Banking Basics – I

Four Common Financial Institutions

Financial institutions help people manage their money, protect it, and make it grow.

People often use different types of financial institutions at different stages of their lives. Of these institutions, we will examine four:

•Commercial banks

•Savings and loan associations (S&Ls)

•Credit unions

•Brokerage firms

Most banks offer checking and savings accounts, creditcards, loans, travelers’ checks and safety deposit boxes forboth business and personal use. Generally, your depositsare insured up to $250,000 per owner by the governmental FederalDeposit Insurance Corporation or FDIC (in case yourbank fails).

Savings and loans may offer some of the same services, but focus on loansfor people who want to buy or fix up a home. Here, your deposits are alsosimilarly government-insured, but by the Savings Association InsuranceFund (SAIF) administered by the FDIC.

Credit unions also operate like banks, but are owned and operatedby a group of people having something in common, like attending thesame church or working at the same place. They only serve their ownmembers, who can buy life or health insurance or get loans at low rates.Generally, deposits in federal and most state-chartered credit unions areinsured up to $250,000 in retirementaccounts by the governmental National Credit Union Administration(NCUA).

In the past, each type of financial institution offered specific and limited services.Banks took deposits to be placed in checking accounts, savings accounts, and certificatesof deposit, and they granted credit (often in the form of loans) to qualified individuals.Savings and loans offered savings accounts and home mortgages. Creditunions, a type of member-owned cooperative, made low-interest loans available totheir members. Brokerage firms bought and sold stocks for customers on an exchange,and offered other financial services.

Deregulation in the financial industry has blurred the lines between these institutionsand increased competition among them. Deregulation means that laws havebeen enacted to remove some of the restrictions (or regulations) that previously affectedthe industries in question. For example, savings and loans now can offerchecking accounts and many types of loans in addition to home mortgages. Manycommercial banks now can offer brokerage services.

  1. Deposit Services

Types / Characteristics
Checkingaccounts / Convenience andsafetyforaccountholders.People canpaybycheckordebitcardinstead ofcash.Theyretainarecordoftheirtransactions.
Savings accountsandcertificatesofdeposits(CDs) / Safeplaces toletmoneygrow;interestisearnedondeposits.
Automatedtellermachines(ATMs) / Easyaccess tomoneyfrom multiplelocations,24hoursaday.
Directdepositsandautomaticwithdrawals / Enableaccountholderstodepositmoneyorpaybills automatically.
Onlinebanking / Informationaboutdeposits,payments,statements, andalltransactionsisimmediatelyavailableonline,with only afewkeystrokes,24hours aday.Userscanmake paymentswithoutwritingchecks.
Depositinsurance / Guaranteesthat depositsareinsuredbythefederalgovernmentforupto$250,000per depositor.Agenciesprovidingthisinsurancearethe FDIC(forbanks andS&Ls)ortheNCUA(forcreditunions).
  1. Credit Services

Types / Characteristics
Credit cards / Enable card holders to access credit (for purchases) conveniently up to the amount of an approved credit limit.
Installment loans and credit lines / Provide opportunities to borrow money for major items such as a new or used automobile, education, home improvement, and other personal or house- hold items.
Mortgages / Provide opportunities to borrow for the purchase of a home.
Home equity loans / Enable home owners to borrow money against the equity in their homes.
Student loans / Provide opportunities to borrow money to pay for a college education (often at below-market rates).
Small business loans / Provide opportunities to borrow money for the financial needs of a small business.
  1. Investment Services

Types / Characteristics
Retirement accounts (IRAs,SEPs, KEOGHs) / Enable people to save money toward retirement on a tax-deferred basis.
Stocks,bonds,and mutual funds / Enable people to invest in corporations and governments in order to meet their financial needs for the future.

Checking out checking accounts vocabulary

ATM: Automatic teller machine.

Debit card: A plastic card that is used to deduct funds automatically and immediatelyfrom a checking account.

Deposit: Adding money to a bank account.

FDIC: Federal Deposit Insurance Corporation. Institutions that have an FDICdesignation currently guarantee your bank deposits up to $250,000.

Interest: Money paid for the use of someone else’s money.

Overdraft: Writing a check or using a debit card for an amount that is morethan the amount on deposit in a bank account.

PIN: Personal Identification Number; a confidential code used to access privatefinancial information or to make a transaction.

Service charge: The fee charged by a financial institution for certain services itprovides to customers.

Smart card: A plastic card with a microchip that both stores and transfers information.These cards can be used for identification and as either a credit or debitcard.

Withdrawal: Subtracting money from a bank account.

Example 1 You receive a bill for three pairs of jeans. You are writing a check for your purchase by filling in the blanks identified on the check below.

1. 06/04/20122. Green Jean Shop

3. 146.774. One hundred forty six and 77/100

5. Three pairs of jeans6. Your signature

Immediately after you write a check, you will have to record itin yourcheck register, which is where you list the detailson each and every check you write, every deposits made into your account, as well as all ATM and checkcard transactions, and fees, too!

There, you will note:

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  1. The date & the check number you write the check or make the transaction.
  2. The name of the person or business to whom the check is written.
  3. The amount of the check in numeric form.
  4. Your remaining balance, once the check, and ATM withdrawal or check card transaction is subtracted from the previous amount.
  5. If you have online banking and check your account online, remember to record those transactions too.You may not see them taken out right away, so do not spend money you have already spent.

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