- The Ascent
Beginner's Guide to Banking
Kailey is an industry specialist covering bank accounts, credit cards, and all things personal finance. Her work has appeared on USA Today, CNN Money, Fox Business, and MSN Money.
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Most of us wouldn't feel very safe keeping all of our hard-earned cash under our pillows at night, so we open bank accounts and park our cash there instead. Banks and credit unions help keep your money safe and they can also grow your wealth, depending on the type of bank account you choose.
Picking the right bank or credit union account can be challenging, especially for those who are new to banking. By the end of this guide, you should understand the differences between banks and credit unions, types of bank accounts, what to look for in a bank account, and how to open a bank account and fund your account.
Bank vs. credit union vs. online bank
The first decision you'll have to make is whether you'd like to put your money in a brick-and-mortar bank, a credit union, or an online bank.
What is a bank?
Best for: Those who want a variety of product offerings, advanced online tools, and easy access to their funds.
Not for: Those who want the lowest fees and the most favorable interest rates.
You're probably familiar with brick-and-mortar banks, even if you've never had an account with one. Banks are for-profit institutions owned by a group of investors. Some banks are regional while others are national, but they're typically larger than credit unions. Most have hopped on the bandwagon with online banking features, like mobile check deposit and online bill pay, but you can still visit a branch location in the bank's service area if you'd like in-person support.
Anyone can join a bank and they'll usually enjoy a wider variety of services than credit union members, including checking and savings accounts, personal and business loans, credit cards, certificates of deposit (CDs), money market accounts (MMAs), and other investment products. However, because banks have so many buildings to operate and people to pay, they often charge higher fees and offer lower interest rates on checking and savings accounts than credit unions or online banks.
Up to $250,000 of the money in your bank account is protected by the Federal Deposit Insurance Corporation (FDIC). This means that if the bank were to go under, the FDIC would pay you the amount you had in your account up to this limit so you wouldn't lose your savings.
Many checking accounts also offer a sign up bonus. For the best bonuses this month, check out our roundup of the best checking account promotions.
What is a credit union?
Best for: Those who want good customer service and more favorable interest rates than brick-and-mortar banks.
Not for: Those interested in rarer product offerings, like business bank accounts or money market accounts (not all credit unions offer these).
Credit unions are nonprofit organizations owned by their members. Each defines its membership differently. Some only require you to pay a small membership fee to open a credit union account while others only allow people in a certain geographic area or members of a certain organization, like the military and their family members, to join. If you're considering a credit union, look over its membership requirements to ensure that you're eligible to join before you start filling out any applications.
Most credit unions are small local or regional institutions. They usually don't have the advanced online banking tools or the large network of branches or surcharge-free ATMs that can be useful to those who travel often. They also tend to have fewer product offerings than larger banks. But they still draw many customers because their customer service is often better than some large national banks' and they often have lower interest rates on loans and higher interest rates on checking and savings accounts.
Credit unions are not backed by the FDIC. Instead, they're backed by the National Credit Union Association (NCUA), which works the same way as the FDIC does for banks, insuring customer funds up to $250,000 per account against credit union failure.
What is an online bank?
Best for: Those seeking the best interest rates on loans and bank accounts and advanced online banking tools.
Not for: Those who prefer in-person customer support and those who need fast access to their cash.
Online banks are fast becoming one of the most popular places for people to park their cash. They're similar to brick-and-mortar banks, except they don't have any branch locations. If you need help, you must contact the online bank by phone or email. Avoiding branches helps keep online banks' overhead costs low and they are able to pass their savings along to their customers in the form of high interest rates on bank accounts and low interest rates on loans.
The biggest drawback of online banks is that accessing your funds can be more difficult. Some banks have ATM networks where you can withdraw cash for free, but if you don't live near one of these or you need to withdraw a large sum of money at once, you'll probably have to transfer the funds to a bank account in your name at a brick-and-mortar branch so you can get your money out. This can take several days.
There is no clear winner in the brick-and-mortar bank vs. credit union vs. online bank battle. It all depends on how you plan to use your money and what you value most -- easy access, favorable interest rates, customer service, or something else. Understanding the pros and cons of each type of financial institution can help you begin narrowing down your options.
Check out our shortlist of the best online checking accounts if this is the right option for you.
Choosing the right type of bank account
Most banks and credit unions enable you to place your money in a checking account, a savings account, a CD, or an MMA. I discuss the pros and cons of each of these below.
What is a checking account?
Best for: Those who want a safe place to keep their money with few restrictions on accessing it.
Not for: Those who want to earn a lot of interest on their money.
