As part of our ongoing series of tips and tricks to get the most from your banking experience, we will review three common bank accounts and outline a few steps needed to start your banking relationship.
Benefits of Banking
Establishing a bank account has several benefits that impact your short-term and long-term financial goals.
Bank accounts, primarily checking accounts, offer debit and ATM card access. These cards give you easy access to your money without the need to carry around large sums of cash. Simply find a bank branch or ATM to withdraw money anytime.
Additionally, most banks provide access to online banking, making it easier to keep track of your funds, transfer money, and more. Notably, a bank account opens up the opportunity to set up direct deposits with your employer, resulting in quicker access to your paycheck.
Bank accounts can provide an added layer of safety that cash does not. For example, cash and prepaid cards are uninsured funds. Once lost, those funds are gone forever. Conversely, most banks are insured by the Federal Deposit Insurance Corporation (FDIC), an independent government agency that protects depositors against the loss of their deposits (the money they keep in an account) if an FDIC-insured bank fails. A person does not have to be a U.S. citizen or resident to have their deposits insured by the FDIC, and in the unlikely event your bank suffers significant financial setbacks or loses money, your funds are insured and replaced. Since the FDIC's creation in 1933, no depositor has lost any FDIC-insured deposits.
In addition to the immediate benefits of a banking relationship, a bank account can have long-term benefits. For example, some accounts earn interest over time, such as savings accounts. This translates to more money back in your pocket, something you will miss out on if you are solely relying on cash.
How to Open a Bank Account
Opening an account can be done at your local bank branch. Some institutions, such as FirstBank, will allow you to start the account process online.
The requirements for opening an account can depend on the account and institution. However, most banks will require one or more of the following:
- Valid driver's license
- State ID
- Mexican Consular Identification
- Social Security Number or Individual Taxpayer Identification Number (ITIN)
Proof of address
If your ID does not reflect your current address, you may need to provide alternative proof. This may include a recent utility bill, car registration, or paystub.
Some, but not all, accounts may require an opening deposit to establish an account. It is a good idea to check the opening and balance requirements in advance.
What type of account is right for me?
There are three common deposit accounts: checking, savings, and time deposit accounts. Let us briefly review each.
Checking accounts provide access to your money anytime. These are handy accounts if you need to pay bills, make purchases, and deposit money. You will often have access to ATM and debit cards and the ability to order checks, making it easy and convenient to deposit and withdraw funds.
Although a savings account gives the account owner access to their money on demand, it is generally used to save money long-term. Therefore, you cannot write checks from a savings account. Unlike a checking account, you do not have access to a debit card, but some banks offer a card that allows the owner to withdraw money at an ATM.
It is worth noting that savings accounts typically earn interest. Interest is the amount you earn in a deposit account and is typically shown as an Annual Percentage Yield (APY).
Because you earn money on the amount in your savings, it is good to keep spending money in checking and long-term savings in a savings account. Funds can easily be transferred between accounts when needed.
Time-deposit accounts (CDs)
Time deposit accounts are often called "Certificate of Deposit" or "CD" accounts, and unlike checking and savings accounts, time-deposit accounts hold your money for a set period of time in exchange for a higher interest rate than you would earn in a checking or savings account. Funds cannot be withdrawn early without a penalty.
CDs earn compound interest. As you earn interest on your original deposit, the interest earned is added to your balance, and as a result, you start earning interest on top of what you have already earned. The longer you leave your money sitting in a CD, the more you will potentially earn.
Is a debit card the same as a credit card?
Although they can look similar, debit and credit cards are very different. Let us quickly review some of the differences below.
Debit cards allow you to spend money by withdrawing money you have deposited with your bank. Additionally, you may use this card to make purchases directly with a merchant at a store or online.
Essentially, you are spending money you already have.
Debit card PROS:
- Lower maintenance fees than some credit cards
- You do not have to pay back any interest
- Can withdraw money from an ATM without interest fees
Debit card CONS:
- No rewards earned
- No access to additional funds. If you do not have money in your account, you cannot make a purchase
- Does not build any credit
Unlike debit cards, credit cards allow you to borrow money up to a specific limit to purchase items or withdraw cash. You will eventually have to make payments to pay back the borrowed funds with interest.
With credit cards, you are spending borrowed money.
Credit card PROS:
- Builds credit
- Allows you to make purchases and access cash even if you do not have it in your bank account
- Some credit cards earn rewards that can be used for cash back and purchases
Credit card CONS:
- You will pay interest on balances left unpaid each month
- Some cards have higher annual fees
- Negative impact on your credit score if payments are not made on time
Establishing a bank account is a simple process with several potential benefits. A debit card and check access can make purchases easier in person or online. If you open an account that collects interest, you will be able to make your money grow over time. And finally, you will have the added protection that comes with having your money backed by the Federal Deposit Insurance Corporation (FDIC).
What to bring:
- Valid ID: Driver's License, state ID, passport, or Mexican Consular Identification)
- Social Security Number or Individual Taxpayer Identification Number
- Proof of address (if your identification does not have your current address)
- Opening deposit
Common Account Types:
- Checking: Provides access to debit cards and checks for easy withdrawals and purchases.
- Savings: Interest-bearing account you can use to save money for big purchases, emergencies, retirement, and more.
- Time deposit (CD): The account holds your money for a set amount of time in exchange for a higher interest rate.