account will be used to cover that debt. Your deposit earns interest while serving as security, just as it would in any savings account.

Can I get a secured credit card even though I have a bad credit record?

You probably can, but different companies have different requirements. If you don't have any unpaid debts and you've had no negative information about you reported to the credit reporting agencies in six months, you will probably qualify for a secured card. If you are turned down, try another secured card company.

Can I get the money I deposited for a secured credit card out of the bank any time I need it?

As long as there is no large outstanding balance on the secured credit card, you should be able to close the account at any time and your deposit will be returned to you. It may take a few weeks to get your money back, however. If there is a balance outstanding, the company will probably want to withhold that amount until the balance due is paid off.

One credit card company I contacted said it was necessary to pay a $95 "processing fee." Should I pay it?

A new kind of card for people with impaired credit is widely available. These cards do not require a security deposit, but when you look closely at the terms this is not an advantage. Typically, these cards are rip-offs with upfront fees that are charged on the first billing statement you receive. As an example, one such card grants most applicants a credit limit of $250. But when the first bill arrives, there are $225 worth of charges on the card already, for application, processing and annual fees.

Other companies make you pay for credit limit increases. One bank asks cardholders to pay $89 for a $200 credit line increase. This is a rip-off.

There are still banks offering traditional secured cards that do not charge application or processing fees. You should avoid banks that charge these fees. Look for a bank that will pay you interest on your security deposit—even if the bank pays 1 or 2 percent each year, it will add up. (Virtually all secured credit cards have annual fees, however. These can range from $15 to $90 per year.) Bankrate.com is an Internet site that has frequently updated information about secured credit cards.

Loans to Avoid

Is there any reason I shouldn't take advantage of an offer that I saw on TV to borrow money quickly with no credit check?

Many companies offer "quick money" to people in desperate circumstances. But some of those may be bad deals. Some of the loans offered by walk-in store-front lenders have interest rates above 20% and high late fees that can drastically increase the amount you owe if you miss even one payment. Do not enter into any loan without reading all the fine print and asking what will happen if you can't pay the loan back as agreed. The answers should convince you to stay away from high interest loans.

Other types of high cost loans include:

• Payday loans. Check cashing outfits and some banks offer to make short-term loans or cash advances secured by post-dated personal checks or your next direct deposited benefits check or paycheck. The price of such loans is very high. According to the Consumer Federation of America, check cashers are making payday loans at effective annual interest rates that start at more than 250%.
• Pawnshops. These companies accept personal property, such as jewelry, electronics, cameras, musical equipment or guns, as collateral for loans based on the value of the goods. Most pawnshops will lend you less than half an item's resale value. You have several months to repay the loan and are charged very high interest rates until you do so. Many pawnshops also charge storage costs and insurance fees. If you do not repay the loan, or if you default on interest payments, the pawnshop can keep and sell your things.
• Car title pawn. A twist on the pawnshop, these companies ask you to sign over the title to your auto as security for a loan representing only a fraction of its value. Interest payments, storage cost and insurance fees quickly add up, making it hard or impossible to repay the debt. If you default, the company takes your car and sells it.
• Debt consolidation. In return for giving you a loan to pay off a few of your creditors, these companies may charge outrageous interest rates and fees that will jeopardize your limited resources.
• Any loan that jeopardizes your home. Banks and other reputable companies allow you to borrow money against your home's equity (the estimated value of your house minus the amount you still owe). But there are unscrupulous lenders who might give you a loan they know you can't repay just so they can take your home. Your home is the collateral to guarantee that you pay the loan, and if you are unable to make the payments, you are likely to lose your home.

I'm looking for money to consolidate my loans and do some much-needed home repairs. How can I make sure I'm getting a fair deal?

The best defense against fraud, or unrealistic loan terms, is to shop around with several lenders. Compare the terms offered by banks and credit unions. Make sure that you will be able to comfortably meet the payments you will be required to make.

Links from Article

Download PDF

No Download Available

For More Information

Sponsors

Notes

Filed Under

Banking   ♦   Money Management   ♦  

Copyright

© 2000 Consumer Action. Rights Reserved.

Tags/Keywords

banking, money management, checking accounts, investment, bank account, secured credit card, eta, loans to avoid, saving account, questions & answers about financial services

Article Statistics

Article Viewed: 17368