You should open a checking account for money you plan to use for everyday spending. Unlike savings accounts, CDs, and money market accounts, there are no restrictions on when or how often you can withdraw money from a checking account, as long as you don't withdraw more money than you have. They're ideal for paying bills and you can easily turn your checking account funds back into cash as needed with the included debit card. You can also purchase checks for your checking account if you prefer to pay this way.
While some online checking accounts offer interest, these accounts are rare, and even the best interest-bearing checking accounts usually have annual percentage yields (APYs) lower than most savings account APYs. If you're hoping to grow your money, you're better off using one of the other bank accounts listed below.
Some checking accounts charge a monthly maintenance fee, but they might waive this if you meet certain requirements, like having a certain number of deposits per month or maintaining a minimum balance. Other fees you might run into with checking accounts are ATM fees for using ATMs outside of your bank or credit union's network or overdraft fees if you try to withdraw more money from your checking account than it contains.
What is a savings account?
Best for: Those who want a low-risk way to grow their money.
Not for: Those who plan to withdraw money frequently from their account.
A savings account is a low-risk account where you can earn interest on your money. Banks and credit unions take the money you place into your savings account and use it to finance loans for other customers. Then, they give you a portion of the interest they earn from the borrower. The average savings account APY is 0.09%, but some high-yield savings accounts offer APYs in excess of 2%. A higher APY will help your savings grow more quickly. While you can technically keep the money in your savings account indefinitely, savings accounts are best for money you plan to use in the next three to five years. Invest longer-term savings if you hope to beat inflation and actually increase your wealth over time.
A savings account isn't the best choice if you expect to withdraw cash from your accounts often. That's because it's subject to Regulation D. This is a federal law that restricts savings account holders to six "convenient" withdrawals or transfers per month. Convenient transactions include transfers made online or over the phone, bill payments or other recurring transfers, and overdraft transfers. If you have more than six of these per month, your bank or credit union will charge you extra fees. You can still make additional "inconvenient" withdrawals, though, including visiting a branch location if your financial institution has them or requesting a mailed check from your bank.
Savings accounts don't usually include checks or debit cards for accessing funds. You may need to transfer funds to a checking account before you can withdraw the money via check or debit card payment. You also need to be mindful of the account's minimum balance requirement. If it has one and you let your balance fall below that level, you might incur additional fees.
If you’re looking for a savings account, here’s our list of the best savings accounts.
What is a certificate of deposit (CD)?
Best for: Those who want to earn a high interest rate and don't need to spend that money anytime soon.
Not for: Those who think they'll need to withdraw their money before the CD's maturity date
A certificate of deposit (CD), also known as a share certificate if you're using a credit union, is a special type of savings account that offers much higher interest rates -- but there's a catch. When you put the money into a CD, you're agreeing that you won't touch it for the length of the CD term. This can be anywhere from a few months to several years. Usually, the longer the loan term, the higher the interest rate. The best CDs can offer APYs of around 3%.
You can withdraw money from your account before it reaches its maturity date (the end of the CD term), but you'll pay a high penalty. This is often a certain number of months' worth of interest, and the farther away you are from your maturity date, the greater the penalty. A few CDs, known as no-penalty CDs, do not charge you if you withdraw your money early, but these usually have lower APYs than other types of CDs.
CD laddering is a popular strategy that lets you take advantage of the higher APYs offered by longer-term CDs' while still giving you access to some of your funds every year. You start by investing your money into CDs with consecutive annual maturities -- for example, a one-year, a two-year, a three-year, a four-year, and a five-year CD. When the one-year CD matures, you roll those funds into a new five-year CD. The next year, the two-year CD will mature and you put this into a new five-year CD as well, and so on. Every year, another CD will mature and you can withdraw the money if you decide or put it into a new one to keep growing your money.
Looking for a CD? Check out our list of the best CDs available now.
What is a money market account?
Best for: Those who want to earn a high interest rate without sacrificing their easy access to their money.
Not for: Those with small savings who cannot meet the minimum balance requirements.
Money market accounts have features of all three of the bank accounts listed above. They keep your money fairly liquid, like checking and savings accounts, and they come with checks so you can withdraw money directly from the money market account. Some may also provide debit cards so you can withdraw money at ATMs or use your money market account to make purchases at stores or online.
Their APYs are often higher than savings accounts, in some cases they're in excess of 2%, so they're a wise choice if you hope to grow your money more quickly without tying it up in a CD for years at a time. But that's not to say they're without restrictions.
