Banking Services Consumer Education Chapter 7

How Banks Work 7.1

How Banks Work  Banks are a business; they work to earn a profit  Most profit comes from interest charged on money they lend to customers  Money lent out to customers comes from the deposits of other customers

How Banks Work – Why use banks?  Protect your money’s purchasing power  Inflation – interest earned offsets inflation  Banks are regulated  Owners must invest, money is on reserve  Most deposits are insured  Federal Deposit Insurance Corporation (FDIC)  Up to $250,000 (increased in 2008)  Banks make borrowing easier (reduce risk)  Money flow – savers to borrowers

Money and Financial Transactions  Bartering – trading goods and services without using money  Money allows an equal comparison of goods and services  Currency – paper money and coins used for financial transactions  Check – an order to a bank to pay a specified sum to a business or person (payee)  Statement – a monthly record of all transactions of an account provided to a customer by a bank

Advantages of Using Checks  Safety-only able to be cashed by payee  Bank that cashed the check can be held responsible (should ask for ID)  Lost checks can be reissued  Can also issue a stop payment order  Convenience-don’t have to carry large amounts of cash, can send through mail  Record of your transaction-  cancelled check (check that is stamped and perforated to show that it has been paid) is proof of payment  Register

Use Your Checking Account 7.2

Your Checking Account  Checking account-a bank account that allows depositors to write checks  Must be 18. Must open an account with adult if younger. Called a joint account.  Will sign a signature card. Bank should check that the signature is authentic.  Charged a fee for checks  Many charge a service charge unless you have a combination of accounts or a minimum balance. May have free student accounts.

 Writing a check (blue/black ink)  Correct date (usually valid for 6 months)  Write numbers clearly starting immediately after $.  Write amount in words. Include cents as 30/100 or no/100 for even dollar amounts  If they don’t match, bank uses the written amount (words).  Sign! Cannot be cashed without signature.

 Record in your register (CAN use pencil)  Booklet the comes with the checks.  Record all transactions including check numbers.  Keep your account balance-total amount in the account at a specific date.  Overdrawing (overdraft, bouncing a check) writing a check for more than you have in your account.  Often caused by forgetting to record a transaction…by check or debit

 Cash a check (blue/black ink)  Must endorse (sign on the back) with the exact name on the check  Blank-sign only (not very safe)  Restrictive-for deposit only and sign  Special (endorsement in full) Pay to the order of ___________ and sign. Referred to as a third party check. Some banks won’t cash.

 Deposit slip (blue/black ink)  Any small errors can be neatly crossed out and corrected. Must add initials by error.  Significant mistakes-write VOID across a check or rewrite a deposit slip.

Checking Account Types and Costs  Types of accounts  Interest –bearing accounts- pay interest. May need to have a large minimum balance.  Noninterest-bearing accounts-No interest  Checking account fees  Monthly service charge-flat monthly charge or may charge per transaction (per check)  Overdraft fee

Balance your checkbook 7.3

 Reconcile-bringing into agreement the bank statement and your check register  Why reconcile?  Avoid overdrafts  Catch bank errors  Outstanding-a transaction that has occurred but has not yet been recorded by your bank. (debits or credits)

 What if  the bank made an error?  Bring documentation to bank (deposit slip, cancelled check, etc) and talk to teller

 How to reconcile  Step 1: Use the check column to check off all transactions on the statement.  Step 2: Write down on form the ending balance from the bank statement.  Step 3: Add any outstanding deposits (not checked off)  Step 4 Subtract any outstanding checks (not checked off)  Remember to look at previous months to see if anything outstanding from previous months.

Electronic Banking 7.4

Electronic Banking Electronic Funds Transfer Moving money from one account to another by use of a computer Advantages-less expensive, quicker, less likely to lose money, electronic record of the flow of money Included ATMs, direct deposits, debit cards, auto bill pay, and online banking Automated Teller Machine (ATM) A computer terminal that you can use to make deposits, withdraw cash, transfer money, check your balance, and pay certain bills

Personal Identification Number (PIN) A secret number that identifies you to the ATM as the owner of the card and the account  Usually don’t pay a fee for using own bank’s ATM.  Report a lost card immediately.  Be aware of surroundings at ATMs.

Electronic Banking Direct Deposit Paychecks that are electronically deposited into a checking or savings account Still get a pay stub and/or a non-negotiable check Debit Cards Pay by Phone Setting up an electronic funds transfer from your account over the phone (routing number and account number are used) Automatic Withdrawal Bills that are paid automatically from your checking or savings account and electronically transferred

Other Banking Services Certified Checks A personal check on which a bank has written its guarantee that payment will be made Cashier’s Check (or Teller’s Check) A bank check issued and signed from the banks own account Money Order A check that draws on the money of the bank or other financial business that issues it Postal Money Orders – issued and backed by U.S. Postal service Traveler’s Checks – checks that you pay for in advance, and that can be replaced if lost or stolen

Traveler’s Checks:

Other Payment Methods cont.  Wire Transfers  a financial transaction that electronically moves funds from one bank to another  Safe Deposit Boxes  Boxes with individual locks that can be rented from the bank  What’s the difference?  Online Bill-Pay / Automatic Payments / Online Payments