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| Banking Institutions and How to Understand Them |
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SECTION TWO: Banking Institutions and How to Understand Them
Banks take in deposits from account holders and offer them a certain interest for the money. At the same time, banks give loans to customers, usually in the form on mortgage loans, educational loans, auto loans, business loans, and private loans. Banks become profitable as they charge a higher rate for the loans they give out than the interest rate they pay to deposits. While most banks are clear with the rates they offer, some will not disclose full terms unless you really question them in specific manner.
Most banks have interest rate tiers. For example, a bank can be paying an 1% APY to all accounts with under $5,000 in daily balance and 5% APY to accounts with $5,000 and up in daily balance. So you can have $100,000 in your account for all but the last day of the month, which was dropped to $4,999, you will only be paid at an APY of 1% because your daily balance dipped below the minimum for the tier.
Tip: Always stick to a bank with a simple tier system. Avoid banks with constant revisions to their tiers. It simply isn't worth the trouble. Tip: Always provide your physical and email address to your bank and request to have them mail and email you if the account terms change.
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass-Steagall Act of 1933. When a bank is FDIC insured, it means that the FDIC will pay up to $100,000 to each account (savings, checking, money market depository, or certificate of deposits - this is currently at $250,000 in response to the "subprime crisis") in the event of the bank failing. More information can be found in the FDIC website. Checking if your bank is FDIC insured is easy. You can check if your bank is FDIC insured via the FDIC: Bank Find Tool.
Not all banks are well run. Just like any other investment companies, they can sometimes make very unwise bets. It is crucial that you identify the financial status of the bank before letting them safeguard your hard earned money. Bank data for FDIC insured banks are readily available from the FDIC website. You can get the data on the banks from the FDIC: Institution Directory page. As the rule of thumb, we recommend that you pay special attention to the bank’s total assets and total liabilities.
A traditional bank is one that you have to bank in person or over the phone. The need for this type of banking has eased with the development of online banking. Many of the prominent new banks such as ING Direct, Emigrant Direct, and Virtual Bank actually have only an online presence! You can call this catching up with the technology or simply banking in your pajamas! The only thing you will need special care when banking online is security. Just like the people that will always try to forge your signature, there are the same types of people present online. Some of the useful tips about banking online:
A credit union (CU) is essentially identical in features to a bank except that it is own and run by its members. The members are required to belong to the same “field of membership” as defined by its charter. Only members of the credit union can deposit money with and borrow money from it. In the United States, credit unions usually pay higher dividend (in form of interest) to its members and charge lower interest on loans than banks. Read the article on Understanding Banks vs. Credit Unions for more information. Tip: Similar to banks that are FDIC insured, credit unions are insured by the National Credit Union Administration (NCUA). You can check if the credit union is insured using the Credit Union Queries page at the NCUA.
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