Money market accounts are also subject to Regulation D, like savings accounts, so you're limited to six online or phone transfers and withdrawals per month. Checks also count toward your six convenient withdrawals per month, but ATM withdrawals do not. Another thing that may discourage some people from choosing an MMA is that these accounts usually have a much higher minimum balance than savings accounts, sometimes up to $5,000. Those without much money in their name may not be able to open one.
If a money market sounds like the right account for you, check out our list of the best money market accounts.
What to look for in a bank account or credit union
Once you've identified the type of financial institution and the type of account you're interested in, it's time to dig into the details. Here are a few things you should look into, regardless of your account type:
- FDIC or NCUA insurance: You'll probably never need FDIC or NCUA insurance, but if you do, you'll really need it, so make sure that your bank or credit union has it before you sign up. Most state their member ID number on the footer of their website. You can also contact the bank or credit union if you're unsure, but most should have the applicable type of insurance.
- Access to funds: Your access to funds will vary depending on the type of account you choose. Focus on the factors that matter most to you:
- Branch locations: Banks and credit unions usually have branch locator tools on their website so you can track down the one nearest to you.
- ATM network: Your bank or credit union may have an ATM network or it may partner with a company like Allpoint or MoneyPass® that offers a nationwide surcharge-free ATM network. Some banks don't have any fee-free ATMs at all, but they reimburse you for ATM fees you incur.
- Debit card: All checking accounts should come with a debit card and some money market accounts will as well.
- Checks: Checks are available with checking and money market accounts.
- Online tools: Most banks and many credit unions offer online accounts where you can view your transaction history, pay bills, transfer funds, and more. Some also have mobile apps where you can do all the same things, plus remotely deposit checks.
- Interest rates: Look at the APYs your bank or credit union offers on the type of account you're interested in and compare this to some of its competitors. Note that some financial institutions employ a tiered system where you earn a higher interest rate for having a larger balance. If this is the case, figure out what kind of interest rate you can realistically expect based on how much you plan to keep in this account. You should also look into how its interest rates on loans stack up against competitors if you think you might ever take out a loan from the bank or credit union.
- Other product offerings: You may only be looking for a checking or savings account now, but in the future you might need to buy a home or start a business and then you'll need a mortgage or a business loan. Anticipating your future needs and choosing a bank or credit union that can accommodate them can prevent you from having to jump ship as your needs change.
- Fees: Check the fee schedule for the type of account you plan to open. Contact the bank or credit union if you are unable to find this information on its website or if you have any questions about its fees. Read through it all carefully and make sure you understand what you're getting into. Common fees to watch for include:
- Monthly maintenance fee: This is the fee you pay to own the account. Some banks or credit unions enable you to waive this if you meet certain criteria.
- Overdraft fees: You'll only have to worry about these if you opt into overdraft protection and withdraw more money from your account than it contains.
- Minimum balance fee: If you drop below the account's designated minimum balance, you might pay a fee until you get your balance back up again.
- Statement fee: Those still getting paper bank statements might owe a fee unless they switch to eStatements.
- Inactivity fee: Not using your account enough could result in additional fees. Check with your bank or credit union if you're unsure of how to avoid this fee.
- Card replacement fee: Some banks charge you for a replacement debit card if your first one is lost or stolen.
- Minimum balance: Many banks and credit unions require a minimum initial deposit to open your account and they may have ongoing minimum balance requirements you must meet to avoid fees. The requirements will vary by institution and account type. Make sure you're comfortable with these before you sign up or you could cost yourself money.
- Sign-up bonus: An increasing number of banks and credit unions are offering special sign-up bonuses like credit cards do to entice new customers. This could be the deciding factor between two similar bank accounts, but don't base your decision on a sign-up bonus alone.
- Customer service: Look into how you can contact the bank or credit union if you have questions or problems with your account. Check into its customer service hours as well. Some national banks have 24/7 customer support while smaller regional banks and credit unions may only operate during normal business hours.
How to open a bank account
When you've finally selected the best bank or credit union account for you, the next step is to open the account. Follow these steps:
- Gather the important information and paperwork: You'll need the following to open a bank or credit union account:
a. Full name
c. Date of birth
d. Social Security number or tax ID number
e. Driver's license or passport
- Fill out the application form: Most banks and credit unions should have an online application form that you can fill out. If your bank or credit union has a branch, you can also visit it if you prefer to deal with a live person. You may need to print, sign, and mail your application form to the bank if it does not give you an option to submit online.
- Fund your account: Your bank or credit union should provide you with information on how to fund your account once you've set it up. Usually, you have the following choices:
a. Deposit cash
b. Deposit a check or money order
c. Set up direct deposit with your employer
d. Transfer money from another bank